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

CIBC comments after Investor Day presentation

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CHEMTRADE LOGISTICS INCOME FUND

Investor Day Highlights       Organic Growth Potential

Our Conclusion

CHE.UN held an Investor Day in Toronto on November 18. While CHE.UN will provide its 2023 guidance early next year, the focus of the event was on the longer-term macro trends and organic growth targets for the next 3-5 years. While historically CHE.UN focused more on a growth-throughacquisition strategy, it sees abundant opportunities to grow organically, driven by ultrapure acid (used in the semiconductor industry) capacity expansion, organic projects in water chemicals (PAC/ACH), and the monetization of green hydrogen production. The balance sheet is in good shape (net debt / EBITDA of 2.4x vs. ~6x last year), and we see no issues for funding these organic investments and/or covering its dividend (~7% yield) over the mid-term. We maintain our $11 target and Outperformer rating.

Key Points
Meaningful Organic Growth Contribution Over The Next Three To Five Years:
CHE.UN is targeting to generate incremental annual adj. EBITDA of $45MM by end-2025 and $75MM by end-2027 through organic projects with a target IRR of 20%-30%. The incremental EBITDA figures represent about 10%-20% of our 2023 adj. EBITDA estimate. About ~55% of the incremental EBITDA will come from ultrapure acid (Cairo, Ohio facility expansion and Arizona greenfield), with the remaining split between water chemicals (PAC/ ACH) and green hydrogen. CHE.UN estimates ~$270MM of growth capex will be incurred through 2027 to complete these projects.

Chlor-alkali Has Likely Hit Peak Levels, But Prices Should Remain Higher Than Historical Due To High European Energy/Electricity Prices: While caustic prices may have peaked in 2022 (considering a potential recession in 2023), Chemical Market Analytics (OPIS) highlighted at the Investor Day that European gas/electricity prices (Europe utility costs are 5x10x higher than a few years ago) should remain high through at least 2025 and keep caustic prices above historical averages.

U.S. Semiconductor Fabrication Buildout To Support Demand For Ultrapure Acid (UPA): The CHIPS Act in the U.S. should continue to fuel semiconductor growth of 2x-3x over the next five years. There are currently 8-10 fabrication plants under construction in U.S. The underlying long-term positive outlook for the North American semiconductor industry supports CHE.UN’s recent decisions to maintain its market leadership position in UPA via the two organic growth projects in Ohio and Arizona.
Capital Allocation – Focus On Organic Initiatives And Maintaining Balance Sheet Strength:
CHE.UN has reduced its overall net debt / EBITDA ratio to 2.4x vs. ~6x last year and is reaffirming its long-term target to keep leverage under 3x, keeping in mind heavy growth capex over the next few years. M&A is not a current focus. CHE.UN looks to maintain its dividend (yielding ~7%) and is not looking to increase it for now.

Investment Thesis Factors supporting our rating include: chlor-alkali pricing should remain elevated vs. historical levels; dividend (currently yielding ~7%) is safe; recently improved balance sheet given improved profitability, asset sales and equity financing (net debt / adj. EBITDA of 2.4x); we expect the company to be a long-term beneficiary of increased demand from the structurally growing semi-conductor (ultrapure acid), lithium (caustic), and green hydrogen industries.

Price Target (Base Case): C$11.00 We apply a multiple of ~6x to our 2023 EBITDA estimate. We assume chlor-alkali prices remain elevated going into 2023 due to high energy costs in Europe/Asia, and margins in the SWC segment benefiting from lower input sulphur costs.

Upside Scenario: C$13.00 Our upside scenario assumes no recession, a sustained period of higher chlor-alkali (caustic and HCl) demand/pricing, and stronger SWC segement results.

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).