Ultrapure Sulfuric Acid Expansion For Semiconductors May Improve Future Prospects, But Margin Pressures And Lease Risks Persist

Key Takeaways

• Expanding production at key facilities positions Chemtrade to capitalize on high-demand markets, potentially boosting revenue and profit margins significantly.
  
• Strategic investments in ultrapure acid and water chemicals, alongside capital management, enhance long-term unitholder value and strengthen financial stability.
  
• Sale of key business units, operational disruptions, cost fluctuations, and lease risks all pose significant threats to revenue growth and margin stability.

Catalysts

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

• Chemtrade is ramping up production at its Cairo, Ohio facility to become one of the first plants in North America meeting the requirements for next-generation semiconductor production, potentially boosting revenue and profit margins in the ultrapure sulfuric acid segment.
  
• The company is strategically expanding its water chemicals business by increasing production capacity and developing a new specialty water chemical line in Augusta, Georgia, which may drive revenue and enhance profit margins due to high demand and improved pricing.
  
• Chemtrade is seeing improvements in caustic soda pricing and expects further positive developments, which could increase earnings in the chlor-alkali segment due to better netbacks.
  
• Investment in organic growth projects, particularly in ultrapure acid and water chemicals, suggests a focus on enhancing long-term unitholder value, which can increase future revenue and earnings.
  
• The company's active management of its capital structure, including reducing potential unitholder dilution and decreasing financing costs, strengthens its financial position, allowing for potential revenue growth and increased earnings through strategic investments and unit buybacks.

Chemtrade Logistics Income Fund Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Chemtrade Logistics Income Fund's revenue will grow by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.3% today to 6.6% in 3 years time.
• Analysts expect earnings to reach CA$119.6 million (and earnings per share of CA$0.84) by about February 2028, down from CA$128.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 18.9x on those 2028 earnings, up from 9.2x today. This future PE is lower than the current PE for the CA Chemicals industry at 22.7x.
• Analysts expect the number of shares outstanding to grow by 3.2% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.8%, as per the Simply Wall St company report.

Chemtrade Logistics Income Fund Future Earnings Per Share Growth

Risks

• The sale of the P2S5 business in Q4 2023 resulted in a loss of revenue and EBITDA, which could impact future revenue growth expectations.
  
• The work stoppage at Canada's two largest railways had a negative impact on EBITDA, highlighting potential vulnerabilities in logistics and supply chain operations that could affect future earnings.
  
• The production curtailment for a main sodium chlorate customer has led to the consolidation of operations, potentially impacting future revenue and margins if demand does not recover as expected.
  
• Fluctuating raw material costs, such as sulfur, could pressure margins, particularly in segments with fixed-price contracts, potentially affecting net margins if costs cannot be passed on to customers in a timely manner.
  
• The potential risk associated with extending the lease for the North Vancouver site, which is critical for chlorine production, could impact operational stability and future revenue if lease negotiations do not progress favorably.

Valuation

• The analysts have a consensus price target of CA$13.857 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$15.5, and the most bearish reporting a price target of just CA$12.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$1.8 billion, earnings will come to CA$119.6 million, and it would be trading on a PE ratio of 18.9x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of CA$9.9, the analyst price target of CA$13.86 is 28.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• 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.