Pull out the chemistry set and fire up the Bunsen burner! Takeaways from roadshow, 2Q21 preview and a chemical primer
The Desjardins Takeaway
We hosted a non-deal roadshow with CHE on June 15 and walked away even more convinced by its strategic plans, with a focus on organic growth and deleveraging. We have also compiled a primer (the CHE cheat sheet) in Appendix 1, summarizing CHE’s main chemicals in terms of key facilities, market share, suppliers, end markets, key competitors, outlook and risk mitigation. Finally, we trimmed our 2Q21 EBITDA to C $67m (from C$70m) to reflect a one-month impact from the Vale strike on SPPC.
Highlights
CHE outlined its “blueprint for success” (growth, business model, financial prudence and operational excellence) and long-term earnings growth strategy, driven by:
1. Market/COVID-19 recovery: Merchant acid should recover with industrial production, while regen acid has already benefited from stronger driving activity, with refineries operating at higher rates vs last year. In EC, caustic soda is poised for a multi-year recovery with robust global demand (~8% CAGR) and limited capacity additions. At the current price of ~US$310–350/MT, caustic soda may exceed CHE’s guidance of ~US$220/MT for the year. The chlorine markets have rallied hard and HCl should continue to recover on higher oil prices and rig counts (can convert up to 60% of chlorine into HCl).
2. Organic growth: (i) ultra-pure acid (capacity expansion and quality improvement to meet robust demand and increasingly stringent requirements by the semiconductor industry (may partner with an Asian producer)); (ii) water treatment (debottlenecking capacity for PAC and ACH, which are growing at ~4–5% annually); (iii) hydrogen (commercializing green hydrogen by-product at Prince George (meaningful contribution starting 2027), but the larger opportunity is at Brandon).
3. Productivity and reliability: C$10m in annual savings targeted through various operational initiatives.
CHE aims to reduce its total debt/EBITDA to <4.0x and senior debt/EBITDA to <2.5–3.0x, aided by earnings growth and FCF generation. It would also like to become a leading example of corporate ESG (building company-wide tracking systems with ESG targets).
Valuation
We maintain our C$12 target, based on 7.75x EV/2022 EBITDA and our DCF. CHE trades at 6.2x vs specialty chemicals peers at 12.5x and commodity chemicals peers at 6.5x.
Recommendation
An excellent reopening trade. We reiterate our Buy rating.