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

Scotia comment on result

[incomedreamer11]

Poised for Relative Outperformance

OUR TAKE: Positive. We believe CHE is poised for relative outperformance N/T. First, chlor-alkali remains tighter than most other chemical chains, with caustic still up 50% y/y, despite recent moderation. This is the main reason for the 31% H2-implied guidance raise (17% for ‘22 overall). Second, refinery rates remain strong; and now that gasoline prices have eased, we no longer see incremental regen acid demand risk. Third, the water solutions business (relatively stable margins through a recession) will now get a boost from sulphur costs improving dramatically over the past 3-4 weeks, while CHE is proactively pushing for higher prices to partially compensate for the spike. Fourth, we’re bullish on CHE’s opportunity to benefit from the U.S. build-out of semi-conductor capacity, both from its legacy ultra-pure business and the new JV. Fifth, at 3.2x and improving, leverage is much better today than when CHE’s B/S struggles led to meaningful share price deterioration. Sixth, we believe CHE’s board could increase the distribution in time (7% yield already), given a sustainable sub-50% payout. So, we like the stock, but also understand why some past shareholders remain skeptical/cautious, and need to see further improvement.

What we learned on the call: (1) every US$50/mt change to caustic pricing, sustained for a year, results in a $10M change to EBITDA; (2) ultra-pure acid demand remains very strong, with CHE now adding capacity from two projects; (3) CHE anticipates continued success in proactively passing on higher sulphur costs to its water treatment chemical customers; (4) should be a record year for EC in ‘22; (5) CHE continues to generate robust margins in chlorine, which at times, as been a break-even business for the company; (6) the HCl outlook is improving on the back of higher fracking activity; (7) demand for sodium chlorate remains subdued; (8) CHE does not carry a lot of sulphur inventory, especially when prices were spiking recently; (9) CHE’s ultra-pure market share in NA is ~80%; (10) Q3 EC EBITDA should exceed Q1/Q2.