OMVJF - OMV: Attractive Dividend Yield While We Wait For Multiples To Re-Rate

2023-05-04 12:11:11 ET

Summary

• OMV's 1Q23 earnings were strong, with adjusted net income exceeding consensus estimates, driven by outperformance in the Energy and Refining & Marketing segments.
• The acquisition of Borealis has elevated the downstream activities growth profile.
• I recommend a buy rating for a small position to take advantage of the cheap valuation and dividend yield.

Overview

OMV AG (OMVJF) is primarily engaged in the exploration, processing, and distribution of oil and natural gas. In addition, the company also produces polyolefins and technical plastics. The company's strong 1Q23 results were driven by outperformance in the Energy and Refining & Marketing segments, resulting in EBIT and adj. net income that exceeded consensus. With the acquisition of Borealis , OMV is well-positioned to become a market leader in the polyolefin industry, which I believe will be a key driver of growth in the medium to long term. Despite trading at a decade low of only 2.5x EBITDA, OMV has a current indicated yield of around 12%, offering decent upside potential if the valuation were to re-rate to average (of 4x). Overall, I would recommend a buy rating for a small position to take advantage of the cheap valuation. However, it is important to be aware that the business is still somewhat correlated to energy prices, which can be volatile.

1Q23 earnings

Adjusted net income for OMV was €1.025 billion, or 16% higher than the consensus estimate of €884 million. The Energy segment's materially higher Gas marketing and Power businesses drove OMV's outperformance in EBIT, which increased from -€47 million in 4Q22 to a staggering €358 million in 1Q23. These aside, while results from the refining and marketing divisions were above expectations, the chemicals and materials division's EBIT was 10% below projections.

Downstream

As previously mentioned, I anticipate that OMV's downstream activities will be the key driver of the company's future revenue growth. It is noteworthy that the downstream industry has undergone a significant transformation and expansion in recent years, particularly in terms of its global reach and market share. OMV's acquisition of Borealis has been one of the most noteworthy developments, resulting in total synergies of €200 million by the end of 2022. This deal has positioned OMV as a frontrunner in the European polyolefins market, enabling the company to shift towards higher-value and lower-carbon chemical products, and thus better aligning the company with its lower-carbon future goals.

FCF profile

In my view, OMV's attractive dividend yield is a significant factor that draws investors as they wait for a possible re-rating in the stock's multiple. I am pleased to note that OMV's robust operational performance in both upstream and downstream segments drove healthy cash flow in 1Q23. Nevertheless, I remain cautious about the increased cash flow in 1Q23, which was boosted by OMV's dividends from Borouge and insurance compensation for the Schwechat incident. Despite this, I would like to emphasize that my confidence in management's ability to sustainably provide attractive dividends has been strengthened by the inclusion of long-term guidance for operating cash flow in the 2022 presentation . Management aims to double operating cash flow from 1Q23, which was approximately €2 billion before changes in working capital, to €6 billion in 2025 and €7 billion in 2023. Achieving these targets is not impossible, given that it would only require an increase of €1.2+ billion from the average of €4.8 billion over the past five years pre-COVID. In my opinion, OMV is well-positioned to achieve these goals due to its restructured business, which is now more focused, profitable, and generates more cash, thanks to the Borealis transaction and downstream expansion efforts. Despite the company's efforts to grow organically and inorganically, its cash flow has improved significantly in recent years, rising from approximately €2.8 billion to €7+ billion today. This trend of consistent cash flow generation was further confirmed in 1Q23 when OMV reported a run-rate operating cash flow of €10.7 billion.

Balance sheet

In addition to its strong cash flow, one of OMV's most notable features is the company's ongoing effort to deleverage its balance sheet, which has reached 2% as of 1Q23. This further strengthens my conviction that OMV has a solid foundation upon which to safely distribute dividends. The reduced leverage ratio should also help the valuation. There is also a path for OMV, in the future, to lever up its balance sheet again to return excess capital to shareholders - via special dividend.

Conclusion

OMV's 1Q23 earnings report demonstrated the company's strength and resilience despite a challenging market environment. The acquisition of Borealis, positions OMV to become a market leader in the polyolefin industry, which I believe will be a key driver of growth in the medium to long term. Despite trading at a decade low valuation, OMV's current indicated dividend yield of around 12% provides attractive returns while investors wait for valuation to re-rate to average. OMV's robust cash flow generation, ongoing deleveraging efforts, and potential for a special dividend also make the company an attractive investment opportunity. However, it is important to consider that the business is still somewhat correlated to energy prices, which can be volatile. Overall, I would recommend a buy rating for a small position to take advantage of the cheap valuation and potential growth opportunities.

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