Research Note - Algoma Central Corporation (ALC:TSX,$17.25|BUY $22.00 TARGET) Diversification Strategy Proving Fruitful

Algoma Central Corporation announced Q2/22 financial results on Friday after market close that beat our expectations on revenue and were in line on EBITDA. ALC reported revenue of $183.5M (+9% YoY, +15% over 2019), beating our estimate of $164.9M and EBITDA of $61.4M, in line with our estimate of $61.8M (-1% YoY, +17% over 2019). Similar to Q1, the quarter was driven by an increased proportion of revenue coming from the international businesses which has been capitalizing on higher freight rates and volumes. Management remains confident that it can continue to post impressive financial results as economic conditions evolve.

 

Domestic Dry-Bulk: DDB EBITDA came in at $28.0M vs. our estimate of $31.5M and $37.3M in Q2/21. Revenue came in at $99.3M vs. our estimate of $98.4M and $96.9M in Q2/21. The increased revenue was driven by higher fuel recoveries and slightly increased base freight rates; this was offset by 11% lower volumes and 9% lower revenue days. The decrease in volumes were in response to lower demand in the salt and construction sectors. This plays into the normalizing trade mix theme that management has reiterated the last few quarters. The EBITDA miss was driven by unfavourable lay-up and maintenance timing compared to 2021 as well as inflationary pressures. Management is expecting strong volumes across all commodities in H2, leading to increased fleet utilization; however, management caveats that it expects grain volumes to decline in the fall.

Ocean Self-Unloaders: OSU EBITDA for Q2 came in at $18.0M vs. our estimate of $11.6M and $10.3M in Q2/21. OSU revenue was $50.3M vs. our estimate of $34.2M and $40.0M in the same quarter last year. The large beat was driven by increased pool volumes, higher freight rates and the increased fuel prices. Management expects higher costs throughout the remainder of the year and a sizeable dry-docking period in Q3.

 

Product Tankers: PT EBITDA was $7.2M vs. our estimate of $9.0M and $8.3M in Q2/21. Revenue for the segment came in at $31.9M vs. our estimate of $30.1M and $28.7M in the same quarter last year. The miss was due to inflationary pressures and a 4% decrease in revenue days in response to unplanned outages on two vessels. Management highlighted that demand is recovering and it expects the fleet to be well utilized in H2/22.


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