Nothing Fake About Rentech's Value

 | Jan 10, 2012 | 1:00 PM EST
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Investors would be wise to take a very close at Rentech (RTK), which is a special situation investment play. Trading at $1.58 a share or a market cap of $352 million, Rentech's marketable assets are worth nearly $450 million, nearly 30% above the company's current market cap. Add in another $150 million or so in net cash on the balance sheet and you have a business that aside from operations should be worth more than $500 million, or a 50% upside, if the company announced a liquidation tomorrow. In an optimistic scenario, shares could be worth closer to $3, nearly 100% above today's levels.

Rentech provides clean energy solutions through the production of synthetic fuels. Unsurprisingly, this business is not yet commercially viable for Rentech. For the last three years ending Sept. 30, Rentech has lost money at a growing clip. Management now seems to understand the business and plans to reduce capital expenditures by 85% in fiscal 2012, which should bring cap-ex to less than $10 million from $39 million in fiscal 2011. R&D expenses are expected to decline some 50% in fiscal 2012. Before management made the decision to significantly cut back on expenditures, I would have argue that the business was eroding value.

Rentech's value come's from its nitrogen fertilizer business, Rentech Nitrogen Partners (RNF). In November 2011, Rentech completed the IPO of Rentech Nitrogen, a fertilizer master limited partnership (MLP). The IPO sold 15 million common units for $20 per unit, for gross proceeds of $300 million. Rentech received around $140 million in cash from the IPO. In addition, Rentech maintained a 61% equity interest, or 23.25 units in Rentech Nitrogen.

Today, Rentech Nitrogen trades for a market valuation of $750 million, which places Rentech's 61% stake at a value of more than $450 million. As an MLP, Rentech Nitrogen plans to distribute out all its available cash flows. According to RNF's forecasts, it expects to pay out distributions of $2.34 a unit in 2012. Given the slowdown in the fertilizer industry, it's likely that this initial distribution will come in lower than expected.

In any event, Rentech owns 61% of a very attractive cash-generating business. If RNF pays out $1.75 per share in 2012, RTK will collect some $40 million in 2012. Investors should consider the value created by CVR Energy (CVI) when it spun off its nitrogen fertilizer plant, CVR Partners (UAN) a few years ago. Rentech is the general partner of Rentech Nitrogen, and management understands the enormous value of the nitrogen assets since they have indicated that will maintain majority ownership in Rentech Nitrogen.

Post-IPO, Rentech's balance sheet consists of $200 million in cash and $58 million in debt, or a net cash position of $160 million. Add in the current market value of Rentech Nitrogen stake, $450 million, and you get a value of $600 million. I subscribe no value to the synthetic fuel business; in fact to be conservative, I assume it erodes value.

But to be fair, 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. With distributions coming in 2012, those NOLs carry value. And with management significantly curtailing operating and capital expenditures, Rentech is a cash- and asset-rich investment play that should be conservatively worth between $550 million and $600 million, or $2.50 to $3 a share. That's good for 60% to 100% upside from here.

Market fluctuations in the value of Rentech Nitrogen will affect the stock price of Rentech. Yet, given the strong outlook for the nitrogen businesses, such as CF Industries (CF) and Terra Nitrogen (TNH), Rentech Nitrogen should perform well in the coming years. Rentech Nitrogen's plants are located in the heart of the Corn Belt, giving the company cost advantages in transportation to corn farmers.

All of these factors combine to make Rentech an exciting business to own now, in light of the significant disconnect between its market value and liquid asset value.

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