Chemtrade Logistics Income Fund

Chemtrade Logistics Income Fund (TSX: CHE.UN) operates in diversified business and offers industrial chemicals and related services across North America. The group is a leading supplier of sulphuric acid, spent acid processing services, inorganic coagulants for water treatment, sodium chlorate, sodium nitrite, etc. across North America.

Key Highlights:

• The company declared a monthly cash distribution of CAD 0.05 per unit, payable on September 25, 2020.
• The company reported that it had completed the issue and sale of 8.50% convertible unsecured subordinated debentures amounting to CAD 11.25 million with a due date of September 30, 2025 at a price of CAD 1,000 per Debenture. 

Q2FY20 Financial Highlights: Chemtrade Logistics announced its second-quarter results, wherein revenue stood lower at CAD 347.534 million as compared to CAD 396.735 million in the previous corresponding period (pcp). The decline in revenue was driven by lower sales volumes combined with a fall in the selling prices for hydrochloric acid and caustic soda. The group reported a lower sales volume within the Regen and merchant sulphuric acid across the Sulphur Products & Performance Chemicals segment, which resulted in the top-line erosion. Gross profit stood at CAD 32.622 million as compared to a gross loss of CAD 12.282 million in Q2FY19 as cost of sales declined substantially. The company reported a decline in the selling and administrative expenses to CAD 19.295 million against CAD 21.425 million in pcp. Income before income tax stood at CAD 10.621 million as compared to a loss of CAD 59.918 million in pcp, due to a considerably lower net finance costs in the current quarter. Net earnings stood at CAD 4.499 million as compared to a net loss of CAD 57.576 million, a year ago. Cash and cash equivalent stood at CAD 12.326 million, while total assets were reported at CAD 2,707.046 million.

Q2FY20 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 has corrected ~52% in the last one year due to a decline in the chemical prices on account of a fall in demand for industrial chemicals in the recent past. The company is a leading supplier of several industrial chemicals and has a solid product presence across the North American market. During the quarter the company reported a lower selling and administrative expenses along with a drastic fall in the net finance costs, which has resulted in an improved bottom-line. We expect with the gradual revamp of the economy, the demand for the company's products would likely to improve and would support the top-line. 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.  Furthermore, the company is paying a dividend on a regular basis, while most of the businesses are cutting down its dividend payments in order to maintain liquidity. At the last traded price, the stock was offering a dividend yield of 11.01%, which is lucrative considering the current interest rate environment. We have valued the stock using the EV to Sales based relative valuation approach and arrived at a target price, which suggests a lower double upside potential (in % terms). For the said purpose, we have considered peers like Nutrien Ltd., Mosaic Co etc. Considering the aforesaid facts, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 5.45 on September 10, 2020.

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

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