Braskem Buoyed By A Buyout Offer

The climb down from record-high petrochemical spreads in 2021 has been a painful one for Braskem (NYSE:BAK), with the ADRs of this large Brazilian chemical company down over 30% over the past year – worse than peers like Alpek (OTC:ALPKF) and LyondellBasell (LYB). Not only has Braskem taken a hit from higher feedstock prices and higher industry supply, but the company has also seen unhelpful developments in its ongoing Alagoas liabilities and from Brazilian government tax and tariff actions.

As I said back in August of 2021, Braskem shares aren’t a particularly attractive option in the face of weaker spreads and weaker EBITDA, and that’s a situation that could persist for a while longer. By the same token, the shares recently hit decade-plus valuation lows (in terms of forward EV/EBITDA), and this is still a profitable, free cash flow-generating company with a respectable future. While the recently reported bid from Apollo Global Management (APO) isn’t necessarily a blockbuster offer, it could help restore confidence in the long-term outlook for this beaten-down chemicals company.

 

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Braskem Buoyed By A Buyout Offer

Record Resin Prices Leaving Braskem In Great Shape

 

Although I did see upside in Braskem (BAK) shares back in mid-March, I absolutely didn’t expect the magnitude of “stronger for longer” resin prices that we’ve seen since. With record resin prices fueling the business, Braskem’s ADRs have risen roughly 80% since that last article, blowing away other chemical companies I follow like Olin (OLN), PPG (PPG), and even the mighty Sika (OTCPK:SXYAY), not to mention other industry peers like ALPEK (OTC:ALPKF) and LyondellBasell (LYB).

While it hasn’t been an absolutely perfect storm for Braskem – some operational challenges have kept various units from running at full (or near-full) capacity – Braskem is nevertheless seeing cash flow roll in, easing concerns about the Alagoas liability and giving the company much more flexibility on debt repayment and capital returns, not to mention reinvesting in green/ESG projects.

I don’t believe today’s prices are sustainable (I don’t think anybody does…), but it’s plausible that 2022 prices could still be well above long-term averages before settling down in 2023 and 2024. There could still be upside here on a continuation of the “stronger for longer” trade, and Braskem is likely to reap the benefits from this windfall for a long time to come, but this will be a tough stock to hold once resin prices start to correct.

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Record Resin Prices Leaving Braskem In Great Shape

Braskem Strong On Soaring Resin Prices And More Operational Certainty

Whether it’s wood, steel, or plastic, if you sell a commodity these days, odds are pretty good you’re enjoying strong prices. That’s certainly good news for Braskem (BAK), as although these peak prices won’t last, the company can make quite a bit of money in the meantime. On top of those soaring prices, Braskem has moved to shore up issues like its Mexican supply problems and its liabilities for the Alagoas mining disaster.

I liked Braskem back in September, as I did expect higher prices as the economies of Brazil and the U.S. turned around. I didn’t expect multiyear highs for resin prices, though, and Braskem’s 50%-plus move has exceeded my expectations (not to mention significantly outperforming the Brazilian market as a whole).

Even if resin prices stay higher for longer, I don’t see today’s prices as sustainable. Longer term, I expect Braskem to generate mid-single-digit revenue growth as it leverages growth opportunities in North and South America. Although I don’t see much undervaluation on a long-term discounted cash flow basis, even assuming meaningful long-term improvement in FCF margins relative to the company’s historical performance, I do still see double-digit upside on an EBITDA basis, but I’d caution readers that buying Braskem today is basically volunteering for a game of musical chairs.

 

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Braskem Strong On Soaring Resin Prices And More Operational Certainty

Braskem Undervalued On Economic Recovery Prospects, But Debt And Operation Challenges Create Higher Risk

It’s been a while since I’ve updated my thoughts on Braskem (BAK), but it hasn’t been an easy run for the company, with the shares down more than 50% on a host of issues. When I last wrote about the company, I cited some risks from compensation claims from Alagoas, weaker spreads, issues with ethane supply, and overall economic-driven demand, and since that time pretty much every one of those issues has come home to roost.

Management deserves credit for how they’ve managed these challenges, though, and I think the market may be giving too little credit for the value of the company’s diversified feedstock supplies and attractive geographic positioning. The company’s very high leverage is an issue (and it creates some valuation complications), but I do believe these shares are undervalued enough to be worth consideration.

