Chemtrade Logistics Income Fund

Chemtrade Logistics Income Fund (TSX: CHE.UN) provides industrial chemicals and services to customers in North America and around the world. The company organized into four main operating segments: Sulphur Products and Performance Chemicals (SPPC), Water Solutions and Specialty Chemicals (WSSC), Electrochemicals, and Corporate. 

Key Highlights:

• Positive Caustic Soda Outlook: The company derives a major chunk of its revenue from Caustic Soda, and the long-term outlook of the segment remains bright, which augurs well for higher realized prices. We expect a gradual recovery in the demand dynamics on account of reopening of the major economies.

Source: Company Presentations

• Income Play: The company has a glaring history of consistent dividend payment, across economic cycles, which suggest operational resiliency and stable cash-flows. However, due to the current downturn, the organization has lowered its dividend distributions to CAD 0.15 per share, compared to CAD 0.30 per share, a year ago. At the last traded price, the stock was offering a lucrative dividend yield of ~12% on an annualized basis, which would attract several income investors.

5-year Dividend History (Source: Refinitiv, Thomson Reuters)

Q3FY20 Financial Highlight:

• The group announced its quarterly results, wherein the company posted revenue of CAD 345.850 million, as compared to CAD 395.653 million in the previous corresponding period (pcp). The decline was primarily attributable to lower sales volumes and lower selling prices for caustic soda and hydrochloric acid. Moreover, the lower sales volume of merchant sulphuric acid, Regen acid and other products in the Sulphur Products and Performance Chemicals segment also acted as a drag.
• Gross profit plunged to CAD 7.389 million, from CAD 41.417 million, a year ago. The decline was primarily due to a lower revenue and a higher cost of sales and services.
• The company posted an operating loss of CAD 19.824 million, as compared to an income of CAD 13.687 million in pcp.
• The company reported a higher net loss of CAD 48.318 million, as compared to CAD 0.163 million in pcp, due to a significantly higher net finance costs (CAD 46.121 million versus CAD 22.675 million in pcp).
• Cash and cash equivalents stood at CAD 18.581 million, while total assets stood at CAD 2,609.175 million.                 

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risk: The performance of the company is dependent on the commodity prices, and volatility in the prices would impact the overall performance.

Valuation Methodology (Illustrative): EV to Sales based

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

Over the years, the company maintained strong financial flexibility and balance sheet with sound capital management, through increasing its size, scale and diversity of earnings. The company also caters to specialty chemicals segment, which has a distinct barrier to entry and has stable client-base. The company is a leading supplier of several industrial chemicals and has a solid product presence across the North American market. 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.  We have valued the stock using EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Nutrien Ltd., Mosaic Co etc. Hence, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 5.0 on November 30, 2020.

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

Polaris Infrastructure Inc

Polaris Infrastructure Inc. (TSX: PFI), is a Canada-based company, which is engaged in the acquisition, development, and operation of renewable energy projects in Latin America. It operates energy projects in Central and South America, which includes both Geothermal and Hydroelectric energy projects.

Key highlights

• An income play: The company has a strong history of dividend payment, which establishes the fact that the company’s business is resilient in nature and has reported stable cash flows over the years. The group declared a quarterly dividend of USD 0.15 per outstanding common share, which was paid on 30 November 2020. The stock is offering a yield of 4.65% amid a low interest rate environment. 

• Improved Liquidity and working capital: As of September 30, 2020, the company reported an increase in its total cash balance to USD 58.6 million, as against USD 32.6 million as on December 31, 2019, while the working capital stood at USD 43.7 million, as against USD 13.6 million. 

Financial Overview of Q3 2020 (in USD Thousands)

Source: Company

• In Q3 2020, Revenue posted by the company decreased by USD 0.5 million to USD 17.1 million, compared to USD 17.6 million in Q3 2019, mainly due to decrease in production at the San Jacinto facility and Canchayllo facility.
• The company posted an operating income of USD 6.59 million in Q3 2020, as against USD 8.7 million in the previous corresponding period. The reason behind the low operating income were high direct cost, increased depreciation, and high G&A expenses as compared to Q3 2019.
• In Q3 2020, the group reported net earnings of USD 1.32 million, as against USD 2.77 million, primarily due to higher operating expenses, partially offset by lower interest expense as compared to Q3 2019.

Risk associated with investment

Risk related to environment and climate change could hamper the operations of the group. Other critical risks associated with the group are interest rates, liquidity, foreign exchange, and any change in regulations and government policies could affect the overall business of the group. 

Valuation Methodology (Illustrative): Price to Cash Flow

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The company’s facilities and operations in Peru and Nicaragua, as well as the head office in Toronto have not been significantly impacted by COVID-19 and are operating without major issues. Further, to date the operations have not been materially affected from changes to the supply chain as a result of the various restrictions that local governments have instituted to date. The company is offering a dividend yield of 4.65%, which is lucrative, considering the current interest rate environment. Therefore, based on the above rationale and valuation done using the above methodology, we have given a ‘Hold’ recommendation at the closing price of CAD 16.88 on November 27, 2020. We have considered Northland Power Inc, Capital Power Corp, etc. as the peer group for the comparison. 

Daily technical chart. Source: Refinitiv (Thomson Reuters)

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.