Methanex Corp

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.

Key highlights 

• Robust cash flow generation: In Q4 2020, the firm increased its cash flows from operating operations to USD 98 million, up from USD 35 million in Q3 2020. The rise in cash flows from operating operations was largely attributable to higher profits, which were bolstered by an increase in the average realized price of methanol to USD 282 per tonne in the announced period, up from USD 217 per tonne in Q3 2020. 

• Industry leader: Within its division, the firm is the industry leader, with a global market share of 13%. The company has a large client base and global procurement plans while ensuring customer supply protection. Furthermore, as the only producer with well-established manufacturing and distribution in all major regions, the firm has a strategic edge.

Source: Company 

• Positive long-term industry outlook:Methanol is expected to develop steadily as an important ingredient in a variety of chemical derivatives and as a building block in the production of a wide range of consumer and industrial goods. In comparison, post-2022, based on lower investment in the current market, a limited capacity addition is expected, with demand expected to rise at a steady CAGR of 3-4% over the medium term. We assume that the business would be benefitted from the demand-supply imbalance.

• Healthy liquidity position: The company took various steps in 2020 to preserve its liquidity and financial flexibility in the challenging economic environment. As a result, the group ended FY 2020 with USD 834 million in cash, and USD 300 million undrawn revolving credit facility with no debt maturities until 2024.

Financial overview of Q4 2020 (In millions of USD)

Source: Company 

• In FY 2020, the company registered a decline in revenue to USD 2,650 million, against USD 3,284 million in FY2019. While on a sequential-quarter basis the company grew its revenue to USD 811 million in Q4 2020, against USD 581 million in Q3 2020, primarily due to higher average realizations price.
• On an annual basis, the company booked adjusted net loss of USD 123 million, against a profit of USD 71 million in FY 2019. On a sequential basis, the company turned around to USD 12 million of profit, compared to a loss of USD 79 million. 
• In Q4 2020 the company clocked higher cash flows from operating activities, which stood at USD 98 million, against USD 35 million in Q3 2020. 

Risks associated with investment 

The company is highly exposed to the volatility in the methane prices in the international market, which can weigh on the group’s performance. Further the company is exposed to the forex risk as well. 

Valuation Methodology (Illustrative): EV to Sales 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

For FY2020, the impact from the COVID-19 pandemic on the global economy and lower oil price environment resulted in a sharp decline in methanol demand and lower methanol prices in the second and third quarters. In comparison, the group witnessed some recovery in the fourth quarter, as the global methanol demand combined with various planned and unplanned methanol industry outages and delayed start-up of new industry capacity led to tighter market conditions and lower inventory levels, which supported higher methanol prices. Methanol prices increased by 30% in the reported quarter, resulting in higher Adjusted EBITDA compared to Q3 2020. Furthermore, we conclude that the industry's long-term supply/demand dynamics are solid, with only limited capacity addition anticipated after 2022. Based on the technical analysis, the stock has support at CAD 40 level. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 48.73 as on April 27, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

1-Year Price Chart (as on April 27, 2021). Source: Refinitiv (Thomson Reuters) 

Bombardier Inc

Bombardier Inc (TSX: BBD.B) is engaged in the business of manufacturing aircrafts. It designs, manufactures, markets, and provides aftermarket support for Learjet, Challenger, and Global business jets, spanning from the light to large categories.

Key Highlights

• Guidance for 2021: The company is repositioning itself as a pure-play business aviation company. 2021 would be a transition year as it executes its productivity actions. Revenues from business aircraft activities in 2021 are expected to be better than 2020 based on a gradual economic recovery scenario. Adjusted EBITDA is expected to increase to greater than USD 500 million. EBIT is expected to be greater than USD 100 million. Free cash flow usage in 2021 is expected to be higher than USD 500 million.

Source: Company

• Productivity and profitability initiative: The initiative's overall goal is to make the company more efficient, agile, and capable of delivering more robust financial performance under current market conditions while also establishing a lower cost base for growth once the market recovers. Notably, the company expects to achieve USD 400 million in recurring savings by 2023 through labor productivity improvements, reduced corporate costs and indirect spending, and by optimizing its manufacturing footprint.

Source: Company

• Strengthens liquidity: The Company focuses on strengthening its liquidity. Recently, it has divested the transportation business. Moreover, the proceeds from the transaction would allow the Company to begin debt paydown.

Source: Company

• Event Update: The company will release its financial results for the first quarter of 2021 on May 6, 2021.

