Tronox Holdings Plc

Company Overview: Tronox Holdings Plc (NYSE: TROX) is involved in the mining, exploration and marketing of titanium products. The company also manufactures electrolytic manganese dioxide, primarily focused on specialty boron products and battery materials. TROX is also involved in manufacturing pigments for paints and other plastics, coatings, and paper for applications in inks, rubber, food, fibres, pharmaceuticals, and cosmetics.

TROX Details

Material Business Updates

• Influential Changes in Debt Structure: On 15 March 2021, TROX announced the completion of a US$1,075 million offering of 4.625% senior notes due 2029 to redeem 6.500% senior notes due 2026 (US$615 million outstanding) and 5.750% senior notes due 2025 (US$450 million outstanding). On 11 March 2021, TROX confirmed the existing first lean loan refinancing with a 7-year first lean term loan credit facility with a 5-year revolving facility. TROX estimates the remodeling of capital structure may translate into ~US$30 million benefits in annualized cash interest.
• Updates on Secondary Public Offering: On 24 February 2021, TROX announced the upsize of 19,108,970 ordinary shares of Exxoro Resources Limited (related party), which shall be public at US$18.25 per share.
• Acquisition Update: On 4 January 2021, British Competition and Markets Authority indicated their intention to execute a phase 2 investigation, as part of standard procedures, into TROX’ proposed acquisition of TiZir Titanium and Iron business (TTI) from Eramet SA. In line with TROX prospects, the $300 million strategic acquisition of TTI falls into TROX’s vertical integration strategy.

Historical Financial Trend:

TROX illustrated sustainable historical growth while keeping the value proposition intact. The Operating revenues have been growing since FY16 with consistent growth in gross income. Operating revenues grew at a 20.5% CAGR (FY16 – FY20), above the industry estimates.

Figure 1: Historical Financial Overview

Source: Company Reports, Analysis by Kalkine Group

First Quarter FY21 Performance:

TROX recorded a 14% sequential increase in revenue, primarily resulting from double-digit growth in zircon and TiO₂ volumes and a 3% surge in TiO₂ average sale price. Adjusted EBITDA remains ahead of the guidance with a 25% margin, predominantly driven by improved revenues and partially offset by unfavourable FX impact.

On the balance sheet front, liquidity position stays resilient with modifications in debt structure to mitigate interest burden. As a result, the net debt to TTM Adjusted EBITDA ratio stood at 3.8x, and free cash flow levels for the quarter stood at US$77 million.

Figure 2: Quarterly Performance (1QFY21)

Source: Company Reports, Analysis by Kalkine Group

Full-Year FY20 Performance:

Revenue increased marginally by 4% due to improved TiO₂ sales volumes in South and Central America, followed by Europe, North America and EMEA. As a result of pension curtailment gain and release of tax valuation allowances, net income surged exponentially, partially offsetted by transaction costs attached to TTI acquisitions, integration and restructuring costs. Despite significant improvements in bottom-line, cash flows from operating activities declined by ~13.8%, predominantly affected by ~US$899 million adjustments in deferred income taxes.

Figure 3: Annual Performance (FY20)

Source: Company Reports, Analysis by Kalkine Group

Top 10 Shareholders:

The top 10 shareholders together form ~56.70% of the total shareholding. The Cristal Inorganic Chemicals Netherlands Cooperatief W.A. and Fidelity Management & Research Company LLC holds a maximum stake in the company at ~24.52% and ~7.88%, respectively.

Figure 4: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Metrics:

Consistent growth in sales volume across zircon and TiO2 has translated into long-term sustainable growth levels. In addition, gross margins improved sequentially with improved operational efficiency. As a result, TROX’ profitability and returns status remain stable and growing despite recent market disruptions.

Figure 5: Key Financial Metrics

Source: Analysis by Kalkine Group

Outlook:

• Strong Industry Prospects: The semiconductor and battery industry remains growing and robust, given the soaring demand of Electric Vehicles (EV) and energy sector's transition towards renewable sources.
• Q2FY21 Guidance: For Q2FY21, TiO₂ sales volume is expected to grow between the low- and mid-single-digit range, surpassing Q1FY21 sales records. For the same period, Zircon sales volumes are expected to remain above elevated in 2019 and 2020. However, the Adjusted EBITDA is expected to fall in the range of US$225 – 240 million in Q2FY21.

Key Risks:

Amidst global operations, TROX is susceptible to heavy losses from unfavourable FX movements. Moreover, the COVID-19 impact may directly affect product demand and commodity prices which may increase uncertainties.

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

Stock Recommendation: TROX has delivered 3-month and 6-month returns of ~+4.945% and ~+40.446%, respectively. The stock is trading above the average of the 52-week high price of US$24.81 and the 52-week low price of US$6.66, indicating a trending opportunity. We have valued the stock using the EV/EBITDA multiple-based illustrative relative valuation method and have arrived at a target price of low double digit-upside. We believe that the stock might trade at a premium compared to its peer average EV/EBITDA (NTM trading multiple), considering stable operating revenue, refinancing facilities at disposal, and proliferated product demand. For this purpose, we have taken peers such as Chemours Co (NYSE: CC), Kronos Worldwide Inc (NYSE: KRO), Celanese Corp (NYSE: CE), to name a few. Considering the optimized liquidity position, favourable product sales and price, potential strategic acquisition, restructured capital structure, and valuation, we give a “Buy” recommendation on the stock at the current market price of US$20.80, up by ~2.82% on 12 July 2021.

TROX Daily Technical Chart

Source: REFINITIV, Note: The purple color line reflects RSI (14-period) trend.

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 Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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