Summary

• BASF SE (BASF) provides every corner of the world with chemicals through its companies in 90 countries. At present expands into Asia as the main growth is expected there.
• Dividend has been in steady growth and has not been cut in challenging 2020. The yield of 4.9% is high for the industry and safe despite 2020 performance.
• Sales in 2020 were just slightly lower than in 2019 due to higher precious metal prices. BASF incurred losses due to the impairments of assets resulted from lower oil & gas price.
• At present the stock is fairly valued under P/E stock valuation method and assumptions we use.

Dividend    Revenue    Profitability    Financial Strength    Investment Case

German BASF (BAS) provides chemicals and intermediates solutions. It has companies in 90 countries and operates six Verbund sites (the combination of multiple production facilities) and 241 additional production sites worldwide. Verbund site in Germany is the world’s largest chemical complex owned by a single company. In 2020 BASF started construction of the first plants at the Verbund site in China. From 2022 these plants will produce engineering plastics and polyurethane. The company expects that the main growth (two thirds of it) in the chemical industry will take place in China (currently China has 40% of the global chemical market).

BASF has the following six segments:

• Chemicals – 14% of sales in 2020; the segment supplies other segments with basic chemicals and intermediates. It has Petrochemical and Intermediates divisions and is essential part of Verbund.
• Materials – 18% of sales; the segment’s portfolio comprises advanced materials, including isocyanates, polyamides and inorganic products for the plastics industries. The main focus is on organic growth. There are two divisions within the segment: Performance Materials and Monomers.
• Industrial Solutions – 13% of sales; consists of Dispersion & Pigments and Performance Chemical divisions. Produces ingredients and additives for industrial applications: fuel, lubricant solutions, polymer dispersions, pigments, resins, etc. The aim is to grow organically in key industries, such as automotive, plastics, electronics and energy and resources.
• Surface Technologies – 28% of sales; consists of Catalysts and Coatings divisions which offer chemical solutions for surfaces. The portfolio serves the automotive and chemical industries.
• Nutrition & Care – 10% of sales; serves the demand for fast – moving consumer goods. Its customers are food and feed producers as well as the pharmaceutical, cosmetics, detergent and cleaner industries. It consists of Care Chemicals and Nutrition & Health divisions.
• Agricultural Solutions – 13% of sales; provides seeds, crop protection and digital solutions.

In 2020 EUR 1.3 B acquisition of Solvay’s integrated polyamide 6.6 business was made to expand in Asia and Americas. In the same year Construction Chemicals division was sold for EUR 3.17 B. It generated sales around EUR 2.6 B in 2019.

The future success of BASF is highly dependent on innovations. About 10K employees are involved in R&D and over EUR 2 B were invested in this field in 2020.

In tackling climate change issue BASF is going to achieve net – zero emissions by 2050.

  Dividend

Dividend	Dividend Yield	5Y Growth	PayOut Ratio
EUR 3.3 per share	4.9%	2.6% per year	36% in 2019

BASF used to increase dividend in smooth and consistent way. However due to the pandemic related disruptions dividend was not increased last year for the first time since 2009. BASF pays one of the highest dividends within German DAX30. The payout ratio for 2020 is not available as the company’s bottom line is negative.  Also the company had less free cash flow (EUR 2.3 B) than the amount to be paid in dividends (EUR 3B). So it is difficult to make dividend sustainability conclusions based on the 2020 results. The performance in 2021 and beyond should be much better as consumer demand rebounds strongly. For now dividend is not covered neither by cash flow nor by earnings. However we could expect that the company would return to gradual dividend increase policy with the rebound of a global economy. So we could assume in the future the same average growth as in the past 5 years, i.e., about 2.5%.

  Revenue

Revenue	5Y Growth	Revenue growth over 2020	Company Outlook 2021
EUR 59.15 B	-3.4% p. a.	Total sales                        -0.3% By divisions: Chemicals                        -15% Materials                           -6% Industrial Solutions          -9% Surface Technologies   +27% Nutrition & Care               -1% Agricultural Solutions      -2%	Sales of EUR 61 B – 64 B.

Sales in 2020 are almost at the same level as in 2019. Revenue was affected significantly by the pandemic related challenges. Sales were weaker in Chemicals, Materials and Industrial Solutions. In Chemicals and Materials that was the result of lower prices due to weaker demand from customer industries, especially automotive. In Industrial Solutions both prices and volumes were lower. In Nutrition & Care and Agricultural Solutions sales declined slightly. The only outperforming segment was Surface Technologies. Sales were higher due to higher precious metal prices. In 2020 there was high demand in pharmaceutical and cleaning industries due to the pandemic.

