Chemtrade Logistics Income Fund

Chemtrade Logistics Income Fund (TSX: CHE.UN) operates in diversified business and provides industrial chemicals and services majorly to North America. The Company is a leading supplier of sulphuric acid, spent acid processing services, inorganic coagulants for water treatment, sodium chlorate, sodium nitrite, etc. across North America. It is one of the largest suppliers of sulphur, liquid sulphur dioxide, chlor-alkali products, sodium hydrosulphite, zinc oxide and potassium chloride. It also provides industrial services, which include processing by-products and waste streams.

The management declared a monthly dividend of CAD 0.05 per common share, payable on July 31, 2020. The Group would disclose its second quarter FY20 results on August 14, 2020.

Q1FY20 Financial Highlights: CHE.UN announced its quarterly result and reported revenue of CAD 366.90 million compared to CAD 385.25 million in the previous corresponding quarter. The decline was primarily attributable to a lower realization price of caustic soda and hydrochloric acid along with a lower sales volume of sulphuric acid and other sulphur products. The Company reported an operating loss of CAD 51.54 million, significantly higher than the operating loss of CAD 19.74 million, a year ago. The steep deterioration in the operating performance was primarily attributed to an increased cost of sales & services expense along with an increase in selling & administrative expenses. However, the Company posted a higher Adjusted EBITDA of CAD 80.88 million against CAD 43.96 million in Q1FY20, due to an addition of impairment of goodwill expense amounting to CAD 56 million in the current quarter. Net finance costs stood at CAD 67.45 million, considerably higher than CAD 27.11 million, majorly due to a significant surge in a change in the fair value of convertible debentures. Net loss stood relatively higher at CAD 97.87 million as compared to CAD 29.32 million in Q1FY19. The Group ended the quarter with cash and cash equivalent of CAD 52.17 million while total assets stood at CAD 2,837.91 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group’s performance is linked to the oil and gas sector as products, such as regen sulphuric acid and hydrochloric acid, are extensively used within the oil and gas sector. A slowdown in oil and gas demand would impact the group’s performance.

Valuation Methodology: EV to Sales Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of CHE.UN corrected ~51% so far this year due to weak market sentiment on account of COVID 19 pandemic. The products are widely used across several industries, and the recent lockdown has hindered the demand of the commodity chemicals, resulting in a lower realization price. However, the demand for the company’s product is expected to increase as the governments across the states are easing the lockdown restrictions and allowing the industrial and manufacturing activities to resume. Further, the group’s products are extensively used in the water treatment segment, and the demand is likely to remain stable in the foreseeable future, which is a key positive. Further, the group is consistent in dividend payment, which makes it an attractive bet from an income investor’s point of view. At the last traded price, the stock was offering a dividend yield of ~11.15%, which is lucrative considering the current interest rate environment. We have valued the stock using EV/Sales value-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Nutrien Ltd, Ag Growth International Inc etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 5.38 on July 27, 2020.

CHE.Un Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

AirBoss of America Corp

AirBoss of America Corp (TSX: BOS) is a Chemicals Company based out of Canada. The Group is engaged in the business of manufacturing products based on the rubber for industrial, automotive, resource and military markets. The Company’s operations are divided into three reportable segments being AirBoss Defense Group, Engineered Products and Rubber Solutions.

Recent News

27 July 2020: AirBoss Defense Group, a survivability solutions platform of the AirBoss of America Corp., received a contract worth around USD 121 million from the U.S. Department for Health and Human Services. The deal includes the manufacture and sale of 50,000 FlexAir™ Powered Air Purifying Respirator (PAPR), 3,000,000 high-efficiency filters and spare protective hoods. The orders would be delivered to Strategic National Stockpile (SNS). The FlexAir™ PAPR system is a respirator system with a lithium-ion battery installed that could be used for defense against the viruses such as Covid-19. In March 2020, the Company also received orders of USD 96 million for PAPR systems from the U.S. Federal Emergency Management Agency of which 90 percent of the orders have been delivered.

Financial Highlights – Q1 Financial Year 2020 (31 March 2020, USD, thousand)

(Source: Quarterly Report, Company Website)

In the first quarter of the financial year 2020, the net sales increased to $94,197 thousand (Q1 FY2019: $82,575 thousand). Reflecting the higher revenue mix for the period, the adjusted EBITDA stood at $9,728 thousand (Q1 FY2019: $8,511 thousand). Due to an increase in the operating expenses, the Company reported an EBITDA of $7,435 thousand in Q1 FY2020 (Q1 FY2019: $7,895 thousand). The net income for the period stood at $787 thousand in Q1 FY2020 (Q1 FY2019: $2,926 thousand). The adjusted basic and diluted earnings per share stood at 0.08 cents in Q1 FY2020 (Q1 FY2019: 0.15 cents), with a declared dividend of CAD$ 0.07 for the period. The cash balance as at 31^st March 2020 stood at $11,782 thousand (31^st December 2019: $121 thousand). The total assets as at 31^st March 2020 stood at $292,894 thousand (31^st December 2019: $249,664 thousand).

Share Price Performance

AirBoss of America Corp shares closed at CAD 23.65 at the time of writing after the market close on 27 July 2020. Stock's 52 weeks High is CAD 24.71 and Low is CAD 4.59.

Key Risks

The demand for rubber products has declined due to the outbreak of covid-19, which resulted in lower financial performance. The overall business of the Company could be affected by a change in regulations and government policies.

Conclusion

The Company has shown a decline in financial performance in the first half of the financial year 2020. The revenue has increased, while the bottom-line performance has declined, with lower profitability margins for the period. The revenue from core operations has declined, while the cash balance has increased significantly. The Group needs to manage its operating expenses unless it results in further deterioration in financial performance in the coming years. Recent contracts win from HHS and FEMA will provide the Company with sufficient working capital and help in reducing net debt. The demand for rubber products under its core business has declined due to the impact of covid-19. The Group is looking to reposition Rubber Solutions segment to achieve a defensive leadership position in the North American market. The stock is trading at a forward EV/EBITDA multiple of 7.9x, which is higher than the industry average of 6.4x. Presently, the company is trading near a 52-week high, raising doubts at the upside potential at current prices.

Based on the factors as highlighted above, we recommend investors to keep a “Watch” on the stock at the closing price of CAD 23.65 (as on 27 July 2020), with support from few catalysts needs to be evaluated at a later stage.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.