Stellus Capital's Valuation Under Pressure Following Q2 Earnings

Stellus Capital Investment Corporation's Q2 earnings have led to unjustified premium valuation, according to a finance expert. The company is a Business Development Company that benefits from the higher interest rate environment, but is facing pressure due to rising interest rates. The expert believes that Stellus Capital's valuation is no longer justified based on its performance.

Stellus Capital Investment Corp's (NYSE: SCM) second-quarter (Q2) earnings have sparked debate among finance experts. The company, a Business Development Company (BDC), reported a net investment income of $0.34 per share and core net investment income of $0.35 per share, both of which met Wall Street expectations [2]. However, some experts argue that the company's valuation is unjustified based on its performance and the current higher interest rate environment.

The company's performance in Q2 was relatively strong, with a total portfolio value of $985.9 million and a net asset value per share decrease of $0.04. Stellus Capital also declared a dividend of $0.40 per share for the third quarter, payable monthly. However, the company's earnings per share (EPS) have not covered the dividend for the last few quarters, raising concerns about sustainability [1].

The higher interest rate environment has been beneficial for Stellus Capital, as it benefits from higher yields on its investment portfolio. However, the rising interest rates also pose a challenge, as they increase the cost of borrowing and may lead to a decrease in the value of existing investments. The company's weighted average yield on total investments was 9.6% in Q2, which is above the historical average but may not be sustainable in the long run [3].

Stellus Capital's valuation has been under scrutiny due to the company's high leverage and the increasing number of nonaccrual loans. The company's regulatory test leverage is about 0.9 times, and its total leverage for GAAP is about 1.7 times, which may limit its flexibility in increasing leverage [1]. Additionally, the company has loans to five portfolio companies on nonaccrual, comprising 6.8% of the total cost and 3.8% of the fair value of the total loan portfolio. While the company expects to receive all principal and income from these investments, the presence of nonaccrual loans raises concerns about the company's risk profile [1].

In conclusion, while Stellus Capital Investment Corp's Q2 earnings were in line with expectations, the company's valuation remains a contentious issue. The company's high leverage, increasing nonaccrual loans, and the current higher interest rate environment have led some experts to question the justification of its premium valuation. Investors should closely monitor the company's performance and the evolving interest rate environment to make informed investment decisions.

References:
[1] https://finance.yahoo.com/news/stellus-capital-investment-corp-scm-072841503.html
[2] https://finance.yahoo.com/news/stellus-capital-q2-earnings-snapshot-224736085.html
[3] https://www.prnewswire.com/news-releases/stellus-capital-investment-corporation-reports-results-for-its-second-fiscal-quarter-ended-june-30-2025-302523620.html