Green Polymers And Transform Rio Will Shape Mixed Long Term Petrochemical Outlook

Catalysts

About Braskem

Braskem is a global petrochemical company that produces resins, chemicals and biopolymers with industrial operations in Brazil, the United States, Europe and Mexico.

What are the underlying business or industry changes driving this perspective?

• Although the Transform Rio expansion should add 220,000 tonnes of ethylene and equivalent polyethylene capacity in a structurally deficit Brazilian PE market, execution risk around funding, long term gas supply from Petrobras and project delivery through 2028 could delay or dilute the anticipated near 200 million dollars of incremental EBITDA. This could limit medium term earnings growth.
• While the new ethane import terminal in Mexico and reduced reliance on Fast Track logistics can structurally lower feedstock and freight costs, the combination of low global spreads and Braskem Idesa’s need to first rebuild utilization and rebalance its own capital structure means any normalized contribution to consolidated earnings and leverage relief is likely to be gradual rather than rapid.
• Despite regulatory advances in Brazil such as antidumping duties and the expected implementation of PRESIQ and the renewed feedstock incentives, these benefits are tied to fiscal budgets and political approval cycles. Any shortfall versus the indicated 280 million to 300 million dollars EBITDA uplift from 2026 would leave margins and cash flow more exposed to the prolonged global oversupply.
• Although the transformation initiatives in Alagoas and Rio Grande do Sul, including LPG import flexibility and the shift to more competitive EDC based PVC production, can structurally improve the cost curve position of these assets, the industry outlook of depressed operating rates until at least 2030 suggests that much of the cost savings will be absorbed by weak pricing. This would limit upside to net margins.
• While Braskem GreenCo and the fly up to green agenda position the company to benefit from growing global demand for lower carbon and renewable based polymers, current low utilization at the green ethylene plant, the cyclical pressure on biopolymer premiums and the need for sizable long dated investments imply that any material contribution to consolidated revenue and earnings will be back weighted toward the end of the decade.

Assumptions

This narrative explores a more pessimistic perspective on Braskem compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Braskem's revenue will grow by 3.9% annually over the next 3 years.
• The bearish analysts are not forecasting that Braskem will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Braskem's profit margin will increase from -7.1% to the average US Chemicals industry of 9.0% in 3 years.
• If Braskem's profit margin were to converge on the industry average, you could expect earnings to reach R$7.4 billion (and earnings per share of R$9.33) by about December 2028, up from R$-5.2 billion today.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 1.7x on those 2028 earnings, up from -1.2x today. This future PE is lower than the current PE for the US Chemicals industry at 9.7x.
• The bearish 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 27.65%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A structurally prolonged downcycle in global petrochemicals, with excess capacity in China and the Middle East and operating rates expected to remain historically low until at least 2030, could drive spreads and selling prices below current levels for longer than anticipated, putting sustained pressure on Braskem's revenue and EBITDA.
• Very high leverage of around 14.7 times and recurring operating cash consumption despite improved quarterly EBITDA, combined with heavy maintenance, Alagoas related disbursements and the need to fund large projects like Transform Rio, increase the risk of a more aggressive balance sheet restructuring that dilutes equity holders and weighs on earnings and net margins.
• Key regulatory and fiscal supports in Brazil, including the approval and budget execution of REIQ and PRESIQ and maintenance of antidumping duties and import tariffs, remain exposed to political and fiscal risk and any shortfall versus expectations could leave Braskem more exposed to cheap imports and weak spreads, negatively impacting domestic volumes and contribution margins.
• The long dated resiliency and transformation initiatives, such as gas based feedstock shifts, LPG imports and green portfolio expansion, may be slow to offset structurally weak global spreads and rising competition, delaying any material uplift in profitability and limiting improvement in net margins and earnings growth.
• Persistent weakness or deindustrialization in key regions like Europe, combined with shifting global trade flows and protectionist policies, could alter trade patterns in ways that intensify competition in Braskem’s core markets and constrain its ability to pass through costs, thereby suppressing revenue growth and compressing EBITDA margins.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Braskem is R$7.55, which represents up to two standard deviations below the consensus price target of R$11.61. This valuation is based on what can be assumed as the expectations of Braskem's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$18.0, and the most bearish reporting a price target of just R$7.55.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be R$82.7 billion, earnings will come to R$7.4 billion, and it would be trading on a PE ratio of 1.7x, assuming you use a discount rate of 27.7%.
  
• Given the current share price of R$7.75, the analyst price target of R$7.55 is 2.6% lower. 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.