- BASF’s capex is set to drop sharply in 2026, driving a projected 9% free cash flow yield.
- The stock trades near historical valuation lows, with upside from margin recovery and policy support not priced in.
- Further tariff resolution news flows could trigger a rerating given the overly bearish sentiment in the sector
Although the recent 20% sell-off in BASF since mid-March reflects valid concerns over the latest tariff-induced recession risks, elevated input costs, and the soft demand in automotive and construction sectors, we believe current valuations likely fully reflect what appears to be peak pessimism in cyclical stocks while overlooking a compelling array of upside risks amid signs of improving volumes over the last few quarters.
Looking ahead, 2026 could mark a pivotal turning point for BASF where its capital-intensive Verbund site in China is expected to slash capex from EUR5.7bn in 2025 to EUR3.4bn, boosting the free cash flow yield to 9%. At the same time, European fiscal stimulus, fueled by increased defense spending and infrastructure investments, will likely spur industrial activity, further supported by positive developments in Ukraine-Russia peace talks and reductions in German energy costs that will amplify benefits for the company’s energy-intensive operations.
Despite significant earnings downgrades, BASF trades at a modest 7.3x FY1 EV/EBITDA, aligning with historical lows, while consensus estimates undervalue potential tailwinds from policy support and a recovery in compressed margins, currently at the 10th percentile. Further tariff resolution news flow or continued signs of a trough in volumes at its upcoming 1Q25 earnings on 5 May could trigger a rerating given extremely bearish investor confidence.
We propose Dec25 50 calls at a net cost of 3.8% of underlying (Spot ref: 44.0, Fut. 42.9).