An Equity Valuation and Investment Recommendation for BASF

With the intention of making a final investment recommendation, this thesis is written in the format of an equity valuation study for the global chemical company BASF (BAS:GR), based in Germany. Prior to undertaking an in-depth study of BASF's financial status and outlook for the 6 operational areas of the company, the research assesses the state of the global economy and the chemical industry in light of the political and economic challenges encountered in 2021. The discounted cash flow model is used as the main technique of valuation, and it projects 10 years' worth of free cash flows to the end of 2031. BASF reported healthy performance in Q1 2021, in line with the preliminary results, which had surprised positively in terms of both revenues and adj. EBIT. However, an impairment charge of approximately EUR 1.1 billion recognised by its subsidiary Wintershall Dea (in which BASF owns a 72.7 percent share) weighed down the net income, particularly in relation to a loan to the abandoned pipeline project Nord Stream 2. Despite the ongoing uncertainty, the company reaffirmed its guidance for 2022, with sales expected at EUR 74bn-EUR 77bn (down 4% yoy at the midpoint) and adj. EBIT expected at EUR 6.6bn- EUR 7.2bn (down 11% yoy at the midpoint). Upstream business decreased EBIT by adj. Adj. EBIT decreased 1% year over year to EUR 2.3 billion, but somehow it surprised to the upside by outperforming expectations by 12% on a difficult comparative base and in a challenging market environment (at the time of pre-release). Due to the inflation of raw material costs and rising energy prices, the margin shrank 170bps yoy to 10.2 percent. Except for Surface Technologies, almost all of the downstream business' segments recorded overall EBIT growth. In contrast, the Materials and Chemicals upstream segments recorded reductions, albeit in line with expectations. Recommendation stays Buy. Profiting from ongoing strong demand for its goods and large price increases, BASF reported strong performance in Q2, demonstrating the company's ability to pass on rising input cost inflation. In light of the excellent quarter, management raised its sales forecast but decreased its expectation for 2022's full-year adjusted EBIT. Our BUY recommendation remains maintained, and our PT remains at EUR 82.58.