TSX:CHE.DB.E - Post by User
Post by
retiredcfon Aug 16, 2023 9:14am
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Post# 35590618
RBC
RBCTheir upside scenario target is $14.00. GLTA
Outperform
TSX: CHE.UN; CAD 8.91
Price Target CAD 11.00
Chemtrade Logistics Income Fund
How quickly will Q2/23 peak earnings normalize lower?
Our view: Chemtrade reported another record quarter in Q2/23 and reiterated 2023 guidance, but flagged a weaker second half of the year (lower caustic pricing, softening sodium chlorate demand from pulp mills, and higher turnaround outages). We believe the market will try to assess what the lower normalized earnings will look like in 2024. Despite hitting peak earnings potentially in Q2/23, we continue to forecast robust operating results, and expect the shares to move higher, particularly if the U.S. economy achieves a soft landing.
Key points:
2023 still looks very strong despite softer second half. The company generated record EBITDA of $276 million in H1/23, but pointed to a softer H2/23 due to i) weaker caustic soda prices, ii) weaker pulp markets, and iii) more turnaround activity in Q3/23. The Q2/23 results highlight that strong pricing in the other products (e.g., chlorine and sodium chlorate) have more than offset the weakness in caustic soda prices, realizing the benefits of a diversified portfolio.
What does 2024 look like? With the record results potentially behind us, investors are starting to look ahead into what a more normalized 2024 could look like. In January 2020 (pre-COVID), management's 2020 EBITDA guidance was $300-350 million, which would have assumed a typical mid- cycle year. The guidance was eventually pulled after COVID-19 impacted the global economy. We believe that geopolitical tensions and higher global electricity prices (main input cost in the Electrochemicals division) could lead to a higher EBITDA run-rate over the medium term. Looking longer term, the company's ultrapure acid development in Arizona could further increase the run-rate EBITDA.
Likely moving ahead with Arizona ultrapure acid development. As previously announced, management expects the capital cost of its greenfield ultrapure sulphuric acid development in Arizona to be US$300– 380 million, and decided to put the project on hold while negotiating revised commercial agreements to ensure an acceptable level of return (project IRR of ~20%). TSMC is investing a total of ~US$40 billion into two new fabrication facilities in Arizona, with the second facility to be completed in 2026. We believe a domestic source of acid will be needed, and construction on Chemtrade's Arizona development will need to start in early 2024 to supply TSMC with acid in 2026. Based on a ~20% project return, we estimate that the facility could generate ~$50 million of incremental EBITDA (49% stake) for Chemtrade.
Increasing estimates. We raised our 2023 and 2024 EBITDA estimates to $487 and $388 million, respectively (from $460 and $378 million, respectively). The revisions to our forecast primarily reflect the strong Q2/23 results as well as a modestly higher forecast for the EC segment.