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Estimating The Fair Value Of LyondellBasell Industries N.V. (NYSE:LYB)

Blake Harford

I am going to run you through how I calculated the intrinsic value of LyondellBasell Industries N.V. (NYSE:LYB) by taking the expected future cash flows and discounting them to today’s value. I will be using the discounted cash flows (DCF) model. Don’t get put off by the jargon, the math behind it is actually quite straightforward. If you want to learn more about discounted cash flow, the basis for my calcs can be read in detail in the Simply Wall St analysis model. If you are reading this and its not January 2019 then I highly recommend you check out the latest calculation for LyondellBasell Industries by following the link below.

View our latest analysis for LyondellBasell Industries

What’s the value?

We are going to use a two-stage DCF model, which, as the name states, takes into account two stages of growth. The first stage is generally a higher growth period which levels off heading towards the terminal value, captured in the second ‘steady growth’ period. In the first stage we need to estimate the cash flows to the business over the next five years. For this I used the consensus of the analysts covering the stock, as you can see below. The sum of these cash flows is then discounted to today’s value.

5-year cash flow forecast

2019 2020 2021 2022 2023
Levered FCF ($, Millions) $2.36k $2.79k $3.48k $3.23k $3.01k
Source Analyst x9 Analyst x5 Analyst x2 Est @ -6.94% Est @ -6.94%
Present Value Discounted @ 11.85% $2.11k $2.23k $2.48k $2.07k $1.72k

Present Value of 5-year Cash Flow (PVCF)= US$11b

We now need to calculate the Terminal Value, which accounts for all the future cash flows after the five years. For a number of reasons a very conservative growth rate is used that cannot exceed that of the GDP. In this case I have used the 10-year government bond rate (2.9%). In the same way as with the 5-year ‘growth’ period, we discount this to today’s value at a cost of equity of 11.8%.

Terminal Value (TV) = FCF2023 × (1 + g) ÷ (r – g) = US$3.0b × (1 + 2.9%) ÷ (11.8% – 2.9%) = US$35b

Present Value of Terminal Value (PVTV) = TV / (1 + r)5 = US$35b ÷ ( 1 + 11.8%)5 = US$20b

The total value, or equity value, is then the sum of the present value of the cash flows, which in this case is US$31b. To get the intrinsic value per share, we divide this by the total number of shares outstanding, or the equivalent number if this is a depositary receipt or ADR. This results in an intrinsic value of $79.5. Relative to the current share price of $86.7, the stock is fair value, maybe slightly overvalued and not available at a discount at this time.

NYSE:LYB Intrinsic Value Export January 5th 19

Important assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. You don’t have to agree with my inputs, I recommend redoing the calculations yourself and playing with them. Because we are looking at LyondellBasell Industries as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighed average cost of capital, WACC) which accounts for debt. In this calculation I’ve used 11.8%, which is based on a levered beta of 1.262. This is derived from the Bottom-Up Beta method based on comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Next Steps:

Valuation is only one side of the coin in terms of building your investment thesis, and it shouldn’t be the only metric you look at when researching a company. For LYB, I’ve compiled three pertinent factors you should further research:

  1. Financial Health: Does LYB have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.
  2. Future Earnings: How does LYB’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.
  3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of LYB? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every US stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.