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), Electrochemical (EC) and Corporate (Cor).  

Key highlights 

Improving macros: The improvement in refinery utilization rates and improved momentum in the chlor-alkali industry are encouraging to the firm. The North East Asia spot index for caustic soda, which is a crucial driver of the company's selling price, has continued to rise sharply as demand grows with little new supply. The chlorine market in the United States has likewise been robust. We anticipate a continuing economic recovery, which will be beneficial to the firm since higher prices will be realized, resulting in increased cash flows.

Source: Company

• Catering to diverse industries: While working with clients to increase performance, drive efficiency, and improve product quality, the firm is always developing its product offering. Its products are now employed in a wide range of sectors. This diversification, we believe, contributes to its success because it is not only reliant on one sector.

• Management guidance: Recently the management shared its guidance for adjusted EBITDA for FY2021, where it expects its adjusted EBITDA to range between CAD 245.0 million and CAD 260.0 million.

• An income play: The group continues with a track record of dividend payment and recently it announced a monthly dividend of CAD 0.05 per common share payable on September 27, 2021. At the last traded price of CAD 6.86, the stock offers a healthy dividend yield of 8.746%, which is lucrative considering the current interest rate environment.

Financial overview of Q2 2021 (In thousands of CAD)

Source: Company

• In Q2 2021, the company reported revenue at CAD 337.2 million against CAD 347.5 million in the previous corresponding period. The fall in revenue was primarily due to lower selling prices for sodium chlorate and caustic soda in the Electrochemicals ("EC") segment and forex volatility.
• Gross profit stood lower at CAD 24.2 million, against CAD 32.6 million in Q2 2020. Cost of sales as a % to revenue increased to 92.8% V/s 90.6%, was the sole reason behind lower gross profit.
• On the back of higher SG&A expenses, the operating loss stood at CAD 1.5 million in the reported quarter against a profit of CAD 13.3 million of in pcp.
• Net finance cost increased to CAD 19.1 million compared to CAD 2.7 million in pcp.
• The company reported net loss of CAD 14.0 million against a profit of CAD 4.4 million in the previous corresponding period.

Risks associated with investment

The company’s balance sheet is highly leveraged, due to which it is incurring higher interest cost. Furthermore, the commodity prices influence its 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’s Q2 2021 was affected by the COVID-19 pandemic. However, it began to see signs of improvement in several of its businesses and it is encouraged by the recovery in refinery utilization rates and positive momentum in the chlor-alkali business. Additionally, the North East Asia spot index for caustic soda, which is a key determinant of the company’s selling price, continued  strong upward trajectory as the demand continues to grow. These factors will contribute to the higher realization prices thus expected to boost the cash flow of the firm.

Therefore, based on the above rationale and valuation, we recommend a "Speculative BUY" rating at the closing price of CAD 6.86 as on August 27, 2021. We have considered Ag Growth International Inc, Mosaic Co, Boyd Group Services Inc, 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.

 Technical Analysis Summary

One-Year Technical Price Chart (as on August 27, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Roots Corporation

Roots Corporation (TSX: ROOT) provides a portfolio of apparel, leather goods, accessories, and footwear for men, women, and children under the Roots brand. The company operates through two segments: Direct-To-Consumer (DTC), which accounts for majority revenue, and Partners & Other. The DTC segment sells products through the company's corporate retail stores and e-commerce.

Key highlights 

• Increasing demand offtake: Led by the easing lockdown restriction along with more people getting inoculated against the deadly virus, and an increase in discretionary spending has boosted demand dynamics. It can also be gauged by seeing the topline performance of the company, which jumped by 24.7% on a YoY basis.
  

• Enlarging eCommerce reach: After been brutally shaken by the COVID-19 epidemic, the retail clothing sector is undergoing a fundamental transformation. Traditional brick-and-mortar stores are concentrating their efforts on expanding their reach and footprint in e Commerce. ROOT grew eCommerce sales by around 50% year over year in the first quarter of fiscal 2021, largely offsetting decline in retail revenue during shutdown times. 
  

• Increased brand portfolio: The company has amplified the brand with the launch of multiple collaborations, including  Révolutionnaire x Roots , Roots x Emma Knight and ROOTS X AVENGERS S.T.A.T.I.O.N.
  

Financial overview of Q1 2021 (In thousands of CAD)

Source: Company 

• In Q1 2021, the company’s revenue surged by 24.7% to CAD 37.3 million compared to CAD 29.9 million in the previous corresponding period. This was primarily driven by 27.6% jump in the Direct-to-Customer sales to CAD 31.4 million V/s CAD 24.6 million reported in pcp.
• Gross Profit surged by 30.7% to CAD 21.47 million compared to CAD 16.43 million reported in pcp, mainly due to higher revenues.
• The company minimized its S&G expenses to CAD 25.8 million against CAD 27.8 million, as a result it witnessed lower loss before interest and income tax at CAD 4.4 million compared to CAD 6.5 million in pcp.
• Net loss for the reported period also stood lower at CAD 4.9 million compared to CAD 7.7 million in Q1 2020.

Risks associated with investment

The company is exposed to variety of risks ranging from supply chain risks, resurgence of Delta variant of COVID-19, a fresh lockdown and travel restrictions, intense competition, forex risks, credit risk. Additionally, the company’s highly leveraged balance sheet is exposed it to interest rate risks. 

Valuation Methodology Illustrative: Price to Earnings 

Stock recommendation

Despite the present operating environment's volatility, the company's fundamentals have improved considerably over the last five quarters, which is a big plus. The company's E-commerce revenues rose by over 50% year over year in the first quarter of 2021. Furthermore, increased eCommerce penetration aided the firm in lowering operational costs, resulting in a reduction of operating losses. Furthermore, the group's brand has been enhanced through the introduction of various collaborations, which is a big positive. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 3.30 on August 27, 2021.

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

Technical Analysis Summary

One-Year Technical Price Chart (as on August 27, 2021). Source: REFINITIV, 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.