Methanex Corp.
(MEOH-Q, MX-T) US$34.61 | C$44.36
Bad News Arguably Priced In; Upgrading to BUY from Hold Event
Methanex reported Q4/20 adjusted EBITDA of $136mm, slightly below the consensus estimate of $140mm and below our forecast of $147mm. The company also guided to lower-than-expected 2021 production.
Impact: NEGATIVE, but upgrading to BUY based on our view that most of the bad news has already been priced in
Actual vs. Expected Results: The major variance vs. our forecast was lower-than- expected sales of Methanex-produced methanol, which we attribute largely to timing issues associated with plant turnaround activity straddling Q3/20 and Q4/20.
2021 Production: Methanex expects 2021 production to be similar vs. 2020 production of 6.6mm tonnes, based on lower-than-expected gas availability in New Zealand, Trinidad, and Chile. Our sense is that gas availability in New Zealand is more of a structural issue, whereas we believe that gas availability in Trinidad and Chile has been partially impacted by COVID-19 (deferred maintenance and reduced drilling activity).
Methanol Prices: China spot methanol prices of $290-$345/tonne have continued their upward trajectory, and are up 56% since the end of Q3/20, and up 30% y/y; however, spot methanol prices in North America and Europe, which led the recent run-up, appear to have peaked on improving supply. We believe that recent spot methanol prices are unsustainable based on fundamentals, but to the extent that Methanex's gas supply issues are indicative of what the broader industry is facing, which we believe that they are, then methanol prices should bottom at a higher level than would otherwise be anticipated. Methanex estimates that the cost floor in China is ~$260/tonne.
TD Investment Conclusion
Methanex is the market share leader in methanol and has a cost structure that enables it to remain free-cash-flow positive across a wide range of methanol prices and effectively leverage higher methanol prices. The stock is trading at an enterprise value of only $590/tonne of capacity vs. replacement cost of $1,100/tonne+, and at a low-double-digit free-cash-flow yield based on an average realized price of $300/ tonne, which we characterize as the low-end of the normal range. It seems to us that a lot of bad news has been discounted in the current share price, and we are upgrading our rating to BUY from Hold.