Jeffrey Gall's  Instablog

This article provides an analysis of Prospect Capital's (PSEC) 3rd quarter 2012 earnings report. PSEC is a business development company that lends to and invests in private and microcap public businesses. A large majority of their holdings are in industries related to the Energy Sector.

PSEC continues to:

• grow book value
• increase dividends
• cover dividends with net investment income
• superior credit quality of underlying portfolio
• execute secondary offerings above book value (thereby increasing book value on a per share basis)

For the quarter, PSEC delivered solid numbers, and appears to be well-situated to continue its trend of gradually increasing its dividend and growing book value for the quarters ahead.

Highlights

• Net investment income per share of income of $0.46 per share, which covers the quarter's dividend by a factor of 1.5
• increased books value by $0.05 Q-over-Q while paying out just over $0.30 in dividends
• This is the trend I like to see: PSEC's net asset value (NAV) in the last eight quarters is as follows (from oldest to newest): 10.25, 10.30, 10.36, 10.41, 10.69, 10,82, 10.83, 10.88
• During the last 8 quarters, PSEC has increased book value by 6.1% while paying out $2.44 in dividends
• Zero loans placed on non-accrual status in 5 years. Per the earnings report:

We are pleased with the overall credit quality of our portfolio, with many of our companies generating year-over-year and sequential growth in top-line revenues and bottom-line profits. None of our loans originated in approximately five years have gone on non-accrual status.

• Portfolio fair value: $0.99 on the dollar (cost of 2.698B versus fair value of 2.664B). To put this metric in perspective, another business development company that I follow, Gladstone Capital (GLAD), currently values its portfolio at $0.77 on the dollar.
• Continued improvement in portfolio credit metrics

The fair market value of our loan assets on non-accrual as a percentage of total assets stood at approximately 1.5% on September 30, 2012, down from 1.9% on June 30, 2012 and 3.5% on June 30, 2011.

• Equity offerings at: $11.86, $11.59, $11.53, $11.15, and $10.96 - all of which were done above NAV and therefore accretive to NAV
• Strong balance sheet:

Our debt to equity ratio stood at less than 45% (and less than 35% after subtraction of cash and equivalents) at September 30, 2012.

Disclosure: I am long PSEC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

1.  Motivation

This note presents a method for predicting the quarterly revenues of Freeseas Inc. (FREE, FREED) prior to earnings release.   This method is shown to be unbiased (i.e. no systematic overestimation or underestimation of revenues), and accurate to with +/- 5% of FREE’s actually quarterly revenues.  It is the hope that readers will be able to apply this method to other shipping companies, and ultimately estimate other aspects of a shipping company’s balance sheet (e.g. quarterly free cash flow, earnings per share, etc.).

2.  Method

The following steps are based on actual numbers from FREE’s 4^th quarter of 2009.

Step 1.  Create a new spreadsheet and add all ships and their charter rates in units of dollars per day.  FREE’s current charter rates are found on their webpage and their subsequent updated charter rates are provided via press releases.   The first set of rates were the charter rates as of 9/1/2009.

	09/01/09
Destiny	10000
Envoy	7900
Goddess	12500
Hero	14500
Impala	8750
Jupiter	25216
Knight	8300
Lady	51150
Maverick	9500
Neptune	15000

 

Step 2.  Every time FREE updates its charter rates, update the spreadsheet accordingly.  Be sure to note the date of the press release at the top of the column.  For example, during Q4 2009, FREE updated its charter rates two other times during the quarter – 11/19/2009 and 12/15/2009.

