On Monday, Lucid (NASDAQ:LCID) Capital Markets initiated coverage on Runway Growth Finance Corp. (NASDAQ:RWAY) with a Neutral rating and set a price target of $11.00 per share. The firm's analysis suggests that RWAY should trade at 81% of its projected 2025 year-end Net Asset Value (NAV), which is estimated at $13.59.
Runway Growth Finance Corp. is recognized for its unique strategy of investing in late-stage venture and early-stage growth companies, offering investors an alternative to traditional middle market Business Development Company (BDC) lenders. This approach allows for portfolio diversification and potential growth.
However, the inherent risks associated with investing in companies at these stages are acknowledged by Lucid Capital Markets. Runway Growth Finance aims to mitigate these risks through selective industry exposure and conservative underwriting standards relative to its peers.
The neutral stance taken by Lucid Capital Markets is partly due to the current economic uncertainties and RWAY's asset-sensitive balance sheet, which includes a higher than average level of nonaccruals. The firm's cautious perspective is reflected in their recommendation to adopt a "wait and see" approach to RWAY's shares at present.
The price target of $11.00 implies a 14.5% dividend yield based on the forecast for FY25 regular dividends of $1.60. This is in comparison to the current dividend yield of 15.4% relative to RWAY's share price at the time of the report. A comparison with a peer group of externally-managed BDCs shows that these typically trade at a median Price to NAV (P/NAV) of 94% and have a median dividend yield of 11.6%.
In other recent news, Runway Growth Finance Corp. has reported strong third-quarter financial results, including a total investment income of $36.7 million and a net investment income of $15.9 million. These earnings comfortably covered its quarterly dividend. Additionally, the company has entered a definitive agreement to be acquired by BC Partners Credit, aiming to enhance capabilities while maintaining independence.
The company's fair value investment portfolio was valued at approximately $1.07 billion, with net assets increasing to $507.4 million and net asset value per share rising to $13.39.
Runway Growth Finance also announced the resignation of director Gregory M. Share, as revealed in a recent SEC Form 8-K filing. Notably, Mr. Share's decision to step down was not due to any disagreement with the company's operations, policies, or practices. The vacancy left by Mr. Share's departure will be filled by a nominee from OCM Growth Holdings, LLC, as per the Stockholder Agreement dated December 15, 2016.
These developments follow a period of disciplined investment approach by Runway Growth Finance, despite changing market conditions. Operating expenses did increase by 6% from the previous quarter to $20.8 million, however, the company recorded a net unrealized gain of $9.2 million, contrasting with a net unrealized loss in the prior quarter.
InvestingPro Insights
Recent data from InvestingPro adds depth to Lucid Capital Markets' analysis of Runway Growth Finance Corp. (NASDAQ:RWAY). The company's P/E ratio (adjusted) stands at 6.12 for the last twelve months as of Q3 2024, suggesting a potentially undervalued stock relative to earnings. This aligns with Lucid's price target implying potential upside.
InvestingPro Tips highlight that RWAY "has raised its dividend for 3 consecutive years" and "pays a significant dividend to shareholders." These tips corroborate Lucid's focus on RWAY's attractive dividend yield, which InvestingPro data shows at an impressive 28.69%. This high yield surpasses both the current 15.4% mentioned in the article and the peer group median of 11.6%, potentially making RWAY an appealing option for income-focused investors.
However, it's worth noting that InvestingPro Tips also indicate that "8 analysts have revised their earnings downwards for the upcoming period," which may explain Lucid's cautious "wait and see" approach. Investors seeking a more comprehensive analysis can access 4 additional tips and a wealth of financial metrics on InvestingPro.
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