On Thursday, UBS analysts revised the rating for Methanex (NASDAQ:MEOH) Corporation from Neutral to Buy, while also increasing the price target to $60 from the previous $51. This adjustment reflects a positive outlook on the company's financial prospects as it enters a period of lower investments and potentially higher cash returns.
Methanex, a leading producer of methanol, is recognized for transitioning into a phase where it is expected to generate improved cash returns, a development that is currently believed to be undervalued by the market. Although methanol pricing may experience near-term volatility, there are indicators that prices could rise by approximately 5% to mid-cycle levels, which would positively impact Methanex's earnings.
The company's new G3 unit is starting up amidst fluctuating global demand. Despite this, UBS anticipates a significant increase in Methanex's EBITDA (earnings before interest, taxes, depreciation, and amortization) and FCF (free cash flow) by 2025. These financial metrics are projected to be approximately 30% and 150% above the five-year average, respectively, translating to an increase of over $200 million per year.
Although 2024 is considered a transition year for Methanex, the market is expected to gain clearer visibility of the company's future EBITDA and FCF generation within the next few quarters. UBS's updated 2025 EBITDA estimate for Methanex is $923 million, which is 4% above the consensus, while the FCF forecast of $458 million corresponds to a free cash flow yield of roughly 15% at current trading levels.
The new price target set by UBS implies an approximate 33% upside and an 11% free cash flow yield for Methanex. This is notably higher compared to the average 8% yield at which most commodity peers trade, indicating a more optimistic assessment of Methanex's value and future financial performance.
InvestingPro Insights
As UBS upgrades Methanex Corporation (TSX:MX) to Buy with a higher price target, the InvestingPro platform offers additional insights that align with this positive sentiment. The company's commitment to shareholder value is evidenced by its aggressive share buyback strategy, as noted in one of the InvestingPro Tips. This aligns with the analyst's view that Methanex is transitioning into a phase of higher cash returns. Moreover, the company's ability to maintain dividend payments for 23 consecutive years, despite market fluctuations, underscores its financial resilience and commitment to shareholders.
InvestingPro Data further supports the strong investment case for Methanex. With a market capitalization of $3.03 billion and a price-to-earnings (P/E) ratio of 17.38, the company presents a value proposition in the chemical sector. The P/E ratio, which is adjusted for the last twelve months as of Q4 2023, is complemented by a solid price to book value of 1.57, indicating that the company's assets are reasonably valued in the market.
Additionally, Methanex's revenue for the last twelve months as of Q4 2023 stands at $3.723 billion, with a gross profit margin of 17.6%. This profitability is also reflected in the company's return on assets, which is a robust 4.35%. These metrics, coupled with a dividend yield of 1.65%, make Methanex an attractive investment for those seeking steady income and potential for capital appreciation.
For investors looking to delve deeper into Methanex's financial health and future prospects, there are more InvestingPro Tips available. Using the coupon code SFY24 can secure an additional 10% off a 2-year InvestingPro+ subscription, or SFY241 for a 10% discount on a 1-year subscription. There are 7 additional tips listed on InvestingPro for Methanex, which could provide further valuable insights into the company's performance and market position.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.