BASF’s stock down as sharply weaker guidance hints at 'more pain' ahead

BASF shares were trading down on Tuesday morning after the German chemical major’s core business suffered “sharply weaker than expected” trading conditions in the second quarter, chemicals analysts said.

BASF’s shares were trading down 6% compared to the previous close, at €58.89 at 10:30 CET.

The German major’s profit warning dragged the European chemicals stocks index down on Tuesday, with an average fall of more than 2%. Other chemicals majors like Solvay or Arkema had lost more than 4% of their value as of 10:30 CET.

The company said late on Monday that its Q2 and full-year earnings were expected to fall significantly below its forecasts, with 2019 pre-tax earnings before special items up to 30% below 2018, compared to a previous forecast of a slight year-on-year increase of 1-10%.

Sales in 2019 should fall slightly, it added, compared to a previous estimate of growth at around 1-5%.

While a profit warning was expected from BASF, chemicals analysts said the extent of the fall had been a surprise, and showed a trend within the industrial chemicals sector which could also dent trading conditions in the third quarter and beyond.

Analysts at Bernstein Research said that the agrochemicals division at BASF – enlarged after the acquisition of Bayer’s assets – would have been negatively impacted by the severe weather conditions in the US during the second quarter, and by the intensification of the US-China trade war.

“Materials earnings will be hit by lower volumes and isocyanate prices. Chemicals has scheduled turnarounds. [And we] can't ignore autos: BASF is clearly not immune to a declining auto market, with global production down 6% in H1 [the first half of] 2019, with double the decline at -13% in China, the largest automotive market,” said Bernstein.

Bernstein noted how BASF’s sales are strongly geared to the automotive markets, with around 20% of its sales done to original equipment manufacturers (OEM), key suppliers to the automobile industry.

“We expect more pain in H2,” the Bernstein analysts concluded.

Analysts at US investment bank Jefferies also focused on how the Q2 woes afflicting BASF were likely to spill into the third quarter, arguing that upcoming scheduled turnarounds and pressure on cracker margins would be a challenge in coming months.

“These headwinds are likely exacerbated by severe destocking, particularly in longer value chains, which will likely spill into Q3 as well,” said the bank.

As a result, key BASF selling products like toluene di-isocyanate (TDI) and methyl di-p-phenylene isocyanate (MDI) are likely to remain soft, Jefferies added, while demand from the automobile sector would “continue to disappoint”, as well as that for lubricants and catalysts.

In agrochemicals, it said crop protection volumes were also likely to bring “severe disappointments” in North America, key for BASF’s agrochemicals as the company sales around 40% of its volumes within that division in that region.

“Construction trends have likely been relatively benign in Q2, and trends have probably been healthy in nutrition and short-cycle consumer goods (personal care, cleaning products).”