Thursday, February 20, 2014

AINV: February 2014 Report



Apollo Investment (AINV) is part of my suggested ‘underdog’ portfolio and recently reported favorable results beating EPS estimates for a third quarter in a row along with large net asset value (“NAV”) growth, driving its price to new 52-week highs.  I consider AINV a ‘Hold’ due to its riskier profile and current pricing.  AINV has resided in the bottom half of my rankings since I began coverage but recently was upgraded from a ‘Sell’ due to its continued progression to realign its portfolio to maximize its risk vs. return to shareholders.

On the most recent earnings call management stated “Since early 2012, we have been focused on investing in secured debt, which we believe continues to offer the most attractive risk-adjusted returns. Accordingly, 63% of investments made during the period were secured debt. And at the end of December, secured debt accounted for 51% of the portfolio, up from 32% when we started to reposition the portfolio.”

I believe this is the right move and have adjusted my risk rankings to reflect these continued changes.  AINV is outspoken about its willingness to take on more leverage both in its portfolio companies and as a company.  This makes it riskier than other BDCs but hopefully with higher returns.  Management is focused on creating value through monetizing some of its higher risk assets as well as equity positions in many of the portfolio companies.  These efforts have grown its NAV per share 5% over the last two quarters, more than most BDCs (see page 9) and is a key reason for upgrading the stock.  These increases in value along with its 9% dividend yield provide for higher than average returns.

Some of my key concerns are the amount of leverage within its portfolio companies currently at 5.2 times EBITDA and higher than most BDCs.  I believe leverage of over five times cash flow increases the risk of non-payment especially during an economic downturn.  The company has stated this as a key differentiator and a willingness to invest in highly levered companies to increase returns to shareholders.  This, along with 7% of the portfolio in ‘structured products’ increases the amount of risk to shareholders.

This article discusses the pros and cons of investing in AINV along with earnings projections, dividend sustainability and growth potential over the coming quarters including best and worst case scenarios as well as key risk considerations, updated rankings/pricing compared to the other 25 BDCs that I follow.
Also included:
  • Interest rate sensitivity analysis
  • Timing for future share issuances
  • Projected total returns compared to the other BDCs
  • Price target based on expected total returns
  • Pricing based on multiples of NAV and projected earnings
  • Overall rankings and recommendations

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