On Monday, Lucid (NASDAQ:LCID) Capital Markets initiated coverage on Stellus Capital (NYSE:SCM) with a Neutral rating and a price target of $13.50. The coverage by Lucid Capital Markets reflects an assessment of Stellus Investment Corp's current market performance and potential future valuation. The firm's analysis highlights the company's experienced management, consistent lending strategy in the middle market segment, and disciplined underwriting as positive attributes.
The Neutral rating comes at a time when Stellus Capital's stock has risen by 7.3% year-to-date (YTD), outpacing the peer group average gain of 1.2%. This performance has led to the stock trading at a price to net asset value (P/NAV) of 102%, which is above the business development company's (BDC) historical average of 91% and the median level of 94% for its peers. According to Lucid Capital Markets, this indicates that the shares are currently fairly valued.
The $13.50 price target is based on Lucid Capital Markets' expectation that Stellus Capital will trade at 100% of its estimated net asset value (NAV) at the end of 2025, which is projected to be $13.60. The target suggests a potential for a stable investment return, particularly when considering the dividend yield. The projected dividend yield of 11.9% is based on an anticipated fiscal year 2025 regular dividend of $1.60 per share, consistent with the dividend provided in the previous fiscal year.
In comparison to its peers, Stellus Capital's dividend yield stands at 11.6% relative to its current share price. This is in line with the median dividend yield of a peer group of externally-managed BDCs, which is also at 11.6%. These BDCs are currently trading at a median P/NAV of 94%, as per the analysis by Lucid Capital Markets.
In other recent news, Stellus Capital Investment (NYSE:SCM) Corporation reported a steady Q3 growth with optimistic projections for Q4. The company's third-quarter financial results revealed a GAAP net investment income per share of $0.39 and $0.40 on a core basis. Stellus also announced an increase in net asset value per share by $0.19, and its investment portfolio, valued at $908.7 million across 99 companies, is expected to grow further in Q4. The company also declared a dividend of $0.40 per share for Q4, highlighting its dedication to shareholder returns.
Stellus Capital anticipates growing its portfolio to between $930 million and $950 million by the end of the year, with projected Q4 loan repayments of approximately $29 million and equity realizations of about $5.3 million. The company also reported a spillover income of $42 million as of the end of Q3, excluding anticipated realized gains for Q4. Despite a decrease in new onboarding spreads, the average yield remains in the 6s.
InvestingPro Insights
Recent data from InvestingPro adds depth to Lucid Capital Markets' analysis of Stellus Capital (NYSE:SCM). The company's P/E ratio of 7.06 suggests that the stock may be undervalued relative to its earnings, which aligns with the firm's assessment of fair valuation. This is particularly interesting given SCM's strong year-to-date price total return of 18.47%, significantly outperforming the peer group average mentioned in the article.
InvestingPro Tips highlight that SCM "pays a significant dividend to shareholders" and "has maintained dividend payments for 13 consecutive years." These points reinforce the article's focus on SCM's attractive dividend yield, currently standing at 11.58% according to InvestingPro data. This yield is consistent with the 11.6% mentioned in the article for both SCM and its peer group median.
It's worth noting that InvestingPro offers 7 additional tips for SCM, providing investors with a more comprehensive analysis of the company's financial health and market position. These additional insights could be valuable for those considering an investment in Stellus Capital or seeking to understand its position within the BDC sector.
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