2023-11-08 14:36:10 ET
Summary
- We are decreasing our 2024 EBITDA estimate to reflect Dow's near-term lower earnings power.
- Dow should be impacted by lower demand in H1 2024.
- While the near-term remains challenging, Dow offers a tasty DPS with an ongoing buyback and cost-saving initiatives. We continue to see Dow as a buy.
Today, following the Q3 results, we are back to comment on Dow ( DOW ). This year, we already analyzed Q1 and Q2 financial releases, where we reiterated our buy rating considering a challenging Q3. Our overweight target was backed by a superior asset MIX with cost-saving initiatives and no significant financial debt maturities until 2027. In addition, our downside protection was supported by a tasty dividend yield. In numbers, Dow's next DPS will be paid on the 8th of December (going ex-dividend on the 29th of November). At the current price, Dow is yielding 5.67%. Before moving on with our analysis, we reviewed the company's Q3 results to assess the latest financial implications.
Q3 results
Q3 2023 EBITDA was -31% lower compared to last year and 16% lower versus last quarter. At the aggregate level, Dow reached an EPS of $0.48, 9% above consensus expectations. In numbers, Dow delivered a Q3 EBITDA of $1.28 billion, in line with the company's Q2 indication. The modest beat was due to better-than-expected results in the Performance Materials & Coatings division. This was supported by better seasonal demand in the construction and building and industrial intermediates division. On the other hand, Dow's performance was offset by weaker-than-expected output in the Packaging & Specialty Plastics segment. This was due to lower integrated polyethylene margins. By segment and by region, we can see that there was a lot of variance in the results. At the aggregate level, Dow's top-line sales were down by 24% to $10.73 billion, with volumes down in EMEA, North America, and APAC by 9%, 8%, and 2%, respectively, and output up in LatAm by 4%.
Source: Dow Q3 results presentation
Q4 Projections and 2024 implication
Looking ahead, Dow expects Q4 EBITDA to be approximately $1.23 billion versus the consensus expectation of $1.35 billion. This will result in an EBITDA down by 2% on a yearly basis and 4% on a quarterly basis. In addition, the company provided Q4 turnover guidance between $10 and $10.5 billion, 4% below consensus and down in the range of 11% and 16% on a yearly basis.
Here at the Lab, we have decided to reduce our 2024 estimates for the company. Last time, we anticipated lower-than-expected Q3 EBITDA, but we maintained the target price. Today, after having listened to management comments in the Q&A call, we understood that H1 2024 volumes will be impacted by lower demand. Therefore, we reduced 2024 EBITDA to $6.5 billion from $6.8 billion to reflect a weaker H1 with conservative results in Packaging and Specialty Plastics division. In addition, we adjusted the 2025 EBITDA projection, which is now at $7.3 billion, down from $7.5 billion. This is due to reflect Dow's near-term lower earnings power. Q3 marked the 5th consecutive quarter of lower volumes and the 4th consecutive quarter of lower pricing.
Conclusion and Valuation
Despite a challenging macroeconomic environment, we still rate Dow with an overweight target. The company offers a 5.7% dividend yield, secure and supported by an FCF yield between 6% and 6.5% in 2024 and 2025. Here at the Lab, we anticipate that Dow has the option to delay its longer-term CAPEX projects in a worsening of economic conditions. Indeed, the company plans to invest $7 billion in an ethylene and polyethylene production site in Alberta. Our internal team forecasted a total investment of $6 billion, given government incentives and a base case of $1 billion of additional EBITDA.
In addition, we should report the following:
- Cash provided by operating activities –reached $1.7 billion and was up by $311 million compared to Q2. Dow reported a cash flow conversion higher than 100% in the last twelve months. On cash flow, the company highlighted >$1 billion levers in 2024 due to $500 million of NOVA litigation proceeds and an additional $500 million in working capital improvement;
- The company continues to return cash to shareholders. In detail, the total remuneration was $617 million, made of $492 million in dividends and $125 million in buyback. On share-repurchase, Dow anticipates $125 million in share repurchase in Q4;
- On the cost savings, the company realized $350 million in Q3 compared to $250 million and $100 million in Q2 and Q1, respectively. Therefore, Dow expects to recognize the remaining $300 million in savings in Q4;
- Regarding the valuation, here at the Lab, we believe that DOW should trade at about 6.5x normalized EV/EBITDA with mid-cycle earnings of about $8 billion. Using this valuation, we arrive at an unchanged target price of $60 per share . While the near-term remains challenging, we believe that Dow can reach a mid-cycle EBITDA of approximately $10 billion by 2030 (the company forecast $14 billion of mid-cycle EBITDA) supported by a myriad of growth investments. Despite our next twelve-month EBITDA decreasing to $6.5 billion, we see Dow as a clear buy.
Downside risks include oil and NatGas price evolution, weaker-than-expected cash flow generation, a slowdown in industrial activities with lower commodity chemical margins, and an imbalance between supply and demand with capacity expansion from competitors. Valuations for commodity chemical companies tend to be volatile.
For further details see:
Dow: Resetting Expectations, Still A Buy