hawk35 wrote: SP dropped because of downgrade today. Analyst see's short term issues.
Desjardins Securities analyst David Newman lowered his earnings expectation for
Chemtrade Logistics Income Fund (
CHE.UN-T) ahead of the release of its fourth-quarter results on Feb. 20, pointing to a decline in caustic soda and hydrochloric acid (HCI) prices.
Though he expects a recovery in the second half of 2020, his near-term view and recent share price appreciation led him to lower his rating for Toronto-based Chemtrade to "hold" from "buy."
“We expect results to be driven by: (1) continued weakness in Northeast Asia caustic soda and HCl prices, compounded by lost volumes due to the CN Rail strike; (2) some stabilization/rollover in merchant acid prices, offset by margin improvement from regen acid capacity rationalization; (3) higher selling prices for WSSC’s water treatment chemicals, with margin improvements augmented by more benign raw material costs; and (4) weaker specialty chemicals sales,” he said.
“In 2020, we expect caustic soda prices to recover in 2H, given the positive impact of IMO 2020 and other demand drivers (also impacted in 2Q20 by a scheduled turnaround of CHE’s North Vancouver facility), with HCl likely to benefit from a recovery in the energy markets. SPPC will have to manage through more turnarounds (eg a major turnaround at its Richmond, California, regen plant in 4Q). While merchant acid prices will likely remain stable/roll over, strong demand for regen and ultra-pure acid should continue into 2020. For WSSC, higher contract prices with municipalities and increasingly benign raw material costs should propel margins to similar levels realized several years ago. We are waiting for an update from CHE regarding the potential sale of selected specialty chemicals.”
For the fourth quarter, he lowered his pre-IFRS 16 adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) estimate to $55-million from $61-million. His full-year 2019 and 2020 projections slipped to $334-million and $343-million, respectively, from $340-million and $355-million.
Based on his revised 2020 expectations, Mr. Newman also lowered his target price for Chemtrade shares to $11.50 from $12. The average on the Street ix $12.
“While we remain constructive on CHE’s longer-term outlook, we are taking a more cautious stance in the short to mid-term given the prolonged weakness in chlor-alkali and an elevated level of turnarounds in 2020, which is neutralizing a resurgent base of traditional chemicals in its SPPC and WSSC businesses,” the analyst said. “With more limited potential upside, we are moving to a Hold.”