NEUTRAL (HRZN, $14.17)
You Get What You Pay For: A Solid BDC But Near Fair Value - Initiating With A Neutral Rating And $15 Price Target.
May 26, 2015
Christopher R. Testa
Investment Conclusion. We are initiating coverage of Horizon Technology Finance Corporation (HRZN) with a neutral rating and $15 price target. In our view, the company has the ability to grow net investment income (NII) per share over the next two years. We anticipate 19.5% NII/share growth in 2015 and 9.3% NII/share growth in 2016. The company has only utilized 65% of its available debt commitments (excluding the $100 million accordion feature on the credit line) with leverage at 0.45x and the company preferring to stay around 0.75x although it has reached 0.93x the past couple of years. Given the spare capacity in debt and potential SBIC license in 2016 combined with low leverage HRZN has the ability to grow the portfolio significantly over the next two years. The company has also announced a $27.9 million secondary (gross) in 1Q15 and we estimate a $40 million gross issuance in 1Q16. While we anticipate yields will come under pressure we also think that borrowing costs will step down as a result of a shift in funding sources and help to preserve NIM (net interest margin). Horizon is unique in that it gives investors exposure to venture capital and early stage investments but mostly through debt with minimal equity and minimal asset quality issues. Our $15 price target implies an estimated 2016 Price/Net Investment Income (P/ NII) of 10.3x, dividend yield of 9.3%, and Price/Net Asset Value (P/NAV) of 1.02x compared to the BDC sector averages of 9.5x, 10.1%, and 0.95x, respectively.
Source: S&P Capital IQ, National Securities Corporation Estimates
We think that HRZN will experience some pressure in effective yields earned on its debt investments but that borrowing costs should fall in-step with this. We estimate HRZN’s effective all-in yield will finish 2015 at 14.16% from 14.58% in 2014. We anticipate that this will step down to 13.55% in 2016. We anticipate fees will contribute 64 basis points (bps) to total effective yield in 2015 and 72 bps in 2016. We...
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