BUY (MCC, $8.90)
Despite Some Challenges Valuation is Far Too Low - Initating With A Buy Rating And $11 Price Target.
January 21, 2015
Christopher R. Testa
Investment Conclusion. We are initiating coverage of Medley Capital Corporation (MCC) with a Buy rating and $11 price target. Medley Capital Corporation is a middle market focused BDC investing mostly in senior secured first and second lien loans although the company has exposure to secured notes, unsecured debt, equity, and warrants. The company has not reduced its dividend since inception in the quarter ended 3/31/2011; however, cash NII (net investment income minus PIK income) coverage is north of 100% and has been for each quarter. The company earns significant fees and the vast majority of its originations are direct, enabling points earned on originations to bolster all-in effective yields. MCC generally issues equity each quarter to assist in funding investment purchases and originations while keeping leverage in check. Trading at a 30% discount to NAV (net asset value) and stating that they do not intend to issue equity below NAV, MCC is going to face an uphill battle to grow the portfolio over the next year. The company has a SBIC (Small Business Investment Company) license and has $130 million in commitments and $110 million in debentures outstanding. While SBA (Small Business Administration) commitment will most likely increase to $150 million and the revolver is only at 42.3% of capacity, even with these increasing and assuming no outsized prepayment activity our estimates for portfolio growth are lower than the growth MCC has experienced over the past several years. Asset quality has been in sharp decline the past year, with unrealized losses as a percentage of NAV increasing to 4.1% currently from1.7% a year earlier. Over this same time period investments ranked 4 and 5 jumped to 3.2% from 1.6% a year earlier. Despite the decline in asset quality, it remains much better than peers trading at substantially higher multiples. Our $11 price target implies an estimated 2016 Price/Net Investment Income (P/NII) of 7.1x, dividend yield of 14.4%, and Price/Net Asset Value (P/NAV) of 0.81x compared to the BDC sector averages of 8.7x, 10.9%, and 0.90x, respectively.
Source: S&P Capital IQ, National Securities Corporation Estimates
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