In this article, I will show my Q4-12 metric intensive update for Fidus Investment Corporation; show the inputs for a more nuanced Net Investment Income (NII) projection that suggests the current consensus analyst forecast is too low; show my analysis of FDUS' current valuation metrics; show two spreadsheets on BDC year to date performance and valuations; and tell you if I see green flags or red flags in the numbers.
Fidus Investment Corporation (FDUS) is a subordinated debt heavy Business Development Company (BDC). The FDUS IPO was on June 21, 2011 at a price of $14.75. Its first full quarter dividend was $0.32/share. FDUS closed on 3-11-13 at $18.92/share, paying a dividend of $0.38/share/quarter. Fidus Investment Corporation was formed to continue and expand the business of Fidus Mezzanine Capital, L.P., a fund formed in February 2007 that is licensed by the U.S. Small Business Administration as a small business investment company.
FDUS reports NII of $0.40/share compared to a dividend of $0.38/quarter
Fidus Investment Corporation reported for calendar Q4-12 Total Investment Income of $9.644 million ($0.81/share) and Net Investment Income of $4.713 million ($0.40/share). The Net Increase in Net Assets Resulting from Operations was $5.116 million ($0.43/share). PIK income was not detailed - but most loans had a PIK component. Fee income for Q4-12 was approximately $0.512 million. FDUS' net asset value per share was $15.32 compared with $15.27 at the end of Q3-12; $15.02 at the end of Q2-12; and $14.94 at the end of Q1-12.
The ratio of total operating expenses to average net assets for the 12 months ending 12-31-12 was 11.5% (7.4% for operating expenses and 4.1% for interest expenses). The ratio of net investment income to average net assets was 10.0%. The portfolio turnover was 10.7%.
|Total interest and fee income||9,185||8,760||7,412||7,418|
|Total dividend income||454||157||182||151|
|Interest on idle funds||35||34||34||27|
|Total investment income||9,644||8,980||7,629||7,596|
|NII before taxes||4,704||4,010||3,343||3,634|
|Income tax expense||-9||8||-8||13|
|Net investment income||4,713||4,002||3,351||3,621|
|Net increase in net assets resulting from operations||5,116||6,577||4,199||3,519|
What They Own
As of December 31, 2012, FDUS had debt and equity investments in 30 portfolio companies with a total fair value of $274.249 million. At fair value, FDUS had $32.736 million (11.9%) in senior secured loans; $193.961 million (70.6%) in subordinated debt; $26.430 million (9.7%) in equity; and $21.392 million (7.8%) in warrants. FDUS held equity ownership in 93.3% of its portfolio companies - and the average fully diluted equity ownership in those portfolio companies was 8.4%. The weighted average effective yield on its debt investments was 15.3%.
During the three months ended December 31, 2012, Fidus made investments of $27.8 million in two new portfolio companies and three existing portfolio companies. FDUS received proceeds from repayments and sales of investments totaling $7.3 million.
A Top-Down Run Rate NII Projection
Net originations in Q4-12 were $20.5 million. I would normally use half that number for my Q-13 projections, and cut that again by half when projecting portfolio growth because those new dollars will on be at work half of the quarter. But FDUS has already announced $15 million in investment for January. I will use two thirds of $15 million for growth and guesstimate that new investments made after the conference call will have only a small impact on TII. So 82.5% of a portfolio of (274 + 10) $284 million at a yield of 15.3% would generate $10.863 million in interest income for the quarter. Instead of projecting a normal drop in fee income by half in Q1, I will use two-thirds of the Q4-12 fee income because Q3-12 fee income was the same as Q4-12 (0.333). My dividend projection is $0.200 million and idle fund income projection is in line with prior quarters (0.034). This produces a TII projection of (10.863 + 0.333 + 0.200 + 0.034) $11.430 million. This compares to a consensus revenue projections of $9.930 million with a high of $10.170 million and a low of $9.610 million. I have made logical adjustments to the 'news' already in the marketplace to calculate a bullish TII or revenue projection.
With NII/TII ratios for the last two quarters of 48.86% and 45.69%, I will use the average of 47.3% to generate a NII projection of $5.406 million. With an ending share count of 11.930 million plus a two-thirds addition of the 1.7 million shares issued in early February (adjusted count = 13.063), NII would be $0.4139/share. The consensus Q1-13 NII projection is only $0.40/share. The Q4-12 NII was $0.4026/share and the 2013 consensus projection is for $1.69 or $0.4225/quarter.
Portfolio Quality Metrics
FDUS has no investments on non-accrual. At December 31, FDUS portfolio of companies had a combined ratio of total net debt through Fidus' debt investments to total EBITDA of 3.4 times. In addition, the portfolio companies have a combined ratio of total EBITDA to total cash interest expense of 2.9 times.
What They Owe
With long-term debt ('SBA debentures') of $144.500 million and with shares outstanding of 11.954 million, the debt/share was $12.0880 and the debt/NAV ratio was 78.90%. Interest on SBA debentures is payable semi-annually on March 1 and September 1. The weighted average fixed interest rate for all SBA debentures as of December 31, 2012 was 4.5%. The 10 year SBA interest rates have fallen dramatically. Debt originated in 2008 had interest rates in the 6s. Debt originated in 2009 was in the low 5s and high 4s. Debts originated in 2012 have had rates of 3.483% and below - with the lowest being 2.530%.
Discussion on FDUS' Valuations
The attributes I want in a BDC are (1) a well covered dividend; (2) growing NII/share; (3) growing NAV/share; (4) a growing dividend/share; and (5) a long history of superior performance. 'Newbie' FDUS has three out of five of those attributes. It also lacks NAV growth. But few of the 2011 vintage BDC newbies have produced NAV growth. There is a theory that NAV growth is mainly coming from older BDCs that are marking back up the older vintages of loans. That is logical. But NAV growth also comes from selling new shares above NAV - and having a dividend payout that leaves some NII behind to boost NAV. Even the newbies can do that. If wanting a rising NAV causes me to have an anti-newbie bias, that is a fault I can live with in 2013.
