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

RBC Report

[retiredcf]

Their upside scenario target is $15.00. GLTA

May 17, 2024

Chemtrade Logistics Income Fund 
Organic growth and buybacks; increasing PT to $12

Outperform

TSX: CHE.UN; CAD 9.19

Price Target CAD 12.00 ↑ 11.00

Our view: Chemtrade posted strong Q1/24 results, and management is now guiding to the upper end of its 2024 guidance range. The operating segments are performing well and with a significantly stronger balance sheet relative to previous years, the Board has approved a 10% NCIB and the company is also considering strategic M&A opportunities, supplementing organic growth. We reiterate our Outperform rating and increase our PT to $12 (from $11) to reflect the improved outlook and potential impact from the NCIB.

Key points:

Strong balance sheet provides financial flexibility. After several years of deleveraging, the company's leverage has reduced to 1.9x LTM EBITDA, and management expects leverage to stay below 2.0x at the end of 2024. Management also intends to retire (force conversion) $86 million of in-the-money ($7.35/unit conversion rate) convertible debt maturing in September 2025 at its earliest opportunity, which would further reduce leverage. We believe the combination of a healthy balance sheet and further delays at the Casa Grande, Arizona ultrapure acid development, gives the company the flexibility to initiate a 10% NCIB, invest in further organic growth projects and assess strategic M&A opportunities (target $10-50 million EBITDA contribution).

M&A multiple may exceed company's trading multiple. We estimate that Chemtrade currently trades at an EV to 2025 EBITDA multiple of 4.5x, and management acknowledged that it will need to pay a valuation multiple that exceeds its own trading multiple for a strategic acquisition. Management feels that it is important to grow the size of the overall business and pursue acquisitions that do not require a capital raise. We favour organic growth opportunities followed by unit buybacks, and believe acquisitions must have a strong strategic fit with the existing business.

Cairo ultrapure acid expansion on track, but larger JV could be on hold for longer. Management indicated that the Cairo, Ohio ultrapure acid expansion is on track to finish construction later this year (commercial ramp-up to begin in 2025). The larger ultrapure acid project in Casa Grande, Arizona remains on pause as the JV continues discussions with the U.S. CHIPS office. Management indicated that the delay in chip manufacturing facilities in the U.S. has also been a factor for the delay. We expect that the project will eventually move forward with construction, but the delay process could be longer than originally expected (potentially years rather than months).

Tweaking forecast and increasing PT to $12. We are increasing our 2024 EBITDA estimate to $433 million (from $428 million) to reflect the stronger- than-expected Q1/24 results (2025 EBITDA estimate unchanged). We are increasing our price target to $12 (from $11), which is based on 5.5x (previously 5.0x) our 2025 EBITDA forecast.