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BASF SE (OTCQX: BASFY) is one of the world’s largest diversified chemical companies. Although the company is located in Germany, it has a global presence and operates in six segments. Below is a graphical breakdown of 2021 earnings by segment and geographic location.
Based on July 2022 BASF Factbook
The company recently operates six “Verbunds” that integrate production plants, energy flows and curtains, logistics and infrastructure in one place (a seventh Verbund is being built lately). Below is a detailed map of BASF’s global operating footprint that appears in Verbund and other productions.
BASF databook July 2022
As you would expect from a German large-cap fabric company, BASF can be characterized as a mature/low-growth inventory that pays dividends with an average decline in equity in mid-adolescence while operating in a cyclical industry. While those characteristics generally don’t lend themselves to fertile hunting ground for oversized returns, a confluence of points has made BASF a mature candidate for strong risk-adjusted returns over the next six months.
While 2022 has been a complicated year for the global economy, Europe’s stage has a real Shakespeare tragedy. The center of Europe’s unrest (just like the US) is the center of Europe’s unrest. UU) It’s runaway inflation, especially energy inflation.
Europe aggressively pursued “green” energy projects that included efforts for domestic production and the use of classic fossil fuels such as coal, oil, gas, etc. that supply continental Europe. This led to parabolic increases in the burden of domestic gas, coal and electric power and led to the current and much-publicized European energy crisis.
economista. com
As bloodless weather approaches, there are fears that the continent will deplete its energy stocks and face a scenario where the industry grinds to a halt, consumers suffer with skyrocketing app bills, and citizens literally freeze without heating. Add to this the risk of nuclear bombs and it is no exaggeration to say that sentiment towards Europe’s scenario is apocalyptic.
These headwinds have a negative effect on BASF on several fronts. First, the undeniable fact that BASF’s industry is relatively cyclical and suffers from the resulting global macroeconomic slowdown. And second, BASF consumes a very large amount of natural gas, either for fuel for its operations and as a crude curtain for its products.
As indicated in its earnings call for the current quarter of 2022, 60% of its European call for herbal fuel in 2021 went to electric power and steam generation, while the remaining 40% went to unfired materials. Of this 40% for unfired materials, 50% went to the production of ammonia. Rising prices have a negative effect on margins and create the threat that production will have to stop or reduce if the German government determines that there simply isn’t enough fuel for everyone.
As a result, investors have become very bearish regarding European stocks and, in particular, trading material names such as BASF. In fact, BASF recently traded at a price relative to the tangible cost of the e-book that is even lower than the levels seen in the depths of the COVID Crisis and the Great Financial Crisis!
Compiled through the author
Investors would have done very well to have bought BASF at the height of the panics of 2008 and 2020. Do we also have an explanation for why to be positive this time?
When Pierre Andurand speaks, investors will have to listen. He is the French founder of one of the world’s most successful energy-focused hedge funds, Andurand Capital. In late September, Pierre gave his impression on Bloomberg’s Odd Lots podcast and presented his thesis on how Europe deserves to spend the winter smoothly. In short, LNG imports combined with modest discounts in demand deserve to be sufficient to offset Russian fuel materials (see here for details).
Peter turns out to have been on the right track. Less than a month later, we learned that fuel workshop services in Germany were 95% ahead of the November 1 deadline. Commodity costs reacted accordingly. The parabolic degrees of the “end of the world” are well outdoors.
barchart. com
All of this might seem like a wonder if only all the pessimistic headlines that keep coming out every day.
Then there’s the lingering narrative that even if Europe limps through the winter, the continent is permanently weakened as Russian fuel will never return. This is myopic linear thinking at its worst. It will be complicated and time-consuming, but Europe will emerge from Russian dependence and regain its energy security. As Reuters reported on Oct. 20, Germany is already doing the unthinkable: starting talks about creating new fields of herbal fuel to meet continental demand.
In a draft document notified via Reuters, Germany said EU countries agreed at the summit “to work with countries that have the capacity to expand new fuel fields, as part of the commitments of the Paris climate agreement. “
Germany is rushing to get in on Russian fossil fuels, either by ramping up renewables faster and loading in more non-Russian gas.
