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Tronox (TROX) Downgraded To 'Neutral' By UBS On Near-Term Headwinds, Stock Appreciation

 January 10, 2013 03:12 PM


(By Balaseshan) UBS Securities analyst Gregg Goodnight downgraded rating of Tronox Ltd. (NYSE: TROX) to "neutral" from "buy" citing near-term headwinds and recent stock appreciation, and lowered price target by $2 to $21.

The brokerage reduced its fourth quarter per share estimate to a loss of $0.18 from a profit of $0.14, and its 2013 EPS estimate to $1.00 from $1.32. UBS cut its Q4 EBITDA estimate to $68 million from $113 million and 2013 estimate to $534 million from $564 million.

Goodnight downgraded his rating to reflect lower near-term earnings expectations due to TiO2 pricing and demand headwinds that he expects to persist until at least the second half of 2013. His revised price target of $21 gives an excess return near zero and thus he downgraded his rating.

The analyst said he lowered Q4 per share estimate based primarily on his revised estimate of TiO2 in 4Q. He is now assuming that sequential TiO2 pricing was down $0.20/lb versus a prior forecast of down $0.10.

For 2013, Goodnight reduced earnings estimate to reflect a softer first half of the year due to lower assumed pigment prices. The company's $100 million EBITDA guidance for 4Q-2012 may prove difficult.

The analyst revised Q4 EBITDA estimate on lower TiO2 margins. His revised number is below the company's guidance given in the 3Q conference call of "approximately $100 million".

Goodnight is lowering price target based on his discounted cash flow model that assumes a weighted average cost of capital (WACC) of 11%, a terminal growth rate of 2%, and a normal EBITDA of $510 million.

The target price reduction reflects a tougher near-term earnings environment, the analyst noted. At his price target, the 2013 EV/EBITDA is 6.1 times versus the commodity chemical sector average of 6.5 times.

TROX is trading down 5.21% at $19.85 on Thursday. The stock has been trading between $14.12 and $38 for the past 52 weeks.

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