Horizon Technology Finance Stock: A High Quality, 10.4% Yielding Tech-Focused BDC (HRZN)

ByArlen Simpelo

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Horizon Know-how Finance Company (NASDAQ:HRZN) suffered a 24% valuation reduce in 2022, and the business development enterprise is now worthy of getting at e book price.

Horizon Technologies Finance is a substantial-yielding, technology-centered BDC with a produce that just lately surpassed 10%. To assistance its development, the business development business has a secured, credit card debt-oriented investment decision portfolio.

Horizon Know-how Finance’s credit rating portfolio is doing effectively, and the stock could inevitably trade at a better book worth various.

Another Gem In the BDC Sector

Business development providers have experienced sizeable valuation losses in 2022, owing to investors’ expectation that recession things will have an effects on the sector’s prospective customers for e book value advancement.

For the duration of recessions, it is far more complicated for business development corporations to create optimistic growth in important metrics these as web expense revenue (due to portfolio money strain) and ebook benefit (because of to stress on credit history good quality which tends to increase through recessions).

With that said, I think it is time for dividend traders to concentrate on BDCs that, due to their credit efficiency and floating amount exposure, have the possible to outperform the sector.

Horizon Engineering Finance is a regular-paying specialty finance organization with a rapidly growing expense portfolio. The portfolio experienced 50 debt investments and 81 warrant positions as of March 31, 2022.

Credit card debt investments built by the BDC are ordinarily Senior Expression Financial loans that offer the BDC with a superior level of funds safety. In March, the firm’s credit card debt, warrant, and equity positions had been valued at $515 million, and the BDC was invested at a 12.4% annualized average portfolio produce.

Portfolio Composition

Portfolio Composition (Horizon Engineering Finance)

Horizon Know-how Finance is an fascinating dividend investment decision since it principally invests in enhancement-stage organizations in the technologies, lifetime science, health care data, and companies industries, and it participates in the upside of those people firms via fairness and warrant positions.

Horizon Technologies Finance is similar in many approaches to Hercules Money, a different BDC that seeks to capitalize on equity upside in specific engineering niches.

Horizon Technological know-how Finance has developed and nurtured a know-how-aim in venture funds, which is where by the BDC sees the biggest prospect for superior returns. The BDC is properly-diversified and steers apparent of cyclical industries that pose earnings and dollars movement threats. Biotechnology as an business accounts for 22% of the BDC’s overall field publicity.

Investments Overview

Investments Overview (Horizon Technological innovation Finance)

NII Exceeds Distributions

Horizon Know-how Finance’s portfolio created $1.41 for every share in internet expense money in 2021, even though BDC paid out $1.25 for each share, implying an 89% pay-out ratio. The dividend fork out-out ratio was 90% from 2019 to 2021, so investors can moderately assume that the $.10 for every share month to month dividend is sustainable.

Sail Via The Next Desire Fee Climbing Cycle With Horizon Technological innovation Finance

The central financial institution is aggressively boosting rates, generating now an superb time to pick out BDCs with the finest quantity of floating charge publicity.

Horizon Know-how Finance buildings its finance deals carefully to assure 100% floating rate exposure, which implies HRZN has more floating amount publicity than the normal business development firm in the sector.

This implies that a sizeable boost in interest fees will advantage Horizon Technology Finance much more than other BDCs. Centered on the BDC’s curiosity sensitivity desk, a 200-basis-point increase in curiosity fees is predicted to final result in a $8.26 million improve in Horizon Know-how Finance’s internet property.

Interest Sensitivity

Interest Sensitivity (Horizon Know-how Finance)

Investing At Book Worth

Since of their similarities in specific industries and deal constructions, I believe Hercules Money is the ideal similar for Horizon Know-how Finance. Hercules Funds has a P/B ratio of 1.3x, owing to the BDC’s large results with its tech-targ
eted expense tactic that combines desire payments with fairness upside.

For the reason that the current market benefits HTGC for the consistency of its portfolio results, the BDC trades at a high quality to book value. Horizon Technological innovation Finance at present has a P/B ratio of 1.0x, implying that HRZN may be a greater obtain than Hercules Funds based mostly entirely on ebook value.

Data by YCharts

Are There Any Asset Good quality Problems?

Ideal now, I will not see any key difficulties. Horizon Know-how Finance experienced one personal loan that was past owing as of March 31, 2022. The price tag of this expense was $11.9 million, and the reasonable value was $5.5 million. On a reasonable worth foundation, the non-accrual ratio was about 1%, primarily based on the total portfolio value of $515 million.

Why Horizon Engineering Finance Could See A Decreased Inventory Selling price

To receive up-to-day data about Horizon Engineering Finance’s portfolio efficiency, buyers need to intently watch the BDC’s ebook value trend and non-accrual ratio. With only just one non-accrual investment decision, I would say portfolio high-quality is powerful, but factors can usually alter for the worse, particularly if the BDC sector is destabilized by a economic downturn.

My Summary

Now that Horizon Know-how Finance is trading at e-book benefit, the proposition will become a lot more attractive.

HRZN is one particular of the very best bets in the BDC sector for mounting curiosity rates since it is 100% exposed to floating costs.

The dividend is coated and fairly safe and sound, even though non-accruals are saved to a least.

Horizon Technological innovation Finance is distinguished by its technological focus, and equity appreciation outcomes in the payment of exclusive dividends.