FDUS sells at a price/NAV ratio (based on prices from 3-12-13) of 1.20 compared to a sector average that of 1.20. FDUS sells at a 2013 projected P/E ratio of 10.83 compared to a sector average 11.12. FDUS had a yield of 8.26% compared to a sector average yield of dividend producing BDCS of 8.82%.
BDC Performance and Valuation Spreadsheets
Yield in the spreadsheet below is based on the Q1-13 dividend. Spreadsheet header abbreviations: Div = dividend; EPS = earnings per share; LTM = last twelve months; YTD = year to date. BPS = basis points. The dividend to EPS ratio is a measure of dividend safety. The dividend to NAV ratio is a measure of safety and efficiency. The last four columns measure the percentage change in the 2013 EPS projection and the change in the price target since the beginning of the year; the change in the Q1-13 dividend from the Q1-12 dividend; and the change in the Q4-12 NAV from the Q4-11 NAV. Some BDCs have already started declaring Q2-13 dividends.
|Share Price||Div/||Div/||Q4-12||Price||YTD Percent Change||LTM||LTM|
|With the 10-year Treasury at 2.02% and sector average yield (on Q1 dividends) at 8.82% - the spread is 680 BPS|
|The cap weighted ETF BDCS is up 7.09% year-to-date - with dividends its return is 8.96%|
|Average yield and average Dividend to EPS ratio were divided by 28, not 30, to filter out the effect of the zero payout ACAS and SAR|
|Weeding out ACAS and SAR, the average share price gain is 6.66%|
BDC Earnings Growth & P/E Ratios 03-12
Fiscal and calendar years are not always in sync. BDCs than began fiscal 2013 on or before calendar Q3-12 include AINV, FULL, GAIN, GBDC, GLAD, MCC, PSEC, PFLT, and PNNT. The range metric is the high estimate minus the low estimate, with that result dividend by the consensus estimate - and serves as one of several measurements for assessing risk. All EPS projections are from Yahoo Finance.
|Earnings / Share||Earn. Growth||P/E Ratios||13 EPS Range|
Because my key to judging valuations begins with a "yield + CAGR" assessment, I will start by building a short-term CAGR projection. Q1-12 over Q1-11 dividend growth was (0.34/0.32) 6.25% while Q1-13 over Q1-12 growth (0.38/0.34) was 11.76%. There is at least a high-to-mid single-digit trend in dividend growth. For the NII, growth was (1.54/1.64) -5.8% in 2012; and is projected to grow (1.70/1.54) 10.39% in 2013 and (1.85/1.70) 8.82% in 2014. There is room in the Dividend/NII ratio (1.52/1.70) for dividend growth to exceed NII growth in 2013. For NAV, 2012 growth was (15.32/15.45) - 0.85%. This lack of NAV growth will cause me to cut the other indicators of growth in half. The current 89.41% payout ratio suggests mid to high single digit dividend growth in 2013. The consensus analyst five year forward CAGR found at Yahoo Finance is 8.0%. I would not project FDUS having that high of a dividend growth rate until I see evidence of NAV growth.
I am conservative when it comes to my CAGRs - and I use a 4.5% CAGR for FDUS. With a current yield of 8.26% - the yield plus CAGR metric is 12.76%. Most BDCs have 'yield plus CAGRs' in the low 11s.
Now let us talk about risk. FDUS is too new to have a meaningful historical accuracy of EPS metric. With a spread of 2013 EPS projections [high estimate minus low, with that result divided by the consensus] at 7.06%, the spread indicates average risk. The portfolio debt/EBITDA and interest coverage ratio metrics for FDUS are superior to the sector average data - and this is an indicator of very low risk. The weighted average yield is 15.3% - and this suggests higher than average portfolio risk. With FDUS' debt/NAV at 78.90%, its leverage indicates higher than average risk. The FDUS portfolio is heavy in subordinated debt - the riskier kind of loan. FDUS has zero loans on non-accrual - another very low risk indicator. FDUS has no publicly traded debt to generate a risk level based on that attribute. FDUS does not have a credit facility to generate a risk metrics based on the "LIBOR plus" number. With investments in 30 portfolio companies, the FDUS portfolio is not that granular or diversified - another higher risk metric. None of the metrics indicated average risk; four indicated low risk; and four indicated high risk. This analysis was not done to create a muddy picture - but that sometimes happens.
In total, FDUS has the metrics of an average to higher risk BDC. A different analyst could take the same metrics and make a good argument that the risk is lower than what I currently judge it to be. That means that the risk qualities of FDUS should logically produce a higher 'yield plus CAGR' metric to offset those slightly higher risks.
There is a lot to like about FDUS, and most of those attractive attributes are already priced in. At the current price, FDUS is closer to being a buy than a hold. But I want more of a value in 'yield plus CAGR' to call it a clear buy due to those attributes that I believe make it riskier than average. I also dislike bad NII/TII ratios - and I want to be compensated for that current flaw in FDUS.
Ironically, it is some of the less attractive attributes that have the most potential for you to make money on FDUS in the future. FDUS is small and thinly traded stock that is part of a poorly understood sector. When there is once again more fear than greed in the market, FDUS is likely to drop more than average. FDUS is a very highly rated stock. It has only four ratings and all of them are "outperform" or "strong buy". It is in some danger of a downgrade due to its high valuations. High trading volume on a potential downgrade could easily cause a significant pricing correction. So FDUS is a very good 'buy on the dips' candidate.