Flex 2 Project And Cash Improvement Will Unlock Value

Key Takeaways

• Portfolio reshaping and cost reductions aim to improve profitability and unlock significant earnings benefits via the Value Enhancement Program.
  
• Strategic investments and a robust supply network enhance long-term earnings potential and mitigate trade risks, supporting stable financial performance.
  
• Economic uncertainties, strategic cost management challenges, and geopolitical factors pose risks to LyondellBasell's revenue, margins, and 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 reshaping of its portfolio, including closure and sale of certain assets, has already reduced annual fixed costs by $300 million, which will likely improve net margins and overall profitability.
  
• The company’s Value Enhancement Program aims to unlock $1 billion in recurring annual EBITDA, through fixed cost reductions and operational improvements, which is expected to boost earnings.
  
• LyondellBasell's focused cash improvement plan, targeting $500 million cash improvement in 2025, prioritizes reducing capital expenditures and working capital, which should enhance cash flow and strengthen financial stability.
  
• Strategic investment in the Flex 2 project, which converts ethylene into high-value propylene with lower capital and carbon intensity, is projected to provide an annual EBITDA benefit of approximately $150 million, improving long-term earnings.
  
• LyondellBasell’s robust global supply network allows it to optimize trade flows and mitigate potential tariff impacts, maintaining competitive feedstock costs which could support stable revenue and margins amid trade volatility.

LyondellBasell Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LyondellBasell Industries's revenue will decrease by 7.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.4% today to 8.3% in 3 years time.
• Analysts expect earnings to reach $2.6 billion (and earnings per share of $8.11) by about April 2028, up from $939.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $3.5 billion in earnings, and the most bearish expecting $2.0 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.3x on those 2028 earnings, down from 20.1x today. This future PE is lower than the current PE for the US Chemicals industry at 19.3x.
• Analysts expect the number of shares outstanding to decline by 1.3% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.07%, as per the Simply Wall St company report.

LyondellBasell Industries Future Earnings Per Share Growth

Risks

• LyondellBasell is navigating a prolonged downturn and elevated market uncertainty, which could negatively impact revenue and earnings.
  
• The company is dependent on reducing fixed costs and executing strategic asset reviews in Europe to maintain margins, which introduces execution risk and potential for not achieving the intended net margin improvements.
  
• The reliance on trade policy shifts and potential tariff impacts pose a significant uncertainty to its near-term cash flows and revenue predictions.
  
• Economic conditions in China, such as weak demand and high inventory levels, could adversely affect forecasted revenue growth from the region.
  
• Changes in energy costs and the exceptional costs from maintenance could affect net margins and profitability, potentially straining earnings forecasts.

Valuation

• The analysts have a consensus price target of $69.767 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 $105.0, and the most bearish reporting a price target of just $50.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $31.8 billion, earnings will come to $2.6 billion, and it would be trading on a PE ratio of 10.3x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $58.83, the analyst price target of $69.77 is 15.7% 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.