Turnaround Letter Buy-rated Oaktree Capital Specialty Lending (OCSL) reported encouraging 2Q19 results along with more progress in its transformation of the company. The share price remains at a 16% discount to the $6.55/share.
Oaktree continues to make progress with its transformation of the company since acquiring the management rights in October 2017. Key metrics, including: net investment income; realized and unrealized investment gains; leverage and earnings per share, are all moving in the right direction.
Net asset value (NAV) per share grew 12% from a year ago, after paying a total of $0.38/share in dividends.
Within its portfolio, its investment quality, size and diversification, as well as the leverage at the underlying companies, are improving as well. An important part of its strategy to boost investment income is to reduce its non-interest-earning investments – Oaktree sold over $44 million of these non-earning assets in the quarter and is making progress on the remaining $156 million. The released funds will be invested into proprietary deals sourced by Oaktree, which should produce higher yields and better overall terms.
Oaktree declared a $0.095/share quarterly dividend, unchanged from the prior three quarters.
The largest risks to Oaktree Capital Specialty Lending shares would come from a downturn in the credit cycle (in which investors would likely sell OCSL shares sharply) or a downturn in the economy (which would increase its credit losses and lower its NAV). Rising interest rates would hurt OCSL’s funding costs (79% of its funding is floating rate) although 86% of its portfolio companies’ loans are floating rate (helping increase OCSL’s interest income).
Given the steady and likely further progress, and the 16% discount to NAV, we continue to rate OCSL shares a BUY.
We continue to rate OCSL shares a BUY with a price target of $7.
Disclosure Note: An employee of the Publisher owns OCSL shares.