Canadian Pacific Railway Limited

Canadian Pacific Railway Limited (TSX: CP) provides rail and intermodal services across Canada and the United States. The Group operates across a total network of ~12,700 miles. The Group recently announced a record logistics movement of Canadian grain and grain products of 2.8 million metric tonnes for the month of April 2020.

Q1FY20 Financial Highlights: CP declared its quarterly results, wherein the Company reported stellar growth in the top line, while failed to retain the momentum in its bottom line. Revenue for the first quarter stood at CAD 2,043 million, as compared to CAD 1,767 million in pcp. The Business witnessed a strong momentum from its grain and energy chemical & plastics segments, which has contributed to the growth in the total freight income. Operating income stood significantly higher at CAD 834 million, as compared to CAD 543 million in Q1FY19, thanks to the improved income followed by a dip in total operating expenses, resulting in margin expansion. Net income declined to CAD 409 million from CAD 434 million in Q1FY19 due to the inclusion of other expense amounting to CAD 211 million as compared to the other income of CAD 47 million in the previous corresponding period. The Group exited the quarter with cash and cash equivalent of CAD 247 million and total assets of CAD 23,488 million.

Q1FY20 Income Statement Highlights (Source: Company Reports) 

Stock Recommendation: The stock of CP gained ~10% so far this year and stood resilient amidst the correction across the broader market due to COVID 19 crisis. There is a significant jump in demand for ‘essential products’, and the group witnessed robust logistics momentum from grains and energy chemicals & plastic segments. The Company is allocating CAD 1.6 billion for capital expenditure which would be used for the improvement of its network facility. The stock is currently trading at a forward EV/EBITDA multiple of 13.7x against the peer group average of 13.6x. We have considered Canadian National Railway Co, Norfolk Southern Corp, Union Pacific Corp Inc, etc. as peers. We believe, the upside in CP stock seems capped at the current levels as positives are already reflected in the stock price. Hence, we have a ‘Watch’ stance on the stock at the current market price of CAD 335.56 on May 21, 2020 and look for the growth catalyst.

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

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 9 million tonnes of operating capacity with six manufacturing sites.

The Group witnessed a severe setback as a dip in manufacturing activities along with logistic disruption took a tool on the demand of methanol. To weather the current slowdown, the Company has reduced its capital spending by USD 30 million and lowered its quarterly dividend by ~90% in order to support its near-term working capital and liquidity.

Q1FY20 Financial Highlights: For the quarter ended March 31, 2020, Methanex reported a revenue of USD 745 million, lower than USD 902 million in Q1FY19. The decline was due to a dip in the average realized price of USD 267 million versus USD 331 million in Q1FY20, primarily attributable to the soft industry demand. However, the Group reported a total sales volume of 2,788 thousand tonnes, higher than 2,723 thousand tonnes in Q1FY20 and significantly lower than 2,986 thousand tonnes in Q4FY19. Adjusted EBITDA declined considerably to USD 138 million, as compared to USD 194 million in pcp. Net income stood at USD 23 million, as compared to CAD 38 million in Q1FY19. Production during Q1FY20 stood at 2,007,000 tonnes, lower than 2,124,000 tonnes in Q4FY19, due to a small number of plant outages, partially offset by increased production at Geismar.

Q1FY20 Financial Snapshot (Source: Company Reports)

Stock Recommendation: 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 group expects a substantial drop-in manufacturing activity across North America, Europe and Latin America, coupled with soft demand scenario across the Asia Pacific. Lower manufacturing activities are hurting methanol demand across its traditional chemical applications. Logistics disruption further dented the demand. The group’s Titan and Chile IV plants remain idled, and there is no clarity on the operation of these plants. Consequently, we believe the production to take a hit in the second quarter of 2020. The group has deferred its planned capital budget of US$ 500 million for the Geismar 3 project for up to 18 months and put the project on temporary care and maintenance. To support the Company’s working capital, MX withdrew USD 300 million from revolving credit facility and reported USD 823 million of cash balance, which seems sufficient to meet its short-term working capital. The group is trading at a forward EV/EBITDA multiple of 8.2x, which is in line with the industry (Chemical) average of 8.1x. We expect the near-term outlook for MX to be challenging based on the aforementioned facts. Hence, we recommend a ‘Watch’ rating on the stock at the closing price of CAD 24.09 on May 21, 2020.

MX One-Year Daily Price Chart, Source: Refinitiv (Thomson Reuters)

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