NEUTRAL (AINV, $4.88)
Asset Quality a Problem, Growth Prospects Muted, Repurchases Best Return Available - Initiating With A NEUTRAL Rating And $6 Price Target.
January 22, 2016
Christopher R. Testa
Investment Conclusion. We are initiating coverage of Apollo Investment Corporation (AINV) with a NEUTRAL rating and $6 price target. AINV is the BDC of Apollo Global Management (NYSE: APO-$13.15-NR), enabling the company to see a significant amount of sponsored deal flow. AINV has been under pressure from its substantial exposure to oil and gas, which as of 9/30/15 was 15% of the portfolio at fair value. Additionally, non-accruals have reached 4.7% of the portfolio at cost, from 1.3% at the beginning of calendar year 2015. To Apollo’s credit, the company has implemented base and incentive fee waivers to ensure NII payout ratios remain under 100%. Additionally, the company has completed its $50 million repurchase program and has just authorized an additional $50 million share repurchase program. At a 38% NAV/share discount and yield of 16.4%, the company can achieve returns on capital of 54% by repurchasing its own stock; exceeding returns in nearly every asset class the company could potentially invest in. We expect the portfolio will shrink slightly as the company uses repayments and sales to fund repurchases. NIM (net investment margin) has remained stable, bucking the trend seen in most of the sector. NIM finished fiscal 2015 at 10.00% from 9.82% in fiscal 2014 and 10.20% in fiscal 2013. While the leveraged loan environment remains challenging we expect NIM to improve in fiscal 2017 largely as a result of the maturity of notes outstanding which will be replaced with a lower cost revolver. Our $6 price target implies an estimated 2016 P/NII (Price/NII) of 7.1x, dividend yield of 13.3%, and P/NAV (Price/NAV) of 0.78x compared to the BDC sector averages of 7.2x, 13.7%, and 0.75x, respectively.
Source: S&P Capital IQ, National Securities Corporation Estimates
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