Sometimes you can almost feel the market changing its view. This seems to be the case with the PennantPark Investment Corp (PNNT) which released Q3 numbers the other week.
PNNT NAV gained 2.7% – outpacing the sector and causing valuation as of the close to drop to 70% which has now moved back to 73%. GAAP NII of $0.168 was a big increase from the previous quarter and well above the $0.12 dividend.
The company is going through a strategy rotation with a shift towards income-producing assets (which explains its relatively low dividend yield at present). It also means its dividend yield is very likely to rise substantially from current levels.
The company has put up very strong historic total NAV returns – well ahead of the sector average and in nearly double digits for various time horizons.
Recent performance has been very strong as well.
At the same time the company’s valuation is way below the sector average which is remarkably cheap for its historic and recent returns.
PNNT have refinanced their 5.5% notes with 4% notes which is a big tailwind for income as it’s more than a quarter of their overall debt and should push their overall debt cost towards 3.25% from 3.5%.
Equity allocation (which is very large at 27% or so) has decreased a bit and loan allocation increased which is a plus for additional income generation and is a step in the right direction of moving the portfolio back to a sensible BDC allocation with a low double-digit equity allocation.
Net new investments were positive last quarter which is also good to see. Non-accruals remain at zero. Yield on debt investments is moving lower but that is offset by a total increase in income-producing assets. PNNT remains fairly attractive here though clearly there are legacy energy issues in the portfolio (which were converted into equity – hence the unusually large equity allocation). RAM Energy is 12% of the NAV (marked at 50% of cost) though the discount more than compensates for the holding. PNNT remains in our the High Income Portfolio where it is already up 10% in 5 weeks.
We have carried PNNT in our High Income Portfolio for about 6 weeks and since then it is up 10%. What’s not to love?
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