Restructuring Efforts And South China Expansion Will Improve Future Profitability

Key Takeaways

• Cost-saving programs and restructuring efforts are expected to improve competitiveness and profitability through enhanced net margins and reduced operational costs.
  
• Strategic developments at key sites and expanded product offerings aim to drive revenue and earnings growth through increased capacity and timely project execution.
  
• BASF faces financial challenges from declining automotive production, agricultural pressures, currency volatility, rising costs in South China, and issues in the nutrition segment.

Catalysts

Operates as a chemical company worldwide.

• BASF's ongoing cost-saving programs, including structural adjustments at the Ludwigshafen site and plans to achieve €2.1 billion in annual cost savings by the end of 2026, are expected to improve net margins and EBIT in the future.
  
• The development of BASF's Verbund site in South China is anticipated to progress on time and within budget, potentially driving revenue and earnings growth as operations ramp up, despite initial fixed cost increases.
  
• Continued volume and margin expansion in BASF's core businesses, particularly in the Chemicals, Materials, and Nutrition & Care segments, could lead to increased EBITDA and overall earnings growth.
  
• The ongoing global restructuring efforts, including plant closures and efficiency improvements in key divisions, are aimed at enhancing competitiveness, which may result in increased future profitability by reducing operational costs.
  
• Expansion of product offerings and facility upgrades, such as increased capacity in aroma ingredients and the development of new production capabilities, are expected to support revenue growth and potentially improve net margins through higher-value product sales.

BASF Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BASF's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.8% today to 5.6% in 3 years time.
• Analysts expect earnings to reach €4.2 billion (and earnings per share of €4.77) by about December 2027, up from €497.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €5.5 billion in earnings, and the most bearish expecting €2.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.2x on those 2027 earnings, down from 80.6x today. This future PE is lower than the current PE for the GB Chemicals industry at 22.3x.
• Analysts expect the number of shares outstanding to decline by 0.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.84%, as per the Simply Wall St company report.

BASF Future Earnings Per Share Growth

Risks

• Global automotive production is expected to decline, particularly in Western Europe and North America, which could negatively impact BASF's Surface Technologies segment and overall revenues.
  
• The Agricultural Solutions segment is facing pressures from low crop commodity prices, elevated financing costs, and less favorable FX conditions, notably impacting margins and contributing to a decline in EBITDA before special items.
  
• Currency headwinds, primarily from the Argentinian peso and the Brazilian real, have been dampening sales growth, which could affect net margins if currency volatility continues.
  
• The anticipated cost increases related to the new Verbund site in South China, with significant fixed costs before reaching operational status, could pressure earnings and reduce free cash flow in the near term.
  
• The nutrition segment is experiencing issues due to force majeure and other challenges, leading to projected EBITDA impacts that could affect both net margins and overall financial performance into the next quarters.

Valuation

• The analysts have a consensus price target of €53.07 for BASF based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €65.0, and the most bearish reporting a price target of just €40.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €74.2 billion, earnings will come to €4.2 billion, and it would be trading on a PE ratio of 13.2x, assuming you use a discount rate of 5.8%.
• Given the current share price of €44.88, the analyst's price target of €53.07 is 15.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.