Rentech, Inc. (RTK): RTK remains a long-term story; updating RTK estimates post 3Q - Goldman Sachs - August 13, 2007
What's changed
Rentech (RTK) reported 3Q07 earnings on August 9. Key takeaways were:
(1) EPS results were better than expected – RTK posted EPS of $(0.04) vs. $(0.06) and $(0.09) for GS and consensus, respectively, due to better-than-expected volumes and pricing,
(2) the company discussed a new plan to utilize their technology with biomass in order to reduce the carbon impact of using coal-to-liquids (CTL) technology. We are updating our FY07-09 estimates to $(0.28), $(0.12), $(0.19) from $(0.34), $(0.16), $(0.22) due mainly to increased tonnage forecasts. Given the early stage nature of RTK’s business, we expect choppy near-term financial performance.
Implications
We maintain our Neutral rating as our fundamental view of Rentech is unchanged:
(1) We see the technology as less of a risk as variations of Fischer-Tropsch have worked before.
(2) But the challenge of CTL is that exogenous factors such as the price of oil and government support are critical to success.
(3) Given these uncertainties and the long-term nature of the strategy/financial plan, the stock will likely be fairly volatile.
What to watch for:
Key milestones to the long-term plan are:
(1) the planned development unit being mechanically operational before the end of CY07,
(2) finalizing the EPC contract with CB&I which will likely be helpful in attracting financing for the East Dubuque conversion, and
(3) completed financing of East Dubuque in perhaps CY1Q08.
Valuation
We are leaving our target price unchanged at $2.30. Our target price is based primarily on a 10-year DCF analysis. RTK’s stock price has been, and will likely continue to be, very volatile, given (a) the long-term nature of the CTL story and (b) relatively limited financial performance.
Key risks
Inability to obtain funding could prevent RTK from achieving its strategy |
