This Canadian company has established a niche market in the conversion of industrial chemicals.
In the past four years it has successfully integrated two valuable acquisitions that have proved to be excellent fits with its operations. Supply and sales problems caused cash flow to drop in the most recent quarter, although revenue was up. A lower unit price has pushed this fund’s yield up to 11.5%, although the distribution appears safe and the company’s long-term prospects look good.
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CHEMTRADE LOGISTICS INCOME FUND (Toronto symbol CHE.UN; www.chemtradelogistics.com)is one of the largest removal-service providers for resource firms that create acids and sulphur as byproducts. The trust converts (and sells) these substances into useful chemicals such as sulphuric acid. Many of its removal contracts are with oil refineries and base-metal processors.
In March 2017, Chemtrade expanded significantly when it completed its $900 million takeover of Canexus Corp. This gave Chemtrade a business that produces and sells sodium chlorate and chlor-alkali products to the pulp and paper, water treatment, and oil and gas industries.
The acquisition was Chemtrade’s biggest since it bought General Chemical in January 2014 for $941.5 million. That company makes a range of chemicals as well as ingredients for prescription drugs, nutritional supplements and veterinary products.
Growth by acquisition adds risk. But the trust has successfully integrated the General Chemical purchase, and Canexus is also proving a good fit with Chemtrade’s operations. The trust’s debt is high, but it generates steady cash flow that can be applied to that debt.
Value Stocks: Company reverses policy on marketing of sodium bisulphite
In the quarter ended September 30, 2018, revenue rose 4.4%, to $418.2 million from $400.5 million a year earlier. Cash flow per share fell 40.9%, to $0.39 from $0.66. The decline was partly due to maintenance shutdowns at refineries, which resulted in a reduced supply of sulphur.
Poor sales of sodium bisulphite also contributed to the weaker cash flow. Chemtrade transitioned to self-marketing of sodium bisulphite last year.
However, the company has now decided to return to marketing the chemical through its previous distributor. That should boost its cash flow. Sodium bisulphite is primarily used as a bleaching agent in the pulp and paper industry, and can also be used as a de-chlorination agent in water treatment.
In November 2018 the trust paid $51 million to settle a class action civil lawsuit for anti-competitive conduct allegations related to its 2014 acquisition of General Chemical. Chemtrade generates annual cash flow of about $145 million, and that payment has not forced the company to cut its monthly distribution of $0.10. That distribution looks safe and the annual rate of $1.20 yields a very high 11.5%.
The company offers investors diversified exposure to North American industrial chemicals, while generating stable cash flows to support its high dividend. Chemtrade should be able to deliver stronger results once it deals with recent operational challenges and sees stronger demand for its chemicals.
Meanwhile, Chemtrade trades at just 6.2 times its forecast 2019 cash flow per share of $1.66.
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