	09/01/09	11/19/09	12/15/09
Destiny	10000	9075	14000
Envoy	7900	7200	7200
Goddess	12500	12500	12500
Hero	14500	11500	11500
Impala	8750	11500	13500
Jupiter	25216	25216	25216
Knight	8300	7000	15000
Lady	51150	51150	51150
Maverick	9500	10000	14000
Neptune	15000	20000	16000

 

  Step 3.  Calculate the number of days between charter changes, and make sure the total number of days sum to the total number of days in the quarter.  For example, in Q4 2009:

# days 9/1 – 11/18	# days 11/19 – 12/15	# days 12/16 – 12/31	total
49	27	16	92

 

Step 4.  Multiply the number of days by the appropriate charter rate and sum over all ships.  For example, in Q4 2009:

Ship name cum. Revs   cum. Revs   cum. Revs Destiny 49 490000 27 245025 16 224000 Envoy 49 387100 27 194400 16 115200 Goddess 49 612500 27 337500 16 200000 Hero 49 710500 27 310500 16 184000 Impala 49 428750 27 310500 16 216000 Jupiter 49 1235584 27 680832 16 403456 Knight 49 406700 27 189000 16 240000 Lady 49 2506350 27 1381050 16 818400 Maverick 49 465500 27 270000 16 224000 Neptune 49 735000 27 540000 16 256000 SUM   7977984   4458807   2881056						cummulative revenues
Step 5.  Sum all of the cumulative revenue values: sum 1 sum 2 sum 3 total total (million) 7977984 4458807 2881056 15317847 15.32					16	224000

Step 6.  In order to calculate the total revenues, we need to multiply the total from step 5 by the utilization rate.  The utilization rate is essentially the percentage of time that FREE’s ships were actually earning revenues (i.e. transporting goods).  I assumed an utilization rate of 0.94, which was pulled from the previous quarter’s earnings report.  The estimated quarterly revenues then become:  0.94 x 15.32 = 14.25 million.

This is a simple method for estimating FREE’s quarterly revenues.

Verification

I applied this method to Q409, Q110, and Q210.  The table below highlights my performance. 

	forecast	actual	% off
Q4 2009	14.2456	14.5	-1.8
Q1 2010	15.1076	15.66	-3.5
Q2 2010	16.9608	16.5	2.8

Conclusion

This method can be used to estimate a shipping company’s revenues prior to an earnings release.  The drybulk company, Freeseas, was used as an example since it operates in the spot market and updates its charter rates often.  It should be noted that sometimes charter terms include a ballast bonus.  These are one-time fees earned that must also be added to the quarterly revenue estimate.  Future comments will provide methods for analyzing other aspects of Freeseas balance sheet.

 

Disclosure: long FREE

Overview

HSA and HMH are diversified closed-end bond funds managed by Brookfield Investment Management. 

On 9.22.2009, I went long HSA @ 4.93 per share cost.  A month later, I established a similar position in HMH @ 4.63.  With dividend reinvestment, I have an unrealized 22% and 19% gain, respectively, in HSA and HMH.  What's interesting is that on 9.22.2009, I established a positon in SPY, a S&P 500 spider.  With dividend reinvestment, that position is only up 10% even with the S&P's rally this past month.  HSA and HMH have clearly outperformed the broader market over the past 12 months.

Discussion

I will highlight why HSA/HMH were attractive at the time, and continue to be so today.

1.  diversified holdings with well known companies

Hold bonds in all sectors of the market, e.g. energy, consumer staples, etc.

HSA/HMH is comprised of bonds from companies such as:

• Alcoa
• Rogers Communications
• Domtar Corp
• Bombardier
• Levi Strauss & Co
• Chesapeake Energy Corp

2.  expense ratio worth the cost

Purchasing bonds as a private investor is not always easy.  One, we don't have access to all types of bonds via standard brokerage accounts (e.g. Schwab).  Two, some of these bond deals were done via private transactions.  

Also, if I were to attempting to create a diversified portfolio of individual bonds the cost of being each bond would most likely be well above the small expense ratio paid to Brookfield.

3.  HSA,HMH trade below NAV

HSA and HMH trade at roughly a 10% discount to NAV.  Buying the stock today is analogous to buying these bonds at 90 cents on the dollar.  

4.  Nice dividends

Both of these stocks yield close to 9%.  With dividend reinvestment, I have increased substantially to the number of shares owned, and am continually purchasing below NAV.   Both recipes for long-term success.

Conclusion

I remain bullish on my HMH/HSA holdings.   I look forward to updating my position in the fall of 2011.


Disclosure: long HMH HSA