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Harvest Capital : Stock Buy-Back Announced

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Micro Business Development Company Harvest Capital (HCAP) announced a new stock buy-back program. Here are the details and some of the metrics:

BASIC FACTS

In a press release HCAP, which has had buyback programs before, announced its intention to repurchase up to $3mn of shares, when and if appropriate. The program will continue til June 2018.

WHY ?

The BDC Reporter was a little surprised at the move by HCAP. Yes, the BDC’s stock is $13.27, and Net Asset Value at $13.89 in the latest 10-Q (see above) but HCAP is far from being one of those “deep discount to book” BDCs.

We’ve recently begun using Closed-End Fund Advisors excellent public data regarding the BDC Universe. When we reviewed HCAP’s discount in the context of all the BDCs on the list with a discount of price to book, the BDC was far from the top.

As we write, HCAP’s stock price is only (4%) off its book value.

Looking at the charts, HCAP did have a slow start to 2017, with the stock price dropping by (5.7%).  However, the BDC climbed out of that basement weeks ago and is up marginally on the year.

In fact, as the chart shows, HCAP is ever so slightly ahead of the BDC Sector Exchange Traded Note tied to the Wells Fargo BDC Index in 2017.

HCAP hit its all-time high on March 6, 2017 at $14.0 a share

If we pull back a little and look at the 2 year chart, we’ll see HCAP has – along with most other BDCs – shot up in price since early 2016: up 47% from lowest to highest.

LATEST EARNINGS

The most recent earnings were not terribly impressive, with “Core Net Investment Income” dropping, and 3 investments on non-accrual. Here are brief highlights from the press release:

For the quarter ended March 31, 2017, the Company reported a 13.0% decrease in net investment income and core net investment income, compared to the quarter ended March 31, 2016. Net investment income and core net investment income were $2.2 million, or $0.35 per share, for the quarter ended March 31, 2017, compared to $2.6 million, or $0.41 per share, for the quarter ended March 31, 2016.

The increase in net income was primarily attributable to a $1.2 million positive change in net realized gains (losses) on investments and a $1.6 million positive change in net unrealized appreciation (depreciation), partially offset by a $0.3 million decrease in net investment income, for the quarter ended March 31, 2017, as compared to the quarter ended March 31, 2016.

Net investment income and core net investment income decreased primarily as a result of lower non-recurring interest and fee income and higher non-accruals in the quarter ended March 31, 2017, as compared to the quarter ended March 31, 2016.

The BDC does trade at a lower than some multiple to reported earnings of under 10x, but that appears appropriate given its small size, high proportion of Pay-In-Kind and declining investment yield.

BOTTOM LINE

The BDC Reporter is surprised that HCAP’s Board and Investment Advisor bothered to take this step.

In any case,the amount involved is small and would result in the repurchase of well below 5% of total shares outstanding.

SUMMARY

  • HCAP has announced a $3mn stock buyback program to last through June 2018.
  • The BDC’s discount to NAV is minor, and has been improving for weeks, and the stock has been strongly up since 2016.
  • There is no obvious reason for instituting a buyback at this time and at this size.
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