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 

• Industry leader: The company is the world leader in its division, with a global market share of 13%, more than twice that of its nearest rival. The firm serves many customers and works to improve global sourcing strategies while maintaining customer supply security. Furthermore, the company has a competitive advantage as the only manufacturer with well-established production and distribution in all major regions.

Source: company 

• Strong production guidance: Strong methanol demand, low global inventory levels, and ongoing industry supply issues will keep market conditions tight through the second quarter of 2021. The group increased its cumulative production projections for 2021 from 11 plants to 6700K tonnes. It's also commendable that they plan to increase their annual operating capacity to 11,150K tonnes from 9,250K tonnes in the future.

Data 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 sequential 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. 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 will profit from the demand-supply imbalance.

Source: Company

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

Source: Company 

• In Q1 2021, the company registered higher revenue to USD 1,015.5 million, against USD 745.0 million in the previous corresponding quarter. An 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 EBIT at USD 154.1 million in Q1 2021, against USD 43.2 million in pcp. EBIT 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 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

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 will increase the annual operating capacity by 10% to 2.2 million tonnes, which is notable. The company is optimistic that manufacturing activity will rebound. The economy will fully recover in the medium term as vaccine rollouts accelerate and governments announce additional fiscal support measures. Based on technical analysis, the stock has support at CAD 35.0 level. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 43.72 on May 21, 2021. We considered LyondellBasell Industries, BASF, Superior Plus Corp, etc as the 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 or if the price closes below the support level.

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

1-Year Price Chart (as on May 21, 2021). Source: Refinitiv

Andrew Peller Limited

Andrew Peller Limited (TSX: ADW.A) is a wine-producing company and is involved in the production and sales of wine and spirit products across Canada. 

Key Updates:

• Strong Growth in cash flows: The company has reported strong growth in cash from operations, supported by higher earnings and better working capital management as compared to the previous period. A surge in cash from operations is a healthy sign and indicates higher financial flexibility of the firm.

• Positive, long-term outlook: The alcoholic-beverage market has witnessed a drastic change in the recent past due to the change in consumer preferences. The company is a manufacturer of premium wines and believes that the higher-priced premium wine and spirits sales are likely to grow in Canada, which would further support the company’s margins and cash flows in the coming days.

• Entry into new segments: The group has leveraged its detailed knowledge of growth opportunities in the Canadian market and would offer other alcoholic beverages outside the traditional table wine segment. Notably, the company made a strategic alliance with Wayne Gretzky and would enter into the spirits and craft beer categories, which is expected to drive improved prospects in the coming days.

• Event Update: The Group would disclose its fourth quarter FY21 result on June 16, 2021.

Q3FY21 Financial Highlights:

• A announced its quarterly results, wherein the company CAD 111.060 million, higher than CAD 101.597 million in the previous corresponding period (pcp). The increase of 9.3% is driven by an elevated sale from the provincial liquor stores and other retail channels, while factors like reduction in hospitality, licensee sales and lower duty-free export sales on account of COVID-19 restrictions remained as a drag.
• The group reported a gross profit of CAD 38.880 million, slightly lower than CAD 39.549 million in pcp. The corporation reported a higher cost of goods sold of CAD 69.523 million v/s CAD 59.629 million in pcp.
• Net profit stood at CAD 10.236 million, as compared to CAD 8.056 million in pcp. The quarter was marked by slightly lower selling and administration costs (CAD 25.314 million v/s CAD 25.820 million in pcp), a gain on debt modification and financing fees amounting to CAD 2.312 million, and lower interest expense (CAD 1.637 million v/s CAD 1.818 million in pcp).
• The group reported a cash balance of CAD 3.557 million, while total assets were recorded at CAD 515.942 million.

Q3FY21 Income Statement Highlights (Data Source: Company)

Risks: A shift in consumer preference due to the introduction of a new product, changes in discretionary spending etc. would take a toll on the overall sales volume and may affect the company’s performance. Moreover, due to any natural disaster, the group might fail to source domestically grown premium quality grapes, which might impact the company’s production.

Stock Recommendation:

The Corporation is focusing on several initiatives which would reduce costs and enhance its production efficiencies and would enhancing profitability in the coming days. Despite the ongoing economic turbulence, the company maintained its dividend payment at CAD 6.868 million, at par with CAD 6.855 in the previous year, backed up by strong cash flows, which further indicates business resiliency. On the valuation front, the stock is available at forward price to earnings multiples of 14.7x, which is significantly below the industry (Beverages) median of 23.4x. Based on technical analysis, the stock has support at CAD 8.7 level. Hence considering the aforesaid facts, we give a ‘Speculative Buy’ rating in the stock of ADW.A at the closing price of CAD 10.75 on May 21, 2021.

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

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

One-Year Price Chart (as on May 21, 2021). Source: Refinitiv

Disclaimer

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