On Monday, Lucid (NASDAQ:LCID) Capital Markets initiated coverage on shares of Great Elm Capital Corp. (NASDAQ:GECC) with a Buy rating, setting a price target of $11.00. The firm believes that Great Elm Capital is on a promising path following its strategic turnaround efforts that began in 2022.
According to the analyst from Lucid Capital Markets, the company's focus on middle market secured debt lending and equity investments in specialty finance companies and collateralized loan obligations (CLOs) is expected to yield diversified and uncorrelated returns across various business cycles.
The analyst praised the progress Great Elm has made under its new strategy, which aims to correct the course after the previous management's poor performance. The expectation of lower nonaccruals and realized losses is anticipated to significantly improve the stock's trading multiple in the near to mid-term.
Currently, Great Elm's stock trades at a price to net asset value (P/NAV) of 84%, which is below the median level of its peers at 94%. This discrepancy has led the analyst to conclude that the shares are presently undervalued.
The $11.00 stock price target implies an 86% proportion of Great Elm's projected year-end 2025 net asset value (NAV) estimate of $12.81. With this target, the firm also forecasts a 12.7% dividend yield for the fiscal year 2024, based on expected regular dividends of $1.40.
This projection stands in contrast to the current dividend yield of 13.8%. In comparison, a peer group of externally-managed Business Development Companies (BDCs) trades at a median P/NAV of 94% and with a median dividend yield of 11.6%.
Lucid Capital Markets' coverage initiation and positive outlook on Great Elm Capital suggest confidence in the company's strategic direction and potential for stock appreciation. The firm's analysis points to a material improvement in Great Elm's stock valuation as the company continues to implement its turnaround strategy.
In other recent news, Great Elm Capital Corp. has reported a record-setting third quarter for 2024. The company's net investment income (NII) reached $0.39 per share, surpassing the quarterly distribution of $0.35, marking the highest investment income in the company's history.
This surge in NII was primarily driven by increased cash flows from Great Elm Capital Corp.'s CLO joint venture. Despite expectations of a decrease in NII for the fourth quarter, the CEO maintains confidence in the company's ability to maintain dividend coverage.
The company's net asset value (NAV) remained stable at $12.04 per share as of the end of the third quarter. Non-accruals, while reduced, are still present in the portfolio, totaling $1.3 million or less than 1% of portfolio fair value. Furthermore, Great Elm Capital Corp. successfully completed debt refinancing, extending maturities into 2026 and beyond.
These recent developments highlight the company's robust financial position and strategic initiatives. Despite anticipating a decrease in NII in the upcoming quarter, Great Elm Capital Corp. remains well-positioned to cover its dividend and scale up operations, particularly in the CLO joint venture space.
The successful refinancing of debt instruments further strengthens the company's balance sheet, providing financial flexibility and an extended maturity profile.
InvestingPro Insights
Recent data from InvestingPro adds depth to Lucid Capital Markets' analysis of Great Elm Capital Corp. (NASDAQ:GECC). The company's market capitalization stands at $106.07 million, with a P/E ratio of 15.58, indicating a reasonable valuation relative to earnings. GECC's revenue growth has been robust, with a 16.86% increase over the last twelve months and an impressive 27.62% growth in the most recent quarter.
InvestingPro Tips highlight GECC's significant dividend payments to shareholders, which aligns with Lucid Capital Markets' forecast of a 12.7% dividend yield for fiscal year 2024. The current dividend yield is even higher at 13.79%, surpassing the peer group median of 11.6% mentioned in the article. Additionally, GECC has maintained dividend payments for 9 consecutive years, demonstrating a commitment to shareholder returns.
However, investors should note that 3 analysts have revised their earnings downwards for the upcoming period, which may impact future performance. The stock's price movements are described as quite volatile, which could present both risks and opportunities for investors.
For those seeking a more comprehensive analysis, InvestingPro offers 7 additional tips for GECC, providing a deeper understanding of the company's financial health and market position.
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