We are assuming coverage of Chemtrade with a Neutral rating (previously Outperformer) and $13 price target (previously $15), as of December 9. Although we find the defensive nature of Chemtrade’s Sulphur and Water Chemicals (SWC) segment attractive, in addition to its low-cost position, we remain cautious on the elevated commodity prices in the Electrochemicals (EC) segment. Additionally, due to reduced capacity in the NA pulp and paper industry, we see lower volumes in the sodium chlorate business. While uncertainty related to the lease renewal of the key North Vancouver plant remains, we expect a favorable outcome to materialize in 2025.
Key Points
Exposure To Defensive Businesses: Chemtrade’s SWC segment exhibits low cyclicality due to the structure of contracts and its exposure to the municipal water and gasoline sectors. Despite volatile sulphuric acid costs, the SWC segment has maintained relatively stable margins due to risk-sharing contracts. The segment, however, is not immune to commodity price swings, and given rising sulphuric acid costs (+26% Y/Y), we expect margins to slightly decrease in the short-term, before contracts are repriced. Industry consultancy, CRU, expects sulphuric acid prices to remain stable for the remainder of 2024, with a gradual decrease anticipated in 2025.
Continued Tailwinds From High Prices: In the Electrochemicals segment, EBITDA margins have surged from 30% in 2018 to 46% in 2023 as commodity prices are above historical averages, while the company’s access to cheap power (key input) limits cost increases. We see limited upside in prices for the company’s key chemicals in this segment (particularly in chlorine, which is up over 200% since 2018), although short-term caustic pricing should be positive. Additionally, we expect lower volumes on the sodium chlorate side given recent NA pulp mill closures. Due to our cautious view for the segment, our 2026 EBITDA estimate of $435 million is below consensus. Management estimates a US$50/tonne annual change in either caustic soda or sodium chlorate prices impacts EBITDA by ~$13 million.
North Vancouver Lease Overhang: The lease for the company’s key North Vancouver plant (we estimate one-third of EBITDA) has gained media attention over the past year and created an overhang in the stock. The lease for the chlor-alkali facility in British Columbia is expiring in 2032, with liquid chlorine production mandated to be ceased in 2030. We expect the lease will eventually be renewed, albeit with safety improvements added to the facility and we estimate $50 million-$80 million of related costs, with the spending likely to occur over multiple years.
Attractive Payout: While Chemtrade has rallied ~40% YTD (compared to ~22% for the TSX Composite) the shares still offer an attractive 5.6% yield with stability reinforced by the 40% payout ratio of ‘distributable cash flow’ and manageable 1.8x net debt/EBITDA ratio. The company is also returning additional capital to unitholders with ~2% of total units repurchased in Q3/24.