Methanex Corporation

Methanex Corporation (TSX: MX) is a leading producer and distributor of methanol to major global markets across North America, Asia Pacific, Europe and South America.  The business has more than nine million tonnes of operating capacity with six manufacturing sites.

The Management has announced a quarterly dividend of USD 0.0375 per share, payable on September 30, 2020.

Q2FY20 Financial highlights: MX announced its quarterly results, wherein the Company posted revenue of USD 512 million, significantly lower than USD 848 million in the previous corresponding period (pcp). The decline was primarily due to a lower sales volume coupled with significant slippage in the average realization price, which stood at USD 211/tonne versus USD 326/tonne in Q2FY19. Total sales volume for Q2FY20 stood at 2,406,000 tonnes as compared with 2,601,000 tonnes in Q2FY19. The fall in the revenue resulted in a decline in adjusted EBITDA, which stood at USD 453 million as compared to USD 777 million, a year ago. This was partially offset by lower production costs and selling, general, and administrative costs. However, cash flow from operating activities stood higher at USD 186 million as compared to USD 117 million in the previous corresponding period (pcp). The Company reported a net loss of USD 65 million against a net profit of USD 50 million in pcp.

Q2FY20 Operating Highlights ( Source: Company Reports)

Risks: Demand for Methanol is linked to the performance of crude oil. Any volatility in demand and prices of crude oil would impact the demand.

Stock Recommendation: The stock of MX corrected big-time due to lower commodity prices coupled with a volatility in the global equities. The stock plunged ~50% so far this year. To weather the current challenging time, the company took prompt measure and deferred ~USD 500 million in capital spending on the Geismar 3 project and cutting its FY20 dividend distribution by USD 100 million. The Company follows a flexible cost-structure and is capable to re-adjust its input costs and is expected to reduce cost by USD 30 million in FY20, which is impressive. The Company further reported an amendment of USD 300 million committed revolving credit facility and USD 800 million non-revolving construction facility, which would ensure sufficient liquidity to support the working capital needs. During the quarter the demand for Menthol declines substantially on account of lower industrial activities. The group mentioned that the demand from China is recovering, which is an encouraging sign; but demand outside China declined significantly, which poses a concern. Further, the demand for methanol is linked with the Crude oil price movement. A lower crude oil price would drag down the methanol demand and would hit the prices too. The outlook for methanol demand remains uncertain in the near term; hence we prefer to remain on the sideline. On the valuation front, the stock is trading at a forward EV/EBITDA multiple of 8.7x, which is higher than the industry (chemical) median of 8.7x. Hence, considering the aforesaid facts, we recommend a 'Watch' stance on the stock at the closing market price of CAD 24.82 on July 31, 2020.

MX Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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