BASF Earnings: Decelerating Customer Destocking Indicates End-Market Recovery Is Forthcoming

Narrow-moat BASF BAS posted third-quarter results that reflect continued challenges from a sluggish global macroeconomic environment, as demand across end markets and geographies remains suppressed. Total sales declined 28% year over year and 9% sequentially, while firmwide EBITDA margin contracted 160 and 240 basis points over the same periods, respectively. Repressed volume demand and unfavorable pricing dynamics were key hindrances this quarter, exacerbated by unplanned downtime for two crackers in September.

Management reiterated fiscal 2023 guidance issued in the second quarter, but emphasized that 2023 results would likely come in near the lower end with the caveat that any further adverse market impacts could lead to a miss. We’re therefore lowering our fair value estimate to EUR 62 (USD 16) from EUR 64 (USD 18) following the results. Even with the cut, shares still trade at a roughly 30% discount to our fair value estimate. Though we don’t expect significant macroeconomic changes to materialize through the year-end, favorable industry indicators give us confidence that end markets may begin to recover over the next few quarters.

Current manufacturing stock levels imply customer destocking rates now sit at historical inflection points, with some regions already beginning to decelerate, even reverse, destocking activities. Inventory declines in Western Europe have just begun to stabilize, while North American inventories have steadily trended toward a more neutral balance. These two regions make up over half of BASF’s annual revenue and will support improved performance in line with their respective recoveries, moving forward. This will be gradual, and we still expect some headwinds to prevail through 2024, but we estimate the firm will resume revenue growth around 2025, averaging 6% per year through 2027.