Full Operation At G3 Plant Will Increase Production Capacity By 18 Million Tonnes Per Year

Key Takeaways

• Successful G3 plant operations and new gas contracts in Chile enhance production capacity and stabilize revenues, benefiting future earnings.
  
• OCI acquisition synergies and regional methanol price increases offer operational efficiencies and potential revenue growth, improving net margins and shareholder value.
  
• Production constraints and gas supply issues may reduce revenue, hinder expansion, and affect net margins due to unstable markets and geopolitical risks.

Catalysts

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

• The G3 plant's successful completion of commercial and technical performance tests and its operation at full rates are expected to increase Methanex's production capacity by approximately 1.8 million tonnes per year, potentially driving higher revenues and improved earnings.
  
• Methanex's decision to secure additional gas contracts in Chile, including extensions until 2030 and 2027 with favorable terms, is expected to stabilize and potentially increase production, positively impacting future revenue and earnings.
  
• The anticipated closing of the OCI acquisition in the first half of 2025, and Methanex's plans to realize synergies from this transaction, present an opportunity for operational efficiencies and enhanced free cash flow, which could improve net margins.
  
• Regional methanol price increases, particularly in Europe and North America, alongside tight supply in the Atlantic Basin, indicate a potential for Methanex to achieve higher realized prices, thereby contributing to revenue growth and better net margins.
  
• Methanex’s plan to reduce debt and leverage via disciplined capital allocation, focusing on repaying $550 million to $600 million over 18 months post-OCI deal closing, should enhance the balance sheet and lead to increased shareholder value through potential future capital returns.

Methanex Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Methanex's revenue will grow by 11.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 8.7% in 3 years time.
• Analysts expect earnings to reach $448.2 million (and earnings per share of $5.87) by about January 2028, up from $152.4 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $244 million.
• 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, down from 21.7x today. This future PE is lower than the current PE for the US Chemicals industry at 23.1x.
• Analysts expect the number of shares outstanding to grow by 4.23% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.74%, as per the Simply Wall St company report.

Methanex Future Earnings Per Share Growth

Risks

• Methanex faces production constraints in New Zealand due to gas supply limitations, leading to the indefinite idling of one plant. This could reduce overall production capacity and negatively affect revenue and free cash flow.
  
• Temporary idling of operations in Chile and Egypt due to gas supply issues could continue to impact Methanex's production rates, potentially affecting sales volumes and revenue negatively.
  
• The company’s high leverage ratio and focus on paying down debt related to the OCI transaction might limit its ability to invest in growth opportunities or increase shareholder returns, impacting earnings and financial flexibility.
  
• The divergence in regional methanol pricing, with potentially unstable Asian markets, could lead to reduced pricing power in those regions, impacting overall revenue and margin stability.
  
• Regulatory approvals and potential geopolitical tensions related to international operations, such as those in Iran, present risks to supply stability and cost structures, which may negatively impact net margins and earnings.

Valuation

• The analysts have a consensus price target of CA$78.73 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 $5.1 billion, earnings will come to $448.2 million, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 7.7%.
• Given the current share price of CA$70.52, the analyst's price target of CA$78.73 is 10.4% 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.