Chemtrade Logistics Income Fund (TSX: CHE.UN) operates in diversified business and provides industrial chemicals and services majorly to North America and to other parts of the world also. 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.

The Group declared a monthly cash distribution of CAD 0.05 per common share, payable on June 30, 2020.

Guidance: Maintenance capital expenditures for FY20 is expected to be around CAD 80.0 million while Lease payments are expected in the range of CAD 55.0 million to CAD 60.0 million, Cash Interest is anticipated in between CAD70.0 million and CAD 75.0 million. The Company expects North American production volume of sodium chlorate at around 400,000 MT.

Q1FY20 Financial Highlights: For the period ended March 31, 2020, CHE.UN reported a lower revenue of CAD 366.90 million as compared to CAD 385.252 million in the previous corresponding quarter. The decline was majorly attributable to a to lower selling prices for caustic soda and hydrochloric acid followed by lower sales volume of sulphuric acid and other sulphur products and performance chemicals. The operating loss widened to CAD 51.54 million, as compared to a loss of CAD 19.74 million in pcp, due to a soar in cost of sales & services and higher selling & administrative expenses. Net finance costs rose to CAD 67.45 million against CAD 27.11 million, due to a significant increase in change in the fair value of convertible debentures. Net loss stood at CAD 97.87 million, from CAD 29.32 million in Q1FY19. However, despite all the negatives, the Company reported a higher Adjusted EBITDA of CAD 80.88 million, against CAD 43.96 million in pcp, due to an inclusion of impairment of goodwill amounting to CAD 56 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology: P/ CF Based Relative Valuation (Illustrative)

P/CF  Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: The stock of CHE.UN corrected ~48% so far this year as the demand was hindered due to COVID 19 pandemic. The Company expects, the prices of the caustic soda to remain stable throughout the year which is likely to stabilize cash flows. The Group’s products such as regen sulphuric acid and hydrochloric acid, which are extensively used within the oil and gas sector and due to sectoral weakness, Chemtrade reported a sluggish sales volume in the recent past. However, we expect an improved demand from crude oil and natural gas, driven by higher industrial and manufacturing activities, as several governments are easing ongoing restrictions. The stock reacted to the recent uptick in the crude oil prices and appreciated ~16% in the last one month, outperforming the index by ~11%. Despite the recent hiccups in financial performance, the stock seems to be a very attractive option to the income investors. The stock offers an annualized dividend yield of 10.56%, which is lucrative amidst the current interest rate scenario. The stock is trading above its 20-days and 50-days simple moving average (SMA) of CAD 5.02 and CAD 4.76, indicating a short-term bullish pattern.

We have valued the stock using P/CF multiple 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 Superior Plus Corp, Ag Growth International Inc, Mosaic Co etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 5.70 on May 27, 2020.

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

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