Rekindling an Old Flame

 | Jul 18, 2013 | 2:00 PM EDT
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Selling a security should not automatically imply a permanent separation from that business. In fact, the relationship should be the exact opposite: You should keep aware of what's going on, since you have presumably developed valuable knowledge from your first go-around in owning it. 

With that, let's take another look at Rentech (RTK), a $500 million supplier of nitrogen fertilizer and chemical pellets. I first wrote about this company back in January 2012. At the time, shares were trading at $1.58, and I highlighted Rentech's nearly $450 million worth of marketable assets and its roughly $150 million in net cash. "In an optimistic scenario," I note in the piece, "shares could be worth closer to $3, nearly 100% above today's levels." 

A year later, shares were trading for $3 -- and they have since fallen back to $2.29. The undervalued case is now just as compelling as it was back in 2012, if not more so. 

First, Rentech's principal asset is its controlling interest in Rentech Nitrogen Partners (RNF) -- a stake of approximately 23 million common units of the firm, or $713 million, based on the current $31 share price. Rentech has 226 million shares outstanding, so the Rentech Nitrogen stake is worth $3.15 per Rentech share -- against a current stock price of $2.29. 

Second, as a limited partnership, Rentech Nitrogen pays Rentech an annual dividend of $2 a share, or $46 million per year. Third, Rentech -- which had once focused on clean energy -- has since switched focus by acquiring wood-chip processor Fulghum Fibres. With this buyout, Rentech entered the wood-pellet industry and executed contracts to supply millions of tons to utilities. 

At this point, Rentech has a market cap of $520 million and an enterprise value of $593 million. The Rentech Nitrogen stake is worth $713 million. That implies zero value for Fulghum Fibres, which currently generates $20 million in earnings before interest, taxes, depreciation and amortization. If you use a 5x multiple on that EBITDA, that's another $100 million. Add in $46 million of cash flow from Rentech Nitrogen, and Rentech's sum-of-the-parts value is closer to $800 million. I'm not even giving consideration to the $100 million or so in net operating losses at the company. 

As the old saying goes, "History doesn't repeat itself, but it does rhyme."



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