Post CEO/CFO update (and post $70M equity raise ex over-allotments), our target rises
to $7.50 (~6.5x 2021E EV/EBITDA, ~8% yield). 2021/22E estimates rise slightly. For 2021E,
Q2/Q3E estimates increase as caustic has strengthened in recent weeks, close to prices
management thought achievable by Q4E (we also boost sulphuric acid margins). CHE
should be well levered to macro recovery (implying normalized ~$300-350M EBITDA for
2022E, and a payout ratio lowering to ~55% vs ~80% this year). We seek more evidence
of a turn, however, considering the black box-nature of the business.
Key Points
Caustic soda pricing performing better than expected with the NE Asia index
trending up to ~$270/t (up ~$40/t in March following ~$20/t increases in February,
though this still represents ~$15/t q/q after strong declines in January). In February
guidance, CHE was expecting NE Asian caustic to rise gradually across 2021 (though
still average $40/t lower y/y), but increases to current levels have come quicker than
expected. However, ~20-25% of N.American caustic capacity was down in February
following the Texas freeze (boosting spot prices), so it's possible caustic prices could
moderate again soon as supply catches up, plus the weaker USD could eat into some
upside.
New CEO Scott Rook was clear that CHE has transitioned away from M&A focused
growth to a focus on organic growth and cost controls (though admittedly the
details around cost controls seem high-level for now to us). First, the major
recovery in earnings is still going to come from recovery in caustic soda (stronger
aluminum markets perhaps), refinery rates (sulphuric acid etc.) and HCl demand (oil
fracking picks up); this can only come from macro recovery, and strong operational
performance. Second, despite current issues around the business (including a lost large
customer), CHE's ultrapure acid business is seen as one of its largest opportunities
for organic growth over time, supported by expansion of U.S. semiconductor
manufacturing. Third, beyond this, organic growth is seen coming from continued lowsingle-
digit water business growth (monetizing green hydrogen seems longer-term in
nature with CHE recently disclosing in its AIF that it sees a $5M margin opportunity for
this by 2028).
Balance sheet improvement a clear focus via targeted divestitures (vaccine
adjuvants, potassium chloride etc.) and EBITDA recovery. Longer term CHE is
targeting a leverage range of ~2.5x (~4x incl. debentures) vs. 2020-end levels below
~4x (~5x incl. debentures).