FS Investment Hints At A Surprising Openness To Raising Additional Equity

D.A. Davidson’s Arren Cyganovich mentioned FS Investment Corporation’s FSIC 2Q results benefited from “a higher level of fee income as it recycled prepaying investments into existing portfolio companies.”

Cyganovich maintained a Buy rating on the company, with a price target of $10.

Dividend Stable

“Given elevated fee income in 2Q, there is potential for under-earning the dividend in 3Q as the timing of expected fees varies; however, FSIC’s substantial undistributed taxable income of $0.63 per share provides a cushion to the dividend,” the analyst said.

Cyganovich does not expect the company to generate meaningful earnings growth going forward, although the 9.4 percent dividend is stable.

Q2 Performance

Adjust NII for Q2 came in at $0.24, marginally above the estimate and the consensus, driven by higher than anticipated fee income and lower interest expense, offset by lower interest revenue and higher G&A costs.

Book value per share increased 4 percent to $9.18, from $8.82 in Q1, reflecting mostly unrealized gains in the portfolio.

According to the D.A. Davidson report, “Management noted that competitive conditions intensified during the second quarter relative to the first, though they are still finding attractive opportunities that meet their hurdle rates for investing.”

The analyst expects investment activity in Q3, and potentially into Q4, to remain largely the same as in Q2, based mainly on prepayment and exit expectations.

Additional Equity

“For the first time in our memory, management opened the door to raising additional equity, with the caveat that it needs to be accretive with compelling investment opportunities available,” Cyganovich added.

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