Chemtrade Logistics Income Fund

Chemtrade Logistics Income Fund (TSX: CHE.UN) is engaged in providing industrial chemicals, and services to customers across the North America and around the world.

Key Highlights:

• An income play: Irrespective of economic cycles, the group has paid a consistent dividend to its shareholders, which is a key positive. At the last closing price, the CHE.UN stock carries an attractive dividend yield of ~8.9% on an annualized basis, significantly higher than the TSX composite of ~3.37% on an annualized basis.                

Ten-years dividend distribution (Source: Refinitiv, Thomson Reuters)

• Bullish Technical Indicators: The stock closed above its long -term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish pattern. Notably, the stock appreciated ~51% and ~33%, respectively in the last three months and nine months, respectively.

 Technical Price Chart (as on Februaery 04^th, 2021). Source: Refinitiv (Thomson Reuters)

• Growth in Cash flows: The group has reported higher cash from operations during Q3FY20 and 9MFY20 at CAD 90.866 million and CAD 188.763 million, respectively, higher than CAD 80.462 million and CAD 78.818 million, respectively, a year ago. The improvement was driven by depreciation costs and prudent working capital management.

Cash Flow Snapshot (Source: Company Reports).

Recent Announcement:

• The group would disclose its Q4FY20 result on February 23, 2021.
• The company reported monthly cash distribution of CAD 0.05 per unit, payable on February 23, 2021.

Q3FY20 Financial Highlights:

• The group announced its quarterly results, wherein the group posted revenue of CAD 345.850 million, lower than CAD 395.653 million in the previous corresponding period (pcp). The decrease was majorly attributable lower sales volumes from regen and merchant sulphuric acid. Moreover, a decline in other SPPC products due to COVID-19 pandemic also dampen the performance.
• Gross profit declined to CAD 7.389 million, from CAD 41.417 million in Q3FY19. The decline was primarily due to lower revenue, partially offset by a lower cost of sales and services (CAD 338.461 million versus CAD 354.236 million in pcp).
• The group reported a higher net loss of CAD 48.318 million, as compared to a loss of CAD 0.163 million in pcp. The decline was primarily due to significantly higher Net finance costs (CAD 46.121 million versus CAD 22.675 million in pcp), partially offset by higher income tax recovery (CAD 17.627 million versus CAD 8.825 million in pcp).
• Cash and cash equivalents stood at CAD 18.581 million, while total assets were recorded at CAD 2,609.175 million.          

Q3FY20 Income Statement Highlights

Risks: Continuation of the COVID-19 pandemic restrictions would lead to lower demand of certain company’s products, which would dampen the company’s overall performance.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

The group maintains financial flexibility and balance sheet strength with prudent capital management, while derives ~60% of revenue based on risk shared contracts. The above would support the company’s cash flows during price volatility. The company also operates through a specialty chemicals segment which has a distinct barrier to entry. However, on the flip side, the management highlighted that its Q4FY20 result might be impacted due to the maintenance shutdown of North Vancouver chlor-alkali plant and one of the company’s regen plants. We have valued the stock using P/CF based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Mosaic Co, Nutrien Ltd etc. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 6.71 on February 4, 2021.

1-Yrar Price Chart (as on February 04^th, 2021). Source: Refinitiv (Thomson Reuters)

Tidewater Midstream and Infrastructure Ltd.

Tidewater Midstream and Infrastructure Ltd. (TSX: TWM) is a Canadian company, which is engaged in providing midstream infrastructure and a natural gas storage facility. The group mainly focuses on the purchase, sale, and transportation of Natural Gas Liquids (NGLs) such as propane and natural gasoline throughout North America and export to premium markets. 

Key Updates:

• Positive Technical Indicators: The stock of TWM closed above the long -term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish price trend. Moreover, the stock gained ~11% and ~40%, respectively in the last one month and three months, respectively driven by a revival in the international crude oil prices.

(Source: Refinitiv, Thomson Reuters)

• Consistent Dividend-payout: The company has a solid track record of consistent dividend payment, backed up by stable cash flows. During 9MFY20, the group paid a total dividend of CAD 10.135 million, higher than CAD 9.928 million, a year ago. Moreover, at the last closing price, the stock was offering a dividend yield of ~4.44%, which is decent considering the current interest rate environment.               

Five-years dividend distribution (Source: Refinitiv, Thomson Reuters)

• Sequential improvement in performance: The company reported a revival in the overall performance, and posted improved revenue, gross profit, and operating income of CAD 273.5 million, CAD 39.1 million and CAD 8.5 million, respectively, higher than CAD 178.6 million, CAD 34.4 million and CAD 5.8 million in Q2FY20, respectively. We expect the above trend to continue driven by improved crude oil prices.

Q3FY20 Financial Highlights:

• TWM reported its quarterly results, wherein the group posted revenue of CAD 273.461 million, significantly higher than CAD 147.045 million in the previous corresponding period (pcp). The strong growth was supported by the significant recovery in commodity prices for crude oil and refined products. Moreover, the combination of higher gasoline and diesel demand due to summer travel season followed by large infrastructure projects in the interior of British Columbia resulted in the revenue growth.
• The company reported total expense of CAD 263.972 million, considerably higher than CAD 158.107 million in Q3FY19 due to a surge in the operating expenses (CAD 234.401 million versus CAD 135.262 million in pcp).
• The group reported a net loss of CAD 2.433 million, as compared to a net income of CAD 10.677 million in Q3FY19, due to higher total expenses, increase in finance costs (CAD 16.533 million versus CAD 8.737 million in pcp), Realized loss on sale of assets amounting CAD 10.726 million versus a gain of CAD 2.069 million in pcp.
• The group reported a cash balance of CAD 10.929 million, while total assets were reported CAD 2,048.534 million in pcp.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: The group’s bottom line has been dampened due to higher input costs coupled with increase in finance costs. Continuation of the above trend would further dampen the company’s profitability and cash flows.

Valuation Methodology (Illustrative): Price to CF based

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

Stock Recommendation:

The company derives ~75% EBITDA from long term contracts while ~50% of EBITDA from Investment Grade counterparties. This augurs well for stable cash flows and income generation. Moreover, the company has diversified market access through connectivity and strategically owned pipeline assets, which lowers the risk profile. We have valued the stock using P/CF based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered industry (Natural Gas and Utilities) median multiple on NTM basis. Hence, considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 0.90 on February 4, 2021.

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

Disclaimer

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