I argue that LYB’s current valuation levels have become too attractive to ignore.
I believe the stock has already priced in all of the market’s fears about high NG prices and has proven it can pass its costs growth onto end customers.
I expect the company to feel a lot less pressure in 2022 than it did in 2021.
Meanwhile, LYB is increasing its dividend, reducing long-term debt, and actively growing revenue and EBITDA values while increasing its marginality.
Compared to the rest of the sector, LYB looks the cheapest at current levels. That’s why I recommend long-term investors to keep an eye on this stock.
MiguelMalo/iStock via Getty Images Thesis
LyondellBasell Industries N.V. (NYSE: LYB ) is a Netherlands-based chemical company with a market cap of $30.5 billion whose valuation has become too cheap to ignore, in my opinion, given the easing pressure from natural gas prices in 2022. Why do I think so?
LyondellBasell is active in various areas of the chemical industry – Iakov Fatianov has well presented the revenue structure in his recent article about the company: Source: ” LyondellBasell: Substantially Undervalued Long-Term Play “
Since the company’s production activity is highly dependent on the use of ethane and butane (the main components extracted from natural gas, NG), the increase in natural gas prices has a strong impact on the company’s margins, as the costs of the products produced/sold (COGS) has become more expensive and the selling prices are sometimes either fixed or limited by the existing demand.
But as the latest quarterly Q3 report showed, the unfavorable change in commodities needed for COGS has been partially shifted to end customers – as evidenced by a) revenue growth – 87.43% (YoY) and b) cash flow from operating activities growth. Source: LYB’s 3Q 2021 IR presentation
However, EPS miss put a lot of pressure on the stock, which, against the backdrop of continuing fears about the rise in NG prices, drove the quotes significantly below their June values. Source: Seeking Alpha Data by YCharts On the whole, I believe that demand for the company’s products will be strong enough for a long time to come – we can judge this by the example of polypropylene, or more precisely by the recent price trend, which once again confirms that LYB’s end markets are at least largely absorbing the additional costs the company faces due to high NG prices: Data by YCharts Moreover, the cycle of high natural gas prices next year should end, or at least become much less hot after the approaching cold winter. Gas prices will generally decline through 2022, amid rising US gas production and slowing growth in LNG exports, EIA said. The agency projected Henry Hub gas prices would average $4.10/MMBtu for full-year 2021 and $3.93/MMBtu in 2022, down from the previous month’s estimates of $4.17/MMBtu in 2021 and $4.01/MMBtu in 2022. Source: S&P Global Platts This should significantly reduce the pressure on LYB and increase the selling volumes. Given the current low valuation of the company, the stock has the potential to show good returns in the next couple of years from here.
I associate this primarily with the fact that LYB has not budged over the past year, while its key multiples fell to extremely low values – P/E and EV/EBITDA multiples (both forward) fell by 74.64% and 61.43%, YoY, respectively: Data by YCharts This happened against the backdrop of a fairly sharp increase in EBITDA and dividends even compared to pre-COVID times: Data by YCharts Value investors are always trying to find public firms that can bring a fairly comfortable dividend yield and be financially stable. LYB has both – since the beginning of 2021, the company has increased its dividend payment by 7.62%, while reducing long-term debt by 15.30%, without increasing short-term debt: Data by YCharts In this regard, LYB is now the most profitable company (based on ROCE and dividend yield of 5.05% ) among its closest peers; its dividend is more stable (the payout ratio is lower), and the stock in general looks cheaper in terms of forwarding EV/EBITDA multiple. Data by YCharts At the same time, LYB’s EBITDA estimate for the next year has increased by 36.67% since the beginning of the year. It can only be compared with (NYSE: DOW ), which is also trading quite low and seems to be attractively priced, but still lags behind LYB in some key indicators – at least LYB’s operating activities seem to be more sustainable in tough times like […]