METHANEX:
Valuation and Strategic Review
Recommendation: BUY
1-year Price Target: C$36.15
Price as of Feb 7th: C$34.24
Dividend Yield: 2.15%
Total Implied Return: 7.68%
MICHAEL COOK
ERIN ROBINSON
PHIL WALLACE
RUSHAB HARIA
RAJANVIR AHUJA
AGENDA
Introduction
Industry Analysis
Company Overview
Reasons to Buy
Investment Risks
Valuation
Conclusions
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
1
Introduction: What is Methanol?
Introduction
Acetic Acid
Dimethyl Ether
Industry Analysis
Company Overview
Reasons to Buy
Investment Risks
Valuation
Conclusions
Fuel Blending
Formaldehyde
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
2
Industry Analysis: A Market Set for Growth
Introduction
Industry Analysis
Company Overview
Reasons to Buy
Investment Risks
Valuation
Conclusions
Source: Company Reports
Market
Industry Driver
Formaldehyde/acetic acid
Construction industry
Energy/MTO
Fuel blending and plastics
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
3
Industry Analysis: Methanol Markets
Introduction
Industry Analysis
Company Overview
Reasons to Buy
Investment Risks
Valuation
Conclusions
Source: Company Reports, Team Research
• 61% of world demand comes from Asia
• Distribution channels critical for transfers from
supply to demand markets
METHANEX: Valuation and Strategic Review, 22nd February, 2013
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4
Company Overview
Introduction
Industry Analysis
Company Overview
Reasons to Buy
Investment Risks
Valuation
Conclusions
Source: Company Reports
• Plant distribution allows low cost natural gas inputs
• Increasing production in strategic North American
locations
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
5
Reasons to Buy
Introduction
Industry Analysis
Company Overview
Reasons to Buy
Investment Risks
Valuation
Conclusions
Source: Company Reports
• Increased demand forecast to outpace shortterm supply
• Methanol price stability
• Low cost positioning is stable and improving
• Oil-natural gas arbitrage play
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
6
Reasons to Buy – Chinese Fuel Blending
Introduction
Industry Analysis
Company Overview
Reasons to Buy
Investment Risks
Valuation
Conclusions
Source: Company Reports
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
7
Investment Risks
Introduction
Industry Analysis
Company Overview
Reasons to Buy
Political
•500 MT/year plant in Egypt
•Demand growth dependent on Chinese
energy policy
Execution
•Undertaking massive plant transplant
•Less reliable feedstock suppliers in
Trinidad & Tobago
Investment Risks
Valuation
Conclusions
Market
•Methanex lacks diversification of products
•Highly sensitive to market prices
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
8
Investment Risks
Introduction
Industry Analysis
Company Overview
Reasons to Buy
Investment Risks
Valuation
Conclusions
Historical Methanol Posted & Realized Price
$600
50.0%
$500
40.0%
$400
30.0%
$300
20.0%
$200
$100
15.6%
$-
Posted Price
19.4%
10.7%
Avg Realized Price
15.0%
10.0%
0.0%
Discount
Source: Company Reports
$10 Δ in Methanol price ≈ $37m Δ in EBITDA
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
9
Valuation: Methodology
Introduction
Industry Analysis
DCF (75%)
$37.05
Company Overview
Reasons to Buy
Investment Risks
Valuation
Conclusions
Final Share Value
$36.15
Recent Price (Feb 7th)
$34.24
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
Peer Analysis (20%)
$33.77
Historical Analysis (5%)
$32.12
10
Valuation: DCF
Production Forecast
Introduction
7000
Industry Analysis
6000
Reasons to Buy
5000
Investment Risks
Valuation
Conclusions
MT/year
Company Overview
4000
3000
2000
1000
0
Chile
Trinidad
Egypt
New Zealand
North America
• Production is predominantly from reliable regions
(tapering off in Egypt)
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
11
Valuation: DCF
Introduction
Industry Analysis
Company Overview
Reasons to Buy
Investment Risks
Sales Mix (by volume)
9%
100%
31%
80%
Valuation
Conclusions
60%
60%
40%
20%
0%
2007
2008
Produced
2009
2010
Purchased
2013
(F)
Commisioned Sales
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
2011
2012
12
Valuation: DCF
Introduction
Industry Analysis
Company Overview
Reasons to Buy
Investment Risks
Valuation
Conclusions
Cash Flow Analysis
600
400
200
0
-200
-400
-600
-800
CFO
CAPEX
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
