P&L Check

BASF Comes of Age

  • Why it matters

    Why it matters

    BASF passed last year’s stress test with merely a few scratches and is looking to strengthen its core business in 2017 while increasing its dividend.

  • Facts

    Facts

    • Sales and profits plummeted in the oil and gas division, although most of this drop was due to the group’s withdrawal from gas trading activities.
    • Operating earnings were up almost 12 percent in the group’s chemicals business, which performed significantly better than the sector.
    • BASF predicts a slight rise in operating profit for 2017.
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    Audio

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BASF Schwarzheide GmbH, Außenansicht
BASF had a bit of an annus horribilis in 2016 but the future looks brighter. Source: DPA.

For BASF, the world’s biggest chemicals group and Germany’s leading oil and gas producer, 2016 did not go quite as management and shareholders would have liked. The year began with oil prices plummeting to less than $30 per barrel and ended with a production stoppage at a brand new plant for TDI, an important precursor of plastic, after the plant was plagued by technical problems. And then a huge explosion at the group’s main production site in Ludwigshafen killed four people and brought the factory’s supply of some raw materials to a standstill.

Recalling the dramatic giant column of smoke hovering over Ludwigshafen, might lead some to call the year disastrous for BASF. Yet there’s not much disaster in the annual figures Chief Executive Kurt Bock presented to shareholders at the general meeting on Friday. Income remained stable and the group is financially strong. Shareholders are set to benefit from this with a slightly increased dividend of €3 ($3.26) per share.

Although the group’s sales dropped by one-fifth, its net profit was up 2 percent at €4.05 billion despite the slump in oil business, while operating profit was maintained at €6.3 billion thanks to capital gains. Adjusted for extraordinary effects, BASF contracted by a comparatively moderate 6 percent.

The decline in oil business was offset by much higher earnings in chemicals activities.

The figures show that even the market leader is not immune to major technical breakdowns and that important parts of its business still go through cyclical fluctuations. At the same time, last year’s stress test also confirms BASF’s robustness: it has clearly made large parts of its chemicals business so stable and efficient it can absorb shocks such as those experienced last year without major trauma.

The biggest financial challenge was the oil and gas business, which in previous years had steadily generated at least one-fifth of the group’s profit. The division, already under pressure in 2015, saw operating profit plunge by a further 53 percent to €500 million in 2016, while sales contracted by four-fifths.

But this was largely due to the company’s withdrawal from gas trading activities, which it sold to its joint venture partner, Russian group Gazprom, in September 2015. BASF ceded a large volume of sales in the deal, but relatively little profit. This has led to a significant shift in weightings within the group. BASF has become overwhelmingly a chemicals company again, with the oil and gas division accounting for just 5 percent of sales and 8 percent of operating profits in 2016.

05-12 p21 BASF Over the Years-01

The decline in the oil business was also offset by much higher earnings in chemicals activities. The Ludwigshafen accident and the delays with the TDI project ultimately had only a minimal impact on performance, thanks to insurance and alternative production capacity. Although business with basic products and agrochemicals experienced a slight decline, the two other major chemicals segments at BASF grew significantly. In particular, the functional materials division, which includes business with dyes, plastics and catalysts, reported a 37 percent rise in earnings. Excluding the gain on disposal of the industrial paints business, growth came to 18 percent.

Profits also soared in business with performance products, meaning pigments, precursors to cosmetics and other special chemicals. Both segments benefited from moderate growth in sales; although prices fell, raw material costs in some cases dropped more sharply. Restructuring measures taken in previous years also boosted margins. As a result, the group’s gross profit dropped by only 4 percent, despite the decline in oil and gas business.

BASF
If a 30-percent increase in share prices in 12 months can’t make CEO Kurt Bock smile, nothing will. Source: Uwe Anspach/DPA.

In total, BASF’s chemicals operations recorded a 4.6 percent drop in sales, with operating profit up by almost 12 percent and an improvement in the operating margin to 10.6 percent. So the group is likely to have outperformed its sector. On average, operating profits of the 20 largest companies in the western chemicals industry fell slightly in 2016. The BASF group’s earnings significantly exceeded its cost of capital, which it estimates at 10 percent of business assets of around €62 billion.

The improvements in efficiency in chemicals business and the current favorable environment suggest that BASF may achieve a lasting turnaround and put an end to a two-year phase of stagnation. Mr. Bock forecasts only a slight rise in operating profit for 2017. However, a very strong first quarter, in which operating profit jumped by 31 percent and net profit soared by a quarter, at least opens up the possibility of stronger earnings growth.

This financial strength supports the group’s highly ambitious dividend policy. It can afford an above-average payout rate of over 60 percent of net profit, while still leaving about €1 billion in internally generated funds each year to use for acquisitions.

From a purely financial viewpoint, BASF could therefore afford more acquisitions, particularly as its debts are at a moderate level of 1.4 times EBITDA. However, it does not appear to be under acute pressure to play a bigger part in ongoing consolidation in the chemicals sector. The favorable business environment promises robust organic growth in 2017 at least.

 

Siegfried Hofmann is Handelsblatt’s chemical and pharmaceutical industries correspondent. To contact the author: hofmann@handelsblatt.com.

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