Rentech, Inc. (OTCMKTS:RTKH) Looks To Be A Good Risk/Reward Play

Today, we are welcoming a new company that commenced trading recently on the OTC Market: Rentech, Inc. (OTCMKTS:RTKH). It runs a wood fibre processing and wood pellet production businesses.In a recent press release, the company noted that from the opening of the market on October 16, 2017, the company was going to say goodbye to the NASDAQ.Before we provide information on RTKH, please have a look at the market reaction. The market usually pushes down the share price once a delisting happens as most institutions cannot hold shares of a company trading OTC.The share price went from trading close to $0.50 to hit the share price level of $0.15 in less than 10 days. 2 month chart for RTKHBusinessRTKH is a pure play wood fibre processing company with three core businesses:

• Contract wood handling and chipping services
• Manufacture and sale of wood pellets for the U.S. heating market
• Aggregation and sale of wood pellets for the utility and industrial power generation market

It is not a small company. It runs its business in different facilities in the US, South America, and Canada. Currently, it employs 625 people.

Source: Company WebsiteThe company commenced the process of restructuring, the sale of divisions, and exploration of strategic alternatives. We found the following plan in the company materials.In February 2017, the company decided to idle the Wawa Facility and reduce production at the Atikokan Facility. The following reasons were given:

"Continued difficulty with ramping up production and additional capital required to increase production to levels near the Wawa Facility’s design capacity, projected operating costs that exceed our original expectations and uncertainty around future profitability." Source

Additionally, it was noted that the company commenced to explore a variety of strategic alternatives for the Wawa Facility and the Company as a whole. A sale, merger with other business or recapitalization were the words used in the company materials. Wells Fargo Securities, LLC, was retained to assist in the strategic alternatives review process.Recent DevelopmentsOn August 11, 2017, the company released its latest quarterly earnings. Revenues for this period were $24.7 million, but the company reported a $1.60 per share loss. We are more interested in the balance sheet situation.

• Property Plant and Equipment: $106.8 million
• Total Assets: $232 million
• Total Liabilities: $155 million

Hence, the net assets are equal to approximately $77 million. Given that the total amount of shares is equal to approximately 23 million, the book value per share is $3.3 per share. The share price is close to $0.15. Thus, it seems that the stock is undervalued.But, we need to be careful, as the company does not have liquid assets to pay the liabilities, which could represent a problem in the near future. On October 10, 2017, the company noted that its shares were going to be traded on the OTC Markets.Statistics and HoldersWe could find that the following market participants had owned large stakes in the company:HolderSharesDate Reported% OutValueRaging Capital Management, LLC4,366,781Jun 29, 201718.81%1,877,715Renaissance Technologies, LLC580,380Jun 29, 20172.50%249,563Vanguard Group, Inc. (The)513,353Jun 29, 20172.21%220,741Blackrock Inc.333,935Jun 29, 20171.44%143,592Yakira Capital Management, Inc.131,249Jun 29, 20170.57%56,437Geode Capital Management, LLC124,952Jun 29, 20170.54%53,729

Source

Additionally, it seems that many market participants are also shorting the stock. Approximately 6.5% of the float is short. Thus, if a short squeeze could occur, it will send the share price higher.ConclusionCurrently trading with a market cap of $3 million, RTKH is a stock in play. The company said that it is working with a financial advisor and a merger or a sale is being pursued. Additionally, big institutions reported holding big stakes in the company before the delisting. While ETFs most likely liquidated, hedge funds are looking for a return on their investment.Conversely, the balance sheet shows that the company is not liquid enough to cover its liabilities. Thus, the company reacted by restructuring and selling some facilities, which is a positive move.Honestly, anything can happen on this name. However, at current levels, RTKH looks to be a good risk/reward play.

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Image courtesy of USDA via Flickr

Disclosure: We have no position in RTKH and have not been compensated for this article.