PennantPark Stock: 9% Yield, Monthly Payer, Benefits of Rising Rates (NYSE: PFLT)
Are you familiar with the industry of business development companies recently? Known as BDC, these companies lend money to private companies, which also have co-sponsors, such as venture capital groups and hedge funds.
We have covered several BDCs in our weekend articles, and this week we cover PennantPark Floating Rate Capital Ltd. (NYSE: LTFP), a BDC under the Pennant Park Investment Advisors Group platform.
PFLT seeks to make direct secondary investments, debt, equity and loans. It focuses on companies owned by established mid-market private equity sponsors with a proven track record of supporting their portfolio companies. The fund seeks to invest through floating rate loans in public, private, mid-market companies with low capitalization or small market capitalization. It invests primarily in the United States and, to a lesser extent, in non-US companies. The fund typically invests between $2 million and $20 million. It also has PSSL, a Senior Secured Loan Fund. ((PFLT website)).
Source: Yahoo finance.
As of 6/30/22, PFLT’s $1.23 billion portfolio consisted of 87% senior secured debt, 13% preferred and common stock, and less than 1% senior secured debt . As of 6/30/22, PSSL’s portfolio totaled $747 million and consisted of 87 companies with an average investment size of $8.4 million and had a weighted average return on debt investments of 8. 2%. PFLT’s debt portfolio is 100% made up of variable rate investments.
PFLT focuses on mid-market companies, with an EBITDA range of $10-50 million. Its senior loans range from LIBOR + 5.5% to 7.5%. With LIBOR at 2.56% (down from just 0.09% a year ago), this gives PFLT a current average yield of around 9%.
The company has also invested in larger companies – 29% of its investments are in companies with over $50 million in EBITDA since 2015:
PFLT’s portfolio held 123 different companies as of 06/30/22, compared to 119 as of 03/31/22. Professional services, media, high tech, personal products and IT services are its top 5 exposures, totaling ~37.5%:
LTFP’s fiscal year ends 9/30.
During its fiscal 3rd quarter (period ending 6/30/22), PFLT invested $104.8 million in 6 new portfolio companies and 39 existing companies, with a weighted average return on debt investments of 8.1%. Sales and redemptions of investments totaled $55 million for the quarter. As of June 30, 2022, PFLT had 2 unrecognized portfolio companies, representing 0.1% of its overall portfolio on a fair value basis.
Investment income for the period ending 6/30/22 was $25.7 million, up 23% from $20.9 million a year ago. NII totaled $11.8 million, or $0.29/share, up about 5% from $10.3 million, or $0.27/share a year ago.
During the quarter ending June 30, 2022, PSSL invested $31.5M (including $16.8M purchased from PFLT) in 4 new and 7 existing companies, with a weighted average return on debt investments 8.8%. Sales and redemptions of investments totaled $13.5 million during this quarter.
PFLT experienced strong growth in calendar quarters 1 and 2, with total investment income up approximately 25%, NII up approximately 15% and NII/Share up 9.4%. The number of shares increased by 6.56%.
At its 9/1/22 closing price of $11.89, PFLT returned 9.59%. It has a strong leakage distribution coverage of 1.23X. His next monthly payment is expected to be ex-dividend on 9/16/22, with a payout date of approximately 10/03/22.
Profitability and leverage:
ROA and ROE improved slightly over the last quarter and remained above BDC’s industry averages, while EBIT margin was slightly lower, but still above average. Debt/NAV leverage was 1.5X, above the industry average of 1.26X.
PFLT’s annualized weighted average cost of debt for the nine months ended June 30, 2022 was 3.7%. It had $40.7 million in cash and $80.6 million of unused borrowing capacity under the credit facility as of 6/30/22. Rolling interest coverage remained stable during the quarter at 2.76X, as did the asset-to-debt ratio:
We last covered PFLT at the end of June 2022. It has risen by $1.07 since then, in addition to paying 2 monthly distributions.
So far in 2022, PFLT has outperformed the S&P 500 and the BDC industry by wide margins. He also did this in the last quarter, but has had a tough time in the last month:
Price targets and analyst estimates:
At $11.89, PFLT is about $5 below analysts’ low price target of $12.50 and about 10% below the middle price target of $13.25.
Earnings estimates have increased slightly over the past month, from $1.17 to $1.19, for the fiscal year ending 9/30/22. They increased further for the next LRFP fiscal year, which ends 9/30/23, from $1.16 to $1.21:
At $11.89, PFLT is selling at a discount of -2.62% from its 6/30/22 NAV/share of $12.21, slightly below the BDC industry average of a premium of 1% on the net asset value. PFLT’s earnings multiple, a price/NII of 8.81X, is well below the industry average of 13.45X, while its P/Sales and EV/EBIT are also below average.
PFLT will benefit from higher interest rates, due to its 100% floating rate business model. On the liabilities side, 60% of its debt is at a fixed rate.
His discount on NAV isn’t as big as it was at the end of June, but with the often volatile September in full swing this week, we may soon see lower prices for PFLT and many other vehicles at high yield.
If you’re interested in other high-performance vehicles, we cover them every weekend in our articles.
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