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 nine million tonnes of operating capacity with six manufacturing sites.

Key Highlights

Impressive Production Growth: The company reported elevated production levels during the period of FY12 to FY20 and is likely to report the same trend in the coming periods, due to the growing usage of methanol. Methanol is an essential ingredient used in a variety of chemical derivatives and used across everyday consumer and industrial items. The product finds its application in the energy-related solutions and as a clean-burning and economic alternative fuel. Production grew from 4.1 tonnes in FY12 to 7.6 tonnes in FY19, reflecting a growth of 85%.

Historic production levels (Source: Company Reports)

Market Leader: The company is the market leader within its own segment and holds ~13% of the global market share. The company has a strong clientele and enhances global sourcing plans while maintaining the security of supply for customers. Furthermore, the company has a competitive advantage of being the only supplier with well-established production and sales in all major regions. The management expects to retain its leadership position in the coming days too.                                   

Expected Market Share Company-wise (Source: Company Reports)

Strong Technical Uptrend: At the last closing, shares of MX traded well above the crucial long-term as well as short-term support levels of 200-day, 100-day, 50-day, 30-day, 20-day and 10-day SMAs, which implies a strong bullish trend in the stock. Also moving averages are edging higher another positive technical indicator. Further, the MACD is rising with the difference between 12-day, and 26-day EMA is positive, which is another bullish indicator.

Technical Price Chart. Source: Refinitiv (Thomson Reuters)

Q3FY20 Financial Highlights:

• MX announces its third-quarter results, wherein the performance of the company remained subdued due to a decline in sales volume to 2,678 tons vs 2,824 tons in Q3FY19 coupled with a significant fall in the international prices of methane to USD 217/ton in Q2FY20 vs USD 272/ ton in Q3FY19. The company posted revenue of USD 581 million, as compared to USD 765 million in the previous corresponding period (pcp).
• Adjusted EBITDA stood at USD 40 million, significantly lower than USD 90 million in the previous corresponding quarter. Cash flow from operating activities stood lower at USD 35 million, as compared to USD 71 million in Q3FY19.
• Net loss during the quarter, widened to USD 88 million, from USD 10 million in pcp.

Q3FY20 Financial Snapshot (Source: Company Reports)

Risk 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: Price to CF Based (Illustrative)

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

Stock Recommendation: The long-term fundamental of the company remains positive, driven by stable growth from the methanol industry. However, on account of ongoing lower industrial output coupled with a significant fall in the methanol prices, the business witnessed a serious setback in the recent past and is evident from its recent financial performance. However, despite a sluggish sectoral performance, the stock of MX soared ~78% in the last six-months. More importantly, despite a challenging market condition, its shares are hovering in a steep bullish zone, with price traded well above the crucial long-term as well short-term support levels of 200-day and 50-day SMAs.

Therefore, considering the above rationale and technical strength in the stock, we have given a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 39.50 on October 30, 2020. We have considered industry (Chemical) median forward Price to Cash Flow multiple for valuation purpose.

MX Daily Technical Chart (October 30, 2020, after the market close). Source: Refinitiv, Thomson Reuters)

Celestica Inc.

Celestica Inc. (TSX: CLS) is a US-based electronic manufacturing service (EMS) company which offers a variety of services from design, engineering, and assembly to testing and reverse logistics. The company has two operating segments, namely, Advanced Technology Solutions (ATS) and Connectivity & Cloud Solutions (CCS).

Key Highlights:

• Restructuring Strategy: The company anticipate that total restructuring costs in 2020 will be approximately USD 30 million. The company’s restructuring charges for Q3 2020 consisted primarily of actions to adjust the cost base to address reduced levels of demand in certain of its businesses, including continued actions to right-size the commercial aerospace facilities. The group intend to implement restructuring actions in Q4 2020 in connection with the completion of the Cisco Disengagement and to further adjust the cost base of its businesses undergoing continued demand pressures.
• Lowering Debt-component: The corporation has lowered its debt-component to USD 579.3 million from USD 698.7 million in FY19, which reflects strong cash flows from the existing operations, despite an economic setback, which is impressive. Due to a decline in the debt part, the company posted lower finance costs of USD 28.6 million on a year-to-date basis, as compared to USD 38.2 million in pcp. We expect the above trend is likely to support future profitability and margins.

Q3FY20 Financial Highlights:

• CLS delivered both top-line and bottom-line growth during the quarter. Revenue stood at USD 1,550.5 million, higher than USD 1,517.9 million in the previous corresponding period (pcp). The growth was primarily driven by stable growth from the CCS segments.
• Gross profit stood significantly higher at USD 124.2 million, as compared to USD 97.7 million in the previous corresponding period (pcp).
• The company turned into profitability and reported net earnings of USD 30.4 million, as compared to a net loss of USD 6.9 million in Q3FY19.
• Cash and cash equivalent stood at USD 451.4 million, while total assets were recorded at USD 3,789.3 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Segment Highlights:

Segment Bifurcation (Source: Company Presentation)

Risks: Adverse market conditions in the aviation industry related to COVID-19 to persist throughout 2021 and likely beyond. The group derived a certain portion of its revenue from the above segment. Continuation of weakness in the aerospace segment would affect financial performance.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation: Adverse COVID-19-related demand impacts on the industrial business moderated in Q3 2020 compared to the second quarter of 2020, resulting in a gradual recovery of demand across the industrial customer base. Notwithstanding COVID-19 demand impacts, the performance of the business improved from Q3 2019 as a result of the cost reduction initiatives and the ramp of new programs. The group expects strong demand for diagnostic and 'point of care' equipment and anticipate further improvements in the demand for products used in elective surgeries in the first half of 2021. The group anticipates its Q4FY20 top line within the range of USD 1.35 billion to USD 1.45 billion, at par with Q4FY19. We have valued the stock using Price to Earnings value-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Flex Ltd, Jabil Inc etc. Hence, we recommend a 'Speculative Buy' rating on the stock at the current market price of CAD 7.83 on October 30, 2020.

CLS Daily Technical Chart (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.