FCFF
13
Valuation: Comparables
Introduction
Industry Analysis
Company Overview
Reasons to Buy
Investment Risks
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
6.7x
$3,976M
Valuation
Conclusions
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
14
Valuation: Comparables
Introduction
Forward EV/EBITDA
Industry Analysis
12.00
Company Overview
10.00
Reasons to Buy
Investment Risks
Valuation
Conclusions
11.20x
8.00
8.47x
6.00
4.00
4.18x
2.00
-
Growth in 2014 implies MX is trading at a
discount to historical levels
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
15
Conclusion
Introduction
Industry Analysis
Company Overview
Potential
Positive News
Potential
Negative
News
Reasons to Buy
Investment Risks
Valuation
Conclusions
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
16
QUESTIONS
Appendix: Sensitivity Analysis
EBITDA vs. Realized Methanol
Price
Introduction
Industry Analysis
Reasons to Buy
Investment Risks
Valuation
Conclusions
EBITDA (‘000S)
Company Overview
$600
$550
Prices outside this
range can have a
material impact on
Nat Gas supply
contract prices
$500
$450
$400
$350
$300
$250
$200
$330
$340
$350
$360
$370
$380
$390
$400
$410
Sensitivity Analysis (DCF)
Price of Methanol Pessimistic
WACC
Optimistic
12%
Production Levels
8%
80%
$-
$20.00
110%
$40.00
$60.00
Fair Value/Share
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
$80.00
Appendix: Competitor Analysis
Introduction
Valuation
Conclusions
EV/EBITDA
(2013)
Weighting
Total
Correlation
Investment Risks
Beta
Reasons to Buy
Net Margins
Geographic
Scope
Company Overview
Product
Similarity
Similarity Score
Industry Analysis
Points Possible
ALBEMARLE
CORPORATION
20
30
20
15
15
100
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
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
Appendix: Income Statement
Introduction
Industry Analysis
Company Overview
Reasons to Buy
Investment Risks
Valuation
2010
2011
2012
2013F 2014F 2015F 2016F 2017F
Revenue 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*
Commission Sales*
Total Revenue
Cost Of Goods Sold
Gross Profit
817.4
977.1
979.8
777.7
1,038.8
1,128.3
1,128.3
1,128.3
144.5
1,966.6
1,507.2
293.6
2,608.0
1,910.9
326.6
2,673.0
1,986.8
243.9
2,577.0
1,963.1
243.9
3,360.3
2,543.6
243.9
3,628.8
2,742.7
243.9
3,628.8
2,742.7
243.9
3,628.8
2,742.7
459.4
697.1
686.1
613.8
816.7
886.2
886.2
886.2
26.7%
25.7%
23.8%
24.3%
24.4%
24.4%
24.4%
Gross Profit Margin 23.4%
187.7
196.4
200.5
193.3
201.6
217.7
217.7
217.7
SG&A*
Conclusions
EBITDA
271.7
500.7
485.7
420.6
615.0
668.5
668.5
668.5
19.2%
18.2%
16.3%
18.3%
18.4%
18.4%
18.4%
EBITDA Margin 13.8%
137.2
156.7
171.6
141.0
169.7
179.5
179.5
179.5
Depreciation & Amort.
EBIT
134.5
344.1
314.0
279.5
445.4
489.0
489.0
489.0
EBIT Margin
Net Interest Exp.
6.8%
(28.2)
13.2%
(60.1)
11.7%
(70.8)
10.8%
(59.4)
13.3%
(55.7)
13.5%
(55.9)
13.5%
(59.5)
13.5%
(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
94.0
228.0
(34.6)
169.4
299.8
333.2
330.4
329.4
2.0
(26.7)
(33.5)
0
0
0
0
0
96.0
201.3
(68.1)
169.4
299.8
333.2
330.4
329.4
Earnings from Cont. Ops.
Minority Int. in Earnings
Net Income
* Historical segmented and SG&A expenses are estimated costs based on financial disclosures
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
Appendix
DuPont Analysis
Introduction
35.00%
Industry Analysis
30.00%
Company Overview
25.00%
Reasons to Buy
20.00%
1.5
15.00%
1
Investment Risks
Valuation
Conclusions
2.5
2
10.00%
0.5
5.00%
0.00%
0
2007
2008
2009
2010
2011
ROE (L)
Net Margin (L)
Asset Turnover (R)
Leverage (R)
2012
D/E Ratio
1.50
1.25
1.00
0.75
0.50
2008
2009
2010
2011
2012 2013F 2014F 2015F
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
Changes in ROE
come from Net
Margin. Shifting
towards high
margin segments
will boost ROE.
Appendix
Introduction
Industry Analysis
Company Overview
Reasons to Buy
Investment Risks
WACC
Debt
Equity
Cost of Debt
YTM on Debt
Tax Rate
Valuation
Conclusions
12.73%
87.27%
=
Cost of Equity
Risk Free Rate
Risk Premium
Unlevered Beta
1.66%
6.00%
1.53
=
WACC
Beta
Leavered Beta
Tax Rate
D/E
Unleavered Beta
3.28%
23.06%
2.52%
10.85%
9.79%
Historical Beta
2.5
2
Since 2008 beta has
been consistently
between 1.75 and 2.0
1.5
1
0.5
0
1.84
23.06%
0.26
1.53
METHANEX: Valuation and Strategic Review, 22nd February, 2013
Prepared for the 2013 CFA Research Challenge
Historically
beta was very
low