(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.
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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.
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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.