Braskem: A Justified Valuation Discount

Summary

• Braskem’s recent Investor Day had some positives, but these were clouded by the many near-term risks.
• The rising Alagoas provisions, the uncertainty around the Pemex contract, and the Cenegas contract cancellation are key overhangs, with the latter likely to have a material near-term financial impact.
• While the current c. 7x EV/EBITDA seems cheap relative to historical levels, the material near-term risks mean the valuation discount is unlikely to narrow.

The Braskem (NYSE:BAK) story has become increasingly challenged following the recent gas transportation contract cancellation by Cenagas. The fact that this comes on the heels of an ongoing ethane contract renegotiation with Pemex also highlights overhang on the Mexican operations, which has been its most profitable segment thus far. Admittedly, some of the risks are discounted in the c. 7x EV/EBITDA multiple, but considering the range of additional headwinds as well (for instance, the rising Alagoas provisions) and the implications for the deleveraging timeline, I am skeptical that the valuation discount will narrow anytime soon, keeping me on the sidelines.

Another R$3 Billion in Expenses at Alagoas

Braskem's recent Investor Day event did not start off on a positive note - the company published a material fact announcement beforehand, disclosing additional expenses related to the geological issues in Alagoas (exclusively related to the closure of salt extraction activities in Maceió). The company estimates an additional R$3 billion in spending over the next four years, bringing the total amount provisioned to c. R$10.5 billion based on the company's estimates. Considering the limited visibility, however, there is every chance the provisions could rise further in upcoming quarters.

R$ 'bn	Q4 '20e
Alagoas Liability, Q3 '20	7.9
New Provision	3.0
Disbursement	-0.4
Alagoas Liability, Q4 '20e	10.5

Click to enlarge

Source: Company Data

'Transform for Value' Promise Outweighs Divestment Pause

Perhaps disappointingly, Braskem backtracked on earlier plans to divest non-core assets as part of its deleveraging plan. The rationale does make sense, however, as management highlighted that not only has the profitability outlook materially improved but also that the value of its BRL-based assets would translate into a lower USD inflow due to the BRL devaluation (the USD/BRL is up c. 26% YTD).

Nonetheless, updates on the company's efficiency program ("Transform for Value") are

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.