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 market leader within its segment and hold 13% of the global market share. The group holds 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.

Source: Company 

• Positive long-term industry outlook: Weexpect steady growth for methanol as an essential ingredient used in various chemical derivatives that serves as a building block used to produce a multitude of everyday consumer and industrial items. In contrast, a limited capacity addition is expected post-2022, based on lower investment in the current environment. The demand is expected to grow at a steady CAGR of 3-4% over medium-term. We believe the company can reap the benefits of this mismatch in demand and supply. 

• Robust cash flow generation: The company managed to expand its Cash flows from operating activities in Q4 2020 to USD98 million, compared to USD 35 million in Q3 2020. The increase in Cash flows from operating activities were primarily due to higher earnings, supported by Average realized methanol price, which increased to USD282 per tonne in the reported quarter from USD217 per tonne in Q3 2020.

• 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, they ended the year 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 USD)

Source: Company 

• In FY 2020 the company registered degrowth in revenue to USD 2.6 billion, against USD 3.2 billion 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 recorded 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 involved in 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. 

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 believe that Long-term industry supply/demand fundamentals remain strong as a limited capacity addition is expected post-2022. Based on lower investment in the current environment, the demand is expected to grow at a steady CAGR of 3-4% over medium-term. The company can reap the benefits of this mismatch in demand and supply. On the valuation front, the stock is available at forward Price/Cash Flow multiple of 3.3x against the Chemical Industry median of 9.4x. Hence, considering the aforesaid rationale, we recommend a “Speculative Buy” rating at the closing price of CAD 42.94 on February 1, 2021. 

1-Year Price Chart (as on February 01^st, 2021). Source: Refinitiv (Thomson Reuters)

K-Bro Linen Inc.

K-Bro Linen Inc. (TSX: KBL) is a healthcare and hospitality laundry and linen processor in Canada, which operates around 15 facilities in major cities across Canada, and two distribution centers, providing management services and laundry processing of hospitality, healthcare, and specialty linens.

• Consistent Dividend Distribution: The company has a strong history of consistent dividend distribution, supported by stable cash flows. During 9MFY20, the group reported total dividend distribution of CAD 9.572 million, slightly higher than CAD 9.522 million a year ago, despite the current environment wherein most of the companies are slashing its dividend distributions in order to preserve its capital. At the last closing price, the stock was offering a dividend yield of ~3.33%, which is decent amid low interest rate environment.
• Sequential Quarter Improvement: The group reported revenue was significantly better than the previous quarter at CAD 51.43 million as compared to CAD 37.52 million reported in the previous fiscal quarter, driven by solid improvement in the hospitality sector revenue to CAD 12.36 million from CAD 2.417 million reported in Q2FY20, on account of gradual reopening of the hotels in third quarter. EBITDA improved to CAD 12.719 million, higher than CAD 10.055 million in the previous fiscal quarter.

Source: Company Reports

Q3FY20 Financial highlights:

• KBL declared its quarterly results, wherein the group posted revenue of CAD 51.439 million, as compared to CAD 67.842 million in the previous corresponding period (pcp). The decline was primarily attributed to a significantly lower Hospitality revenue (CAD 12.368 million versus CAD 33.132 million in pcp), due to an ongoing closure of hotels across the regions in which the company operates. The decline was partially offset by improved income from hospitality segment (CAD 39.071 million CAD 34.710 million in pcp).
• The quarter was marked by lower wages and benefits costs (CAD 16.963 million, as compared to CAD 26.605 million in pcp). Expense for Linen, Utilities, Delivery, Materials & supplies and repairs and maintenance stood lower than Q3FY19, which partially supported the company’s profitability.
• EBITDA stood at CAD 12.719 million, as compared to CAD 14.617 million in the previous corresponding period (pcp).
• The group reported net earnings of CAD 3.442 million, as compared to CAD 4.669 million in pcp.
• At the end of Q3FY20, cash and cash equivalents were reported at CAD 0. 998 million, while total assets were reported at CAD 338.591 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Valuation Methodology (Illustrative): EV to EBITDA based

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

Risks: A major part of the revenue is being derived from the hospitality and hotel sectors, and future restriction on the hotel operations would take a significant toll on the company’s income and margins.

Stock Recommendation:

Despite, a significantly sluggish sectoral outlook, the group expects adjusted EBITDA margin before the adoption of IFRS 16 within the range of 12% to 16% for FY20, seems impressive. At the end of Q3FY20, the group reported long-term debt of CAD 59.325 million, lowered from CAD 59.325 million in FY20, which implies lowering balance sheet risk and also it would boost margin profile and profitability in the coming quarters. 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 CareRx Corp, Knight Therapeutics Inc and Savaria Corp etc., as a peer group. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 36.35 on February 01, 2021.

1-Year Price Chart (as on February 01, 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.