Financial Overview of FY2020 (In millions of USD)

Source: Company

• For FY2020, the company posted revenue of USD 6,487 million, against USD 7,488 million in the previous corresponding period. Aircraft activities' revenues reached USD 5,593 million in 2020, reflecting a 3% improvement, driven by the ramp-up in Global 7500 deliveries, which earned a record 16 deliveries in the fourth quarter.
• The company posted a lower gross profit of USD 516 million, against USD 1,041 million in 2019. The gross margin declined due to higher sales cost, which stood at 92% in 2020, against 86% in 2019.
• In 2020, the group posted an EBIT of USD 912 million against a negative EBIT of USD 520 million in the previous corresponding period.
• The company minimized its net loss to USD 568 million in the reported period, against USD 1,607 million in pcp, partially offset by the higher interest expense. 

Risks associated with investment

The Company streamlined its business segments and would concentrate on the aviation segment and the aftermarket segment. However, the ongoing challenges on account of travel restrictions due to the Covid-19 pandemic could hamper the business. Some other risks are also present, such as business aircraft customers' financial condition, trade policy, increased competition, political instability, interest rates, foreign currency fluctuations, etc.

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

Business aviation is poised for gradual recovery from 2020 levels, and with the industry's most comprehensive product portfolio, we believe the company is well-positioned. In the longer term, all demand drivers are well-oriented. The retirement of older models, combined with the introduction of new models, would help meet new customers' needs. Furthermore, the management shared its expected numbers for 2021, where the revenue would be above USD 5.6 billion, along with adjusted EBITDA of over USD 500 million and free cash flows. The group is also trying to deleverage its balance sheet by paying its debts, which is commendable. Based on the technical analysis, the stock has support at CAD 0.78 level. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating at the closing price of CAD 0.94 as on April 27, 2021. We have considered Air Canada, General Dynamics Corp, CAE Inc. as the peer group for the comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

1-Year Price Chart (as on April 27, 2021). Source: Refinitiv (Thomson Reuters)

Ag Growth International Inc.

Ag Growth International Inc. (TSX: AFN) manufactures portable and stationary grain handling, storage and conditioning equipment, including augers, belt conveyors, grain storage bins, grain handling accessories, grain aeration equipment and grain drying systems.

Key highlights:

• Stock Hovering above long-term support levels: The stock of AFN gained ~48% and ~74% in the last six months and one year, respectively and closed above the 100-days, 150-days and 200-days simple moving average, indicating a bullish trend.

Source: Refinitiv (Thomson Reuters)

• Acquired remaining stake of Farmobile: The company recently purchased all the remaining outstanding shares of Farmobile, Inc. after the acquisition of minority equity investment in 2019. This would provide access to the IoT product portfolio held by Farmobile, Inc. and would help the company for data verification space required by the rapidly developing carbon and traceability markets. Moreover, the Farmobile PUC™ offers real-time tracking of the end to end farming process from seed to harvest, and subsequently to the broader grain supply chain process. 
• Elevated Financials indicates Operational Resiliency: The company has reported improved performance in the recent past and delivered consistent growth in revenue and profitability, amidst a slowdown in the economy, which is encouraging. Notably, the company’s gross margin and EBITDA margin in FY20 was higher at 32.1% and 14.9%, respectively, as compared to 31.1% and 14.4% in FY19. Margin improvement during the tepid economic scenario indicates operational efficiency.                      

Source: Company Presentation

FY20 Financial Highlights:

• AFN announced its full year result, wherein the company posted sales of CAD 994.030 million, as compared to CAD 995.787 million in the previous year.
• Gross profit stood lower at CAD 206.690 million, as compared to CAD 267.740 million in FY19. The decline was primarily attributable to a significantly higher cost of goods sold (CAD 787.340 million v/s CAD 728.047 million in FY19), due to a surge in warranty expense.
• The company reported a rise in expenses (CAD 287.656 million v/s CAD 249.336 million in FY19) due to higher selling, general and administrative and increased other operating expense.
• The company posted a net loss of CAD 61.648 million v/s a net income of CAD 14.633 million in FY19.

FY 20 Income Statement Highlights (Source: Company Report)

Risks: The operations of the company are correlated to the economic scenario and the group is exposed to several macro and micro risks, such as fluctuations in the commodity prices, timing and conditions of harvest, volatility in currency etc.

Valuation Methodology (Illustrative): EV to EBITDA

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:

In order to retain liquidity, the management took a prudent step and lowered its dividend payout ratio to 20% in FY20 compared to 55% million in FY19. Moreover, to support the liquidity, the company deferred several capital investments projects and reported lower non-maintenance capital expenditure of CAD 19.9 million in FY20 v/s CAD 33.7 million in FY19. We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered the industry (Food & Tobacco) median on NTM basis. Based on the technical analysis, the stock has a support at CAD 33 level. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 41.73 on April 27, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level.

One-Year Price Chart (as on April 27, 2021). Source: Refinitiv (Thomson Reuters)

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.