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

RBC 2

[retiredcf]

Their upside scenario target is $15.00. GLTA

August 16, 2024

Chemtrade Logistics Income Fund 
And the beat (and raise) goes on

Outperform

TSX: CHE.UN; CAD 9.71

Price Target CAD 12.00

Our view: Chemtrade continues to exceed expectations and increase guidance. Management has raised guidance (or guided to the high end) nine times since the beginning of 2022. We still see some upside to management’s updated guidance range, driven by strong demand and pricing for products, assuming a rail strike does not materialize in H2/24. We reiterate our Outperform rating and believe strong financial results and continued purchases under the NCIB will support a higher share price.

Key points:

Guidance increased again. Q2/24 results were stronger than management expected, and it anticipates momentum to continue into Q3. As a result, management raised its 2024 Adjusted EBITDA guidance to $430–460 million from its prior guidance (May 2024) that it expected to be at the high end of the $395–435 million range that it originally put forward in January 2024.

Caustic soda prices may have bottomed and are moving higher.

At Chemtrade’s North Vancouver facility (chlor-alkali), management continues to see strong demand and pricing for chlorine and HCl and is optimistic that realized caustic soda prices will move higher through the remainder of the year. Taiwan contract prices for caustic soda are trending higher for 2025/26, and Northeast Asian prices set the realized caustic soda price for Chemtrade.

A rail strike could negatively impact H2/24. Management noted that the industry has been preparing for a potential rail strike for the last 60–90 days, with customers stockpiling materials in anticipation. While management has factored into its guidance some disruptions leading up to a potential strike (could be as early as August 22), a prolonged strike could have a material impact on financial results.

More buybacks on the horizon. Chemtrade commenced a substantial issuer bid (SIB) in Q2/24 to purchase the outstanding in-the-money convertible debt that will mature in September 2025. Following this, the company repurchased ~0.5 million units in August 2024 under the NCIB. Management indicated that it believes the units are significantly undervalued and buybacks represent the highest return of capital available to the company at current levels. We believe the company will try to repurchase ~8 million units under its NCIB to offset the dilutive impact from the September 2025 convertible debt.

Increasing our forecast. We raise our 2024 and 2025 EBITDA estimates to $452 million and $431 million (from $433 million and $419 million), respectively, to reflect the stronger-than-expected Q2/24 results and stronger contribution from the two business segments through 2025. Our 2024 EBITDA estimate is consistent with the high end of management’s updated guidance range.