NEUTRAL (BANX, $16.62)
A RIC with Investment Focus on Community Banks, Safe Credits but Near Fair Value - Initiating With a NEUTRAL Rating And $19 Price Target.
September 21, 2015
Christopher R. Testa
Investment Conclusion. We are initiating coverage of StoneCastle Financial Corporation (BANX) with a NEUTRAL rating and $19 price target. BANX is unique for a number of reasons, the first being it is not a BDC per se but a registered investment company (RIC) which puts its asset coverage requirement at 300% as opposed to 200% for BDCs. Also, StoneCastle invests primarily in investment grade companies (75% rated investment grade as of 2Q15) as opposed to BDCs which investment primarily in below investment grade companies. The non-BDC status permits BANX to maintain its industry concentration of community and regional banks. We believe that community banks are an attractive investment as regulation continues to drive M&A in the sector, banks continue to require capital, and StoneCastle’s deal flow pertaining to this sector remains robust. The company has had no losses or impairments of assets since its inception. StoneCastle is also seeking to invest in a pooled bank transaction which would be funded with non-recourse financing and permit higher leverage than what would otherwise be in the RIC structure itself. We believe BANX is in a position to continue to improve effective yields and NIM (net investment margin). We also think that BANX will continue to see sizable deal flow and should be relatively immune from the slowdown in traditional middle market originations. Our $19 price target implies an estimated 2016 Price/Net Investment Income (P/ NII) of 10.7x, dividend yield of 6.9%, and Price/Net Asset Value (P/NAV) of 0.83x. BANX does not really have a publicly traded comp set. Although there are certainly other non-BDC RICs, there are none to our knowledge that invest exclusively in community banks.
Source: S&P Capital IQ, National Securities Corporation Estimates
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