TSX:CHE.DB.E - Post by User
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incomedreamer11on Nov 20, 2023 9:08am
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Post# 35743990
Scotia comments after conference
Scotia comments after conference
Why We Expect Chemtrade to Remain Rangebound
OUR TAKE: Negative. We struggle to build a convincing case for CHE outperformance near-term; our PT falls to $9.50. ‘24 EBITDA is expected to fall 15% to 20% y/y, on weaker merchant acid and sodium chlorate demand, water solutions margin compression, and while caustic prices could remain weak (we’re cautiously optimistic improved housing in ‘24 can pull up PVC demand, such that chlorine production outpaces caustic demand). None of this is a huge deal for a commodity chem enjoying record-high EBITDA. Of course, stocks rarely work when commodity prices/margins are weakening, but that’s also not the issue. The pre-issue, is how this will impact leverage. Based on ‘24 Street EBITDA of ~$410M, and assuming no change to net debt, leverage should deteriorate to 2.2x – but even that alone isn’t a concern. If we extrapolate, CHE could get caught in its ability to fund its growth narrative vs. avoiding the impact of rising leverage on the value of its equity. As a reminder, the Casa Grande JV is on hold until returns improve (via CHIPS Act?). Beyond the Q1 start of the ultra-pure expansion in Cairo, as well as some initiatives in water solutions, we don’t see what catalysts in ‘24 that will propel the stock forward. Maintain Sector Perform.
What about valuation? The company used to suggest mid-cycle EBITDA was $300M to $350M, although this is higher going forward, given the PACI/ACH capacity additions in water solutions, as well as the Q1/24 expansion of the ultra-pure facility in OH. If we assume low-$400s is now run-rate EBITDA, and using the long-term average multiple of 6.6x would give us fair value of $11.50 (the Street’s PT is $12). Of course, this doesn’t take into account that multiples of all equities must be cut due to higher costs of capital for both investors and issuers (and we’re doing this, indiscriminately). So, what is $400M worth at 6.0x? $9.50/sh.
What we learned on the call: (1) ‘23 EBITDA is on track to be a record high for CHE, though weakening macro conditions point to a lower ‘24; (2) Q4 has historically been a seasonally weak quarter across CHE’s segments, and this Q4 shouldn’t be any different; (3) water chemicals pricing should normalize on lower raws, as CHE’s contracts (largely annual) are up for renewal; (4) merchant acid volume may see some deterioration in both price (tracks lower sulfur pricing) and volume (softening demand), though risk-sharing agreements should partially mitigate the full impact on margins (i.e., some measures protect a $/mt margin); (5) caustic soda has likely troughed, and should start to see some price improvements through ‘24 and ‘25 – CHE has a roughly one-quarter lag to index pricing; and (6) the relative demand of chlorine vs. caustic soda will drive the impact of an economic downturn on CHE’s chlor-alkali profitability – a disproportionate impact to chlorine could see chlor-alkali production curtailed, a net benefit to CHE.