Decisive Moves To Boost EBITDA, With Focus On Sustainable Growth And Global Expansion

Key Takeaways

• Strategic focus on increasing profitability and shareholder value through targeted investments and potential divestitures aims to positively impact revenue and net margins.
  
• Commitment to sustainable growth via circular and low-carbon solutions indicates a long-term strategy to enhance revenue streams and improve margins through environmentally friendly innovations.
  
• Cyclical industries dependency, strategic divestitures, significant investment in low-carbon solutions, and market competition could create volatility in earnings and affect net margins.

Catalysts

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

• The significant progress towards the goal of adding $3 billion in incremental normalized EBITDA by 2027 implies a strategy for financial growth aiming to increase profitability and shareholder value, potentially impacting revenue and net margins positively.
  
• The implementation of their European strategic review, aimed at focusing on leading positions in growing markets, suggests divestitures or repositioning could optimize the company's asset portfolio, impacting earnings positively by focusing on more profitable, core operations.
  
• The advancement of LyondellBasell's circular and low-carbon solutions business points to a long-term strategy for sustainable growth, potentially opening new revenue streams and improving net margins through innovative, environmentally friendly product offerings.
  
• The disciplined execution of their strategy supported by core strong cash generation points towards an efficient capital allocation that could drive EPS growth through targeted investments in high-return projects and potential share repurchase programs.
  
• The reshaping of their business portfolio through strategic growth investments, such as the expansion in PO/TBA capacity and formation of the NATPET joint venture in Saudi Arabia, suggests a focused approach to enhance core business profitability and expand global footprint, likely resulting in revenue growth and margin expansion.

Assumptions

• Analysts are assuming LyondellBasell Industries's revenue will decrease by -3.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.6% today to 8.5% in 3 years time.
• Analysts expect earnings to reach $3.1 billion (and earnings per share of $9.71) by about August 2027, up from $2.3 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 13.7x on those 2027 earnings, up from 13.3x today. This future PE is lower than the current PE for the US Chemicals industry at 24.6x.
• Analysts expect the number of shares outstanding to grow by 0.28% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.15%, as per the Simply Wall St company report.

Risks

• The reliance on cyclical industries such as automotive and construction for demand in the Intermediates and Derivatives (I&D) segment could lead to volatility in earnings, impacting net margins.
  
• The strategic review and potential divestiture of European assets might result in short-term operational disruptions and costs, potentially affecting net margins and earnings in the near term.
  
• The substantial investment in circular and low-carbon solutions, while strategically sound, represents significant execution risk and upfront costs that could pressure net margins if market adoption does not meet expectations.
  
• Operational challenges or delays in scaling up new technologies for advanced recycling and renewable hydrocarbons may result in higher operational costs or lower than expected efficiencies, impacting earnings.
  
• Market dynamics, including the addition of polyolefin capacity in other regions and potential for increased competition, could impact LyondellBasell's ability to maintain or grow its market share, affecting revenue and earnings.

Valuation

• The analysts have a consensus price target of $106.21 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 $120.0, and the most bearish reporting a price target of just $91.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $36.7 billion, earnings will come to $3.1 billion, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $94.84, the analyst's price target of $106.21 is 10.7% 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.