In a March 17 research note, BMO Capital Markets analyst Joel Jackson reported that Methanex Corp. (MEOH:NASDAQ; MX:TSX; METHANEX:SSE) is an attractive investment opportunity given that methanol is resilient and the company could defer completion of its G3 plant.
Jackson noted that Methanex is expected to make an announcement before or at its annual meeting in late April about a potential G3 delay. That move would ease balance sheet pressure more than a partial divestment of its Egypt stake, a logistics asset sale and leaseback, and/or a receivables sale would.
A G3 deferral for two years would result in roughly $1.2 billion left to spend after 2019, Jackson indicated. This assumes a minimal, incremental G3 capex spend as of Q2/10, about $25 million in 2021 for care and maintenance along with $125 million per year in companywide maintenance capex.
Yet, were Vancouver-based Methanex not to defer G3 but, instead, keep Titan idle until 2021 and Chile IV idle until Q4/20, Jackson indicated, the company still would have enough free cash flow to cover the 12% dividend, even in scenarios in which methanol prices recovered slowly.
Jackson provided two such low price scenarios in which Methanex could still pay its $110–115 million dividend. It could do so at a methanol price of $250 per ton over the next few quarters and increasing to $285 per ton in 2021. That would result in free cash flow of about $200 million and leverage by year-end 2021 of about 3.5x.
The company could even pay the dividend if the methanol price stayed constant at $250 per ton. In that case, the free cash flow yield would be $100–130 million, but 2020 leverage would be higher, at about 5–5.5x.
Jackson also highlighted that the methanol price is resilient and historically bounced back rapidly from lows. He cited the period following Q1/ to Q3/16 in which the price quickly rebounded to about $400 per ton from about $230 per ton.
The analyst concluded that Methanex's "share price seems too punitive as G3 deferral is a lever the company can pull to calm leverage concerns."
BMO maintained its Outperform rating on Methanex but reduced its target price on the company to $20 per share from $60. The current share price is about $10.47.[NLINSERT]
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Disclosures from BMO Capital Markets, Methanex, March 17, 2020
I, Joel Jackson, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.
Analysts who prepared this report are compensated based upon (among other factors) the overall profitability of BMO Capital Markets and their affiliates, which includes the overall profitability of investment banking services. Compensation for research is based on effectiveness in generating new ideas and in communication of ideas to clients, performance of recommendations, accuracy of earnings estimates, and service to clients.
Analysts employed by BMO Nesbitt Burns Inc. and/or BMO Capital Markets Limited are not registered as research analysts with FINRA. These analysts may not be associated persons of BMO Capital Markets Corp. and therefore may not be subject to the FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Company Specific Disclosures
Disclosure 1: BMO Capital Markets has undertaken an underwriting liability with respect to Methanex within the past 12 months.
Disclosure 2: BMO Capital Markets has provided investment banking services with respect to Methanex within the past 12 months.
Disclosure 3: BMO Capital Markets has managed or co-managed a public offering of securities with respect to Methanex within the past 12 months.
Disclosure 4: BMO Capital Markets or an affiliate has received compensation for investment banking services from Methanex within the past 12 months.
Disclosure 5: BMO Capital Markets or an affiliate received compensation for products or services other than investment banking services within the past 12 months from Methanex.
Disclosure 6A: Methanex is a client (or was a client) of BMO Nesbitt Burns Inc., BMO Capital Markets Corp., BMO Capital Markets Limited or an affiliate within the past 12 months: A) Investment Banking Services
Disclosure 6C: Methanex is a client (or was a client) of BMO Nesbitt Burns Inc., BMO Capital Markets Corp., BMO Capital Markets Limited or an affiliate within the past 12 months: C) Non-Securities Related Services.
Disclosure 9B: BMO Capital Markets makes a market in Methanex in United States.
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