Rentech, Inc. (RTK): Fertilizer business strong but CTL value uncertain; maintain Neutral - Goldman Sachs December 28, 2007
What's changed
There have been three recent developments:
(1) 4Q earnings were reported,
(2) An offer was made to buy company for $2.28/share by Sherwood Investments,
(3) Management decided to switch locations of its first coal-to-liquids (CTL) facility to Natchez, MI from East Dubuque, IL.
Implications
While the fertilizer business continues to do well, the CTL business is more difficult to assess given the uncertainty involved. In our view, the key risk to the CTL business is the lack of political and public support for anything that will increase carbon emissions. And if the government does not support the fledgling industry, there is a risk that it will not materialize. That said, we do believe that management is focusing on the right things by attempting to reduce its carbon footprint by either using biomass as a feedstock and/or locating CTL facilities in places where the carbon can be used for enhanced oil recovery. We maintain our Neutral rating as we believe the current valuation adequately assesses the value in the fertilizer business and the potential of the CTL assets at this point in time. We continue to believe that the shares will be volatile.
Valuation
We are updating our 6-month target price to $2.00 (from $2.30). Our target price is based on a sum-of-the-parts analysis analyzing the nitrogen business and the potential value of the non-nitrogen assets. Our $40 mn FY08 EBITDA for the nitrogen business at a 5.0 multiple plus an estimated value of $150 mn for the IP of the non-nitrogen assets, which drives an enterprise value of $350 mn or about $2.00/share. We are updating our FY08-10 EPS estimates to -$0.24, -$0.27, -$0.28 from -$0.12, -$0.19, $0.22 and note that we are no longer modeling the IL plant conversion.
Key risks
(1) Inability to obtain funding could thwart its attempts to build a CTL business.
(2) Lower than expected fertilizer pricing.
Goldman Sachs Global Investment Research |
