G&M - Scotia Scotia Capital analyst Ben Isaacson continues to see “lots to like” with Chemtrade Logistics Income Fund over the medium term.
However, he’s now “moving to sidelines” based on a weakened outlook, downgrading its shares to “sector perform” from “sector outperform” previously.
“Chemtrade has made tangible strides forward over the past year, irrespective of commodity price moves. Examples include: improved leverage, more evident capital discipline, a clear growth strategy, better disclosure/messaging, etc.,” he said. “But, while all of that is true, it is equally true the near-term outlook for CHE has, not only deteriorated, but continues to do so. We recommend investors take profits now and look to re-load at a more attractive entry point.”
Mr. Isaacsaon said he’s seeing “softness” in the chlor-alkali market, sodium chlorate volume “remains under pressure, and may not see relief anytime soon” and sodium chlorate margins/spreads may also be “under pressure, given a shift in customer mix.”
For investors, he also sees few catalysts to push Chemtrade’s stock price higher.
“(1) the Cairo project won’t see commercial production hit the P&L until ‘25; (2) CHE’s flagship growth project has been shelved due to soaring costs; we think it’s unlikely this project will return – but we’re hopeful; (3) CHE believes low EU TTF gas prices are transient in nature – we agree 100%, but are not convinced it will matter much if demand weakness means the Europeans are needed to run chlor-alkali; (4) other than a few small debottlenecking or improvement projects here and there, CHE provided no other updates on growth or catalysts near-term,” he said.
Expecting leverage to deteriorate, despite seeing Chemtrade “at a healthy starting point to face further macro pressure,” Mr. Isaacson maintained a $10 target. The average on the Street is $11.57.
“The company used to suggest mid-cycle EBITDA was $300-million to $350-million, and a 2H implied guide of $175-million certainly supports that view,” he said. “The record $275-million generated in 2H ($550-million run-rate) is more reflective of peak conditions. If we assume low-$400s is now run-rate EBITDA, and using the long-term average multiple of 6.6x would give us fair value of $11.50 (unsurprisingly, this is the Street’s PT). While we don’t think this is unreasonable for fair value, we’re not convinced why the stock should rise more than 35 per cent to get there, given a weakening near-term backdrop.”