BUY (SLRC, $19.72)
Significant Spare Debt Capacity, Potential Dividend Increases, Low Leverage - Initiating With A Buy Rating And $23 Price Target.
March 18, 2015
Christopher R. Testa
Investment Conclusion. We are initiating coverage of Solar Capital Ltd. (SLRC) with a BUY rating and $23 price target. Solar Capital has the potential to deliver strong earnings growth over the next two years due to its low leverage, spare debt capacity, and growth levers from primary origination platforms along with its joint venture unitranche program with PIMCO (Pacific Investment Management Company) and the life sciences venture lending initiative to lend to companies that are in a middle stage of development and have significant equity cushions. We anticipate NII/share (net investment income per share) growth of 5.8% and 15.9% in 2015 and 2016, respectively. The company also has a $275 million (at cost) ownership of Crystal Financial which is an asset backed lender focused entirely on senior secured, floating rate loans and is not correlated with Solar’s primary middle market leveraged loan business. At a time when most BDCs are fully levered up and dealing with asset quality issues, Solar has nonaccruals at less than 1% of its investment portfolio at fair value and debt-to-equity (D/E) of only 0.24x with a target of 0.65x – 0.70x. The company should also be able to increase its quarterly dividend by 10% in 2016, in our opinion, as a result of strong and sustainable NII (net investment income) growth with no expected share issuances needed to fund growth. Solar has 90% of its portfolio in senior secured loans (including Crystal Financial) and earns impressive yields on its portfolio. Our $23 price target implies an estimated 2016 P/ NII of 12.1x, dividend yield of 7.0%, and P/NAV of 1.04x compared to the BDC sector averages of 9.1x, 10.2%, and 0.95x, respectively.
Source: S&P Capital IQ, National Securities Corporation Estimates
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