Goldman Sachs Reiterates Buy on BASF with EUR 65 Target, Expects Q2 Earnings Improvement
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Goldman Sachs Reiterates Buy on BASF with EUR 65 Target, Expects Q2 Earnings Improvement
Management is confident in the near-term outlook; volume and price increases offset cost pressures, while supply chain resilience supports order growth
- Volume and price increased in April-May; Q2 earnings expected to exceed consensus
- Flexible feedstock procurement strategy ensures supply chain security
- Zhanjiang site achieved profitability for the first time in March, ahead of schedule
- Upstream segment benefits from rising prices; downstream segment demonstrates robust cost pass-through
- Industry consolidation accelerates, highlighting BASF's supply chain advantages
Report interpretation
Overview
This report distills 10 key insights from the BASF post-Q1 management roadshow attended by Goldman Sachs. The core conclusion is that management holds a cautiously optimistic view on near-term operations; current increases in volume and prices are offsetting rising raw material costs, while supply chain resilience supports order growth. We maintain our Buy rating and EUR 65 target price.
Core views
Positive Trading Dynamics: April data and early May indications confirm that earnings forecasts are being realized, with the order book continuing to improve. Both prices and volumes are showing positive growth, fully covering the impact of rising raw material costs. Q2 consensus expectations are robust, with upside potential if June trends follow May's trajectory. Supply Chain Resilience: BASF operates flexible cracker units across key regions, primarily using naphtha and propane at its European and US sites, with 90% of feedstocks sourced locally. Supply is monitored via a traffic light system and rolling forecasts; European supplies of naphtha, benzene, and LPG are secure through June, with manageable supply risks in July. Divergence in Price and Cost Pass-Through: The upstream segment (Chemicals & Materials) directly benefits from price increases driven by supply shocks, while the downstream segment (Industrial Solutions, Nutrition & Care) passes on costs through pricing, with earnings expected to remain flat year-over-year. The Surface Technologies segment saw a slight year-over-year decline in adjusted EBITDA. Rising Expectations for Industry Consolidation: Management noted that if geopolitical conflicts are prolonged, global chemical industry consolidation could accelerate. Customers are becoming more sensitive to supply chain length, and BASF has become a primary or secondary supplier choice for clients in Europe.
Analysis framework
Goldman Sachs obtained operational details through direct communication with management and validated earnings forecasts using financial models. The analytical framework focuses on supply chain resilience (local feedstock procurement ratios, flexible cracker configuration), price pass-through capabilities (differentiated performance between upstream and downstream segments), and changes in industry dynamics (shifts in customer supply chain preferences). Valuation uses an EV/DACF multiple approach, adjusting the historical multiple of 10.0x up by 1% to 10.1x to reflect expected CROCI improvement.
Methodology notes
EV/DACF Valuation Multiple
Valuation based on the ratio of Enterprise Value to Depreciation and Amortization Cash Flow; this report adjusts the historical multiple of 10.0x up by 1% to 10.1x, reflecting improved capital returns driven by upward earnings revisions
Differences in Upstream and Downstream Price Pass-Through Capabilities
Analyzes how the upstream segment directly benefits from raw material price increases while the downstream segment passes on costs through pricing, demonstrating the varying abilities of different supply chain links to cope with cost pressures
Sensitivity to Supply Chain Length
Customers are placing greater emphasis on supply chain stability; BASF's integrated Verbund model serves as a competitive advantage, accelerating market share gains
Key data
- Target PriceEUR 6512-month target price, implying 25.8% upside
- Valuation Multiple10.1x EV/DACFAdjusted up 1% from the historical multiple of 10.0x, reflecting CROCI improvement
- Zhanjiang SiteFirst profitability in MarchCommissioning ahead of schedule; previous force majeure declaration attributed to normal start-up effects
- Local Feedstock Rate90%Proportion of locally sourced feedstocks across regions, reducing supply chain risk
Impact & implications
The report argues that BASF, leveraging its integrated operations and supply chain resilience, continues to gain customer trust amidst industry volatility, with potential to increase its European market share. If geopolitical conflicts are prolonged, accelerated industry consolidation could further solidify its leadership position. Improved cash flow and reduced capital expenditures support deleveraging targets.
Risks
- Weak end-demand due to European recession or German industrial stagnation
- Value destruction if European chemical asset consolidation occurs
- Intensified cost and capacity competition from Chinese producers
- Chinese stimulus policies failing to support domestic chemical demand
- Delays in Zhanjiang site commissioning or low profit margins
- Upstream segment unable to pass on raw material costs, compressing profits
- Weakening in agricultural end-markets due to farmer economics or trade uncertainty
- Continuous erosion of European chemical competitiveness due to energy costs and regulatory burdens
- Reopening of the Suez Canal lowering logistics costs and increasing Asian chemical imports into Europe
What to watch
- Whether June trading trends sustain May's momentum
- Feedstock supply security status in July
- Changes in Zhanjiang site profit margins
- Actual progress in industry consolidation