December 2018 profit warning

On December 7th, 2018 BASF published a profit warning, reducing the previous EBIT before special items guidance. The company now expects a considerable decline in its EBIT before special items for 2018 of between 15% and 20% YoY. This is in the wake of more challenging conditions to base chemical activities, with the prices for isocyanates (TDI/MDI) declining sharply. Furthermore, unusually low water levels in the Rhine river, a key transportation route, limited the shipment particularly of raw materials but also of finished products and made them significantly costlier. Finally, the weakness of the Automotive industry has started to affect earnings since Q3 2018.

Scope sees no impact on the credit rating from the negative effects mentioned. BASF continues to benefit from the exit from the Oil and Gas business in 2019 which will lower the cyclicality of future company earnings. Moreover, the continuing focus of BASF on strengthening its downstream operations should also contribute to the stability of earnings. Recent bolt-on acquisitions by BASF in the Agricultural Solutions segment and the acquisition of Solvay’s polyamide business, pending regulatory approval, will help to contribute to full year results from 2019 onwards. As announced on October 26, 2018 during its quarterly conference call for analysts and investors, BASF is currently exploring options to exit its Construction Chemicals business. Regardless whether and with what solution any such exit is achieved, Scope believes that the resulting reduction of earnings volatility for the remainder of the group will be positive.

For these reasons, Scope does not anticipate any meaningful deviations for key credit metrics in fiscal 2018, with a Scope-adjusted debt (SaD) to Scope-adjusted EBITDA of 1.6x and funds from operations to SaD of 51%. These ratios include the effects of the Wintershall DEA transaction as estimated by Scope. In contrast to BASF’s financial reporting, Scope has not retroactively adjusted historically reported ratios to reflect the treatment of Wintershall as discontinued operations.

Rating implications

While Scope anticipates slightly weaker credit metrics for 2018 as a result of lower operating profits, we see BASF’s financial policy and low leverage as supportive of a rating in the A category. In this regard, Scope points towards BASF’s commitment to selective M&A, avoiding heavy usage of debt.

This publication does not constitute a credit rating action. For the official credit rating action release click here. On September 12, 2017, Scope assigned BASF SE an issuer rating of A. The short-term rating is S-1. The Outlook is Stable.