We like the initiatives senior leadership has taken recently to improve its controllables. While the clean-up of the portfolio and the balance sheet should be rewarded through a slightly higher mid-cycle multiple (5-Yr at 7.2x), we’re certainly not counting on it. We see ‘23 EBITDA at ~$300M, which is in line with our assessment of mid-cycle earnings. So, at a mid-cycle multiple of 7.2x (assuming no re-rating), CHE could exceed $12/unit. That said, we need to walk before we can run. For now, we’re looking for a conservative 6.5x on ‘23 EBITDA of $305M, which lands us at $10.25.
While waiting for (relative) outperformance, investors can enjoy a nearly-8% yield, well-supported by a rolling four-quarter payout ratio that shouldn’t exceed 60% through ‘23. Buy Chemtrade.1. Robust Regen Acid Demand
Demand for regen acid services should increase over the coming quarters, as an elevated global energy complex appears to be sustainable for now, despite increased macro risk to the downside. This, coupled with exceptionally high cracks, should lead to refinery utilization rates averaging new highs over the past few years. Chemtrade processes or regenerates spent sulphuric acid (i.e., containing water + hydrocarbon impurities) by burning it a higher temperature with sulphur to create fresh sulphuric acid. The company’s supply of spent sulphuric acid relies on demand for alkylates, which is used to adjust gasoline octane levels for fuel efficiency targets to be met. In other words, as post-COVID gasoline demand improves, so too will demand for regen acid. Chemtrade’s regen acid services are typically supported by long-term contracts, where indexed pricing formulas essentially translates into cost-plus type margins. In other words, as regen acid service margins are fairly stable/predictable, we’re more interested in near-term volume growth.2. Ultra-Pure Acid Demand Should Soar
We believe ultrapure sulphuric acid demand is set to soar in North America over the mid-term. Ultrapure acid is mainly used in the production of semi-conductors, to etch and clean silicone wafers, as well as in the production of specialty batteries. Many industry observers believe the global semi-conductor industry is poised for a decade of growth. Why? Supply shortages led to bottlenecks in the production of everything from cars to computers to dishwashers. In other words, the absence of a single chip, often worth less than $1, can prevent the sale of equipment worth tens of thousands of dollars. Deloitte estimates this issue cost global auto sales about $210B in ‘21 alone. According to a McKinsey study, megatrends such as remote working, the growth of AI, demand for EVs, as well as a growing theme of domestic supply security, should push the global semi-conductor industry to over $1T in sales by ‘30, up from $600B this year.
For Chemtrade, what we really care about is the start-up of semiconductor chip fabrication plants in North America. Looking ahead, we’re aware of Intel, TSMC, Samsung, as well as other global companies all planning to build semiconductor chip fabrication plants in the U.S. They are all competing for up to $52B in U.S. government subsidies.
Chemtrade is North America’s leading producer of ultrapure acid. Given the rigorous process used to qualify product, customers do not frequently change suppliers. That said, CHE did lose a key ultrapure customer, alth
6. Portfolio / Balance Sheet Clean-Up
Chemtrade has proactively cleaned-up both its portfolio and balance sheet, which we think could result in slight multiple expansion over time. Initiatives include the sale of its non-core specialty chemical business, the $10M sale of an idled facility in Augusta, Georgia, as well as the closure of a chlorate plant in Quebec, due to slower post-COVID demand growth.
Finally, CHE is now considering a sale and leaseback transaction for its North Vancouver facility, which provides the company with all of its North American chlor-alkali production. Part of the property is owned by CHE and part is leased from Vancouver Fraser Port Authority. The lease terminates in 2032, and at that time, the Port has the right to exercise an option to purchase the part of the land CHE owns, and has communicated its intention to do so. Also, in 2030, the lease restricts CHE from using the leased part of the property for chlorine. The parties are currently discussing options.
Based on our analysis, we believe CHE could receive at, or slightly below, the low-end of a $5M to $7M/acre range for its 40 acre property. Properties used for specialized manufacturing purposes tend to go for a discount vs. those used for warehouse/distribution purposes. This would peg the opportunity and somewhere in the range of $170M to $200M, although it’s only an approximation.
ough has since replaced the bulk of the lost volumes in early ‘21.