Methanex Corp. (MEOH)is benefiting from improving fundamentals and lower costs. The company is also benefiting from declining average gas costs as well. It has strong cash flow that drives dividend increases and stock buybacks. However, problems with the company's Chilean facilities force us to rate the stock a Hold with a target of $28. This is 11.8x our 2008 estimate.
New applications for methanol imply strong future growth. New markets for methanol such as DME and bio-diesel offer the potential for growth. Demand growth of 4% should exceed supply growth of 3%. DME could push potential demand growth as high as 10%. Supply growth will be absorbed by demand growth in China. Operating rates are 84% globally now. Methanex, being the largest and most powerful producer, controls nearly 19% of the market. A $1.3M ton expansion in Egypt that will be on stream in 2010 will only enhance this position.
The company has strong cash flow, which drives dividend increases and stock buybacks. The company continues to increase its share repurchase program and announced that the Board has approved the purchase of up to 7.9 million common shares, representing about 10% of the total public float.
However, the company is hard hit by the elimination of natural gas supplies from seven Argentine suppliers as well as an increase in export duty for gas by the country to 100%. However, the company may have found a way out by seeking alternative sources of natural gas or by directly participating in exploration projects. It is now anticipating increasing quantities of Chilean gas in the next 3 years. Consequently, the company expects all four of its production facilities in Chile to be operational within 3-4 years.
Read the full analyst report on MEOH
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