2023-07-02 07:54:46 ET
Summary
- BASF SE is expanding its global production footprint, particularly in China and Europe, and has a cost savings initiative aiming to save over €500m.
- BASF's debt situation is manageable with a decrease in debt from the previous year and an interest coverage ratio suggesting it can service its debt.
- The company is currently undervalued, making it an attractive buy for potential investors.
Investment Thesis
BASF SE ( OTCQX:BASFY ) operates in the diversified chemicals industry as an international chemical company . It operates through industrial solutions, chemicals, agricultural solutions, materials, nutrition and care, and surface technologies segments. The company offers petrochemicals and their intermediaries, advanced materials utilized for systems and applications, as well as market ingredients and additives. It also provides automotive OEM, chemical solutions, consumer goods ingredients, seeds, and their treatment products, digital farming, and biological solutions.
The company has adopted an integration system that incorporates production, market, technology, and digitalization, thereby saving on energy and raw materials, minimizing emissions, and trimming costs. It has also expanded its global production footprint in China and its European capacity. Moreover, with its cost savings initiative, BASF aims to save over €500m at the end of the program.
BASFY’s debt situation is manageable; however, it should work to increase its earnings to avoid the risk of defaulting on its debts. The company is also undervalued, so I encourage potential investors to buy.
An Integrated System
Verbund integration is BASFY’s interconnected system involving the physical integration of technologies, production, and market platforms that connect BASF’s businesses. It is one of the company’s vital strengths and a key component of its portfolio. This integrates its production, technology, market, and digitalization.
Production Verbund provides a competitive supply of essential products to its segments by utilizing established value chains within Verbund. Technology Verbund utilizes technological advantages in all its segments through its impact, expertise, and breadth in areas like catalysis, biotech, and formulation platforms. With Market Verbund, the company develops customer relevance through its size and diverse portfolio in industries such as automation and transportation. Lastly, Digital Verbund leverages AI, scale, and data management to harness the vast advantages and possibilities provided by digitalization in the company’s network.
The company consolidates its operations into six globally highly productive and efficient Verbund facilities. This integration establishes effective value chains extending from basic chemicals to value-added products. Additionally, by-products from one facility can be recycled and utilized as raw materials for another plant. BASF also saves on energy and raw materials, trims costs associated with logistics, exploits synergies, and minimizes emissions, sustaining its competitiveness in the industry.
Expansions Underway
Alkoxylates capacity expansion in Europe
Alkoxylates, chemicals produced through the alkoxylation process, are used across diverse sectors, including pharmaceuticals, textiles, personal care, coats, and paintings. It is used in various applications in the form of dyeing aids, fiber lubricants, emulsifiers, solubilizers, demulsifiers, detergents, and wetting, dispersing, and cleansing agents.
BASF is steadily increasing its alkoxylate production capacity in Antwerp, Belgium, and Ludwigshafen, Germany, with a capacity expansion of more than 150,000 metric tons annually. The long-term demand for alkoxylates was what prompted this investment. The global alkoxylates market is forecast to grow at an approximate CAGR of 5.1% during 2023–2028 due to the rapidly surging demand, propelled by increasing hygiene and sanitation consciousness, its multiple applications across sectors, and the environmentally friendly nature of alcohol alkoxylates. During the forecast period, Europe is expected to hold the lion’s share in terms of revenues in the global alkoxylates market.
The company noted that this expansion will reinforce its position in Europe as a market leader in this expanding segment and open up fresh growth opportunities through its applications in various industries.
New Verbund Facility in China
BASFY is building a new Verbund polyethylene [PE] facility in Zhanjiang, China, with a 500,000 metric ton capacity of PE annually. This investment expands the company’s global production footprint. The production facility will cater to the rapidly growing demand for PE in China, especially among its customers in the packaging, consumer goods, transportation, and construction industries.
In the first two months of 2023, China recorded nearly twice the average global polyethylene consumption. This resulted from the economic resurgence following the relaxation of the pandemic restrictions, thereby spurring the overall demand for PE. While the average global demand growth for PE was 5%, China had more than 10% between January and February this year. Additionally, it contributes to almost a third of global PE consumption, with its annual worldwide usage estimated at 33%. This is an indication that China is a significant player in this market and therefore provides an opportunity for BASF’s growth. The Verbund site is expected to start in 2025.
Cost Savings Program
In October 2022, BASFY announced a cost savings program, primarily driven by a sharp increase in gas prices that affected the business negatively. The program intends to save over €500m annually in Europe. The key focus areas to achieve this are operating, services, corporate, and R&D divisions.
Under this initiative, some of the measures to be taken include simplifying business structures with a focus on divisional management, consistently bundling services in hubs, improving R&D efficiency, and rightsizing business activities and services. The company noted that some facilities would have to shut down, affecting 700 million jobs in production. The company expects costs associated with the program, such as relocation costs and severance payments, to reach about, €400m. The program should also impact 2,600 job positions globally, including creating new ones. The company plans to have implemented these measures by 2026.
How is the debt situation?
Debt is a useful tool when it comes to helping businesses grow, but when a company is unable to pay off its debt, it could lead to bankruptcy, so it’s essential to examine a business’ debt situation. According to the updated balance sheet, as of March 31, 2023, BASFY’s debt was $22.35b, a decrease from $23.18b a year ago. Its net debt was $19.33b considering it had $3.02b in cash.
The company had receivables of $15.458b and cash available of $3.02b. With total liabilities of $47.814b, its net liabilities amounted to $$29.33b. The market cap was $43.2b as of March 31, 2023, and was higher than the outstanding liabilities, suggesting that its market value exceeded its obligations. This meant the balance sheet could be strengthened by raising capital, should the need arise. However, this would mean that shareholders would risk dilution.
Its EBIT of $6.496b adequately covered interest expenses of $747.4m by about 8.69 times, reducing the risk of defaulting on its debt obligation. Additionally, BASFY reported cash of $7.57b from its operations and a free cash flow of $2.54b. This demonstrated that the company had adequate cash and was better positioned to service its debt.
In summary, the company’s interest coverage ratio signals it won’t experience too much trouble servicing its debt. However, the company’s EBIT growth rate is worrisome, and to remain afloat, BASF must increase its earnings. Therefore, investors should be on the lookout regarding the company’s debt.
Valuation
Relative valuation metrics indicate that BASFY is underpriced, with a PS ratio of 0.47 and an EV/Sales ratio of 0.70. This is because the sector’s average PS and EV/Sales ratio of 1.10 and 1.47 are significantly higher than the company’s ratios.
Backed by the Finbox DCF model , BASF is trading well under its fair value of $15.17 and an upside of 27%, which I think the company can exploit, considering its ongoing expansions.
Risks
BASF is facing slow demand in nearly all its segments, including chemicals, nutrition and care, materials, surface technologies, and industrial solutions, which might affect its revenues. The diversified chemicals industry is generally worried about the softening demand from its end markets. Lowering prices in the segments mentioned above, except industrial solutions and nutrition and care, could also pose a potential risk that could affect sales. The company also operates on net losses , which could be attributed to its ongoing expansions. Finally, it is facing negative currency impacts in Europe, Africa, the Middle East, South America, and the Asia-Pacific region.
Conclusion
BASF seems to be a decent investment considering its competitive advantage, the Verbund, and its ongoing expansions and cost savings program, which signals a bright future. The company trades at a discount, which would be a great and cheap entry point for prospective investors. However, they should beware of the inherent risks of investing here. Current investors should hold as they wait for current investments to gain traction.
For further details see:
BASF SE: Growth Initiatives Are Underway