Whichever way forward, Europe has already been hit by rising energy prices and a severe economic downturn. BASF said in its third-quarter 2022 filing that the company has incurred 2. 2 billion euros in additional herbal fuel prices from the beginning of the year through 2021.
Introducing BASF Q3 2022
The effects of 2022 were also dragged down by a weak global structure market, as North America and Europe grapple with higher interest rates, while China continues to digest its own domestic housing crisis.
Have BASF’s revenues and profits fallen as a result?While margins have weakened since 2021, the effects remain strong. BASF was able to pass on price accumulation, while some key consumer industries (e. g. shipping and agriculture) helped the effects.
Compiled through the author
Management highlights can be traced back to contracted capital (ROCE) as its key internal KPI and has guided it between 10. 5% and 11% for 2022. This is the juxtaposition with the winter apocalypse of the market. Returning to the value of BASF according to the tangible ledger, the market turns out to have disconnected from a rational dating with ROCE.
Compiled through the author
While the cyclical typhoon will pass, it has yet to be said that Europe also faces structural headwinds. The management defined 3 express demanding situations facing the European market:
As a result, the control targets €500 million in new charge relief projects within the European chemical segment, representing approximately 10% of the segment’s charges.
We cannot bury our heads in the sand and expect this complicated scenario to solve itself. As a company, we want to act now. Our savings program aims to ensure our competitiveness in the medium and long term in Germany and Europe.
I am encouraged that management is taking the existing scenario seriously and actively demonstrating its willingness to take proactive steps to obtain returns for shareholders.
When thinking about “fair value,” it’s worth remembering that BASF is a large/mature stock that pays dividends. Management is very protective of the dividend and continually emphasizes in its investor documents that its purpose is to build the dividend year.
The drop in BASF’s percentage value pushed the dividend yield to a juicy 7. 4%. When yields are so high, some investors may start sounding the alarm of dividend cuts, but I find this unfounded given that BASF’s guided EBIT in 2022 is around €7. 000 million is more than double the annual dividend of around 3100 million euros. BASF has reduced the dividend only once since 2000, at the GFC. Even then, it was only a 13% relief and was completely reversed the following year.
Compiled through the author
That said, the dividend reduction style is an undeniable and effective valuation approach for a company like BASF. I assume that the company continues to increase the dividend to EUR 0. 10 every year for the next ten years and then increases to 2%. thereafter in perpetuity. I will assume an equity charge of 7. 8% of priceinvesting. io. This translates into a fair price of around EUR 68 and implies an accumulation of around 40% compared to existing levels.
Compiled through the author
Unsurprisingly, this estimated fair price is right in the middle of the diversity that BASF has traded in over the past decade. I think it’s because BASF is kind of a constant source of revenue substitute. Its price comes from its normal and fictitious annual dividend. .
Compiled through the author
This brings us back to my raison d’être as the owner of BASF. BASF will be a multipacker company, but I think we will see its business hold up very well until spring 2023. If this is the case, I would like to be waiting for this unwarranted decrease in cost to the opposite and BASF to return to a percentage value closer to the fair cost, representing a 40% potential return in less than six months.
The fact that BASF now trades close to its tangible ebook price also provides coverage of issues and complements the risk/reward characteristics of a BASF investment. At this time, I expect BASF to incur significant operating losses, so it is unlikely that BASF industry will particularly lower the tangible price of eebook for a significant era of time.
While BASF’s share industry in the German electronic market replaces XETRA, U. S. investors can acquire the shares through the ADR (OTCQX:BASFY). But since BASF shares are denominated in EUR, investors deserve to note that the price of the ADR will be affected. through the EUR/USD replacement rate. This is partially offset by the fact that BASF’s profits benefit from a stronger dollar. BASF usefully estimates the sensitivity of revenue and EBIT to a replacement of $0. 01 in EUR/USD as follows:
BASF databook June 2022
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Disclosure: I have/have a long advantageous position in BASFY shares, whether through ownership of shares, features or other derivatives. I wrote this article myself and it expresses my own opinions. I don’t get any refunds for this (other than Seeking Alpha). I have nothing to do with a company whose actions are analyzed in this article.