RBC CM Research ReportBy Nelson Ng and Trevor Bryan
Price Target: $9
Our view: Chemtrade posted solid Q4/21 results, and we believe the company is well positioned to deliver stronger comparable results in 2022; high Asian caustic soda prices could drive results toward the higher end of management’s 2022 guidance. We reiterate our Outperform rating and continue to believe that the recovery in economic activity, as well as the growth in the U.S. semiconductor industry, will drive Chemtrade units higher.
Key points:
Electrochem segment could provide upside to guidance. Asian caustic soda prices (sets the realized caustic soda price for Chemtrade’s North Vancouver facility) hit historic highs in Q4/21 as China’s government implemented its dual-energy policy, impacting global supply. While prices have moderated in Q1/22, the NE Asia January price was US$575/DMT. Management’s 2022 guidance assumes a price of US$440/DMT, so there could be upside if caustic soda prices remain elevated. A US$50/DMT increase in caustic soda prices would increase EBITDA by ~$13 million. In addition, sodium chlorate has been negatively impacted by a decline in demand for office paper, which, combined with increased competitive pressures has reduced margins. Management expects demand to improve as workers return to the office, but we do not expect demand to return to pre-pandemic levels, as some bleached pulp mills have either closed or converted into non-bleached pulp production.
SPPC segment improving while higher commodity prices impact the WSSC segment. Management indicated that the SPPC business should generate higher results as ultrapure sulfuric acid sales rebound and the regen business continues to benefit from stronger North American refinery utilization (higher U.S. traffic volumes). The water business continues to be impacted by higher material costs in the near term, particularly with aluminum and sulphuric acid. Management expects to pass on higher costs to customers as supply contracts are renewed annually.
Organic growth opportunities in ultrapure sulphuric acid and hydrogen.
The company’s 60% capacity expansion ($50 million capex with an estimated investment return of 25%) at its Cairo, Ohio, ultrapure sulphuric acid facility is under way, with completion scheduled in 2024. Management believes the market for ultrapure sulphuric acid could double or triple over the next five years due to higher demand from the growing U.S. semiconductor sector, and management is currently looking at another project that is “significantly larger” than Cairo. The company is also developing plans to monetize its co-production of green hydrogen at its Prince George (construction starting in 2022) and Brandon facilities.
Leaving estimates unchanged. We remain comfortable with our 2022 and 2023 EBITDA estimates of $285 million and $283 million, respectively. Our 2022 forecast is slightly higher than the midpoint of management’s 2022 guidance, as we see strong contributions from the North Vancouver chlor- alkali facility (produces caustic soda, chlorine, and hydrochloric acid).