On Monday, RBC (TSX:RY) Capital Markets maintained a Sector Perform rating on FS KKR Capital Corp. (NYSE:FSK), while raising the price target to $21 from the previous $20. The adjustment follows a review of the company's earnings per share estimates subsequent to their third-quarter results.
The analyst from RBC Capital noted that FS KKR Capital has been actively reducing non-accruals within its portfolio, which is a positive sign. However, the analyst also observed an increase in payment-in-kind (PIK) income quarter over quarter. Payment-in-kind income refers to the use of goods or services as payment instead of cash.
Despite FS KKR Capital trading at a discount to the projected 2025 estimated net asset value (NAV) — at 0.88 times — the analyst believes that the risk/reward profile is balanced. This assessment takes into account the legacy portfolio, which constitutes approximately 12% of the total portfolio.
The analyst also mentioned that a surge in mergers and acquisitions (M&A) activity could provide additional opportunities for portfolio rotation, which could be beneficial for the company. The decision to maintain the Sector Perform rating and adjust the price target reflects these considerations.
The revised price target of $21 indicates RBC Capital's expectation for the potential value of FS KKR Capital's shares, providing a reference for investors in the context of the company's financial performance and market activities.
In other recent news, FS KKR Capital Corp has secured a $600 million underwriting agreement for the issuance and sale of notes, due to mature in 2030, with a consortium of underwriters led by BofA Securities, Inc., BMO (TSX:BMO) Capital Markets Corp., J.P. Morgan Securities LLC, KKR Capital Markets LLC, SMBC Nikko Securities America, Inc., and Truist Securities, Inc. The capital raised is expected to be used for general corporate purposes, which may include repayment of existing debt, investments, or other business opportunities.
In addition, FS KKR Capital Corp reported strong third-quarter earnings, with net investment income exceeding expectations at $0.77 per share and an adjusted net investment income of $0.74 per share. The company also declared a fourth-quarter distribution of $0.70 per share and made new investments of approximately $1.1 billion, primarily targeting existing portfolio companies.
Despite a slight decrease in the net asset value per share from $23.95 to $23.82, the company anticipates a GAAP net investment income of about $0.63 per share for the fourth quarter.
InvestingPro Insights
Recent data from InvestingPro adds depth to RBC Capital's analysis of FS KKR Capital Corp. (NYSE:FSK). The company's P/E ratio of 11.2 suggests a relatively attractive valuation, aligning with the analyst's observation of FSK trading at a discount to its projected 2025 NAV. This is further supported by an InvestingPro Tip indicating that FSK has been profitable over the last twelve months.
Notably, FSK boasts a substantial dividend yield of 13.71%, which is consistent with the InvestingPro Tip highlighting that the company "pays a significant dividend to shareholders." This high yield could be particularly appealing to income-focused investors, especially given that FSK has maintained dividend payments for 11 consecutive years.
The company's stock is currently trading near its 52-week high, with a price at 99.34% of its 52-week peak. This performance is reflected in the impressive YTD price total return of 18.57%, suggesting strong investor confidence despite the challenges noted in the RBC Capital report.
For investors seeking a more comprehensive analysis, InvestingPro offers 6 additional tips for FSK, providing a broader perspective on the company's financial health and market position.
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