METHANEX:Valuation and Strategic Review

MICHAEL COOKERIN ROBINSON PHIL WALLACE

RUSHAB HARIA RAJANVIR AHUJA

Recommendation: BUY1-year Price Target: C$36.15

Price as of Feb 7th: C$34.24Dividend Yield: 2.15%Total Implied Return: 7.68%

AGENDA

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

1

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

Introduction: What is Methanol?

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

2

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

Dimethyl Ether

Fuel Blending

Formaldehyde

Acetic Acid

Industry Analysis: A Market Set for Growth

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

3

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

Market Industry Driver

Formaldehyde/acetic acid Construction industry

Energy/MTO Fuel blending and plastics

Source: Company Reports

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

4

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

Industry Analysis: Methanol Markets

• 61% of world demand comes from Asia

• Distribution channels critical for transfers from supply to demand markets

Source: Company Reports, Team Research

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

5

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

Company Overview

• Plant distribution allows low cost natural gas inputs

• Increasing production in strategic North American locations

Source: Company Reports

Reasons to Buy

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

6

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

• Increased demand forecast to outpace short-term supply

• Methanol price stability

• Low cost positioning is stable and improving

• Oil-natural gas arbitrage play

Source: Company Reports

Reasons to Buy – Chinese Fuel Blending

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

7

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

Source: Company Reports

Investment Risks

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

8

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

• 500 MT/year plant in Egypt• Demand growth dependent on Chinese

energy policyPolitical

• Undertaking massive plant transplant• Less reliable feedstock suppliers in

Trinidad & TobagoExecution

• Methanex lacks diversification of products

• Highly sensitive to market pricesMarket

Investment Risks

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

9

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

$10 Δ in Methanol price ≈ $37m Δ in EBITDA

2005

2006

2007

2008

2009

2010

2011

2012

2013

+ (F

) $-

$100

$200

$300

$400

$500

$600

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

15.6%19.4%

10.7%15.0%

Posted Price Avg Realized Price Discount

Historical Methanol Posted & Realized Price

Source: Company Reports

Valuation: Methodology

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

10

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

Final Share Value

$36.15

DCF (75%)$37.05

Peer Analysis (20%) $33.77

Historical Analysis (5%)

$32.12

Recent Price (Feb 7th)$34.24

Valuation: DCF

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

11

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

2007 2008 2009 2010 2011 2012 2013(F)

2014(F)

2015(F)

2016(F)

2017(F)

0

1000

2000

3000

4000

5000

6000

7000

Chile Trinidad Egypt New Zealand North America

MT

/ye

ar

• Production is predominantly from reliable regions (tapering off in Egypt)

Production Forecast

Valuation: DCF

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

12

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

2007 2008 2009 2010 2011 2012 2013 (F)

0%

20%

40%

60%

80%

100%

Produced Purchased Commisioned Sales

Sales Mix (by volume)

60%

31%

9%

Valuation: DCF

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

13

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

2007

2008

2009

2010

2011

2012

2013

F

2014

F

2015

F

2016

F

2017

F

-800

-600

-400

-200

0

200

400

600

CFO CAPEX FCFF

Cash Flow Analysis

6.7x $3,976M

Company EV/EBITDA

EV

13.6x $939M

7.1x $9,403M

10.5x $23,385M

8.4x $6,106M

7.5x $61,510M

7.3x $15,297M

Valuation: Comparables

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

14

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

Valuation: Comparables

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

15

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

-

2.00

4.00

6.00

8.00

10.00

12.00

4.18x

11.20x

8.47x

Forward EV/EBITDA

Growth in 2014 implies MX is trading at a discount to historical levels

Conclusion

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

16

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

Potential Positive News

Potential Negative

News

Move Second

Plant to Louisiana

Increasing Usage

as a Fuel Additive

North Sea Shipping

Regulations

Restart of Chilean

Operations

Chinese Growth

Slowdown

Production

Disruptions

Recoupling of

Oil/Nat Gas

QUESTIONS

Appendix: Sensitivity Analysis

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

$330 $340 $350 $360 $370 $380 $390 $400 $410 $200

$250

$300

$350

$400

$450

$500

$550

$600

EBITDA vs. Realized Methanol Price

EB

ITD

A (

‘000S

)

Price of Methanol

WACC

Production Levels

$- $20.00 $40.00 $60.00 $80.00

$16.58

$24.29

$21.63

$66.18

$51.92

$44.76

Fair Value/Share

Sensitivity Analysis (DCF)

