Discount on Methanex Shares

Methanex Corp. (MEOH - Analyst Report) is the world’s largest producer and marketer of methanol. The company is benefiting from improving fundamentals and lower costs. It is also benefiting from declining average gas costs. The company 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 $30. This is 11.8x our 2008 estimate.

New applications and markets for methanol imply strong future growth. The demand growth of 4% should exceed supply growth of 3%. Dimethyl ether (DME) could push potential demand growth as high as 10%. Supply growth will be absorbed by demand growth in China.

Methanex controls nearly 19% of the methanol market. A $1.3M ton expansion in Egypt that will be on stream in 2010 will only enhance this position. The company has approved the purchase of up to 7.9 million common shares representing about 10% of the total public float.

The company is hard hit by the elimination of natural gas supplies from Argentina as well as an increase in export duty for gas by the country. However, it 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 three years. Methanex is currently valued at 11.3x our 2008 earnings of $2.55, which is at a sharp discount to the industry median of 13.4x.

Read the full analyst report on MEOH