Chemtrade Logistics Income 6 50 Convertible Unsecured Subordinated Debentures CGIFF

Scotia comments

[incomedreamer11]

Two Positives: Capital Discipline in Action + '23 Guide Raised

OUR TAKE: Positive. We expect to see a relief rally in CHE near-term, as investors should applaud management’s decision to place the Casa Grade JV on hold. Why? Simply put, the math no longer worked, as soaring capex put both project returns and B/S leverage into question. Separately, the Cairo, OH project remains on time/budget, while better-than-expected chlor-alkali economics should see the Street raising ‘23 EBITDA estimates by 5% to 7%.

• Casa Grande JV on hold, following completion of the FEED study. CHE had warned about capex creep, but the revised capex of US$300M to US$380M vs. $175M to $250M previously no longer makes sense – at least not without a renegotiation of customer contracts. This could be a catalyst for late ‘23, as CHE and its partner Kanto Group seek to sign new supply agreements with its customers.
• Cairo, OH project on time/budget. The ultrapure sulphuric acid expansion project remains on track for a Q1/24 completion, with an expected start-up in ‘24.
• ‘23 guide raised to >$450M vs. the Street’s $427M: (1) 60% of MECU netbacks are from caustic vs. 80% historically; and (2) CHE will benefit from a larger contribution of sodium chlorite. The revised guide considers recent declines in caustic.

What will the bears say? The bears will argue that CHE’s organic growth objectives are no longer achievable, including +$45M of EBITDA by end of ‘25 and +$75M of EBITDA by end of ‘27. So what?!?! Prudent capital management measured by metrics like ROIC are much more important to us vs. empire building by buying EBITDA at any price. Well done, CHE.