CHEMTRADE LOGISTICS INCOME FUND (Toronto symbol CHE.UN;
www.chemtradelogistics.com) is one of North America’s largest providers of removal services for resource firms, such as oil refineries and base-metal processors. These companies create sulphur, acid and other by-products as part of their activities. Chemtrade converts these substances into useful chemicals, like sulphuric acid.
In June 2011, Chemtrade bought Marsulex Inc. for $419.5 million. Marsulex provides a range of environmental services, including improving air quality and treating and handling industrial waste.
In the three months ended September 30, 2012, Chemtrade’s revenue fell 10.3%, to $240.9 million from $268.5 million a year earlier. Cash flow per unit fell 25.0%, to $0.72 from $0.96. However, the decline was mostly due to a one-time accounting charge. The
2011 quarter was also particularly strong.
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Income funds: Tax structure permits Chemtrade to remain income trust
Chemtrade will continue as an income trust. That’s because it believes that it is structured in such a way that its earnings will be subject to a Canadian tax rate of no more than 10%. That will help it maintain its distribution, which currently gives it a high 7.8% yield. It pays out just 60% of its cash flow to unitholders.
The trust needs sustained economic growth to keep demand for its services high. As well, the company aims to lower its risk by signing long-term contracts with customers.
In the latest edition of Stock Pickers Digest, we examine the risk represented by the trust’s exposure to cyclical commodity and chemical prices; in particular, we consider the outlook for the prices of sulphur and sulphuric acid. We also consider the effect of environmental regulations on Chemtrade’s services. We conclude with our clear buy-hold-sell advice.
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