BUY (GARS, $14.53)
Good Growth Potential and Asset Quality With Room to Expand - Initiating With A Buy Rating And $17 Price Target.
February 4, 2015
Christopher R. Testa
Investment Conclusion. We are initiating coverage of Garrison Capital Inc. (GARS) with a BUY rating and $17 price target. We think that Garrison has significant potential to deliver a substantial increase in net investment income (NII) per share growth over the next two years. Garrison has a low cost of funds with an effective cost of debt of 3.31% as of 3Q14. The company is a unique BDC with 9.1% of the portfolio in consumer loans and 2.3% in real estate loans. The diversified asset mix has permitted the company to maintain higher effective yields in an increasingly competitive environment in the leveraged loan space. The company is in the process of obtaining a SBIC (Small Business Investment Company) license and we estimate the company will begin to issue SBA (Small Business Administration) debentures in 3Q15. Combined with the additional borrowing capacity that this BDC has available and ability to issue equity in an accretive and opportunistic manner these tailwinds make us confident in our estimates for strong portfolio growth of 22.9% in 2015 and 20.4% in 2016 with anticipated dividend increases in both years. Our $17 price target implies an estimated 2016 P/ NII of 10.3x, dividend yield of 8.2%, and P/NAV of 1.1x compared to the BDC sector averages of 8.9x, 10.7%, and 0.92x, respectively.
Source: S&P Capital IQ, National Securities Corporation Estimates
Garrison will maintain high effective yields and net interest margin (NIM) through asset mix and low cost of funds, in our opinion. Garrison’s NIM has trended up steadily until 3Q14 when it declined slightly by 8 bps. The company’s cost of debt has steadily declined from 4.3% in 1Q13 to 3.3% in 3Q14 with effective yields rising from 7.8% to 11.5% over this same time period. In 3Q14 first lien was 78.8% of the portfolio which is down significantly from 95.2% of the portfolio in 1Q13. The company
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