It is sometimes hard to make big money investing in BDC's because even though the dividend payouts are generally large, the price appreciation can be painfully slow. That is why when a special situation appears in the BDC world, we should take a look.
CPTA just reported Q2 numbers, and the initial reaction by the street was negative and why not. Both earnings and book value (NAV) were down (again) from the previous quarter.
Earnings were down to $.33 per share from $.37 in Q1. But NII really had to be down because in early Q2, CPTA issued 3.5 million new shares, a 27% increase in the share count which puts a lot of pressure on Earnings per Share. If would have helped if CPTA could have immediately invested the $64 million they received from the stock offering, to offset the new shares with new NII, but that is never the way it works. They did get it all invested by the later part of Q2 which will be a big boost to Q3 NII.
The book value dropped by $.40 per share being impacted by unrealized losses of $16.2 million. But $15.8 million of that was simply from the reversal of $15.8 million in unrealized gains as required by GAAP accounting. That reversal occurred because CPTA recorded $15.8 million in realized capital gains in Q2($.99 per share) from the sale of positions in Boot Barn($7.7 million), Corporate Visions($7.1 million), and KBP Investments($0.9 million). And remember, that $.99 per share, or some portion of it, could in time wind up in the shareholders pockets.
There is nothing new about all of the above as CPTA has presented the investment world with lower earnings and lower book for several quarters now and the stock price has reflected that. We should also note that at the same time, the Company has been paying lots of money to its stockholders in the form of dividends, which the stockholders get to keep forever. So if stockholders can now see the stock price rise while still collecting the generous dividends, we will get to the promised land.
Stockholders need to see a couple of things happen to make that wish come true. First, the monetization program must end or slow down to preclude any further "unrealized gain" reversals. That will allow the book value to resume its growth or at least stabilize, depending on other factors. Second, the NII must grow to cover the basic dividend, because that is what both the Company and stockholders want. The total dividend (regular plus extra) is now being so well covered by NII and Net Capital Gains, that extra dividends may come our way this year or next. In the first six months of this year, CPTA paid out $1.14 in dividends while earning $2.44 in NII and Net Capital Gains. Remember, they must pay out NII (Net Investment Income) and NCG (Net Capital Gains).
So can the Company boost NII to cover the dividend in a reasonable short period of time? In Q2, as previously mentioned, CPTA invested all $64.1 million from the equity offering in the second half of Q2. That money is all postured to grow NII in Q3. Also in Q2, CPTA received $20 million from non-income producing equity investments and reinvested it in interest bearing securities. Year to date the Company deployed about $219 million yielding 12.4%. Q2 was a strong deployment quarter and Q3 is shaping up the same way with $49 million invested so far with a robust pipeline of several hundred million dollars. And from the CFO: "The execution of our strategy to rotate out of equity and into debt, coupled with the investment of the equity offering proceeds during the second quarter, positions the Company well for future growth in NII per share in the second half of 2015. Managements highest priority is to cover regular distributions with NII." From the CEO: "Now that we have completed this equity rotation over the past few quarters, management is very optimistic about NII for the final two quarters of 2015".
Has CPTA sufficiently curtailed the monetization program so that NAV can stabilize and grow? On the CC the CEO said: "Effectively completed the monetization program", and,
"The monetization of Corporate Visions last quarter effectively completed our rotation out of equity securities and into yield".
Keep in mind that CPTA is not out of equity holdings even though their plans to monetize these holdings has diminished. The cost bases of their current equity holdings is $54.6 million. These same holdings have a market value of $82.8 million. Also, new investments keep on coming with equity positions.
So CPTA appears to have reached the point where the coming quarters can finally show growing NII and better NAV. So far, since the CC, I have seen just three broker analysts (Oppenheimer, MLV & Co, and Deutsche Bank) comment on CPTA. They have lowered their target prices (which was expected with the lower Q2 book and lower earnings) but all three reiterated their "Buy" ratings. Oppenheimer said: "Bumpy quarter but solid outlook and great value".
A poster on this board, following the Q1 release, posted the Barclay report on CPTA. Could you please do that again for Q2. I ask because the Barclay estimates were very close to the actual CPTA Q2 results. If you are uncomfortable posting the entire report, perhaps you could post the new Barclay forward estimates. Thanks.
Speaking of value, at a $15.00 share price, CPTA is selling at a price to book of .836 with a dividend yield of 12.53% (without the $.05 extra through December), and 16.53% with the extra. Total Return estimate will have to wait until we get the new average target price from the many analysts. Since last Friday, the average target price has dropped from 19.65 to 19.05. However, if the average target price drops from the current $19.05, say down to $18.50 (as more analysts report), the total return would still be a compelling 39.86%. At last count, of 11 analysts, 10 had a "Buy" with 1 "Hold". That is almost a unanimous positive vote.
So with CPTA we have a company that has been severely penalized because they chose to implement a monetization program and also chose to do a follow-on stock offering. The monetization program hurt NAV and the follow-on temporarily hurt NII per share. The Company has now turned to normal operations with plenty of investable cash and a strong pipeline, and is committed to rapidly grow NII and is postured to stabilize and grow NAV . At the same time, the CPTA stock price is very undervalued relative to dividend payout. The CPTA dividend yield of 16.53% compares with the BDC Industry average yield of 10.3%, and CPTA may have some extra payouts coming down the road.
Finally, today, John McGlinn, the Chief Operating Officer, bought 3410 shares at $14.65 per share. He now directly owns 74660 shares.
Just one opinion.
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