On Tuesday, Compass Point adjusted its stance on shares of Horizon Technology Finance (NASDAQ:HRZN), elevating the stock from Sell to Neutral and setting a price target of $8.25.
The investment firm cited a long-term decline in the company's net asset value (NAV), which has fallen for nine consecutive quarters. Despite the persistent decrease in NAV and significant investment losses totaling $121.1 million over this period, the firm sees a potential positive return in the next 12 months due to the stock's recent depreciation.
The analyst from Compass Point highlighted that Horizon Technology Finance's NAV had dropped by 23% to a record low, and the proportion of distressed credits in the portfolio remained concerningly high at 8.6%. These factors have been impacting Horizon's ability to generate income and cover its dividend, especially when the company does not pay a full incentive fee.
The firm's valuation approach involves projecting Horizon's NAV four quarters ahead, which is estimated to be $9.13. They then apply a price-to-NAV (P/NAV) multiple of 1.00x and adjust for potential future credit losses by discounting 50% of the value of loans in the highest risk categories, 1 and 2. This method has led to the revised price target of $8.25.
Despite the challenging credit performance and erosion of NAV, the recent decline in Horizon Technology Finance's stock price, including the dividend, suggests a positive outlook for the next year.
The improvement in the potential return outlook is the primary reason for the upgrade to a Neutral rating. The current NAV stands at $9.06, and the forward-looking analysis points to a slight increase, which supports the new price target and rating change.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.