Capital Southwest: 11% Yield, Robust Progress On Rising Charges (NASDAQ:CSWC)

Whereas rising rates of interest have introduced on increased curiosity bills, the BDC trade has benefited from this pattern, as most BDC’s have a giant majority of floating price investments, and a smaller quantity of floating debt.

One such BDC is Capital Southwest (NASDAQ:CSWC), which has seen its money curiosity funding revenue rise by ~59% for the reason that quarter ending 9/30/22:

Administration estimates that for each 50 foundation level rise in rates of interest, CSWC will earn $.12/share in annual NII:

Firm Profile:

Capital Southwest Company is an internally managed enterprise improvement firm specializing in credit score and personal fairness and enterprise capital investments in center market corporations, mezzanine, later stage, mature, late enterprise, rising progress, buyouts, recapitalizations and progress capital investments. (CSWC web site)

CSWC’s inner administration construction has resulted in decrease than common working bills, which have fallen from 3% in 2019, to 1.9%, as of 6/30/23.

Holdings:

Administration has been steadily rising the % of 1st Lien investments, which stood at 97% as of 6/30/23. It additionally held 3% in 2nd Lien investments.

CSWC’s portfolio elevated to 89 corporations within the interval ending 6/30/23, with a complete honest worth of $1.23B. Its common yield on debt investments is 12.9%, with issuer EBITDA averaging ~$20M:

Enterprise Providers, and Media & Advertising, remained the biggest trade publicity within the quarter ending 6/30/23, rising from 12% to 13%. Healthcare Providers have been regular, at 11%. The two Client classes totaled 16%:

CSWC additionally has a JV, – its I-45 Senior Mortgage Fund (“I-45 SLF”), in partnership with Primary Road Capital. As of 6/30/23, 95% of that portfolio’s investments remained in Senior Loans. There have been ~$132M in debt investments in 33 corporations, with a mean issuer EBITDA of ~$71M, and a 6.4% LIBOR unfold, up from 6.3% within the 3 earlier quarters.

As of 6/30/23, the highest 5 industries comprised 65% of this portfolio, vs. 57% as of three/31/23, led by Enterprise Providers at 17%, up from 15%, and Healthcare at 16%, up from 14%. The common funding dimension was 3% of the portfolio, vs. 2.6% as of three/31/23.

Portfolio Corporations’ Scores:

As with different BDC’s, CSWC’s administration reevaluates its portfolio corporations every quarter. It makes use of a 4-tier system, with 1 being the highest tier, and 4 being the bottom. There have been $9M in upgrades within the newest quarter, with no downgrades. The common funding score was 1.91, vs. 1.93 at 3/31/23, with 96% of the investments within the high 2 tiers.

Earnings:

CSWC’s fiscal yr ends on 3/30. Fiscal Q1 ’24 had main progress in whole and Internet Funding Earnings, of 79% and 97% respectively. NII/Share rose 32.7%, resulting from a 47% rise within the share depend vs. a yr in the past. As with different BDC’s, Curiosity expense was up, rising $4M, however was surpassed by NII.

Fiscal Yr ending 3/31/23 additionally had robust progress, with Whole Funding Earnings up 45%, and NII up 61%. NII/share rose 22%, and Curiosity expense rose 45% for the yr.

New Enterprise:

CSWC originated $111.9M in new commitments within the quarter ending 6/30/23, consisting of investments in 6 new portfolio corporations totaling $98.6M, and add-on commitments in 7 portfolio corporations totaling $13.3M. CSWC acquired proceeds from the sale of 1 fairness funding totaling $3.4M.

Dividends:

At its 9/8/23 value of $22.03, CSWC had a daily dividend yield of 10.17%, and supplemental dividend yield of 1.09%, for a complete yield of 11.26%. It will go ex-dividend this week, on 9/14/23, with a 9/29/23 pay date.

Administration raised the quarterly common dividend for the fifth straight quarter, from $.54 to $.56, and likewise raised the supplemental dividend from $.05 to $.06. CSWC has one of many highest 5-year dividend progress charges within the BDC trade, at 19.5%.

Dividend protection was 1.08X on a Pre-Tax foundation within the quarter ending 6/30/23, and 1.01X for the most recent fiscal yr, ending 3/31/23. That features each common and supplemental dividends. As of 6/30/23, administration estimated that undistributed taxable revenue was $0.34/share.

Administration has delivered a complete worth of $30.66/share, for the reason that 9/30/15 IPO at $17.68, comprised of $10.57 in common dividends, and $3.71 in particular/supplemental dividends:

Profitability & Liquidity:

ROA and ROE each elevated within the 1st half of 2023, transferring increased above BDC trade averages, whereas EBIT Margin was a bit decrease, however remained above common. Debt/NAV eased, and was rather more conservative than the BDC trade common, whereas EBIT/Curiosity was barely decrease, however considerably increased than common.

Debt & Liquidity:

CSWC’s earliest maturity is not till January 2026, when its $140M in 2026 Notes come due. It had ~$227M in liquidity as of 6/30/23, consisting of $12M in money and ~$22^m in undrawn capability.

Through the quarter ending 6/3023, CSWC acquired funding grade scores from each Moody’s and Fitch.

Efficiency:

CSWC has outperformed the BDC trade, the Monetary sector, and the S&P 500 by vast margins over the previous quarter, the previous yr, and thus far in 2023.

Analysts’ Value Targets:

With all of that outperformance, it isn’t stunning that CSWC solely a bit increased than analysts’ common value goal. At $22.03, it’s ~3% under their $22.69 common value goal.

Valuations:

At its 9/8/23 intraday value of $22.03, CSWC was promoting at a 34.5% premium to its $16.38 Value/NAV, a lot increased than the three% common BDC trade low cost to NAV/Share. It usually sells at a premium/NAV – it peaked at over 1.6X in late 2021. It did nonetheless, dip into adverse territory within the 2020 pullback.

Its trailing NII/Share of 8.99X is in step with the BDC common, whereas its ahead P/E of 8.38X is a bit increased than the 7.77X common.

Its 11.26% whole dividend yield is in step with the BDC common, whereas it EV/EBIT is a bit increased than common.

Parting Ideas:

CSWC inventory is 3.75% off of its 52-week excessive of $22.92. We price it a HOLD. It is a good long run revenue holding, in case you can handle to purchase it at a a lot decrease premium.

All tables furnished by Hidden Dividend Shares Plus, except in any other case famous.