 

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Braskem Undervalued On Economic Recovery Prospects, But Debt And Operation Challenges Create Higher Risk

Braskem Buffeted By Challenges On All Sides

Not much has gone right for Braskem (OTCPK:BRKMY) since I last wrote about Brazil’s leading basic chemical producer. Not only have the buyout talks between LyondellBasell (LYB) and Braskem’s controlling shareholder (Odebrecht, or ODB) collapsed, but Braskem is facing collapsing spreads as its products go through a cyclical downturn, an environmental problem with a salt mining operation in Brazil, and compliance issues that have led to the shares being delisted from the NYSE for the time being.

I’d previously written that a collapse in the LYB talks could push the shares back down in the low-to-mid $20’s, and with the added pressures of the environmental problem and the cyclical downswing, Braskem’s ADRs are now around $20. I do believe that the environmental issue is manageable, that management will get back into compliance and get the shares relisted on the NYSE, and that the business will likely bottom out in 2020, but what will happen with ODB’s bankruptcy remains a major open question. I do believe the shares are undervalued now below the low-to-mid $20’s, but there are a lot of issues for investors to digest, and I can understand why most investors would steer clear.

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Braskem Buffeted By Challenges On All Sides

Solid Pricing Boosting Braskem's Free Cash Flow, But A Buyout Is The Best Outcome

I thought Braskem (BAK) had so-so prospects back in the spring of 2018, as the company was likely to face tougher spreads and a wobbly Brazilian recovery but improving free cash flows. Although the local shares have done better than I expected on persistently higher prices, with the BRKM5.SA shares up almost 20%, the unsteady Brazilian situation and the resulting currency weakness have depressed the returns on the ADRs to just a bit over breakeven.

A tight U.S. polypropylene market could continue to help Braskem, and chemical spreads should remain favorable, but management has guided toward weaker utilization and demand and spreads outside of the U.S. and Mexico could be vulnerable. Braskem appears to have a little bit of upside from here as is, but the ongoing discussions between LyondellBasell (LYB) and Braskem's controlling shareholders Odebrecht are likely the best source of upside for shareholders, as a buyout in the low $30s would offer a clean outcome with a decent premium.

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Solid Pricing Boosting Braskem's Free Cash Flow, But A Buyout Is The Best Outcome

Healthy Spreads And International Expansion Helping Braskem, But Mind The Risks

Compared to what Braskem (NYSE:BAK) was 15, 10, or even just five years ago, I think it’s fair to say that management has done a good job of improving the business. Braskem is now much less dependent upon naphtha as a feedstock and the company has made strides in diversifying beyond Brazil. The company’s involvement in the Brazilian “Car Wash” scandal was certainly a major black mark against it, but Braskem has nevertheless established itself as a major global chemical company with room for further growth and improvement.

Braskem is leveraged to an emerging recovery in Brazil as well as ongoing demand growth in markets like Mexico and the U.S., as well as other export markets. There are risks tied to a corruption investigation in Mexico that could threaten its supply of attractively-priced ethane, but the company is moving forward with greenfield growth in the U.S. and the shareholder structure may become simpler in the relatively near future. With a discount tied to uncertainties in Mexico and the ownership situation the shares look only a little undervalued, but absolution in Mexico and a cleaner shareholder structure could support a fair value in the mid-$30s even as polyolefin spreads look as though they’ll decline.

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Healthy Spreads And International Expansion Helping Braskem, But Mind The Risks

Healthy Spreads And Steady Operations Helping Braskem

Brazilian shares have had a good run since the spring, and Braskem (NYSE:BAK) has gone along for the ride with the shares climbing another third since my last piece, taking the shares up 70% over the past year. Brazil's economy is still in tough shape, but weak oil prices and healthy international demand for polyethylene and polypropylene have kept the company's financials in good shape.

There are a lot of unknowns that investors have to make their peace with if they're going to own Braskem. The company announced earlier this month that they were having settlement discussions with the U.S. Department of Justice and the SEC regarding the company's involvement in a widespread bribery and corruption probe in Brazil, but the magnitude of any settlement (in the U.S. and Brazil) is still unknown.

What's more, Brazil's economy seems to be stabilizing, but the path of the recovery is uncertain and Braskem's chemicals are tied to demand for fundamental products like construction materials, appliances, cars, packaged foods and so on. In addition to all of that, there is the regular unpredictably of the currency markets, energy markets, and basic chemical markets.

I believe Braskem is still undervalued on an EV/EBITDA basis, but it's a more challenging call. Braskem should benefit from increased production in Mexico, healthy fundamentals in the U.S., and the Brazilian recovery, but basic chemical companies don't often lend themselves to being long-term buy-and-hold stocks.

