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

Scotia comment on results

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Four Reasons We're Warming Up

OUR TAKE: Positive. We have increased our PT to $9.50 (+12%) as the near-term outlook continues to improve for Chemtrade. First, CHE.un has taken a number of steps to improve the B/S, resulting in leverage of 3.5x vs. 5.9x y/y. Leverage should continue to strengthen, enabling greater flexibility re: growth opportunities, as well as future commodity price volatility. Second, demand for regen acid (via gasoline) has recovered, the merchant acid industry is tight, the outlook for chlor-alkali products (caustic, chlorine, HCl) remains favourable. The one area of continued weakness is sodium chlorate, due to reduced demand for office paper. Third, overall pricing looks to be stronger for longer, led by ECU netbacks up 60% y/y. This has supported a guidance bump (to $315M vs. $280M mid-points). Fourth, there is more upside than downside to our $9.50 PT. Why? To be conservative, we have cut our valuation multiple to 6.5x vs. a mid-cycle multiple of ~7.5x. Our conservatism assumes elevated margins (EC in particular) will moderate over time; but this may not occur given market tightness, in which case each +0.5x multiple increase is worth $1.50/sh in value. While we maintain a SP rating, we’re warming up to the Chemtrade story.

What we learned on the call: (1) CHE.un is looking for a realized caustic soda price of $575/mt in ‘22, up $135 from its previous guidance, and $285 higher y/y; (2) the mid-point of guidance implies a distribution payout ratio of 50%, potentially opening up the possibility of a higher distribution (our view) down the road; (3) the ultrapure acid outlook for use in the semi-conductor industry is very strong; (4) a $50/mt change in caustic soda pricing is worth ~$10M in EBITDA; (5) the expansion of CHE.un’s ultrapure acid facility at Cairo, OH continues on schedule for commissioning in ‘24, with a ~$50M for an expected 25% ROIC; (6) production of hydrogen from its Prince George, BC facility should commence next year (+$3M to +$5M pick-up in EBITDA), with another potential project in Brandon, MB; (7) Q2 may see some cost pressure, as sulphur has spiked again, although CHE.un has generally shown an ability to pass these higher costs on to customers (over time); and (8) for the remainder of the year, SWC EBITDA likely won’t improve, meaning the bulk of the upside should come from the EC segment.