August 26, 2022
The BDC Reporter undertook a review and annotation of Blackrock Capital Investment's (BKCC) IIQ 2022 earnings conference transcript a few days ago. However, there was nothing that we learned which changed our initial projection for distributions for the years 2022-2026: $0.4000 in every year. The terminal multiple, which we multiply with the last year's distribution to come up with a reasonable Target Price remains at 11.50x. In the last 12 months BKCC has traded just under 11.0x its current distribution at its highest point.
As a result, the Target Price remains $4.60, 17% above the latest opening price on Friday August 26, 2022 of $3.94. At the current price, BKCC yields 10.2%. The projected Total Return is 68%, or 13.5% per annum. 75% of the return will come from those unchanging distributions.
What's notable about BKCC - and the factor most likely to keep our valuation unchanged - is that current earnings do not yet even cover the $0.10 quarterly distribution. As a result - as this BKCC tax document shows - 34% of the $0.40 per share payout of 2021 was treated as a return of capital. That's good for anyone in a taxable account, but demonstrates that the BDC is not yet performing as hoped.
The IIQ 2022 showed the BDC's never-ending turnaround unchanged from the prior quarter where profitability is concerned, with Adjusted Net Investment Income Per Share (ANIIPS) clocking in at $0.08. Again. NAV Per Share dropped, but so did most every BDC's and there were no new non accruals or any strong signs of credit stress. On the contrary, if one reads the conference call transcript.
Not discussed too much by management, but on everyone's mind was what higher rates might mean for BKCC's earnings power going forward. We put our pen to paper, whipped out the calculator and made some common sense assumptions. The bottom line: a 200 basis point increase in the reference rate should carry BKCC's recurring earnings over the $0.40 level on an annual basis - but not by much. When we adjust - very roughly - for potential new bad debts, the BDC will likely match what is earned with what is distributed. This is likely to show up by the IQ 2023.
On paper, BKCC - which is one of the most under-leveraged BDCs out there with a net debt to equity of 0.64x (versus a target of 1.25x) has plenty of room to grow its portfolio size and - by implication - its earnings. However, we're leaving out any incremental earnings from this source given how slow management has been to grow assets. Current liquidity is sufficient only for a modest increase in the balance sheet. We'll revisit this assumption if a clear shift occurs - something we've been expecting for several years now.
As a result, we really only expect BKCC in the next few years to see EPS catch up with the distribution level - set at the $0.10 level since the IIQ of 2020. Maybe BlackRock has other plans for BKCC - a half guess posing as a prediction by the BDC Reporter ever since BlackRock TCP Capital (TCPC) was acquired by the huge asset manager more than 4 years ago. Many other asset managers have combined BDCs under their control and bearing their name in recent years, why not BKCC and TCPC ? However, that's too speculative to serve as a useful projection. We just point out that if BKCC was - say - merged into TCPC at net book value per share, the former's shareholders would see the value of their stock go to $4.57. That's very close to the $4.60 Target Price we've set.
As a result, we've made no changes to any of the numbers in BKCC's Expected Return, except for a slight increase in the analyst consensus for 2023 EPS which has gone from $0.36 90 days ago to 0.37 now. Apparently - based on the consensus of the two analysts covering this stock - we are a little more optimistic about BKCC's earnings power in the medium term. Either way, though, the dividend is likely to remain unmoved.