Chemtrade Logistics Income 6 50 Convertible Unsecured Subordinated Debentures CGIFF

CIBC comment on result

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Committed To The Dividend -   Q4/22   Review

Our Conclusion

Q4/22 was essentially a non-event given that CHE.UN previously provided 2023 guidance in January. That said, CHE.UN is indicating that 2023 adj. EBITDA should be above the mid-point of its guidance given the better-thanexpected start to the year (chlor-alkali pricing). Despite higher planned growth capex in 2023 that will temporarily bring the dividend payout ratio above 100% (note, we calculate the payout rate excluding growth capex in the low-40% range), CHE.UN remains committed to its dividend (yielding 6%+) given its improved balance sheet capacity.
Post Q4/22 results, we are raising our 2023 estimates slightly to reflect the relatively more bullish outlook for the EC segment, but our 2024 estimates are largely unchanged. We maintain our $12 price target and Outperformer rating. Note, CHE.UN is trading at 5.3x 2023E EV/EBITDA, below chlor-alkali peers at 6.1x and MEOH at 6.9x.

Key Points

Committed To Dividend; Balance Sheet In Good Shape Ahead Of Higher Growth Capex Levels: CHE.UN’s balance sheet is in a much better position, as shown by a net debt/adj. EBITDA ratio of 2.2x as at Q4/22 vs. 2.4x Q/Q and 4.2x Y/Y. While high growth capex in 2023 ($110MM-$140MM mostly tied to ultrapure facilities for the semiconductor industry) implies the dividend is not fully covered from internal FCF (see FCF calculation on page 2), CHE.UN affirmed that it is committed to its dividend (currently yielding 6.3%). CHE.UN will target keeping leverage below 3x during this temporary period (2023/2024) of higher growth capex.

Improved 2023 Outlook Reflects Good Start To Year For Electrochemicals: CHE.UN is reaffirming its 2023 adj. EBITDA guidance range of $360MM-$400MM issued in January 2023. But given the strong start to 2023, CHE.UN now expects to be above the mid-point of its 2023 adj. EBITDA range (i.e., above $380MM vs. consensus of $382MM). Management noted that caustic prices have been higher than prior estimates, and other parts of chlor-alkali (hydrochloric acid and chlorine) and chlorate results have been better than previously expected.

Another Strong Year Expected For EC Segment: CHE.UN reiterated its expectation for chlor-alkali and chlorate prices to remain higher than historical levels, driven by high energy/electricity costs in Europe. Recall, electricity costs represent ~75% and ~50% of the variable production cost for chlorate and chlor-alkali, respectively. While caustic prices will moderate in 2023, chlorate prices should increase. CHE.UN’s 2023 guidance assumes an average Northeast Asian caustic price of $465/t (~$185/t lower Y/Y) vs. current pricing of just under $500/t. Every $50/t change has an ~$12MM adj. EBITDA impact. Most chlorate contracts are negotiated annually, so CHE.UN should see the benefit from higher chlorate pricing in 2023.