Prospect Capital's Strong Performance Not Expected To Continue, Says BMO

BMO is not expecting the strong performance of Prospect Capital Corporation (NASDAQ: PSEC) shares to continue, given the brokerage's outlook for flat NAV and rising inflation expectations.

BMO, which maintains its Market Perform rating and $7 price target on the stock, said Prospect Capital was the second-best performing stock in BMO's coverage universe, outperforming the S&P 500 Index by some 27 percent year-to-date.

"We will consider pegging our PSEC target price at a multiple closer to 1x NAV when U.S. inflation expectations abate (typically BDC shares trade inversely with inflation forecasts) and when NAV per share starts to grow again. This is an unlikely near-term combination of events, in our view; therefore, we maintain our Market Perform rating on PSEC shares," analyst James Fotheringham wrote in a note.

Related Link: Barclays "Little Concerned" With Prospect Capital's Core Earnings Run Rate

The analyst's $7 price target implies 6 percent downside for shares (including the dividend yield) and is predicated on a heavily discounted multiple to NAV (0.7x).

The analyst cut his FY2017 core NOI per share forecast to $0.99 (from $1.00) on lower than previously expected net originations, while his FY2018 NOI per share forecast is unchanged at $1.00.

Prospect Capital's fourth quarter core net operating income (NOI) per share of $0.22 missed BMO's $0.24 estimate by 8 percent and consensus of $0.25 by 12 percent on lower-than-expected net originations.

However, NAV per share increased for the first time in a year, up a penny from last quarter to $9.62, following unrealized gains. But, the analyst is not forecasting growth in NAV going forward.

At time of writing, shares of Prospect Capital were down 0.45 percent to $8.61.

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