Chemicals
The hunt for recoveries
With momentum in the European chemicals sector likely to be weak in 2009, we
look farther out. We estimate BASF and Solvay will achieve the highest earnings
recovery in the sector, while Umicore will suffer from the expiration of hedging
contracts. Buy: BASF and Solvay. Sell: Umicore. Hold: AkzoNobel and DSM.
Table 1 : Key recommendations & forecasts
Reuters Year end Recom Price Target
price
EPS
1fcst
PE
1fcst
AkzoNobel AKZO.AS Dec 2009 Hold €29.46 €27.00 2.80 10.5
BASF BASF.DE Dec 2009 Buy €23.77 €30.00 1.58 15.1
DSM DSMN.AS Dec 2009 Hold €20.30 €20.00 1.51 13.4
Umicore UMI.BR Dec 2009 Sell €14.25 €12.00 1.03 13.9
Solvay SOLB.BR Dec 2009 Buy €50.52 €58.00 5.26 9.60
Prices as of 27 March 2009
Source: Company data, ABN AMRO forecasts
Yes, 2009 should be a terrible year for the chemical industry
In 4Q08 the chemical industry experienced a sharp decline in demand as customers in key
industries such as construction and automotive stopped ordering. According to most
chemical companies volumes are even weaker in 1Q09, providing a very negative outlook for
the year. In response, chemical companies have adjusted quickly by implementing capacity
cuts of 10% to more than 25% of total capacity and laying off employees. Therefore, we have
a cautious stance on the sector, which is also reflected in our recommendations.
We look for diversified recovery stories beyond 2009
We believe key investment themes will be diversified business models, strong balance
sheets, and potential earnings recovery. Looking beyond 2009, we see BASF and Solvay as
the most diversified recovery plays in our universe with 2009-11F EPS CAGRs of 29% and
26%, respectively. We like Solvay as it provides defensive exposure through
Pharmaceuticals, while its recovery will likely be driven by organic volume growth, cost
cutting, improved market conditions and a better supply/demand balance for its key products.
In our view, BASF, as the most diversified chemical company, will benefit from a general
recovery of most of its end-markets. AkzoNobel and DSM are more late-cyclical companies
and should grow in line with the market. We believe AkzoNobel and Umicore are the only
chemical companies that will face an earnings decline from 2009 to 2010 and 2011,
respectively. We even forecast Umicore to show a negative 2009-11F EPS CAGR of 8%
given the expiration of its hedging contracts in the recycling division combined with lower
spot prices for precious metals.
Buy BASF and Solvay, Sell Umicore
We initiate coverage on BASF with a Buy recommendation. We upgrade Solvay from Hold to
Buy. We downgrade AkzoNobel and DSM from Buy to Hold. Finally, we downgrade Umicore
from Buy to Sell.
Contents
Investment view 2
Below we provide a brief overview of key positive and negatives per company. 2
BASF (Initiate with Buy, TP €30) – Best-in-class chemical 2
Solvay (Upgrade to Buy, TP €58) – Hedged for recovery 2
AkzoNobel (Downgrade to Hold, TP €27) – A grey picture 2
DSM (Downgrade to Hold, TP €20) – Murphy’s Law 3
Umicore (Downgrade to Sell, TP €12) – Running out of fuel 3
Look beyond 2009 4
2009 can already be regarded a loss for the chemical industry, in our view.
However, companies have adjusted their cost base and are financially sound. We
look beyond 2009 and see significant earnings recovery combined with low
valuation.
The chemical ABCs 4
Yes, 2009 will be a terrible year for the chemical industry 6
We look for diversified recovery beyond 2009 9
Credit perspective 16
We prefer BASF and Solvay 19
After a dramatic 2H08 share price performance, the recent performance for our
chemical universe is more positive. We think BASF and Solvay have the highest
recovery potential and their valuations look attractive on both SOTP and DCF. We
see downside for Umicore.
Company profiles
AkzoNobel 22
BASF 33
DSM 78
Solvay 88
Umicore 98