Focusing On Circular & Low Carbon Solutions Will Drive Future Opportunities

Key Takeaways

• Strategic initiatives, including refinery transformation and asset reviews, aim to enhance EBITDA margins, impacting earnings positively.
  
• Focus on Circular & Low Carbon Solutions and MoReTec plants supports future revenue growth with high-margin opportunities.
  
• LyondellBasell faces potential earnings pressure from slow global growth, regulatory changes, and industry-specific challenges, requiring careful management to maintain profitability.

Catalysts

Operates as a chemical company in the United States, Germany, Mexico, Italy, Poland, France, Japan, China, the Netherlands, and internationally.

• LyondellBasell's strategic progress in unlocking incremental value could enable them to surpass historical cycle performance, particularly as they anticipate global demand for durable goods to return post-pandemic, impacting revenue growth and potential margin expansion.
  
• The company is focused on building its Circular & Low Carbon Solutions business, targeting $1 billion of incremental EBITDA from 2 million tons of annual volumes by 2030, which is expected to positively impact both revenue and net margins due to higher margins from circular plastics.
  
• LyondellBasell's strategic initiatives, including the transformation of their Houston refinery and a strategic review of European assets, are expected to provide a durable uplift in EBITDA margins, with a focus on high-value opportunities potentially impacting earnings positively.
  
• LyondellBasell's Value Enhancement Program is on track to exceed a year-end run rate of $1 billion in recurring annual EBITDA improvements, expected to boost earnings and cash flow in the coming years.
  
• The planned construction of MoReTec chemical recycling facilities in Germany and Houston is anticipated to position the company to capitalize on growing demand for circular plastics, potentially enhancing revenue and profitability through high-margin products.

LyondellBasell Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LyondellBasell Industries's revenue will decrease by 5.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.3% today to 7.8% in 3 years time.
• Analysts expect earnings to reach $2.6 billion (and earnings per share of $8.18) by about March 2028, up from $1.4 billion today. 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 12.9x on those 2028 earnings, down from 18.0x today. This future PE is lower than the current PE for the US Chemicals industry at 21.2x.
• Analysts expect the number of shares outstanding to decline by 0.67% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.9%, as per the Simply Wall St company report.

LyondellBasell Industries Future Earnings Per Share Growth

Risks

• LyondellBasell's exposure to prolonged downturns and slow global growth, particularly in China, along with structurally higher energy costs and regulatory impacts in Europe, could potentially lead to sustained pressure on revenue and earnings.
  
• The potential for capacity additions to outpace demand in the petrochemical sector could lead to continued margin compression, negatively impacting net margins.
  
• Challenges in the automotive industry, particularly in North America and Europe, have led to declines in production among key customers, pressuring earnings in the Advanced Polymer Solutions segment.
  
• European regulatory changes mandating increased use of recycled plastics could impose additional costs or operational hurdles, affecting net margins and overall profitability if not managed effectively.
  
• Discontinued operations and exiting certain business lines, such as the Refining segment, may impact near-term revenue streams and necessitate careful capital allocation to ensure future earnings growth.

Valuation

• The analysts have a consensus price target of $85.958 for LyondellBasell Industries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $115.0, and the most bearish reporting a price target of just $74.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $34.1 billion, earnings will come to $2.6 billion, and it would be trading on a PE ratio of 12.9x, assuming you use a discount rate of 7.9%.
• Given the current share price of $75.09, the analyst price target of $85.96 is 12.6% higher.
• 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.