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Honeycomb Investment Trust dividend looks secure, says Kepler

Published: 09:31 19 Jul 2021 EDT

Honeycomb Investment Trust plc -

Honeycomb Investment Trust plc (LON:HONY) has a “very diverse” portfolio and has “not missed a beat” with its dividend or net asset value growth during the pandemic, says Kepler Trust Intelligence, highlighting the “highly promising” momentum of the portfolio in 2021.

As analyst Thomas McMahon said in a note, the trust generates a high yield by investing in asset-backed loans to non-bank lenders, which are secured against assets. Its customers mostly lend to consumers, small and medium-sized enterprises and property investors, with the manager looking for investments which have a positive impact on society, for example by providing affordable housing.

Because of their short-dated nature, the underlying loan books can be quickly run down when trouble hits, as was the case in 2020, the analyst added.

“Helped by this feature, HONY has not missed a beat during the pandemic, maintaining its 80p a year dividend with only a minor contribution from reserves.

“As it makes loans there are no capital gains expected, with NAV returns serving as a good proxy for the cash available for distribution.”

In the four months to 30 April, the portfolio delivered an annualised NAV return of 8.4%, more than covering the dividend.

The discount of the share price to NAV has narrowed in recent months, and as of mid-July was 5.7%.

“HONY’s portfolio has shown welcome resilience during the pandemic,” McMahon said.

“It would be natural for investors to worry how exposure to consumers and SMEs would cope with a recession and lockdowns. To some extent, we think this has been a proof of concept: providing finance to lenders secured on their loan portfolios with a cushion provided by being senior in the capital structure has meant there have been no monthly falls in NAV during the pandemic.”

He noted that HONY employs gearing to help it generate its high returns and is currently around 70% debt to equity geared on a net basis, close to the limit of its expected 50-75% range.

It was also noted that buybacks worth circa 10% of the market cap had a significant effect on NAV returns in 2020 and therefore cash available for redistribution, with managers able to maintain net returns partly by increasing the gearing levels.

“Although gearing is still within the range expected, that lever is no longer available to be pulled, so investment returns will need to remain high for the current level of distributions to be met without running down reserves,” the analyst said.

“The momentum behind the portfolio in early 2021 is highly promising in our opinion, with annualised net returns of 8.4% in the first four months running at a rate high enough to replenish the reserves used in 2020 and provide a cushion for the 20p a quarter dividend, which we think looks secure in the immediate future.”

The Kepler research was commissioned by Pollen Street Capital, the manager of the trust. 

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