Chemtrade: Mid-Teens FCF Yield, with Near-Term Issues Largely Resolved

Reno Giancola and Jeff Hales presented their in-depth investment thesis on Chemtrade Logistics (Canada: CHE.UN) at Best Ideas 2019.

Thesis summary:

Chemtrade Logistics is a global provider of industrial chemicals, diversified across three operating segments: sulphur products, water solutions, and electrochemcials.

Unlike traditional chemicals companies, Chemtrade’s business is stable with little commodity exposure or economic sensitivity. Chemtrade had an awful 2018, which has created an attractive opportunity for long-term investors.

The company faced rail congestion issues, extensive plant maintenance, costly litigation, a reduction in sulfur supply from a key supplier, and margin pressure in its municipal water solutions business driven by a lag in passing-through raw materials inflation. These issues have been resolved, and despite positive developments and strong/improving fundamentals for the sulphur products and electrochmcials businesses, the stock languishes near seven-year lows.

At 6.5x 2019E EBITDA, ~16% FCF yield, and ~11% dividend yield, the shares reflect a high degree of pessimism, which is unwarranted. Despite a challenging 2017-2018, the company has a long history of creating value for shareholders. Since the IPO in 2001, total shareholder return has been 11+% per annum, almost double the S&P/TSX Composite Index over the same period.

Reno and Jeff estimate the company is conservatively worth $16-18 per share, representing roughly 50-100% upside.

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About the instructors:

Reno Giancola is President of Port Investments Inc., an investment company. Mr. Giancola was previously a Portfolio Manager at Alignvest Capital Management, where he managed North American concentrated long-only and equity long/short funds. Prior to Alignvest, he was Vice-President & Portfolio Manager at Gluskin Sheff + Associates, where he managed several North American equity long/short Funds. Mr. Giancola graduated from Wilfrid Laurier University with a Bachelors of Business Administration and a minor in Economics. He has also earned his Chartered Financial Analyst (CFA) designation. Mr. Giancola is an elected member of the User Advisory Council of the Accounting Standards Board.

Jeff Hales is President of Provident Capital, a private investment company. Mr. Hales was previously a Portfolio Manager at Alignvest Capital Management, where he managed North American concentrated long-only and equity long/short funds. Prior to Alignvest, he was Vice-President & Portfolio Manager at Gluskin Sheff + Associates, where he managed a variety of North American equity strategies. Mr. Hales graduated from Wilfrid Laurier University with a B.A. in Economics, earning the Governor General’s Academic Medal as the top student in his undergraduate class. He has also earned his CFA designation.