OCI Acquisition And Methanol Demand Growth Will Expand Capacity And Market Reach

Key Takeaways

• Methanex's strategic production and efficiency improvements position it to benefit from growing methanol demand, potentially boosting revenues and margins.
  
• The OCI acquisition expands capacity and market reach, improving earnings and operational efficiency while deleveraging strengthens financial stability.
  
• Methanex faces risks from reliance on contracted gas supplies, potential integration challenges with OCI, and market fluctuations affecting revenues and net margins.

Catalysts

Produces and supplies methanol in China, Europe, the United States, South America, South Korea, Canada, and Asia.

• Methanex expects methanol demand to grow in 2025, driven by traditional chemical and energy applications, which could boost revenues.
  
• Increased production at key facilities, such as Geismar and Chile, along with improved operational efficiency, positions the company to capitalize on favorable pricing, potentially enhancing net margins and earnings.
  
• The strategic OCI acquisition is expected to expand Methanex's capacity and market reach while generating synergies, contributing to higher earnings and efficiency in financial operations.
  
• Methanex plans to reduce leverage significantly by repaying $550 million to $600 million in debt over the next 18 months, which should improve net margins and increase financial stability.
  
• Methanex maintains a strong free cash flow capability, allowing for deleveraging and potential shareholder distributions, likely supporting earnings per share growth.

Methanex Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Methanex's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 9.5% in 3 years time.
• Analysts expect earnings to reach $421.9 million (and earnings per share of $3.52) by about April 2028, up from $164.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.6x on those 2028 earnings, up from 11.0x today. This future PE is greater than the current PE for the US Chemicals industry at 9.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.58%, as per the Simply Wall St company report.

Methanex Future Earnings Per Share Growth

Risks

• The reliance on contracted gas for Methanex's production, particularly in Chile, Egypt, and New Zealand, poses a risk of production curtailment, which could negatively impact Methanex’s revenue.
  
• The integration and execution of the OCI acquisition present a potential risk; failure to efficiently integrate and achieve the synergies identified could lead to increased costs, impacting net margins.
  
• Uncertainties in Iran’s methanol production due to the energy crisis might affect the global supply-demand balance, thereby potentially impacting Methanex's earnings if new supplies flood the market when the crisis resolves.
  
• Regulatory risks related to the OCI acquisition and any potential delays in approvals could impact Methanex's financial outlook and anticipated synergies, affecting future earnings.
  
• The potential changes in North American gas prices and Methanex's hedging strategy could influence the cost structure unfavorably, impacting the net margins and operating income.

Valuation

• The analysts have a consensus price target of CA$76.818 for Methanex based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.4 billion, earnings will come to $421.9 million, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 9.6%.
• Given the current share price of CA$37.26, the analyst price target of CA$76.82 is 51.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.