2023-06-08 11:34:31 ET
Summary
- Methanex Corporation's EPS slid nearly 50% YoY in Q1 2023, but the company remains a hold due to potential value from the G3 project.
- The G3 project, expected to be completed in Q4 2023, could generate substantial cash flows and boost value through share buybacks and dividends.
- Risks include delays in the G3 project, supply chain issues, and decreasing methanol production volumes.
Investment Rundown
Methanex Corporation ( MEOH ) has seen a slight increase in the company's volumes, suggesting the market they are in is still alive and well. But unfortunately, the pricing environment is softer compared to a year prior and the bottom line has taken a significant hit as EPS slid nearly 50% YoY, reaching $0.87 EPS in Q1 of 2023. The lower margins the company is experiencing don't help a buy case, it does the opposite, and until there is a clear uptrend in the margins, I won't be rating MEOH a buy. But with the value shareholders can still extract here, I think MEOH will remain a hold instead. Collecting a decent dividend of 1.63% whilst the company is also spending FCF to buy back shares at a decent rate seems fair.
Company Segments
Methanex Corporation operates in the energy and chemical industries, specializing in producing and distributing methanol. The company is involved in various segments that contribute to its overall business. The company according to their own estimates has around 12% of the market share , which would be more than double the second-largest company, Proman.
With a solid global presence, the company operates multiple strategically located production facilities around the world, establishing itself as a leader in methanol production. Methanex also boasts an extensive distribution network that enables them to supply methanol to customers worldwide efficiently.
One of the fastest growing parts of the company is the purchased methanol. In the first quarter of the year, the company increased it by nearly $200 million YoY or a close to 30% increase. This highlights the momentum the industry they are in is seeing, and some suggest it will experience above 4% CAGR until 2028.
The G3 Project
One of the major intriguing parts about MEOH is the G3 project they have. It is estimated to help the company start to generate a substantial amount of cash flows once started, which is about 80% right now. It's estimated to be finished in the fourth quarter of 2023, and hopefully up and running by Q1 in 2024. The project will be in the spotlight in that quarter to really see the potential of cash flow increases.
The project cost the company between $1.25 - $1.3 billion which seems sustainable and using over $300 million of cash to pay off the last part as the company has more than double that in cash right now. In the middle range of the G3 expectations, they see a $250 million EBITDA being generated.
The cash flows potential of the project seems very optimistic. If they come true, MEOH will have a massive upswing from the TTM FCF of around $32 million. If they achieve the EBITDA expectations, the company would be generating around $750 - $800 million in FCF if scenario 2 comes true. Which would be the G3 running at full capacity and full rates. But even if the company just achieves scenario 1, then the FCF would be above $600 million, it seems. This greatly boosts the investor's value here as MEOH has already made it clear they want to buy back shares and keep a strong dividend as they just recently announced a raise to it.
Risks
The risks facing MEOH right now would be a delay in the G3 project, I think. So far they have maintained the budget for it and seem to be on time as well. But if we experience supply chain issues, then that could be a cause for concern. The company sort of hinges on the completion of this project to start generating strong FCF once again.
I think MEOH will continue to have a market to operate in, but for investors seeking to make a profit here, the delay in the project would most likely cause the share price to start sliding as new valuation expectations would have to be set up. But with a p/fcf of just over 4, it doesn't seem wildly overvalued right now nonetheless.
Lastly, one worrying sign I saw on the last earnings report was the lower volumes of Methanex-produced methanol the company had, decreasing about 5% YoY.
Financials
Looking at the financials of the company, they have maintained a strong position all through the last few years it seems, especially with the cash position which has stayed around $800 million for the last 3 years after nearly doubling between 2019 and 2020.
With the G3 requiring some further capital, which the company has said will be funded by cash on hand, I don't see it as worrying the cash position is decreasing on a QoQ basis here. But in 2024, I think improvements on the balance sheet will be in the spotlight. That's when the project will hopefully have been completed and also started generating strong FCF for the company.
Looking at the liabilities of MEOH, the current liabilities offer little risk in my opinion. The current portion of the long-term debt sits at just $12 million, which the company will be able to cover with ease. On the other hand, the long-term debts might be worrying to some if you are just looking at the TTM numbers, as MEOH has $2 billion in debt, and just above $30 million in FCF. That could cause some concern, but as I have mentioned above here, the completion of the G3 project will help bring more balance and hopefully improvements to the balance sheet. If they achieve the nearly $700 million FCF repetition, they will be able to pay off significant amounts of this debt in quite a short time. They could essentially be debt free in 3 years' time if all was diverted to that cause.
Final Words
Methanex Corporation right now I think is all about the potential of the G3 project and the FCF that could be generated from there. If scenario 2 the company provides is reached and the commodity prices the company expects remain stable, they could generate around $750 - $800 million in FCF. Q1 of 2023 had the company generate $162 operating cash flows, and the company returned $60 million to shareholders at that same time. If MEOH reached the FCF estimates, they could with ease buy back nearly 10% of the outstanding shares. Just over the last 5 years, they have bought back 12.7% of the outstanding shares, and I don't see them stopping this anytime soon. But as the investment thesis hinges on the potential of the G3 project, there is a little too much speculation for me right now. I will keep a hold rating for now, and most likely upgrade it to a buy when there is more clarity about the potential of Geismar 3.
For further details see:
Methanex Corporation: The G3 Project Should Bring Strong FCF