2023-10-16 11:25:12 ET
Summary
- Chemtrade Logistics has seen an improvement in its financial performance and has hiked its EBITDA guidance for 2023.
- The company generated over C$95M in distributable cash flow in Q2, leading to a net income of C$87.3M.
- Chemtrade's 2028 debentures are trading at an attractive price, offering a yield to maturity of approximately 8.2-8.3%.
Introduction
Chemtrade Logistics ( CHE.UN:CA ) ( OTC:CGIFF ) provides industrial chemicals to North American customers . The company is active in two divisions: electrochemicals and sulphur and water solutions. The company is a large supplier of sulphuric acid to the semiconductor industry.
After a few tougher years, Chemtrade's financial performance improved and the company's guidance for 2023 was already pretty strong, but just last week, it hiked its EBITDA guidance once again. That bodes very well for the distributable income and the balance sheet health but despite the improving financial performance some of its publicly listed debentures saw their prices decline due to the increasing interest rates on the financial markets. And this could be an interesting opportunity.
The Q2 performance remained strong, the guidance was hiked once again
Although the distributable cash flow result is the most important metric to use, I also like to keep an eye on the company's income statement . As you can see below, Chemtrade made a lot of progress compared to last year as in the second quarter of the current financial year, the gross profit increased by approximately 50% thanks to an increasing revenue and a lower COGS.
Additionally, the overhead expenses decreased which resulted in an operating income of C$94.2M which ultimately led to a net income of C$87.3M. With a total unit count of 116.2M, the EPS was approximately C$0.75 in the second quarter and C$1.44 In the first semester.
An excellent result but as you can imagine I'm mainly interested in the distributable cash flow. The starting point of the DCF calculation is the operating cash flow, and the lease and sustaining capex expenses are deducted from this result to calculate the DCF and DCF per share. As you can see below, Chemtrade generated in excess of C$95M in distributable cash flow in the second quarter which represented C$0.82 per unit (based on the average share count throughout the quarter).
Chemtrade currently pays a distribution of C$0.15 per quarter (payable in equal monthly tranches of C$0.05 per unit) which indeed means the company 'hoarded' in excess of C$70M in cash in the second quarter and almost C$150M in the first half of the year.
A portion of that cash was used to fund the non-maintenance capex of just over C$26M in the first half of the year, but that growth capex will accelerate in the second half of the year.
But based on the updated full-year guidance , Chemtrade will be able to add quite a bit of cash to its balance sheet. The image below shows the updated guidance when the Q2 results were published. But just last week, the company hiked its EBITDA guidance to C$475M, a C$25M increase . All other elements remained unchanged.
So if I would assume a C$475M EBITDA and deduct C$200M in total capex, C$55M in lease payments, C$50M in interest payments and C$20M in cash taxes (as you notice, I am taking the higher end of all guidance elements to err on the side of being cautious), the total net free cash flow would be approximately C$150M while the distributable cash flow result would be C$250M or C$2.15 per share).
The C$150M in net free cash flow after also taking the growth investments into consideration will be more than sufficient to cover the C$70M in distributions which means Chemtrade should generate about C$80M in net free cash flow after growth investments and distributions. And that will further reduce the net debt and improve the debt ratio.
As of the end of June, Chemtrade had a net financial debt (excluding lease liabilities) of C$769M. With an adjusted EBITDA of C$475M and about C$420M excluding lease payments, the debt ratio is just around 1.8, comfortably below the company's maximum of 3.0.
A closer look at the recently issued 2028 debenture
Chemtrade Logistics currently has just over C$800M in financial debt (excluding lease liabilities) and as you can see below, approximately C$435M of that debt was raised by issuing convertible debentures. That debt ranks junior to the bank debt but is obviously senior to the equity on the balance sheet. The total amount of equity is C$665M but as there are about C$560M in intangible assets, the tangible equity is relatively low.
That doesn't have to be an issue as Chemtrade is a strong cash flow generator and I definitely have no problem being a creditor of the company. Chemtrade has several different convertible debentures outstanding, with varying maturity dates and coupons, as you can see below.
And although the debentures are convertible debentures, I will not take any potential conversion benefits into consideration and I will just assume the cash repayment of 100% of the principal value on the maturity date.
The company issued a new debenture earlier this year and the Series H debenture is now trading with ( CHE.DB.H:CA ) as the ticker symbol. The ticker page of Seeking Alpha doesn't show the recent price but as the image below shows, there definitely are trades in this debenture and the most recent closing price was just over 94 cents on the (Canadian) Dollar.
And I think that is an attractive price for the debenture. While I acknowledge a lot can happen between now and June 2028, a strong 2023 will be a tremendous help to strengthen the balance sheet. As you can see below, the debt maturity schedule is well spread out in time, but the market is obviously putting a discount on the debentures that are maturing after the bank debt has to be refinanced in 2026.
While that's understandable, I do like the risk/reward of the 2028 convertible debentures. At a price of 95 cents on the dollar (slightly higher than the most recent closing price), the yield to maturity is approximately 8.2-8.3%.
Investment thesis
It goes without saying Chemtrade is benefiting massively from the current tailwind in the sectors it is supplying. The semiconductor output in North America is growing and Chemtrade is definitely benefiting from this in its sulphuric acid division. While I obviously acknowledge the company may see its EBITDA come under pressure in the next few years, as a creditor I feel pretty comfortable, and I am still a buyer of the 2028 debentures.
I would consider buying some other debentures as well, but for now, I am focusing on the 2028 maturity date to lock in the 8%+ return for a relatively extended period of time.
For further details see:
Chemtrade Logistics: I Am Buying The Debt For An 8.2% Yield