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Healthy Spreads And Steady Operations Helping Braskem

Seeking Alpha: Braskem Doing Well Despite Brazil's Problems

Finally - a Brazilian stock I can look back on and not feel bad about. Although Braskem (NYSE:BAK) shares have come down hard from a recent top (down almost 20% from a week ago), the shares are nevertheless up about 40% since my last review of the company. Brazilian shares have perked up since mid-January, but Braskem has done quite a bit better than Brazilian shares in general since June, as the company has benefited from lower feedstock prices and the opportunity to leverage a weaker Brazilian currency by importing Brazilian-produced chemicals into the U.S..

Management expects spreads to tighten up in 2016, and Brazil's economy remains weak, but low oil prices are still working in the company's favor. The addition of the company's Mexican plant should boost growth and Braskem seems to be looking toward a period of solid returns on assets (solid, at least, for a chemical producer). Valuation is difficult, as the shares don't look very cheap on a long-term FCF basis but do still seem undervalued on EV/EBITDA, while the role of the company in a widespread corruption scandal centered on Petrobras (NYSE:PBR) remains unknown.

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Braskem Doing Well Despite Brazil's Problems

Seeking Alpha: Braskem Not Fully Broken

Trying to find value in the Brazilian industrial commodities sector has been an unrewarding task over the past year. Companies like Gerdau (NYSE:GGB) and Braskem (NYSE:BAK) have shown me no love at all, as the combination of economic malaise and currency erosion has weighed heavily on the value of these ADRs. In the case of Braskem, there are additional worries tied to the company's naptha supply arrangement with Petrobras (NYSE:PBR), global polyolefin spreads, and potential changes in the tax regime in Brazil.

The nearly one-third decline in Braskem's share price since my last update is almost enough to tempt me to erase the company from my spreadsheets and take a vow of silence on the stock. Brazil probably has not yet reached its point of maximum economic pain and there are legitimate concerns regarding the company's cost structure under the new Petrobras agreement. That said, the shares are trading at 4.5 times the average sell-side EBITDA forecast over the next 12 months and that seems punitive relative to the company's leverage to an eventual recovery in Brazil and its increasing diversification into natural gas as a feedstock.

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Braskem Not Fully Broken

Seeking Alpha: Braskem Hamstrung By Brazil's Industrial Malaise

Continuing my run through Brazilian commodity companies that have had disappointing results this year, I come to Braskem (NYSE:BAK) - Brazil's large polyolefin and PVC producer. Like the steel companies Gerdau (NYSE:GGB) and CSN (NYSE:SID), Braskem has underperformed in the face of weakening domestic demand and fears that the Brazilian national election could bring in a government less supportive of the structural barriers that allow them to charge higher prices in Brazil.

I liked Braskem six months ago and I still believe the shares are undervalued. Even amidst an underwhelming domestic market, the general expectation is that Braskem will still see year-on-year EBITDA growth in the high single-digits for 2014 and double-digit growth in 2015. What's more, I think Braskem is looking at a window of opportunity (before major cracker project start-ups in the U.S.) where its naptha-based production can still be quite profitable. There's a not-so-fine line between being patient and being wrong, though, and these shares could still disappoint further.

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Braskem Hamstrung By Brazil's Industrial Malaise

Seeking Alpha: Fear Driving The Braskem Trading And Obscuring The Value

Chemical stocks can be volatile enough in their own right, as they are sensitive to the prices of key inputs like oil (naphtha) and natural gas and demand is typically tied to economic growth. Braskem (BAK) seems to offer additional risks, as investors worry about the impact of electricity rationing on the Brazilian economy and the company's competitiveness with gas-based cracking capacity.

Questions about the health of the Brazilian economy are valid, as the company has about two-thirds share in Brazil and over half of its sales go into this economy. Even so, the market appears to be overdoing it and the discount to other chemical companies seems to wide to ignore. I believe that fair value for Braskem starts around $20 today, making this is a notably undervalued play on Brazil's underlying economic growth as well as operational improvements that could improve the company's product portfolio and cost structure in the coming years.

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Fear Driving The Braskem Trading And Obscuring The Value

Investopedia: Is It Time To Prepare For A Braskem Rebound?

The peculiar logic that goes with commodity company investing works a little something like this - Brazil's Braskem (NYSE:BAK) is near its 52-week lows, so investors should probably add it to their watch lists. The trouble with this approach, though, is illustrated by the recent troubles in the coal sector - buying near the lows is all well and good, but what do you do if and when the stocks keep digging out new lows?

Is a Rebound Coming?
The trouble with Braskem is a familiar one; sluggish demand has hurt volumes, while spreads have been exceptionally low. Even though Braskem has a commanding (two-thirds) share of the Brazilian chemicals market and is largely protected by the Brazilian government, there's not much to change the short-term reality that demand is sub-optimal and the company's costs are high.

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