Methanex Corporation

Methanex Corp (TSX: MX) is a Canada-based leading producer and supplier of methanol to international markets in North America, Asia Pacific, Europe and South America. The company’s customers use methanol as a feedstock to produce end-products like adhesives, foams, solvents, and windshield washer fluids.

Why Should Investors Book Profit?

• Heavily leveraged: The company’s debt to equity ratio at the end of June 2021 stood at 2.04x, higher than the industry median of 0.83x. Additionally, its % LT Debt to Total Capital stood at 59.8% against the industry median of 28.6%. These factors imply higher balance sheet risks.
• Long cash cycle days: The company is consistently increasing its Cash Cycle (Days) compared to the previous sequential quarter, implying the company is taking more days to convert its inventory to cash. Furthermore, its Cash Cycle is of 87.2 days against Industry median of 76.4 days.
• Stretched valuations: MX shares are available at an NTM P/E multiple of 9.5x compared to the industry (Basic Materials) median of 7.2x, while on NTM Price/ Cash Flow multiple, it is trading at 4.5x compared to the industry median of 4.3x. This implies that the shares are overvalued against the industry.
• Trading near upper band of Bolinger Band: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~76.28 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales

*1USD=1.26CAD

Stock recommendation

The business saw good industry circumstances through the first quarter of FY 2021, with strong momentum continuing into the third quarter. In the second quarter of 2021, the business announced strong financial results, increasing the average realized price to USD 376 per tonne from USD 363 per tonne in the first quarter. The firm, however, is deeply leveraged, posing a balance sheet risk. Even on a sequential basis, its cash cycle days are rising, which is higher than the sector median, suggesting a negative liquidity profile. Furthermore, the company is trading at stretched values across a number of metrics, and technical indicators imply that the stock is possibly overbought and due for a price correction or consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 61.58 on October 4, 2021.

Secure Energy Services Inc

Secure Energy Services Inc (TSX: SES) is a Canada-based energy services company, which provides treatments and disposal services to the oil and gas industry. It constitutes midstream services, environmental services, systems and products for drilling, production and completion fluids, and other specialized services and products.

Why Should Investors Book Profit?

• Lower margin profile v/s Industry: In Q2 2021, the company failed on maintaining its pace and witnessed lower performance across operating margin matrix against the industry, which exhibits the pressure on company.
• Weak liquidity profile: In Q2 2021, the company's quick ratio was 1.04x compared to the industry median of 1.73x, while the current ratio stood at 1.19x against the industry median of 2.05x. These lower ratios against the industry indicates that the company's short-term obligations are growing faster than its resources to cover them, which is not a good indication.
• Stretched valuations: SES shares are available at an NTM EV/EBITDA multiple of 6.4x compared to the industry (Energy) average of 2.8x, while on NTM Price/ Cash Flow multiple, it is trading at 4.9x compared to the industry average of 3.0x. This implies that the shares are overvalued against the industry.
• Heavily leveraged: The company’s debt to equity ratio at the end of June 2021 stood at 0.91x, higher than the industry median of 0.39x. Additionally, its % LT Debt to Total Capital stood at 31.8% against the industry median of 19.9%. These factors imply higher balance sheet risks.
• Exhausted technical indicators: Recently, the stock witnessed a healthy rally on the daily price chart and has moved above the upper band of the Bollinger band, indicating the stock is perhaps overbought and due for a price correction or a consolidation. Furthermore, the momentum oscillator RSI (14-Period) is trading at ~74.72 levels, which also indicates that the stock is in overbought zone and there is a deep possibility of price consolidation or correction.

Source: REFINITIV, Analysis by Kalkine Group

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The company's solid operational results in the second quarter were aided by sustained commodity price growth. On the other hand, the resurgence of delta variant instances is causing a lot of uncertainty, and it might have an influence on the company's operations and cash flows. Furthermore, the company's liquidity ratios are poor, and it is significantly leveraged, implying that the balance sheet is at danger. Furthermore, the company is trading at stretched values on several valuation multiples. The technical signal even implies that the stock may be overbought and due for a price correction or consolidation. Therefore, based on the above rationale and valuation, we recommend a “Sell” rating on the stock at the closing price of CAD 5.12 on October 04, 2021.

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.