Analyst Upgrades Capitala Finance On Dividend Alignment, De-Risked Portfolio

Ladenburg Thalmann upgraded Capitala Finance Corp CPTA to Buy from Neutral following dividend realignment and portfolio diversification.

Late September, Capitala cut its monthly dividend $0.13 from $0.1567, primarily driven by losses in the energy portfolio and spread compression. The brokerage feels the market "overreacted" to the dividend cut as the company's recent action should alleviate some of the investor concerns.

The company announced its exit from various portfolio in the third quarter and a couple of new investments to reduce energy exposure.

According to CPTA, as of August 25, 2016, energy investments accounted for about 3 percent of the portfolio's FV which is in line with the average in the brokerage's business development companies coverage universe.

"We also note that CPTA does not have direct investments in the metals & mining sector, so the stock is now likely less exposed to volatility in the energy/commodity markets," analyst Mickey Schleien wrote in a note.

Schleien cut his 2016 and 2017 NII/share forecasts from $1.88 and $1.71 to $1.78 and $1.60, respectively, due to expected portfolio contraction. The analyst expects CPTA covering its new dividend from NII without incentive fee waivers in 2017.

"Investment merits include the potential to increase market presence through co-investment with the private credit fund, management's 7% stake, a low level of credit watch investments, a direct origination platform which can generate higher risk-adjusted returns," Schleien continued.

The analyst is also optimistic on the potential upside from monetization of equity positions which represented 17 percent of portfolio fair value as of June 30, 2016, and a total return requirement in CPTA's fee structure.

At the time of writing, shares of Capitala rose 4.58 percent to $13.57 versus analyst's $14.75 price target.