Chemtrade Logistics Income Fund

Chemtrade Logistics Income Fund (TSX: CHE.Un) offers industrial chemicals products and related services across 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 Updates:

• Collaboration with Hydra Energy: On February 23, 2021, the group reported a collaboration with Hydra Energy. The long-term contract is a pillar of Hydra's Hydrogen-as-a-Service (HaaS) business model and includes Hydra capturing, cleaning, and compressing hydrogen. Initially, both companies are focused on one of Chemtrade's plants in British Columbia with the potential to expand across the country.

• An income play: Historically, the group paid a consistent dividend to its shareholders, backed by stable cash flows. Moreover, at the last closing price, the stock was offering an attractive dividend yield of ~8.3, which is significantly higher than the TSX composite of ~3.32%.

Five-Years Dividend History (Source: Refinitiv, Thomson Reuters)

• Consistent reduction in total debt: The group has successfully reduced its debt component during the last few quarters, which indicates impressive capital management. Reduction of the total debt would lead to lower finance costs and would support the company’s bottom-line in the coming quarters. Total debt stood at CAD 1,384.3 million in Q4FY20, compared to CAD 1,520.5 million in Q1FY20.

FY20 Financial Highlights:

• UN announced its quarterly results, wherein the company posted revenue of CAD 1,379.639 million, as compared to CAD 1,532.855 million in FY19.
• Gross profit stood lower at CAD 33.730 million, as compared to CAD 97.323 million in FY19, due to lower revenue, partially offset by a lower cost of sales and services (CAD 1,345.909 million versus CAD 1,435.532 million in FY19).
• Operating loss widened to CAD 74.646 million, from a loss of CAD 35.458 million, a year ago.
• The group reported a net loss of CAD 167.478 million, as compared to a loss of CAD 99.654 million in FY19.
• The group reported cash and cash equivalents of CAD 12.511 million, while total assets were recorded at CAD 2,500.326 million.

FY20 Income Statement Highlights (Source: Company Reports)

Risks: The performance of the company’s industrial chemicals segment depends on the international commodity prices, and subsequent price volatility might affect the overall performance.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

In FY20, the company reported solid growth in cash flow from operations at CAD 261.954 million, significantly higher than CAD 139.477 million in FY19, which reflects a strong operating performance. The company’s water treatment chemicals segment remained resilient during the pandemic and would likely to support the company’s revenues and cash flows. On the flip side, one of the major factors that negatively affected EBITDA in Q4FY20, which stood at CAD 39.741 million versus CAD 69.725 million in Q4FY19 was lower sales volumes for regen acid due to an extended turnaround at a Chemtrade plant. However, the above turnaround is temporary in nature and happens once in five years. We have valued the stock using the P/CF based relative valuation approach and arrived at a target price, which suggests a double-digit upside side potential (in % terms). For the said purpose, we have considered the industry (Chemicals) average on NTM basis. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 7.23 on March 02, 2021.

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

Andlauer Healthcare Group Inc.

Andlauer Healthcare Group Inc. (TSX: AND) is a prominent and growing supply chain management company which offers specialized platform to the third-party logistics and specialized transportation solutions for the healthcare sector.

Key Highlights:

• Lucrative Industry Fundamentals: The fundamentals of the healthcare segments remain solid, driven a by higher aging population and increased life expectancy by the common people. Moreover, increasing demand for a number of Healthcare and Adjacent Products with Unique Logistics needs would likely to drive the company’s growth in the coming years. Notably, as per the historical trend, spending on healthcare logistics and transportation has been outpacing GDP growth, which is a key positive.               

Source: Company Presentation

• Recent Acquisitions to Support Future Growth: The company recently confirmed the acquisitions of Skelton Canada Inc., and a 49% stake of Skelton USA Inc. for a total price consideration of ~CAD 114.7 million. Skelton Companies are specialized in the transportation of refrigerated healthcare products, which is likely to support the AND’s comprehensive platform that focuses on specialized healthcare supply chain solutions.

FY20 Financial Highlights:

• AND announces its full-year results, wherein the company posted revenue of CAD 314.340 million, higher than CAD 289.988 million in FY19. The increase was driven by improved revenue from Healthcare Logistics Segment (CAD 116.356 million versus CAD 109.618 million in FY19), coupled with improved income from the specialized transportation segment (CAD 197.984 million versus CAD 180.370 million in FY19).

Revenue Bifurcation (Source: Company Reports)

• Operating expenses stood at CAD 263.401 million, higher than CAD 244.995 million in FY19. The increase was driven by the higher cost of transportation and services (CAD 131.392 million versus CAD 121.405 million in FY19).
• The group reported an operating income of CAD 50.939 million, as compared to CAD 44.993 million, a year ago.
• Income before income taxes stood at CAD 46.580 million, improved from CAD 42.349 million in FY19, driven by higher operating income, partially offset by the increase in interest expense (CAD 4.595 million versus CAD 3.503 million in FY19).
• Net income and comprehensive income stood at CAD 37.714 million, versus CAD 30.345 million in FY19.
• The group reported cash and cash equivalents of CAD 30.148 million, while total assets were recorded at CAD 252.797 million.

FY20 Income Statement Highlights (Source: Company Presentation)

Risks: The company operates within the Specialized Transportation and Healthcare Logistics segment, which might witness a setback due to further implementation of travel restrictions, self-imposed quarantine periods, temporary closures or restrictions of non-essential businesses, etc.

Valuation Methodology (Illustrative): EV to Sales based

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

Stock Recommendation:

The acquisition of Skelton Companies is likely to support the company’s offerings within the specialized transportation service segment and would mark the company’s entry in the US market. The group reported strong growth within the Dedicated and last mile delivery segment in FY20, while the management is confident of retaining the momentum in the coming quarters. Moreover, the group reported a higher EBITDA margin of 25.1% in FY20, as compared to 24.3% and 23.2% in FY19 and FY18, respectively. We have valued the stock using the 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 Cargojet Inc, Chorus Aviation Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 37.79 on March 2, 2021.

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

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