On Thursday, UBS analyst Joshua Spector upgraded shares of TRONOX (NYSE: NYSE:TROX), a chemical company, from Neutral to Buy and raised the price target to $19 from $17. The upgrade reflects a positive outlook on the company's earnings potential, with UBS's 2025/26 EBITDA estimates standing 9% and 8% above the consensus, respectively.
The analyst pointed to the company's operational rates, which have recently surpassed 80%, as a significant factor in their improved financial forecast. This increase in operational efficiency is expected to provide a $55 million boost to TRONOX's EBITDA by 2025.
The company, a key player in the production of titanium dioxide used in paints and coatings, has seen its volumes remain around 10% below the levels of 2021, compared to a 5% decrease in paint volumes.
The anticipated interest rate cuts and potential economic stimulus in China could catalyze increased demand and restocking in the industry. Additionally, duties imposed in Europe are likely to contribute to an upward trend in pricing.
These factors combined are projected to result in a year-over-year EBITDA increase of approximately 32%, pushing TRONOX's EBITDA above $800 million.
The financial analysis also forecasts a decrease in capital expenditures for TRONOX, leading to a free cash flow of over $300 million. According to UBS, the current market valuation does not fully reflect this potential for increased cash flow, with the stock trading at an approximate 13% cash yield. This suggests that the financial performance improvements expected by UBS are not yet priced into the current stock value.
In other recent news, Tronox Holdings reported a 3% year-over-year increase in revenue for Q2 2024, reaching $820 million. The company also saw an 8% sequential and 16% year-over-year increase in titanium dioxide (TiO2) volumes, along with stable Zircon demand.
Deutsche Bank adjusted its outlook on Tronox, reducing the stock’s price target to $20.00 from the previous $22.00, while maintaining a Buy rating. BMO Capital Markets also maintained its Outperform rating on Tronox, with a consistent price target of $22.00. Both firms highlighted the company's potential to benefit from improving market conditions, regulatory measures, and financial performance.
Tronox anticipates a seasonal decline in TiO2 volumes for Q3 but expects stable Zircon volumes and a slight increase in TiO2 prices. The company also projects Q3 adjusted EBITDA to be between $145 million and $165 million.
InvestingPro Insights
Adding to UBS's positive outlook on TRONOX (NYSE: TROX), recent data from InvestingPro provides further context to the company's financial position and market performance. Despite the analyst's optimistic projections, it's worth noting that TRONOX currently operates with a significant debt burden, as highlighted by one of the InvestingPro Tips. This factor may influence the company's financial flexibility as it pursues growth opportunities.
On a positive note, InvestingPro data shows that TRONOX has maintained dividend payments for 13 consecutive years, demonstrating a commitment to shareholder returns. This aligns with the company's potential for increased free cash flow, as projected by UBS. Additionally, the stock has shown a strong return over the last month, with a 16.77% price total return, possibly reflecting growing investor confidence in the company's prospects.
For investors seeking a deeper understanding of TRONOX's financial health and market position, InvestingPro offers 11 additional tips beyond those mentioned here. These insights could prove valuable in assessing the full impact of the operational improvements and market conditions discussed in the UBS analysis.
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