Back on February 5th, 2013 I published an article titled "How Much Is Rentech Worth As A Standalone Company?" It made the case that the alternative energy assets of Rentech (RTK) were worth "Nothing, Nada, Zip," stating "RTK's alternative energy assets don't appear to be worth much, in fact they look to be a drain on the company."
Well, it looks like RTK's management seems to agree with me, at least about some of their assets. On February 28th, 2013, RTK announced that they would be mothballing their Production Demonstration Unit (PDU) and plan to sell their land in Natchez Mississippi. I visited the RTK website to review what other assets and projects might be on the chopping block, but they no longer have them featured, at least that I could find. They certainly aren't prominently featured in an easy to find manner like they used to be. Some of their older presentations, however, still have some listed like the "Olympiad project." The upcoming conference call on March 19th, 2013 will hopefully cover the prospects of the remaining projects.
While it is doubtful that my article had any influence on the management of RTK in their decision, it is helpful and supportive to have confirmation by the management of the analysis and conclusion reached in that article. The question now turns to how much closing the PDU is worth to shareholders of RTK, and has it already been fully discounted in the stock price.
At first glance, the news didn't seem to have much of an impact, with RTK closing at $2.72 on March 1st, 2013, $0.01 lower than the day before. Currently the stock is trading at $2.63 at the time of this writing, $0.10 lower than on February 28th, 2013. Unfortunately, at the time of the news, there were other factors moving the price of RTK, namely a recent downgrade and following debate over their Rentech Nitrogen (RNF) holdings. In a perfect world we would be able to "hold all else equal" and measure the impact of the news on the stock price, but we don't live in a "ceteris paribus" world.
This article will attempt to put a value on closing the PDU to RTK shareholders ceteris paribus.
From the press release we are told that closing the PDU will immediately cost $16 million to Q4 2012 earnings. We are also told that:
"Rentech expects expenses related to its research activities and facilities and its technologies to decline from approximately $21 million in 2012 to approximately $10 million in 2013"
They also mentioned that this value was consistent with previous guidance, which may help explain the muted response of the stock.
"which is consistent with the Company's previous guidance"
If that is the case, and this event was already fully discounted into the price of the stock, investors should not expect further upside from this news.
Analysis of its value may still be of value however either to justify RTK's current value, provide a model for future events or offer a potential upside target for the price action of RTK.
Assuming that the R&D expense would have continued unaltered into the future, we can treat the expense and resulting savings as a perpetuity, and compare the value of the perpetuity to the cost of shutting down the plant. Because the cost savings is a certainty as long as it remains closed, I will use 6% to discount the cash flows, which is approximately the long-term average yield of the 10 year Treasury.
Present Value of closing the plant: -$16 million.
Present Value of an $11 million perpetuity discounted at 6%: $183 million
Net Present Value: $183 million - $16 million = $167 million.
RTK shares outstanding: 221 million shares
Potential impact on the price per share: $167 million/221 million shares = $0.75/share.
In conclusion, RTK traded as low as $1.68 in June 2012, has paid a $0.19/share dividend and has closed as high as $3.15 in February 2013. Combine the strong price movement over the last year with the fact that the savings were consistent with previous guidance it appears that the closure of the PDU may have already been fully discounted in the stock price, and doesn't appear likely to provide more upside. That however isn't the end of the story, RTK still has other assets to address. Looking forward investors in RTK can expect to hear more about RTK's other assets like the Natchez and Olympia projects.
Right now limited information is known about them, but as more information comes to light, such as the selling price of the Natchez facility, or the monetization value of the Olympiad project, there may be more upside or downside to RTK. As the closure of the PDU demonstrates, the impact on the stock price will be determined by how well the markets have already priced in those events. If they are already fully discounted, the stock price shouldn't move much, but if the values of these projects differ from what is already discounted, there may be more upside, or downside if the ultimate values are disappointing, only time will tell. The upcoming conference call will likely shed some light on these issues, and the impact on the stock price will be well worth noting.
Disclosure: I am long RTK.