BUY (TICC, $7.07)
Challenges Remain but TICC is Significantly Undervalued - Initiating With A Buy Rating And $9 Price Target.
June 10, 2015
Christopher R. Testa
Investment Conclusion. We are initiating coverage of TICC Capital Corporation (TICC) with a buy rating and $9 price target. TICC Capital Corporation is a BDC investing mostly in senior secured notes and collateralized loan obligation (CLO) equity. The company recently reduced its dividend to $0.27/share from $0.29/share since it was last cut in 1Q09 but then increased it the next quarter to the $0.29/share level. While TICC has experienced a fall in yields on its debt investments their CLO equity continues to perform well with no cash flow impairment and yields north of 20%. CLOs are an attractive asset class that performed excellent throughout the financial crisis experiencing minimal losses. The incremental addition to effective yield from the CLO equity is substantial and as a result TICC has experienced respectable yields with few non-accruals historically and none at the moment. We note that realized losses have been growing and are a substantial 13.4% of NAV (net asset value). Also, leverage at the company is high with debt-to-equity at 0.96x and the stock at a substantial 19% discount to NAV. With the company focused on repurchasing shares to close the NAV gap and the higher leverage we think TICC will be forced to shrink the portfolio in 2015 to before resuming to slight growth in 2016. Our $9 price target implies an estimated 2016 Price/Core Net Investment Income (P/NII) of 8.1x, dividend yield of 12.7%, and Price/Net Asset Value (P/NAV) of 0.98x compared to the BDC sector averages of 9.3x, 10.3%, and 0.94x, respectively.
*Note: Core NII = NII + CLO equity additional estimated taxable income + incentive fees on capital gains.
Source: S&P Capital IQ, National Securities Corporation Estimates
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