Prices outside this range can have a material impact on Nat Gas supply contract prices

Appendix: Competitor Analysis

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

Similarity Score

 

Geographic Scope

Product Similarity

Net Margins Beta

Correlation

Total

Weighting

EV/EBITDA (2013)

Points Possible 20 30 20 15 15 100    

ALBEMARLE CORPORATION 18 20 10 14 2 64 16% 8.4

BALCHEM CORPORATION 7 20 12 6 6 51 13% 13.6

CELANESE CORPORATION 18 23 15 10 6 72 18% 7.1

EASTMAN CHEMICAL CO 18 23 15 12 6 74 19% 7.3

PPG INDUSTRIES, INC. 18 20 20 10 5 73 18% 10.5

DOW CHEMICAL COMPANY 15 20 12 10 6 63 16% 7.5

Appendix: Income Statement

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

2010 2011 2012 2013F 2014F 2015F 2016F 2017FRevenue by Segment

Produced Methanol* 1,004.7 1,337.3 1,555.1 1,555.4 2,077.6 2,256.7 2,256.7 2,256.7

Purchased Methanol* 817.4 977.1 979.8 777.7 1,038.8 1,128.3 1,128.3 1,128.3

Commission Sales* 144.5 293.6 326.6 243.9 243.9 243.9 243.9 243.9

Total Revenue 1,966.6 2,608.0 2,673.0 2,577.0 3,360.3 3,628.8 3,628.8 3,628.8

Cost Of Goods Sold 1,507.2 1,910.9 1,986.8 1,963.1 2,543.6 2,742.7 2,742.7 2,742.7

Gross Profit 459.4 697.1 686.1 613.8 816.7 886.2 886.2 886.2

Gross Profit Margin 23.4% 26.7% 25.7% 23.8% 24.3% 24.4% 24.4% 24.4%

SG&A* 187.7 196.4 200.5 193.3 201.6 217.7 217.7 217.7

EBITDA 271.7 500.7 485.7 420.6 615.0 668.5 668.5 668.5

EBITDA Margin 13.8% 19.2% 18.2% 16.3% 18.3% 18.4% 18.4% 18.4%

Depreciation & Amort. 137.2 156.7 171.6 141.0 169.7 179.5 179.5 179.5

EBIT 134.5 344.1 314.0 279.5 445.4 489.0 489.0 489.0

EBIT Margin 6.8% 13.2% 11.7% 10.8% 13.3% 13.5% 13.5% 13.5%

Net Interest Exp. (28.2) (60.1) (70.8) (59.4) (55.7) (55.9) (59.5) (60.9)

Unusual Items 22.2 0 (361.5) 0 0 0 0 0

Income Tax Expense 34.5 55.9 (83.7) 50.8 89.9 99.9 99.0 98.7

Earnings from Cont. Ops. 94.0 228.0 (34.6) 169.4 299.8 333.2 330.4 329.4

Minority Int. in Earnings 2.0 (26.7) (33.5) 0 0 0 0 0

Net Income 96.0 201.3 (68.1) 169.4 299.8 333.2 330.4 329.4

* Historical segmented and SG&A expenses are estimated costs based on financial disclosures

Appendix

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

DuPont Analysis

2008 2009 2010 2011 2012 2013F 2014F 2015F 0.50

0.75

1.00

1.25

1.50 D/E Ratio

2007 2008 2009 2010 2011 20120.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

0

0.5

1

1.5

2

2.5

ROE (L) Net Margin (L)Asset Turnover (R) Leverage (R)

Changes in ROE come from Net Margin. Shifting towards high margin segments will boost ROE.

Appendix

METHANEX: Valuation and Strategic Review, 22nd February, 2013Prepared for the 2013 CFA Research Challenge

Introduction

Industry Analysis

Company Overview

Reasons to Buy

Investment Risks

Valuation

Conclusions

WACCDebt 12.73%Equity 87.27%

Cost of Debt  

YTM on Debt 3.28%

Tax Rate 23.06%= 2.52%

Cost of Equity  Risk Free Rate 1.66%Risk Premium 6.00%

Unlevered Beta 1.53

= 10.85%

WACC 9.79%

   

BetaLeavered Beta 1.84Tax Rate 23.06%

D/E 0.26

Unleavered Beta 1.53

Historical Beta

0

0.5

1

1.5

2

2.5

Historically beta was very low

Since 2008 beta has been consistently between 1.75 and

2.0