Tronox Holdings plc

TROX Details

Tronox Holdings plc (NYSE: TROX) is a vertically integrated manufacturer of TiO pigment. The company operates titanium-bearing mineral sand mines and beneficiation and smelting operations in Australia, South Africa, and Brazil.

Result Performance – For the Second Quarter Ended 30 June 2021

• Rise in Revenue at $927 million, up 60% YoY, led mainly by improved sales volumes and average selling prices across all products
• Income from operations was reported at $150 million, and net income came at $77 million
• GAAP EPS was reported at $0.46 and Adjusted diluted EPS reported at $0.61, signalling the difference of Q2FY21 debt extinguishment costs
• Adjusted EBITDA reported at $237 million, up 67% YoY, and Adjusted EBITDA margin reported at 26%, reflecting a sequential improvement led mainly by the rise of TiO₂ and zircon selling prices
• Free cash flow for the quarter was reported at $150 million

Key Data (Source: Company Reports)

Key Updates

• As per a separate news reported in Reuters, on 13^th September 2021, the Private equity firm Apollo Global Management Inc. plans to buy TROX.N for $4.3 billion in an all-cash deal. The PE firm has offered $27 per share to purchase Stamford, Connecticut-based Tronox
• On 9^th August 2021, TROX’ Board of Directors restructured its committee arrangement to improve the Board's oversight over the environment, sustainability, and governance (ESG). Under the new structure, the Governance Committee will become the Governance and Sustainability Committee. A restated committee charter will require the management to regularly report on its progress on key ESG initiatives.

Risks

Global demand and economic downturns that adversely impact the demand for end-use products could impact the operational results and the favourable prices for the products. The price of products, primarily TiO₂, zircon, and pig iron are volatile, which could impact the financial position and results of operations, if unfavourable.

Outlook:

The company declared a quarterly dividend of $0.10 per share indicating a rise in the quarterly dividend rate of $0.02 per share, equating to a $0.40 per share annual dividend, indicating the confidence in the business model and cash flow generation capabilities.

Management expects TiO₂ and zircon prices to continue to rise. However, in Q3FY21, TiO₂ sales volume is forecasted to decrease 5-10% sequentially from Q2FY21 levels, due to supplier and logistics constraints. Meanwhile, Zircon sales volumes is anticipated to remain high in Q3FY21, driven by sales from inventory, though lower than second quarter 2021 levels.

In Q3FY21, adjusted EBITDA is forecasted to rise to $245-$260 million driven by expected price improvements and the roll-off of Q2FY21 operational disruptions.

Valuation Methodology: EV/EBITDA Based Relative Valuation (Illustrative)

Stock Recommendation:

The stock posted 6-month and 1-year returns of ~+31.23% and ~+152.19%, respectively. It is currently trading above the average of 52-week high price of $25.48 and 52-week low price of $7.61.

The stock has been valued using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price which reflects a decline of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ mean, considering a longer cash conversion cycle at 151.8 days in Q2FY21 versus an industry median of 76.4 days and a higher debt to equity at 1.48x in Q2FY21 versus an industry median of 0.70x.

Considering the aforesaid facts and current trading levels, we suggest investors to liquidate the stock. Hence, we give a “Sell” rating on the stock at the current price of $24.59 per share, (9:52 AM New York, NY, USA Time), as of 17^th September 2021.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Overview:

Chart:

Source: REFINITIV

Note: Purple Color Line Reflects RSI (14-Period)

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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