full td Waterhouse report Event
Chemtrade reported Q2/19 Adjusted EBITDA of $91.2mm versus our estimate of $85.5mm and consensus of $87.2mm. Adjusting for a $2.6mm insurance recovery, the results were still ahead of expectations.
The company reiterated its F2019 Adjusted EBITDA guidance of $335mm- $375mm; however, it noted that disappointing chlor-alkali results YTD means that it may come in at the lower-end of the range (F2019 consensus heading into the quarter was closer to the midpoint of the range at $348mm).
The company also announced that it is selling its Potassium Chloride and Vaccine Adjuvants specialty chemical businesses. A US$50-million non-cash goodwill impairment charge has been taken, and the assets are now classified as held-for- sale. (Q2/19 LTM EBITDA was US$14 million.) Depending on ultimate proceeds, we believe that the company will modestly reduce leverage (net debt/EBITDA) by 0.2x-0.3x from the current 4.5x.
9:30 a.m. ET conference call; 1-866-211-4154.
Impact: MIXED
Overall, we believe that the results and potential asset sales should be a relief to the market, with the offset of management commentary guiding for potentially coming in at the lower end of the EBITDA guidance range due to weaker chlor- alkali markets thus far, and, in our view, the likelihood that F2019 consensus has to come down. The normalized payout ratio through two quarters is approximately 64%, and we are forecasting 91%, essentially at the lower end of the company's guidance range. We continue to believe that the dividend will be maintained.
We have fine-tuned our F2019 forecasts to the lower-end of management's guidance, but we have increased our F2020 forecasts modestly on a continued recovery in most business lines (particularly chlor-alkali). Our BUY rating and $12.00 target price are unchanged.
TD Investment Conclusion
We reiterate our BUY recommendation, as we continue to believe that Chemtrade's current dividend remains sustainable and is unlikely to get cut. We expect gradually improving results over time and believe that patient investors will be rewarded.