In justifying his change, he pointed to several factors, including the expectation that demand for regen acid services should increase over the coming quarters; ultrapure sulphuric acid demand is “set to soar” in North America over the mid-term; a “relatively tight” outlook on caustic soda and “fairly stable margin variability” for its water chemical business.
“Chemtrade has proactively cleaned-up both its portfolio and balance sheet, which we think could result in slight multiple expansion over time,” said Mr. Isaacson. “Initiatives include the sale of its non-core specialty chemical business, the $10-million sale of an idled facility in Augusta, Georgia, as well as the closure of a chlorate plant in Quebec, due to slower post-COVID demand growth.”
He said Chemtrade’s 7.8-per-cent distribution yield has “strong support” and sees a “decent” valuation discount.
“When compared to all equities in the S&P TSX Materials with a market cap greater than $1-billion, CHE offers the second highest yield (its market cap is slightly less than $1-billion),” he said. “As of Q1/22, the rolling four-quarter distribution payout ratio is 48 per cent. Through the end of ‘23, we do not see the rolling four-quarter distribution payout ratio exceeding 60 per cent, providing strong support for a distribution of $0.15/unit per quarter.”
“CHE is trading at 6.1 times and 6.5x ‘22 and ‘23 EBITDA of $325-million and $305-million, respectively. This compares to five- and ten-year EV/NTM EBITDA multiples of 7.2 times and 7.4 times, respectively. The lower five-year multiple is due to the acquisition of Canexus, which brought more basic chemical volatility to the portfolio. However, if we look at the first full year of CHE post Canexus, through to the end of ‘23 (using Street estimates), the average EBITDA is $300-million, with very little variability. Accordingly, we see no reason why CHE’s forward multiple shouldn’t begin to return to 7.2 times over the next year. In fact, one could argue for a premium multiple over this amount, given that leverage has improved materially.”
Mr. Isaacson raised his target to $10.25 from $9.50. The average on the Street is $10.
“While waiting for (relative) outperformance, investors can enjoy a nearly-8-per-cent yield, well-supported by a rolling four-quarter payout ratio that shouldn’t exceed 60 per cent through ‘23,” he said.