The company expects moderate economic growth in Europe (3%) and the US (4%) and strong growth in Asia (7% in China). In 2021 BASF expects strong rebound of sales in Materials and higher sales in the rest of segments. The company expects sales growth in the range from 3% to 8%. Already in Q1 2021 the company had strong performance, particularly in Chemicals and Materials. We could expect moderate sales growth in the coming years after stronger rebound this year.

  Profitability

Profit	5Y Growth	Net Profit Margin	ROE	Company Outlook 2021
EPS EUR -1.15 Net Profit EUR -1.06 B	N/A	-1.82% in 2020 14.3% in 2019	-3.2%	Operating income before special items (EBIT) EUR 4.1 B – 5 B.

Net income turned from the profit of EUR 8.4 B in 2019 to the loss of about EUR 1 B in 2020 mainly due to the impairments of assets resulted from lower oil & gas price forecasts. Earnings were weaker in Surface Technologies and Agricultural Solutions. Adjusted EPS declined only around 20% from EUR 4 to EUR 3.21. So special items had considerable impact on the bottom line of the company.

In 2021 higher contributions to EBIT are expected from Materials, Chemicals and Surface Technologies. Other segments should reach slightly higher EBIT and Industrial Solutions are forecasted to have slightly lower one. EBIT before special items is expected to increase to EUR 4.1 B – 5 B from EUR 3.56 B in 2020, the increase in the range 15% – 40%. In 2019 it was EUR 4.64 B.

EPS growth averaged 10% per year in the pre-pandemic 5 years period. However EPS in 2019 is elevated due to a partial divesture of oil & gas business Wintershall.  Future profits could be pressured by the move to net-zero as it could incur high costs to BASF.

It is difficult to project the future EPS level as it is affected by many unknown factors – commodity prices, rate of growth of a global economy, M&A activity, etc. When uncertainty is so high it is good to turn to long term averages. As a rule of thumb, we will use for our projections EPS value which is the average EPS over the 5 pre – pandemic years, i.e. about EUR 6 per share.

   Financial Strength

Company Capital Structure

In EUR B

Year	2019	2020
Equity	42.35	34.398
Cash	2.455	4.335
Debt	18.377	19.214
Net Debt	15.506	14.677
Debt/Equity	43%	56%

Debt makes up 56% of equity. The net debt declined by EUR 0.83 B over the year as cash rose more than debt. Operating cash flow is 28% of total debt while negative operating profit is not covering interest payments. Overall debt level is moderately high. Debt coverage by operating cash flow and interest payments coverage by operating profit should improve in the future. The company has S&P credit rating A.

  Investment Case

The estimate of future stock price and investment returns based on P/E ratio

Assumptions of dividend and EPS growth over the next 5 years
Dividend could grow at 2.5% per year to EUR 3.73 in 5 years. So the total dividend income over the next 5 years would amount to EUR 17.8. We assume EPS in 5 years to be the same as the average EPS over the past 5 pre – pandemic years, EUR 6 per share.
Projected stock price
Average P/E over the last 5 years (10.3) multiplied by EPS in 5 years =10.3 x EUR 6 = EUR 61.80
Future Returns Based on the Assumptions
Stock price upside potential                                       -8%    from the current price of EUR 67.40 Overall return on investment*                                  18% Compound Annual Return on Investment             3.4%

*- Includes the expected dividend income over the next 5 years and dividends are not reinvested.

Under our model and assumptions made the stock price is already high and does not have any upside potential. So returns should be expected mainly from the dividend income stream.

BASF is one of the largest global chemical companies with wide range of products and innovations pipeline to support the future growth. However it operates in cyclical industry with numerous risks. Hence investors would expect not only dividend income but also stock price appreciation over longer term. At current price levels it seems less likely.

Disclosure:

I have no position in the stocks mentioned in this article and do not intend to initiate any positions within the next three days.

Notes

Data source – the company’s financial reports and presentations. Source of pictures – the company website unless otherwise stated. Colored circles next to headings mean an author’s evaluation of the relevant performance criteria of the company: green means positive, yellow neutral and red negative evaluation. There are many ways to estimate the future stock price. We use only one of them, the one based on P/E ratio. All estimates made in the article are for the informational purposes only. No taxation, brokerage fees and other expenses related to investing are considered in the estimates. The estimates are the result of the rule of thumb assumptions and the real outcome might differ materially from those estimates. As the future unfolds, macro events, not mentioned in the article, could impact the company fundamentals. Use the information in the article only as a starting point for your own due diligence.