NEUTRAL (MAIN, $32.31)
Valuation Keeps us on the Sidelines Despite Strong Growth Prospects - Initiating With A Neutral Rating And $34 Price Target.
July 21, 2015
Christopher R. Testa
Investment Conclusion. We are initiating coverage of Main Street Capital Corporation (MAIN) with a neutral rating and $34 price target. Main Street is an internally managed BDC which is very shareholder friendly, especially as criticism of external fees become louder by market participants. As a matter of fact, Main Street charges the external manager for services they provide to it. MAIN has steadily grown regular dividends the past several years and has also begun to pay special dividends twice a year from the realized gains on its portfolio investments. The company is predominantly first lien debt although it has a significant amount of equity investments (21.4% of the portfolio as of 1Q15) which allows the company to realize significant gains and pay the special distributions. The company makes lower middle market (LMM), middle market (MM), and private loans. While MM loans are still the largest composition of the portfolio they have trended down as a percentage of the portfolio the past several years along with the effective yield of the portfolio. This has caused NIM (net investment margin) to decline as well. Asset quality has been and remains strong with only 1.2% of the portfolio at fair value on non-accrual status. MAIN trades at a substantial 48% premium to NAV and thus can issue equity without fear of dilution to deleverage the balance sheet and continue to grow. Despite having the potential to grow the portfolio and NII/share (net investment income) strongly through 2016 we think at 13.4x 2016 NII and about 148% of NAV the stock is close to fair value. Our $34 price target implies an estimated 2016 Price/Net Investment Income (P/ NII) of 14.3x, dividend yield of 6.2%, and Price/Net Asset Value (P/NAV) of 1.44x compared to the BDC sector averages of 8.9x, 10.7%, and 0.89x, respectively.
Source: S&P Capital IQ, National Securities Corporation Estimates
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