Chemtrade Logistics Income Fund

Chemtrade Logistics Income Fund (TSX: CHE.UN) provides industrial chemicals and services which operates in four business segments: Sulphur Products & Performance Chemicals (SPPC), Water Solutions & Specialty Chemicals (WSSC), Electrochemicals (EC) and Corporate (Cor). 

Key highlights 

• An income play: The group has a proven track record of dividend distribution over a period of time. Recently, it announced a monthly dividend of CAD 0.05 per common share payable on June 25, 2021. Moreover, at the last closing price, the stock was offering a dividend yield of ~7.9%, which is lucrative considering the current interest rate environment.

• Enhanced liquidity through issuance of Fund units: During Q1 2021, the company completed an equity offering of 9.8 million units at a price of CAD 7.15 per unit, resulting in total gross proceeds of CAD 70.1 million. Proceeds from the offering were used to repay its outstanding indebtedness under the senior credit facilities and for general trust purposes.

• Catering to diverse industries: The company continuously develops its product offering while working with customers to improve performance, drive efficiency and enhance product quality. Today its products are used across many major industries such as Water and Wastewater Treatment, Food, Beverage, Pharmaceutical, Pulp & Paper, Oil & Gas, Industrial Processing, Agriculture, and more. We feel that this diversification contributes to its success because it is not entirely dependent on one area. These industries' sluggish demand has begun to improve, although it is still well below pre-pandemic levels.

Financial overview of Q1 2021

Source: Company

• In Q1 2021, the company reported revenue at CAD 312.4 million, against CAD 366.9 million in the previous corresponding period. The fall in revenue was primarily due to lower sales volumes and lower selling prices for caustic soda and hydrochloric acid, lower merchant sulphuric acid, Regen acid, and other Sulphur Products and Performance Chemicals products segment.
• Gross profit enhanced to CAD 20.9 million, against a loss of CAD 21.0 million in Q1 2020. The improved gross profit was mainly due to the lower cost of sales and services.
• On the back of lower SG&A expenses, the operating loss stood at CAD 7.5 million in the reported quarter against CAD 51.5 million of loss in pcp.
• The company managed to minimize its net loss to CAD 20.4 million compared to CAD 97.8 million in the previous corresponding period, mainly due to lower finance cost.

Risks associated with investment

Commodity prices influence the company's performance, and price volatility impacts the company's success. Other business risks include a general decrease in demand for its products, the loss of a segment of its client base, the disruption of product or raw material supply, etc.

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

The company began to see signs of improvement in several of its businesses. However, the operating results for Q1 2021 were affected by conditions caused by the COVID-19 pandemic, primarily non-essential travel restrictions that have impacted refinery production rates and the demand for regen acid, and reduced demand for paper, which affects demand for sodium chlorate. Since it caters to the specialty chemicals segment, which has high entry barriers with a stable client base, it also transformed itself into a leading supplier of several industrial chemicals and has a substantial product presence across the North American market. We also expect high demand for the company's products supporting the revenues with a gradual revamp of the economy. Furthermore, the stock is offering a lucrative dividend yield amid low interest rate environment. Based on technical analysis, the stock has support at CAD 6.2 level. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 7.59 on May 31, 2021. We have considered Ag Growth International Inc, Mosaic Co, Nutrien Ltd, etc. as the comparison's peer group.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level. 

One-Year Technical Price Chart (as on May 31, 2021). Analysis by Kalkine Group

European Residential REIT

European Residential REIT (TSX: ERE.UN) is a publicly-traded unincorporated, open-ended real estate investment trust focused on aggregating a portfolio of high quality, multi-residential real estate assets in key European markets with solid fundamentals.

Key Highlights

• An income play: The group has a decent track record of dividend distribution and continues with the dividend payment. Recently, the company announced a monthly dividend of €0.00917 per unit payable on June 15, 2021. Moreover, at the last closing price, the stock was offering a dividend yield of ~3.8%, which is decent considering the current interest rate environment.

• Improving operating matrix: The group reported an occupancy rate of 98.3% during Q1FY21 in the residential segment, which stood constant to the previous corresponding period, while the commercial segment reported 100% occupancy. The stabilized occupied average monthly rent and portfolio net operating income grew 3.9% and 3.7%, respectively, which is commendable considering the current operating environment.

 Data Source: Company

• Substantial presence in high growth urban markets: The group has an impressive presence across the urban locations, which has an impressive track record of strong rental growth. Thus, we expect that the above would lead to strong cash flow growth in the coming quarters. Moreover, almost 46% of its total units have an average monthly rent of more than € 851.

• Increase in Funds from Operations: In Q1 2021, the company improved its fund from operations to €14.2 million, up from €13.0 million in the previous corresponding period. The increase in FFO was primarily driven by the positive impact of increased stabilized NOI and accretive acquisitions.

Financial overview of Q1 2021 (In thousands of €)

Source: Company

• In Q1 2021, the REIT posted its operating revenues at € 18.8 million, comparatively higher than € 17.0 million in the previous corresponding period. The increase was primarily due to accretive acquisitions and an increase in AMR on the stabilized portfolio.
• Net Rental Income stood at € 14.2 million v/s € 12.9 million in the previous corresponding period.
• The REIT reported a negative income before tax of € 36.1 million compared to an income of € 132.1 million in pcp. The negative income before tax was primarily due to net movement in the fair value of Class B LP units and investment properties.
• Net loss stood at € 35.6 million, against a net income of € 128.4 million in the previous corresponding period.

Risks associated with investment

Change in consumer preferences of relocating from city centers to suburbs would lead to lower demand from the urban areas, which might be a key concern as the group derives a substantial portion of its revenue from the urban region.

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The company reported strong operating results in Q1 2021, fueled by accretive acquisitions and ongoing strong rental growth, with a 3.9% increase in both stabilized Net Average Monthly Rent ("AMR") and stabilized Occupied AMR. The occupancy for residential and commercial properties remained stable at 98.3% and 100.0%, respectively, with 78% of residential vacancy in the current period due to renovation. The REIT also collected residential rental revenue consistently with its historical average, which provided healthy cash flows. Furthermore, the multi-residential asset class in Europe seems resilient and is highly defensive, which indicates stable cash flow generation. Based on technical analysis, the stock has support at CAD 3.45 level. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 4.24 on May 31, 2021. We have considered Killam Apartment REIT, Melcor REIT, Artis REIT etc as the peer group for the comparison. 

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

One-Year Technical Price Chart (as on May 31, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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.