“BASFY Satisfies - and Remains a Hold in the AIM Fund”
By:
Connor Darrow, AIM Student at Marquette University
Disclosure: The AIM International Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.
Summary
• BASF
Chemical Company, Inc. (OTC:BASFY) Is one of the
world’s largest diversified chemical companies. It offers a range of chemicals
and intermediary solutions, and is subdivided into roughly five segments:
chemicals (49.4%), functional materials (18.1%), performance products (17.7%),
oil and gas (12.2%), agricultural solutions (11.9%), and other (-9.4%). The
company was founded in 1865 and is headquartered in Ludwigshafen am Rhein,
Germany.
Source:
FactSet
• BASF is currently trading at a P/E of 11.32, P/S of 1.06,
& EV/EBITDA of 6.73 way below the median of its peers at 18.91, 2.24, &
13.34. Meaning BASF is priced at a deep discount.
• BASF’s ROE and ROA were 19% and 8% in 2017 highest
compared to DowDuPont, Bayer/Monsanto, & ChemChina/Syngenta. This trend has
continued into 2018.
• In 2017, revenues increased by 15.67% and have been
maintained thus far in 2018.
• Recent acquisition of Bayer makes its agriculture segment
viable.
• BASF continues to invest in its future and will complete
two additional acquisitions for a total investment of 7.5B EUR in 2018.
• Recently, made an acquisition with Materialize which will
give BASF exposure to 3-D printing.
• Sale of Wintershall will move BASF away from commodities
and to other important areas.
Key
points:
The chemical industry has seen some serious merger and
activity in the last few years. Dow and Dupoint have merged, ChemChina and
Syngenta, and most recently and of note Bayer and Monsanto. There have been
countless other smaller deals. Thus, the chemicals industry is an intense
consolidation phase. Many of the weaker companies have been acquired, merged,
or have packed up shop. BASF has made several small acquisitions but had not
merged like its peers which has put BASF behind the curve. However, BASF has
explored every deal and remains under good management and have responded with
several smaller deals such as acquiring Bayer’s agricultural segment, investing
in 3-D printing, etc. In the last 12 months BASF has made 10 deals. There frenetic
M&A activity should keep them competitive.
The chemistry itself is expected to bounce back after having
been depressed over the last few years. According to ICIS European
petrochemicals producers are expected to continue running their plants at high
utilization rates in 2018 as the region’s economy enjoys its brightest
prospects in a decade. There should be increase in demand due to strong global
growth prospects, rising exports, increased manufacturing, low chemical
inventories, and favorable shale gas economics. Housing is set to extend its
steady recovery for the rest of 2018. Despite a pull back from record-high
vehicle sales, the automotive sector is expected to remain at relatively
elevated levels. Both are important end-use customers for chemistry. BASF is
seized to capitalize as it remains a top three competitor in the chemical industry
in four out of five of its segments.
Agricultural chemicals are an important position for BASF
one it has been weak in. Thus, BASF was forced to improve its position as it
had lower sales and more risk than its competitors of crop failure. Thus, its
acquisition of Bayer’s herbicides segment was beyond necessary just to compete
as herbicides allow crops to tolerate tough conditions. BASF had been behind
DowDuPont, Bayer, and Syngenta in this matter. BASF was the fifth largest
producer in herbicides. Bayer’s assets will bring revenues and allow them to
compete. At $7B, the purchase will be BASF’s largest transaction ever, which
underlines its importance to the company. In 2016, the Bayer assets generated
revenue of $1.6B and an EBITDA margin of 29.6%. BASF’s Agricultural Solutions
business generated revenue of $6.89B and an EBITDA margin of 23.4%. The transaction
thus increases BASF’s agricultural revenue by 18.8%, its herbicide revenue by
37.1% and its EBITDA by 22.8%. Agricultural Solutions increases from 9.7% of
total revenue to 11.9%. The assets BASF is acquiring will give BASF a solid
position in the three most important oilseed crops and in cotton. This will
give a needed boost to its position in the crucial North American market (32%
of 2016 agricultural revenue) and create opportunities in South America and
Asia.
What
has the stock done lately?
Since last year 9/7/2017, BASF has lost 14% this has been
due to a weak chemical market. That is to be expected given the weak market and
the cyclicality involved with the chemical industry. Over the last five years
the stock has hovered between $20-25. A positive catalyst will be the improved
agriculture segment and higher price chemicals. BASF will benefit due to its
top position in the chemical market and the increased revenues from the
acquisition of Bayer.
Source: FactSet
My
Takeaway:
Buoyed by the strong management of Kurt Brock, president
& CEO, who has been with the company since 2011. BASF is poised to reap the
benefits of an improved chemical market. Chemical prices will soon turn around
looking at historical trends. Shockingly the company maintains an AA ESG rating,
representing the integrity of BASF and its attempt to practice “sustainable chemistry.”
This should bode well for BASF.
