Rentech, Inc. (RTK): Fertilizer business is strong, but FT business still uncertain; Neutral - Goldman Sachs - May 13, 2008
What's changed
Key takeaways from 2Q are:
(1) EPS of -$0.14 came in below our estimate of -$0.09 on account of higher-than-expected operating expenses.
(2) Guidance for the nitrogen fertilizer business was reiterated at greater than $40 mn in EBITDA for FY2008.
(3) Management asserted that purchase of land for its Natchez plant would take place on June 1 and that it expects its PDU facility in Colorado to be operational and begin synthetic fuel production at the end of June.
Implications
Rentech’s fertilizer business is producing strong results but the FT (Fischer-Tropsch) business is still subject to high uncertainty. The FT business needs to prove its technology, obtain financing, and demonstrate the economics—all of which will take time, in our view. However, to the extent that oil prices stay high and that Rentech is able to demonstrate its technology’s carbon footprint is lower than some may expect, there is potential for the FT business. We maintain our Neutral rating and continue to expect volatility in the shares. We are updating our FY2008-FY2010 EPS estimates to -$0.28, -$0.29, -$0.29 from -$0.22, -$0.24, -$0.25 on account of slightly higher expenses.
Valuation
We are updating our six-month target price to $1.30 from $1.60. 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 $44 mn FY2008 EBITDA forecast for the nitrogen business at a 4.5X multiple plus an estimated value of $75 mn for the IP of the non-nitrogen assets drives an enterprise value of $273 mn, or about $1.30 per share.
Key risks
(1) Inability to obtain funding could thwart RTK’s attempts to build a FT business,
(2) lower-than-expected fertilizer pricing,
(3) delays or difficulties in the commencement of operations from the PDU facility. |
