Tuesday, March 20, 2012

The Special Situation Case for Rentech

Not one to usually share ideas (solely so that I can take ownership for Gad Capital's, Gad Partners Funds, and the Sham Gad Family successes and failures), here's is an idea that will appear intriguing to some while dismissed by others. It's simple in concept.

Rentech (RTK), trades at $2 a share or a market cap of $450 million. Rentech's marketable assets are worth nearly $600 million, 33% above the company's current market cap. Add in another $ million or so in net cash on the balance sheet and you have a business that aside from operations should be worth more than $800 million, or a 70% upside, if the company announced a liquidation, although there are no immediate plans to do that.

Rentech provides clean energy solutions through the production of synthetic fuels, a business is not yet commercially viable for Rentech. Management appears to "get it" and plans to reduce capital expenditures by 85% in fiscal 2012 along with a 50% reduction in R&D. Without this decision, I would have argued that the business was eroding value.

The not so hidden gem is the nitrogen fertilizer business, Rentech Nitrogen Partners (RNF) spun out last November. Rentech received around $140 million in cash from the IPO and maintained a 61% equity interest, or 23.25 units in Rentech Nitrogen.

Today, Rentech Nitrogen trades for a market valuation of $990 million, which places Rentech's 61% stake at a value of around $600 million. As an MLP, Rentech Nitrogen plans to distribute out all its available cash flows which according to company guidance, will be $2.34 a unit in 2012. Given the slowdown in the fertilizer industry, it's possible that this initial distribution will come in lower than expected although I should note that nitrogen fertilizer prices continue to hold up along with the fact that RNF has a majority of its production hedged at prices that would support the implied distribution.

In short, Rentech owns 61% of a very attractive cash-generating business and will collect a nice dividend with each payout (over $50 million at the implied distribution). Rentech's balance sheet consists of $240 million in cash (around $40 million at Nitrogen) and $50 million in debt, or a net cash position of about $190 million. Add in the current market value of Rentech Nitrogen stake, $600 million, and you get a value of $790 million.

I assume that the energy business is value destroying; however, one should note that the energy segment sits on $90 million in federal net operating loss carry-forwards which can be used to offset taxable income, including any distributions from income from Rentech Nitrogen. Rentech is a cash- and asset-rich investment play that should be conservatively worth between $600 million and $750 million, or $2.70 to $3.50 a share.

There you have it, enough information to wet your whistle. There's more to the story, but better to teach a man to fish than give him one.

Disclosure: Long RTK

No comments: