NEUTRAL (PSEC, $6.05)
Despite a Strong Origination Platform, Fees Are Far Too High, 30% Basket Likely to Weigh on NAV Multiple - Initiating With A NEUTRAL Rating And $7 Price Target.
January 29, 2016
Christopher R. Testa
Investment Conclusion. We are initiating coverage of Prospect Capital Corporation (PSEC) with a NEUTRAL rating and $7 price target. Prospect has a diverse portfolio which includes sponsored and direct originations, CLO equity, real estate, and online lending. PSEC has 18.2% of the portfolio by fair value in CLO equity, with another 50 bps of the portfolio by fair value in CLO debt. Additionally, the company has investments in a REIT (real estate investment trust) in the portfolio which is primarily focused on multifamily assets. Prospect has for some time discussed spinning off portions of its CLO book, real estate portfolio, and the online consumer lending. While the spinoff would assist in the valuation of the BDC, as the market has made it clear that assets like CLO equity should not be in a BDC (despite our belief that CLO equity is a great asset class), the spinoffs are not ridding PSEC of the non-BDC assets in their entirety. Additionally, fees at PSEC need to be reduced substantially. The base fee is near the high end of the sector at 2.00% and the incentive fee hurdles are towards the lower end with no lookback feature. Base and incentive fees have increased significantly in fiscal years where NAV/share and NII/share declined. We think that absent a complete spinoff of non-qualifying assets and significant fee reductions, Prospect will continue to trade at sizable discounts to NAV. NIM (net investment margin) has decreased the past three fiscal years from 14.72% in fiscal 2013, 10.73% in fiscal 2014, and 9.55% in fiscal 2015. Our $7 price target implies an estimated fiscal 2017 P/NII (Price/NII) of 6.8x, dividend yield of 14.3%, and P/NAV (Price/NAV) of 0.70x compared to the BDC sector averages of 7.0x, 14.7%, and 0.71x, respectively.
Source: S&P Capital IQ, National Securities Corporation Estimates
This publication does not constitute and should not be construed as an offer or the solicitation of any transaction to buy or sell any securities or any instruments or any derivatives of the securities mentioned herein, or to participate in any particular trading strategies. Although the information contained herein has been obtained from recognized services, and sources believed to be reliable, its accuracy or completeness cannot be guaranteed. Opinions, estimates or projections expressed in this report may make assumptions regarding economic, industry, company and political considerations, and constitute current opinions, at the time of issuance, which are subject to change without notice.
This report is being furnished for informational purposes only, and on the condition that it will not form a primary basis for any investment decision. Any recommendation(s) contained in this report is/are not intended to be, nor should it / they construed or inferred to be, investment advice, as such investments may not be suitable for all investors. When preparing this report, no consideration to one’s investment objectives, risk tolerance and other individual factors was given; as such, as with all investments, purchase or sale of any securities mentioned herein may not be suitable for all investors. By virtue of this publication, neither the Firm nor any of its employees shall be responsible for any investment decisions. Before committing funds to ANY investment, an investor should seek professional advice. Any information relating to the tax status of financial instruments discussed herein is not intended to provide tax advice, or to be used by anyone to provide tax advice. Investors are urged to consult an independent tax professional for advice concerning their particular circumstances. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, either expressed or implied, is made regarding future performance.
National Securities Corporation (NSC) and its affiliated companies, shareholders, officers, directors and / or employees (including persons involved with the preparation or issuance of this report) may, from time to time, have long or short positions in, and buy or sell the securities or derivatives (including options) thereof, of the companies mentioned herein. One or more directors, officers, and / or employees of NSC and its affiliated companies, or independent contractors affiliated with NSC may be a director of the issuer of the securities mentioned herein. NSC and / or its affiliated companies may have managed or co-managed a public offering of, or acted as initial purchaser or placement agent for a private placement of any of the securities of any issuer mentioned in this report within the last three (3) years, or may, from time to time, perform investment banking or other services for, or solicit investment banking business from any company mentioned in this report.
This research may be distributed by affiliated entities of National Securities Corporation (NSC). Affiliated entities of NSC may include, but are not limited to, vFinance Investments, Inc., National Asset Management and other subsidiaries of our parent company, National Holdings Corporation.
The securities mentioned in this document may not be eligible for sale in some states or countries, nor be suitable for all types of investors; their value and the income they produce if any, may fluctuate and/or be adversely affected by exchange rates, interest rates or other factors. Furthermore, NSC may follow emerging growth companies whose securities typically involve a higher degree of risk and more volatility than the securities of more established companies. This report does not take into account the particular investment objectives, financial situation or needs of individual investors. Before acting on any advice or recommendation in this material, the investor should exercise independent judgment as to whether it is suitable in light of his/her particular circumstances and, if necessary, seek professional advice. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance.
Additional information relative to securities, other financial products, or issuers discussed in this report is available upon request. Neither this entire report, nor any part thereof, may be reproduced, copied or duplicated in any form or by any means without the prior written consent of National Securities Corporation. All rights reserved. NSC is a member of both the Financial Industry Regulatory Authority (FINRA) and the Securities Investors Protection Corporation (SIPC).
For disclosures inquiries, please call us at 1-800-417-8000 and ask for your NSC representative, or write us at National Securities Corporation, Attn. Supervision Department, 410 Park Avenue, 14th Floor, New York, NY 10022, or visit our website at www.nationalsecurities.com