TSX:CHE.DB.E - Post by User
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anon314on Oct 16, 2020 2:51pm
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Desjardins Research Report
Desjardins Research ReportFrom David Newman and Chi Le
3Q20 preview—a slow climb out of the chemicals trough, with caustic falling behind
The Desjardins Takeaway
CHE continues to slowly recover from a COVID-19-induced trough. Ultra-pure acid and water treatment chemicals remain the bright spots, regen and merchant acid continue to recover as anticipated, caustic soda has rolled over, HCl continues to slide (recent green shoots) and sodium chlorate remains soft. We are keeping our 3Q20 and 2020 EBITDA estimates relatively intact, but have reduced our 2021 forecasts to reflect weaker caustic soda prices (other chemicals on track for recovery).
Highlights
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SPPC. We expect segment EBITDA of C$35m, driven by: (1) tepid but stabilizing merchant acid demand (recovery in industrial end markets); (2) a solid recovery in regen acid (but still down ~10–15% yoy) on the back of higher driving activity and refinery operating rates; and (3) strong demand for ultra-pure acid. CHE’s regen plant in California will undergo a turnaround in 4Q (estimated EBITDA impact of ~C$5–6m).
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WSSC. We expect segment EBITDA of C$29m, aided by resilient demand for water treatment chemical products at stable selling prices and raw material costs, offset by softness in specialty chemicals, eg P2S5 (a lubricating additive for motor oil).
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EC. We expect segment EBITDA of C$28m, given weak caustic soda prices (tepid end market consumption and overflowing supply as excess co-product chlorine is produced to meet strong PVC demand). The average caustic soda price this year is lower than management’s guidance, with a recovery from current depressed levels not likely until 2021. HCl continued to slide (half of last year’s level), but is showing early signs of a recovery in September. COVID-19-related labour challenges may potentially drag out the North Vancouver facility turnaround into 4Q.
CEO transition. We believe CEO Mark Davis will stay on board through 1H21 to ensure the transition to Scott Rook, his successor, is smooth.
Balance sheet. CHE has redeemed C$112.5m of its 2021 convertible debenture. It will redeem the remaining C$14m on November 13; CHE’s earliest debt maturity is 2023.
Valuation
Our target of C$7.50 is based on 6.75x (was 6.50x) our 2021 EBITDA estimate.