Future CapEx Increases Will Compress Free Cash Flows And Constrain Profitability

Key Takeaways

• Aggressive expansion and high CapEx may compress free cash flows, impacting profitability and leading to overestimated future revenue.
  
• Commitment to high dividend payouts could pressure cash reserves and financial stability if cash flows fall short of projections.
  
• Borouge's strategic focus on innovation and sustainability is driving robust financial performance, enhancing reputation, and positioning it well in challenging markets.

Catalysts

Through its subsidiaries, engages in the provision of polymer solutions in Asia, the Middle East, and Africa.

• Borouge's aggressive expansion plans, such as the Borouge 4 international expansion and asset revamps, indicate a commitment to accelerated growth. However, these projects may not translate into immediate revenue growth, potentially leading to an overestimation of future revenue.
  
• The expectation of a maintenance shutdown at the Borouge 3 plant in Q2 2025, impacting production by 320 kilotonnes, could pressure the company's net margins by increasing short-term operational costs without supporting revenue growth during that period.
  
• Increased CapEx in 2025, surpassing previous normal levels due to deferred maintenance projects and ongoing technological investments, might lead to compressed free cash flows temporarily, constraining profitability and potentially affecting earnings.
  
• Despite market challenges, Borouge aims to maintain high dividend payouts ($1.3 billion commitment) in 2025, which may exert pressure on cash reserves and financial stability, leading to potential dilution of earnings per share if cash flows do not meet projections.
  
• The achievement of significant product premia could be established in cyclical terms. It relies on changes in market dynamics that could reverse, posing a possible risk to sustaining high profitability and impacting net income expectations if market conditions shift.

Borouge Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Borouge's revenue will decrease by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 20.3% today to 20.7% in 3 years time.
• Analysts expect earnings to remain at the same level they are now, that being $1.2 billion (with an earnings per share of $0.04). The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.1x on those 2028 earnings, up from 16.9x today. This future PE is greater than the current PE for the AE Chemicals industry at 25.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 19.96%, as per the Simply Wall St company report.

Borouge Future Earnings Per Share Growth

Risks

• Borouge achieved record production and sales volumes in 2024, indicating robust operational capabilities that may positively impact revenue and profitability as the company continues to meet market demand efficiently.
  
• The company maintained a strong EBITDA margin of 40% for Q4 2024 and 41% for the full year, highlighting its ability to generate profit and manage costs effectively, which could contribute to stable or improved net margins.
  
• Borouge's agile market strategy and optimization of sales volumes, geographic positioning, and premium pricing enable it to navigate challenging market conditions, supporting consistent earnings potential.
  
• The strategic focus on innovation with the launch of 9 new products and leveraging AI and digitalization could drive revenue growth by tapping into high-growth segments, thereby impacting future earnings positively.
  
• Borouge's commitment to sustainability and inclusion in the ESG index could enhance its reputation and attract environmentally-conscious investors, potentially stabilizing or increasing its share price and overall financial performance.

Valuation

• The analysts have a consensus price target of AED2.737 for Borouge based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.8 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 32.1x, assuming you use a discount rate of 20.0%.
  
• Given the current share price of AED2.53, the analyst price target of AED2.74 is 7.6% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.