Chemtrade (Outperformer; C$13.50 Price Target)
Our Conclusion: Fundamentals remain strong, supported by elevated chlorine, hydrochloric
acid and chlorate pricing, improving caustic pricing, and improved water chemical margins.
While a potential Canadian rail strike does pose to be a near-term risk to Q3/24 earnings, any potential impact would be transitionary. We continue to like CHE.UN, given its attractive
valuation (~4.8x 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
SIB), 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.
Q2/24 Preview: We forecast Q2/24 adj. EBITDA of C$99MM vs. consensus C$95MM, down
from C$144MM a year ago. Refer to the Exhibit 48 table. Recall, H1/23 last year benefitted
from very strong caustic pricing. Also, CHE.UN underwent its bi-annual North Vancouver
turnaround in Q2/24 this year (~$15MM negative EBITDA impact). We expect chlorine, HCl
acid, and chlorate pricing to remain strong, but expect a modest reduction in chlorate
volumes due to pulp mill closures. For the SWC segment, we expect Q2/24 to post a
sequential Q/Q increase in line with typical seasonality along with a normalization of sodium
nitrite (maintenance was done in Q4/23 and Q1/24). The focus for CHE.UN’s Q2/24 results
will be on 2024 guidance (CHE.UN’s current adj. EBITDA guidance is high-end of C$395MM- C$435MM) and updates on green hydrogen (Brandon opportunity) and ultrapure acid (implications from recent U.S. semiconductor funding announcements) organic growth
opportunities.
1. North Vancouver Lease & Chlorine Operations Extension A Top Priority For
Management: Recall that CHE.UN’s North Vancouver facility lease expires in 2032, with
restrictions to chlorine (Cl) operations by 2030. CHE.UN has entered into discussions
with the Vancouver Fraser Port Authority (and the government / public community)
regarding a renewal of the lease. Given CHE.UN’s safety track record and the fact that
chlorine produced at the facility treats ~70% of Western Canada’s water, we expect a
renewal to be achieved in due course. While we do believe CHE.UN has other options
should a chlorine operations renewal not be achieved (such as converting more Cl to
HCl, producing downstream product derivatives), these would be less profitable.
2. Canadian Rail Strike A Modest Near-term Risk To Q3/24: The earliest a potential
strike by CN and CP rail workers could occur is mid-July. Should a strike extend for more
than two weeks, we believe CHE.UN will be forced to shut down its major
Electrochemical plants in North Vancouver (chlor-alkali) and Brandon Manitoba
(chlorate). Given the potential for both rail providers to be down, there is only so much
CHE.UN can do (i.e., make sure customer tanks are full, existing railcars are loaded,
etc.). We don’t believe trucking is a viable alternative.
3. Improved Balance Sheet / Cash Flow Opens Door For M&A / Organic Growth
Investments / SIB: 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 SIB to purchase up to all the issued outstanding 8.5% convertible debentures
($86MM) due September 30 (currently in the money).