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 

• Restarts Construction on Geismar 3 Project: Mitsui O.S.K. Lines, Ltd. (MOL) and the company recently reached an agreement on important commercial parameters for a strategic maritime cooperation. The deal is intended to provide strategic benefits for the company's Waterfront Shipping division as well as liberate USD 145 million in non-dilutive capital to help the company's financial situation. Furthermore, the company restarted the construction on the Geismar 3 project as the methanol industry outlook is positive, and the company has a strong financial position to fund the project. Geismar 3 is expected to improve the group's future cash generation capabilities.
  

• Strong production guidance: Through the second quarter of 2021, market conditions would remain tight due to strong methanol demand, low global inventory levels, and persistent industry supply problems. The company raised its 2021 output forecasts from 11 plants to 6700,000 tonnes. It's also noteworthy that they want to raise their yearly operational capacity from 9,250 to 11,150 tonnes in the future.

Source: Company 

• Higher cash flow from operations: Cash flows from operating activities increased in Q1 2021 and stood at USD 167 million compared with USD 98 million in the last quarter and USD 142 million in Q1 2020. The rise was primarily a result of higher methanol pricing and higher earnings.
  

• Positive long-term industry outlook: Methanol is expected to develop steadily as an essential ingredient in various chemical derivatives and as a building block in the production of a wide range of consumer and industrial goods. 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 benefit from the demand-supply imbalance.

Financial overview of Q1 2021 (In thousands of U.S. dollars)

Source: Company 

• In Q1 2021, the company registered higher revenue at USD 1,015.5 million against USD 745 million in the previous corresponding quarter. The increase was primarily due to higher average realizations and higher production at the Atlas and Medicine Hat facilities.
• Operating income stood at USD 179.0 million in the reported period compared to USD 66.4 million in pcp, mainly due to higher revenue.
• The company posted income before tax at USD 154.1 million in Q1 2021, against USD 43.2 million in pcp. It increased mainly due to higher operating income and a rise in associates' earnings, partially offset by higher finance cost.
• On the back of the rationales discussed above, the company posted a healthy net income at USD 123.9 million in Q1 2021, compared to USD 33.6 million in pcp, partially offset by higher tax expenses.
  

Risks associated with investment

The company is highly exposed to the volatility in the methanol 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 by Sales 

Stock recommendation

The company witnessed favorable industry conditions continue through the first quarter with positive momentum leading into the second quarter. The reported quarter made higher production at the Atlas, and Medicine Hat facilities offset lower production at the New Zealand and Geismar facilities. Furthermore, it completed a planned turnaround at Geismar 2 plant in the quarter while the debottlenecking would increase the annual operating capacity by 10% to 2.2 million tonnes, which is notable. Interestingly, the company restarted the construction of its Geismar 3 project and increased it dividend distribution to USD 0.125 per share from USD 0.0375 per share. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 42.01 on July 22, 2021. We have considered LyondellBasell Industries, BASF, Superior Plus Corp, etc., as a peer group for comparison.

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

Technical Analysis Summary

One-Year Technical Price Chart (as on July 22, 2021). Source: REFINTIV, Analysis by Kalkine Group

Titanium Transportation Group Inc.

Titanium Transportation Group Inc. (TSXV: TTR) is assets-based transportation and logistics firm that provides services like truckload, dedicated, cross-border trucking services, freight logistics, warehousing, and distribution.

Key Highlights:

• Strong growth from the US Logistics segment: The company reported handsome yields from its strategic expansion in the U.S. freight brokerage. Notably, in Q1FY21, the logistics segment saw an up move of 164.4%, or CAD 29.6 million in revenue, which is noteworthy. We believe the momentum to continue in the coming quarters, supported by growing demand dynamics from the US region.
  

• Improved Performance metrics: Due to the rising cost of the equipment and other assets, not many players are entering in the industry due to lower return ratio and higher break-even period. However, the company enjoys superior borrowing power and prudent asset utilization, which resulted in greater revenue visibility. Notably, the company reported consistent revenue growth (~13.2% CAGR) from FY15 to FY20, which is a key positive. Despite the capital-intensive nature of the business, the company reported improved debt to equity ratio and healthy free cash flows since FY18, which is noteworthy.

Source: Company Presentation

• Implementation of Sophisticated IT/IS systems to cater to growing customer needs: The transportation and the logistic industry witnessed a strong surge in demand in the recent past, which required the usage of innovative IT and software systems, in order to get predictive solutions. Notably, the company upgraded its infrastructure through innovative IT solutions like AI and blockchain, which has resulted in an enhanced customer experience.

Q1FY21 Financial Highlights:

• TTR announces its first-quarter result, wherein the company posted revenue at CAD 79.521 million, up from CAD 40.795 million in the previous corresponding period (pcp). The growth was supported by strong growth from the US Logistics segment due to the company’s expansion within the U.S. freight brokerage segment.
• Operating expenses stood significantly higher at CAD 78.159 million, from CAD 39.765 million in pcp.
• EBITDA was recorded at CAD 7.514 million compared to CAD 4.546 million in Q1FY20, supported by higher revenue.
• The period was marked by higher finance costs (CAD 0.816 million v/s CAD 0.776 million in pcp), the inclusion of transaction costs of CAD 0.8 million and gain on Sales of Investments amounting to CAD 0.597 million.
• Net income stood at CAD 1.169 million as compared to CAD 0.643 million in Q1FY20.

Q1FY21 Financial Highlights (Source: Company Report)

Risks associated with investment

The company reported a surge in its input costs like fuel surcharge, carriers and independent contractors’ expenses and in Vehicle operating costs. Continuation of the above trend would dampen the company’s profitability and cash flow.

Stock Recommendation:

The company has a strong client base of more than one thousand customers and caters to more or less all the industries, which provides a balanced risk profile due to lower dependence on each segment. The company is strategizing to enhance its presence within the US geography and planning to increase its presence from two locations to five locations by the end of FY21, and ten locations in the next three years, which is expected to improve the company’s overall business prospects, supported by improving market share and higher client satisfaction. On the valuation front, the stock is available at a forward EV to EBITDA multiple of 4.3x on an NTM basis, v/s the industry (Freight & Logistics services) average of 10.6x. Hence, considering the aforementioned facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 3.07 on July 22, 2021, with lower double digit (in percentage terms) upside potential.

Technical Analysis Summary

One-Year Technical Price Chart (as on July 22, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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