Chemtrade Logistics Income 6 50 Convertible Unsecured Subordinated Debentures T.CHE.DB.E

TDW Full Comments

[hawk35]

Unlike RBC, TDW has a more optomistic outlook for the next two years.  Here are their full comments.

Chemtrade Logistics Income Fund
(CHE.UN-T) C$9.40
Q4/18: A Disappointing End to a Disappointing Year
 
 
Event
Chemtrade reported Q4/18 adjusted EBITDA of $65.0mm, below our estimate of
$79.1mm and the consensus estimate of $77.9mm.
 
Impact: NEGATIVE
Results in the quarter came in well below our forecast in all three company
segments, as Chemtrade was affected by a number of issues including 1)
unplanned downtime at two SPPC customers; 2) an extended maintenance
outage for a large regen customer; 3) an extended outage at one of its own
regen plants; 4) continued pressure on alum margins from rising input costs; 5)
reduced purchases for two specialty chemical products; and 6) lower chlor-alkali
production rates due to softer HCl demand.
While some of the issues experienced in the quarter will continue to affect results
in the near term, we believe that underlying fundamentals for most of Chemtrade's
core products remain fairly strong and we remain of the view that chlor-alkali
markets will continue to tighten over the next 5+ years, which will serve as a
tailwind for the company for the foreseeable future (once it moves past some nearterm
caustic pricing softness).
For F2019, management believes that SPPC EBITDA will be materially better y/y,
WSSC EBITDA will be flat or slightly lower y/y, and EC EBITDA will be flat to up y/
y (dependant on chlor-alkali pricing), resulting in overall EBITDA improvement in
F2019. However, we model relatively flat EBITDA y/y as we attempt to incorporate
conservatism into our model, given recent execution issues. Our estimates
exclude the impact of IFRS 16 (expected to result in an incremental $55mm-
$60mm of EBITDA).
Our target price has decreased to C$12.00 (from C$15.00) on our reduced
EBITDA estimates and a slightly lower EV/EBITDA multiple (7.0x vs. 7.5x
previously), as we believe that the quarterly miss would result in heightened
investor skepticism.
 
Justification of Target Price
Our C$12.00 target price (previously C$15.00) is based on 7.0x (previously 7.5x) our
F2020 EBITDA estimate. Our valuation multiple is broadly in line with comparables, but
it is below the company's historical valuation, given recent execution issues.
 
TD Investment Conclusion
We reiterate our BUY recommendation, as continue to believe that Chemtrade's best
days lie ahead; the current dividend remains sustainable; and that the company will
ultimately benefit from the tightening chlor-alkali market. Although some of the recent
issues will continue to impact results in the near term, we expect gradually improving
results over time and believe that patient investors will be rewarded.

Key Risks to Target Price
Key risks to our target price include input costs and commodity pricing; competition;
foreign exchange; end-market fundamentals; regulatory changes; industrial demand;
reliance on key customers and suppliers; manufacturing issues; interest rate risk; and
acquisition/integration risk.