Hercules Capital Stock: good profits in the second quarter and increase in dividends (NYSE:HTGC)
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Business development companies, known as BDCs, provide retail investors with high-yield exposure to private companies, and some of them, such as Hercules Capital, Inc. (NYSE: HTGC) to concentrate on companies already backed by venture capital companies. These other companies do not want to lose their investments and will continue to support these companies. This has been crucial during the pandemic.
HTGC invests a much lower percentage of capital in these companies, compared to their venture capital backers, ranging from 0.8% to 1.9%:
HTGC primarily focuses on pre-IPO and M&A, venture capital-backed, high-growth innovative companies as they expand (corporate growth) and established stages in a highly diverse variety of businesses. technology, life science and sustainable and renewable technology industries.
He has a debt portfolio of $2.58 billion and also holds warrants for 103 companies, adding further upside potential to his investment portfolio.
The debt portfolio is made up of approximately 95% floating rates, with floor rates of approximately 70% in Senior Secured 1st position and 22% in Senior Secured 2nd position. He also holds 5% equity investments, 2% unsecured investments and 1% warrants:
Management now estimates that a 100 basis point increase in the prime rate would add $0.18/share to HTGC’s EPS, while a 200 basis point increase would add $0.37/share, both up down $0.02 from the first quarter of 2022. The current prime rate is 5.50%, up from 4.75% just a month ago.
A key factor in BDC’s analysis is the health of the underlying companies in which they have invested. Market concerns about the ability of these companies to survive the pandemic led to steep BDC price/share cuts in 2020.
As of 6/30/22, HTGC’s two lowest rating levels, 4 and 5, represented 0.6% of its portfolio, up slightly from Q4 21. The first two levels, 1 and 2, were 70.4%, compared to 72.2% in Q4 21.
Unexpected loans increased by 1 in Q2 22, with a total of 2 debt investments, representing 0.7% of the total portfolio on a cost basis.
The top industries are drug distribution, software, and consumer and commercial Internet services, which make up 81% of the portfolio’s sector exposure, much more concentrated than the other BDCs we’ve covered:
Management increased the quarterly distribution by 6% from $0.33 to $0.35/share, equating to a yield of 8.88%, at the 7/29/22 intraday price of 15.76 $.
HTGC is one of the few BDCs to post a positive 5-year dividend growth rate of 8.15%, among the highest dividend growth rates in the industry.
HTGC also has a history of making additional distributions, on top of its base payments. This is the third consecutive quarter of additional payouts of $0.15/share. This adds another 3.81% to the yield, for a total of 12.69%.
The ex-dividend date is 08/08/22, with a payment date of 08/16/22.
The NII/Dividend per share coverage was 0.91X in Q2 22 and has a moving average of 0.98X, BUT, HTGC also has an undistributed NII/Share, UNII of $1.18, which provides ample coverage and allows him to pay these %. 15 additional distributions:
The second quarter of 2022 saw a 4% increase in total investment income, with the pre-tax NII increasing by 6%. NII/Share was flat at $0.32 due to an 8% jump in the number of shares. HTGC reported sequential net debt investment portfolio growth of over $169 million, which contributed to management’s decision to increase the quarterly distribution.
Total investment income for the first quarter of 2022 was flat, while the NII was up 6% and the NII/share was flat at $0.62. NAV/Share is down -10.9%, partly due to additional dividends. While interest expense improved, down 16.7%. The average number of shares T1-2 decreased slightly, but the number of shares at the end of 06/30/22 increased to 124.26 million.
Early gains may increase the NII, but they are quite lumpy on a quarterly basis. For example, contingencies accounted for 19.2% of HTGC’s debt investment balance in Q4 2021, but dropped to just 1.3% in Q2 22. The flip side of this event, however, is that it sets up the portfolio for higher interest income in the 2nd half of 2022.
HTGC had record gross debt and equity commitments of over $1.04 billion in Q2 2022, its first quarter of over $1 billion in new commitments. Fundings were also strong in the quarter, exceeding $439 million.
Leverage and profitability:
HTGC has very consistent ROA, ROE, and EBIT margin numbers, with ROA roughly in line with BDC’s industry averages and ROE somewhat below average, while its EBIT margin is above the mean.
HTGC’s first debt maturity isn’t until 2024, when $105 million of notes come due. Management uses a wide range of sources to finance its investments. ~50% in equities, 37% in institutional bonds, 6.5% in SBA loans and ~5% in credit facilities.
Management increased the capacity of HTGC’s credit facilities to $770 million and also raised $200 million in institutional debt. Its debt is rated Baa3 by Moody’s and has received an institutional grade rating from Fitch’s.
HTGC has outperformed the BDC industry and the market so far in 2022, and enjoyed a 15.4% price gain over the past month, outperforming its industry and the S&P by wide margins.
It has also outperformed the market and the BDC industry over the past year, on a total return basis, returning around 4%, compared to 2% for the BDC industry and -6% for the market.
At $15.76, HTGC is selling at a 51% premium to its net asset value/share of $10.43, versus an industry average of 3%. This premium pricing puts it in a good position to raise capital via more equity sales, so we’ll likely see additional secondary offerings over the next 2 quarters.
However, its earnings multiple, Price/NII per share, at 12.22X, is actually quite a bit cheaper than the industry average of 13.83X BDC, as is its EV/EBIT, a testament to its power. beneficiary.
HTGC has a long history of selling at a premium to NAV. Since 2017, its Price/NAV has varied from 1.11X to 1.47X on an annual basis.
Analyst price targets:
At $15.76, HTGC is about 10% below analysts’ mid-price target of $17.50 and 21% below the highest price target of $20.00.
We are changing our rating for HTGC from a buy to a hold at this time, but only because we will soon be heading into the weakest time of the year for market prices. Add it to your watch list and wait for a market pullback in September-October, to take advantage of a cheaper entry point.
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