NEUTRAL (GBDC, $17.55)
Strong Origination Platform, Good Asset Quality with Very Low Non- Accruals, Consistently Increasing NAV/share, But Valuation is Fair and NII/share is Likely to Remain Flat - Initiating With A NEUTRAL Rating And $18 Price Target.
November 2, 2016
Christopher R. Testa
Investment Conclusion. We are initiating coverage of Golub Capital BDC Inc. (GBDC) with a NEUTRAL rating and $18 price target. GBDC is the public vehicle of the Golub family of funds which combined have total AUM (assets under management) of over $18 billion as of 6/30/16; making them one of the largest BDCs (public & private). Additionally, the total platform is almost entirely in leveraged loans and the ability to invest across funds provides GBDC with a significant advantage during a time when certainty of closing matters more to borrowers than pricing. This also permits the company to have relatively small hold sizes within the portfolio while still closing on larger deals in the platform; mitigating the risk of concentration within GBDC. This is demonstrated by the fact that GBDC finished 6/30/16 with a portfolio at fair value of $1.63 billion across 185 companies but the average investment size was a mere $8.2 million. Since the quarter ended 12/31/12 non-accruals as a percentage of par have averaged 0.7%. This strong asset quality at Golub has led to consistent NAV/share increases, generating strong economic returns (changes in NAV/share plus dividends divided by beginning of period NAV/share) for shareholders. We expect GBDC’s NII/share to be largely flat although we expect further step-ups in NAV/share and continued sound asset quality. Despite Golub being a best-in-class originator, we believe the stock is fairly valued and we are therefore giving the company a NEUTRAL rating and $18 price target. Our $18 price target implies an estimated 2017 P/NII (Price/NII) of 14.1x, dividend yield of 7.1%, and P/NAV (Price/NAV) of 1.10x compared to the BDC sector averages of 8.8x, 10.5%, and 0.86x, respectively.
* Core NII = NII + capital gains incentive fee (reversal)
Source: S&P Capital IQ, National Securities Corporation Estimates
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