Global Commodity Price Volatility will impact Margins and Profitability: 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 9 million tonnes of operating capacity with six manufacturing sites.

Business Highlights and Business Outlook:

• The group is the industry leader in methanol and has a prominent market presence followed by global production footprint and integrated global supply chain. The uses of methanol are immense and are extensively used in industrial and consumer products. 

• The medium-term outlook indicates that the industry demand is expected to increase by ~10 million tonnes, representing 3% to 4% CAGR growth over the next three years. The traditional demand is likely to grow in line with GDP and industrial production rates. 

• The business is building a new production facility with ~1.8 million tonne capacity in Geismar, Louisiana. The management expects the capital cost will be in the range of US$1.3-1.4 billion, which is expected to be operational by H2 of FY22.

FY19 Financial Highlights for the Period Ended 31^st December 2019

  FY19 Key Financial Highlights (Source: Company Reports)

MX declared its full-year results, wherein the company reported revenue of US$ 2,784 million, as compared to US$ 3,932 million in the previous financial period. The decrease was primarily due to marginally lower total sales volume and a significant decrease in the average realized price of US$ 295 per tonne, as compared to US$ 405 per tonne recorded in FY18. Adjusted EBITDA stood at US$ 566 million, declined from US$ 1,071 million. Net income attributable to Methanex shareholders stood at US$ 88 million, declined drastically from US$ 569 million in FY18.

Stock Recommendation: The stock of MX is quoting at CAD 20.76, with a market capitalization of CAD 1.58 Billion. The stock is trading near the lower band of its 52-weeks trading range of CAD 13.24 and CAD 80.49. The stock price corrected by ~72.71% in the last one-year period.  The group is the market leader in methanol while the revenue is largely dependent upon the global methanol commodity pricing. Despite a marginally lower sales volume, the business witnessed a significant decline in top-line due to lower average realized price. Despite a decent industry outlook, the company might face macro headwinds with respect to higher commodity input prices, local inflation, and foreign exchange volatility. Recent Coronavirus outbreak could hamper its supply chain and impact the business of the Group. In FY19, operating margin and a net margin of the business stood at 5.8% and 3.5%, significantly lower than 18.5% and 14.7%, respectively in FY18. Consequently, ROE declined to 6.2% from 37.8% in the previous financial year. The company’s profit margin and ROE are lower the industry median, which reflects that the group is not well placed for a short-term period.  Moreover, the company is incurring a capital cost of US$ 1.3 billion to US$1.4 billion in the Geismar, Louisiana plant. Considering, the facts mentioned above, current financials, lower price realizations, we have a “Watch” stance on the stock at the closing market price of CAD 20.76 as on 25^th March 2020.

MX Daily Technical Chart (Source: Thomson Reuters)

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