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Stock to watch: Canexus offers hefty yield and oil-transport kicker

Canexus offers hefty yield and oil-transport kicker

J.P. MOCZULSKI/REUTERS

Canexus Corp.

Last close: $9.46 a share

52-week trading range: $6.87 to $9.67 a share

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Annual dividend: 55 cents a share for a yield of 5.8 per cent

Analysts' ratings: There were five buys, no holds and one sell, according to Bloomberg data. Target prices ranged from $9.25 a share estimated by Scotia Capital analyst Benoit Laprade to $10.10 a share by Acumen Capital Finance analyst Brian Pow.

Recent history: Shares of the Calgary-based producer of specialty chemicals (sodium chlorate and chlor-alkali) used largely in the pulp and paper and water-treatment industries have gained 24 per cent (including dividends) over the past year. Rising volumes and prices for its chemicals, and an emerging business loading Canadian crude onto rail cars from its Edmonton-area terminal helped lift its stock to a 52-week high last week. A spinoff of Nexen Inc., Canexus went public in 2005 as an income trust, and converted to a corporation in 2011.

Manager insight: The chemical business with four plants in Canada and one in Brazil has a lot of stability because it is a low-cost producer. "They are good at expanding these plants at relatively good marginal costs...so they are one of these firms that do well in a bad market, and even better in a strong market," says Michael Decter, president of Toronto-based investment firm LDIC Inc.

But the "kicker" for the stock is its new business getting contracts to load oil onto rail cars from its Bruderheim terminal because energy firms need to find ways to bypass pipeline jams to get crude to U.S. refineries, said Mr. Decter, who has owned Canexus shares for close to two years. "They load chemicals into the rail cars so it's taking a core skill, and moving it to a different industry...This [part of their business] is not well known, and it is early days."

Alberta energy producers are turning to rail to transport oil to the United States in order to get a higher price for its crude that now trades at a hefty discount to West Texas Intermediate. The Bruderheim terminal can handle 60,000 barrels a day, and oil sands producer Meg Energy Inc. is taking a third of that capacity, he said. "By the end of the third quarter, they could be up to 70,000 barrels a day."

Mr. Decter has an 18-month target of $12 on Canexus shares. "We like it for income [5.8 per cent yield], but also for growth," he said, noting that the dividend is sustainable because the company's targeted payout ratio is in the 80 per cent range. "The base case is they can earn support for a $9- or $10-valuation without oil, but we think it is the oil that gives it room to move to a higher-target range...For us, that is the sweet spot. You potentially get the best of both worlds."

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