BMO analyst flash updateCHE.UN-TSX
Rating Market Perform
Price: Nov-7 $7.54
Target $9.00
Total Rtn 27%
A Very Good Update
Bottom Line:
Stock is re-rating positive for yield-seeking investors with another strong release (Q3 beat, ~15% FY guidance raise implying a Q4 beat too). While CHE is already trading inline with U.S. commodity chems names (~4x 2022E EV/EBITDA), the ~8% dividend with only a ~30% payout ratio this year is attractive. The stock could turn quickly if surged caustic prices weaken, though even assuming mid-cycle like earnings (perhaps ~25% contraction), the payout would still seem sub-50%.
Key Points
Conference call: Tuesday, November 8 at 10 a.m. ET; Register here. Adj. Q3 EBITDA of ~$137M (a double y/y) beat ~$101M/107M consensus/BMO. Distributable cash after maintenance capex was ~$82.5M ($0.75/unit). See page 2 for results variance.
SWC (sulphuric acid, sulphur, water treatment, etc.) adj. EBITDA of ~$70M (up ~17% y/y) beat our ~$58M forecast. Margins of ~22% fell ~360bps y/y due to a sharp rise in sulphur prices, an input cost for water treatment chemicals. Though, this was offset with higher sales volumes and selling prices (merchant acid and water solutions products). Plus, after recent normalizations of sulphur benchmarks, we expect Q4 EBITDA margins will likely improve.
ElectroChem/EC (chlorate/chlor-alkali) adj. EBITDA of ~$88M (up ~160% y/y) beat our ~$69M estimate due to reduced availability in Europe (high costs for electricity) and higher selling prices for caustic soda, chlorine, and hydrochloric acid. EBITDA margins of ~42% beat our ~37.5% forecast and rose ~1370 bps q/q.
2022E guidance rises ~$55M to ~$425M ($420-430M range), well above ~$377M consensus, but we're not exactly sure how to bridge this guide up (a stronger USD helps but this much?). First, estimated 2022 caustic ASP rises only ~$10/t to $360/t. Second, 2022 N.A. sodium chlorate production volumes slightly lower to ~345kt (from 350kt), and N.A. MECU sales volumes slightly lower to ~178kt (from ~180kt). Third, the stronger USD is helping as it usually does. Fourth, maintenance capex rises to ~$100M (from ~$85M) at the midpoint.
Though CHE could consider a distribution hike, the priority seems the growth opportunities (ultra pure acid, etc.). Management reiterated expected costs for Kanto ultra pure sulphuric acid JV (~US$175-250M) and now expecting plant to be operational in 2025 (vs. previously late 2024 or early 2025). We continue to expect detailed engineering plans/estimates in Q4.