Scotia's CommentFrom last week:
Latest Research (March 08, 2023):
OUR TAKE: Mixed. We are off restriction following CHE’s bought deal of $100M in 7% sub-debt, convertible at $12.85/sh.We remain bullish on chlor-alkali as well as CHE’s outlook. First, caustic remains tight; with selling prices supported by reduced EU chlor-alkali supply, as well as higher (but improving) electricity costs. Second, HCl demand has improved due to increased fracking activity in NA. Third, we expect to see a tailwind in the water treatment business, as raw material costs have started to decline. Fourth, we’re bullish on CHE’s ultrapure acid capacity growth to support the U.S. build-out of semi-conductor capacity.However, we’re cautious on how CHE intends to fund that growth. As CHE pursues +$75M in incremental run-rate EBITDA by ‘27, it intends to push leverage to 3.0x from 2.2x. It’s understandable why. Without tapping into debt, FCF could be insufficient to cover the divvy this year, based on the mid-points of guidance. While this is rational during a limited period of high growth, as we outline below, 3.0x could creep toward 4.0x with a moderation to midcycle economics. In that scenario, we believe investors would almost certainly cut multiples. This is only a risk, not a forecast.