CIBC comments on resultUnder Promising / Overdelivering? – Q3/23 Review
Our Conclusion
CHE.UN reported solid Q3/23 results and raised F2023 guidance for the fifth time.
While the guidance implies Q4/23 results being below consensus, CHE.UN notes that H2/23 results should provide a good run-rate for 2024, implying adj. EBITDA for F2024 that is ahead of consensus. Post Q3/23 results, we have trimmed our Q4/23 estimates but are taking up our F2024 estimates.
Our price target increases to $14.00 from $12.50 (higher estimates and lower net debt) and we maintain our Outperformer rating.
We believe that CHE.UN’s valuation (~4.5x 2024E EV/EBITDA) is unwarranted and already bakes in 2023 being a peak in earnings.
We continue to like CHE.UN given: 1) economically resilient water solutions and regen businesses, 2) much better balance sheet position,
3) low dividend payout ratio (dividend yielding ~7%), and
4) longer-term upside from ultrapure acid (used in semiconductor industry) and green hydrogen organic growth projects.
Key Points
F2023 Guidance Raised Again; Lowering Q4/23 Estimates Slightly To Account For Caustic Pricing: CHE.UN is raising F2023 guidance once again, now expecting F2023 adj. EBITDA of >$490MM (vs. >$475MM announced October 10 last month) or at least 13% higher than record (F2022) levels. Backing out YTD 2023 results, this implies >$72MM in adj. EBITDA for Q4/23 (consensus: $90MM). Note, CHE.UN’s F2023 guidance assumes a F2023 caustic price of $455/dmt, implying a Q4/23 price of $365/t, down from $580/dmt in Q4/22 last year (~$15MM EBITDA impact on a Y/Y basis). Our revised Q4/23 adj. EBITDA estimate of $83MM implies F2023E adj. EBITDA of $500MM.
Raising 2024 Estimates Reflecting Strong Business Performance In Both Segments: CHE.UN indicates that F2023 record levels of EBITDA should not be used as a run-rate for F2024, particularly given the risk of slowing macroeconomic conditions. That said, CHE.UN notes that H2/23 adj. EBITDA should be a good run-rate for F2024 (implying at least ~$430MM in annual EBITDA). Given that the company will hold its biannual North Vancouver chlor-alkali facility turnaround in 2024 (we estimate an ~$10MM- $20MM EBITDA impact), run-rate adj. EBITDA could be closer to $410MM- $420MM for next year. We have raised our 2024E adj. EBITDA to $410MM.
Leverage Ratios Continue To Improve; Healthy Dividend Payout Ratios: As at Q3/23-end (i.e., not including proceeds received from sale of the P2S5 business mentioned below), CHE.UN’s net debt to adj. EBITDA ratio was ~1.7x in Q3/23, down from ~1.8x Q/Q, and down from ~2.4x a year ago. Subsequent to the quarter-end, CHE.UN completed the sale of the P2S5 business for gross proceeds of US$43MM (cash of ~US$39.4MM). We see CHE.UN’s dividend (yielding ~7%) as safe and estimate a FCF-based payout ratio (including growth capex) of ~36% in 2023 and ~51% in 2024.