Q1/24 Beat, Guidance Raise & New NCIB Our Conclusion
CHE.UN reported strong Q1/24 results and now expects F2024 adj. EBITDA
to be at the top end of its prior guidance range (recall, CHE.UN raised
guidance four times through the course of F2023). We are raising our F2024
and F2025 estimates, primarily reflecting better EC segment performance.
We continue to like CHE.UN, given its attractive valuation (~4.7x 2025E
EV/EBITDA, well below its historical average and chemical peers), improved
balance sheet/cash flow (opening the door for M&A, growth investments, and
an NCIB), sustainable dividend (yield of ~7%), and organic growth
opportunities in ultrapure sulphuric acid, water chemicals and green
hydrogen. We reaffirm our $13.50 price target and Outperformer rating.
Key Points
Raising F2024 EBITDA Expectations, Reflecting Better EC Segment
Performance (And Water Chemical Margins): CHE.UN now expects
F2024 adj. EBITDA will be at the higher end of its guidance range of
$395MM-$435MM (consensus: $415MM). Management notes that the
improved outlook is mostly a factor of strong demand and pricing for HCl /
chlorine, stronger caustic prices and better than previously expected water
chemical margins. Note that F2024 guidance does not include the potential
impact of a Canadian rail strike (which would be felt in Q2/24). Also note,
CHE.UN is holding its biannual North Vancouver turnaround in Q2/24
(~$15MM EBITDA impact, which is already factored into guidance).
Improved Balance Sheet / Cash Flow Opens Door For M&A / Organic
Growth Investments / NCIB: CHE.UN net debt / EBITDA ratio currently
stands at 1.9x, and management expects this ratio to remain at or below 2x
exiting 2024. Partly due to the delay in certain semiconductor facility start-
ups, the Arizona ultrapure greenfield project remains on pause. We believe
this provides CHE.UN with the flexibility to pursue other options over the
near to mid-term, including M&A (strategic targets with EBITDA in the
$10MM-$50MM range), further organic growth initiatives (a new specialty
water chemical line at the Augusta facility that could add $3MM-$5MM in
EBITDA; start-up in H2/25), and an NCIB (CHE.UN is seeking approval for
up to 10%).
Sustainable Dividend (Improved Payout Ratio): We see CHE.UN’s
dividend (yielding ~7%) as sustainable, with an implied FCF-based payout
ratio (excluding growth capex) of ~40%-50% in both 2024E and 2025E.
Including growth capex, our estimates imply a payout ratio of ~80% in 2024
and ~60% in 2025, with the Y/Y improvement driven by lower anticipated
capex spend in 2025 (Cairo, Ohio ultrapure expansion on track for a 2024
start-up).