CIBC comments on resultCHEMTRADE LOGISTICS INCOME FUND
Record Q1/22 Quarterly Results
Our Conclusion CHE.UN reported a very strong Q1/22 driven by solid performance across segments, and raised its 2022 EBITDA guidance by ~12.5% at the mid-point.
We are raising our FY2022 estimates to reflect the solid Q1/22 quarter but have not made any major changes to our forward estimates. For the balance of 2022, we see solid chlor-alkali (high caustic/chlorine pricing and improving hydrochloric acid demand with improving rig counts) and sulphur product market fundamentals offset by transitory factors, including the Q2/22 North Vancouver turnaround, margin pressure for water chemicals (given the spike in raw material costs) and lower chlorate volumes (slow return-to-office trends).
We view CHE.UN’s dividend as safe (2022E payout ratio of ~63%).
We reaffirm our $10.50 price target and Outperformer rating.
Key Points Chlor-alkali Price Strength Underpins Strong Anticipated 2022 EC Segment Performance: CHE.UN 2022 guidance now assumes an average FY2022 Northeast Asia caustic price of US$575/t (US$135/t higher than prior expectations). Given solid pricing to start the year (current prices are north of US$700/t), the guidance implies prices will ease in H2/22 (~US$480/t for H2/22). Note that that the previously disclosed North Vancouver turnaround (currently taking place and scheduled to restart this week) should have a ~$20MM negative impact to EBITDA in Q2/22. Despite concerns of an economic slowdown, current chlor-alkali market dynamics remain positive and caustic/chlorine markets remain tight. Management sees fracking activity growing by 20%-25% over the next 12 months, supporting demand for HCl. SWC Segment – Regen, Ultrapure Strength To Continue, Water Products To Face Transitory Margin Pressure:
Q1/22 results benefitted from solid sulphur/acid pricing/volumes, reflecting improved gasoline refinery utilization trends (no negative impact to driving activity from higher gasoline prices yet), broad-based improvement in industrial end-markets and strong demand from the semiconductor industry. For water chemicals, the continued rise in raw material costs implies transitory margin pressure until contracts are renewed for higher pricing. As a result, we see Q2/22 to Q4/22 SWC segment EBITDA levels remaining fairly consistent on a Y/Y basis.
Potential Sale-leaseback Of North Vancouver Real Estate Could Provide Significant Proceeds: Recall, CHE.UN announced in April that it was actively pursuing the sale of land at its North Vancouver site (~40 acres) through a sale-leaseback structure. According to CBRE, industrial Vancouver land is estimated to reach $7.05MM per acre in 2022 (vs. $6.0MM in 2021 and $3.5MM in 2020). If we assume CHE.UN can sell within the range of $4MM-$7MM per acre, that would imply it could get $150MM-$300MM (pretax) which could be used for ultrapure acid cap
Company Profile Chemtrade operates in two reportable segments: Sulphur and Water Chemicals or SWC (primarily regen, ultrapure acid, merchant sulphuric acid and water treatment chemicals) and Electrochemicals or EC (primarily caustic soda, chlorine, hydrochloric acid and chlorate).
Investment Thesis High earnings torque to improving macro-conditions in 2022 (particularly EC segment and sulphur products), ~8% dividend yield, long-term benefactor of increased demand from the structurally growing semi-conductor (ultrapure acid), lithium (caustic), and green hydrogen industries
Price Target (Base Case): C$10.50 We apply a multiple of 7.0x to our 2023 EBITDA estimate. We assume a recovery in chlor-alkali and sulphur products extending into 2022.
Upside Scenario: C$13.00 Our upside scenario assumes a sustained period of higher chloralkali (caustic and HCl) demand/pricing as well as a faster-thananticipated recovery in water solutions margins.
Downside Scenario: C$4.00 Our downside scenario assumes a deep economic recession, negatively impacting the EC segment and sulphur products (water solutions relatively inelastic to economic growth).