Investments In Water Chemicals And Ultrapure Acid Will Secure Future Success

Key Takeaways

• Investment in water chemicals and ultrapure acid aims to drive growth through improved plant reliability and capacity expansion.
  
• Strategic growth in water chemicals and acid may enhance revenue, while cost pass-through from tariffs protects margins.
  
• Potential U.S. import tariffs, geopolitical tensions, and cost pressures may challenge revenue and margins, while reliance on big customers adds risk to growth prospects.

Catalysts

Offers industrial chemicals and services in Canada, the United States, and South America.

• Chemtrade's investment focus on water chemicals and ultrapure acid is expected to drive future growth, with improved plant reliability and expanded capacity potentially contributing to increased revenue and earnings.
  
• The plan to allocate between $40 million and $60 million for growth CapEx in 2025, particularly targeting expansions in water chemicals and ultrapure acid, is designed to enhance long-term revenue and earnings potential.
  
• Chemtrade's ability to pass through costs from potential U.S. tariffs may protect net margins, as they plan to negotiate with customers to mitigate the impact on their financial results.
  
• The completion and ramp-up of the new specialty water chemical line at the Augusta plant in 2025 is expected to generate additional EBITDA of $3 million to $5 million annually, contributing to earnings growth.
  
• The commitment to buy back Chemtrade units through its NCIB program, along with strategic capital allocation, aims to improve earnings per unit by reducing the total unit count and increasing distributable cash flow.

Chemtrade Logistics Income Fund Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chemtrade Logistics Income Fund's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.1% today to 8.5% in 3 years time.
• Analysts expect earnings to reach CA$165.3 million (and earnings per share of CA$1.05) by about April 2028, up from CA$126.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.2x on those 2028 earnings, up from 8.5x today. This future PE is greater than the current PE for the CA Chemicals industry at 10.2x.
• Analysts expect the number of shares outstanding to decline by 0.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.87%, as per the Simply Wall St company report.

Chemtrade Logistics Income Fund Future Earnings Per Share Growth

Risks

• The potential implementation of U.S. import tariffs on products imported from Canada, such as sodium chlorate, chlorine, and merchant sulfuric acid, could introduce uncertainty and challenges in passing additional costs to customers, affecting revenues and potentially reducing net margins.
  
• Geopolitical tensions and macroeconomic uncertainties may impact foreign exchange rates, making financial results vulnerable to fluctuations, which could lead to variability in revenue and earnings due to changes in the Canadian dollar against the U.S. dollar.
  
• Elevated maintenance turnaround costs in 2025, estimated to impact earnings by approximately $5 million, along with rising sulfur costs that may pressure margins in the water chemicals business until contracts are renegotiated, could dampen net margins and earnings.
  
• The reliance on large customers, such as a sodium chlorate customer who curtailed production, may lead to a decline in production and sales volumes, impacting revenue and net earnings.
  
• Delays in the construction of semiconductor fabs and uncertainty around U.S. import tariffs on chips may affect the pace of growth for the ultrapure acid market segment, potentially limiting revenue opportunities and impacting future EBITDA growth.

Valuation

• The analysts have a consensus price target of CA$14.25 for Chemtrade Logistics Income Fund based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$16.5, and the most bearish reporting a price target of just CA$13.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$1.9 billion, earnings will come to CA$165.3 million, and it would be trading on a PE ratio of 12.2x, assuming you use a discount rate of 7.9%.
• Given the current share price of CA$9.34, the analyst price target of CA$14.25 is 34.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.