Tuesday, September 11, 2018

A current AIM International Fund Holding: BASF (BAS) by Connor Darrow. "BASFY to Satisfy"

“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.

Past Year Performance: Since the start of the year BASF has decreased from $27.56 to $22.10. A 24.7% decrease, this is due to a weaker market outlook for the rest of 2018 and missed earning expectations slightly in Q2 as net income slipped 1% lower than expectations. BASF’s move from Wintershall and acquisition of Bayer’s assets should serve as a catalyst moving forward. Sales and net income should increase due to a better chemical market and realizing the benefits of Bayer’s recently acquired assets.


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.