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Silver Spike Investment: Potential Gem's 8% Yield Not As Risky As It Seems
SSICSilver Spike Investment (SSIC) Seeking Alpha·2024-06-24 18:42

Industry Overview - The cannabis industry grew to 31.6billionlastyearandisexpectedtoreach31.6 billion last year and is expected to reach 35 billion this year, with nearly 50% growth projected over the next six years [4] - Optimism surrounding potential amendments to Section 280E could benefit cannabis companies, especially with more states likely to legalize cannabis [4] - Federal legalization of cannabis could lead to tax credits and deductions for companies in the industry, positively impacting their cash flows [4] Company Positioning - Silver Spike Investment Corp (SSIC) is the only publicly-traded Business Development Company (BDC) that directly lends to the cannabis industry, positioning it well for growth [4] - SSIC currently lends to Curaleaf, one of the largest publicly-traded cannabis companies, which is expected to become more profitable as the industry expands [4] - SSIC has a market cap of less than 100millionandasmallportfoliovaluedatapproximately100 million and a small portfolio valued at approximately 55 million, making it a speculative investment [11] Financial Performance - SSIC reported a net investment income of -0.01forQ1,asignificantdropfrom0.01 for Q1, a significant drop from 0.28 in the prior quarter and 0.22ayearago[19]−TotalinvestmentincomeforQ1was0.22 a year ago [19] - Total investment income for Q1 was 2.8 million, slightly down from 2.9millioninQ4butup162.9 million in Q4 but up 16% year-over-year from 2.5 million [19] - The company incurred a 2.1millionchargerelatedtoarecentacquisition,impactingitsnetinvestmentincome[20]DividendSafety−Despitethenegativenetinvestmentincome,SSIC′sdividendyieldremainswell−covered,withacoverageratioof1322.1 million charge related to a recent acquisition, impacting its net investment income [20] Dividend Safety - Despite the negative net investment income, SSIC's dividend yield remains well-covered, with a coverage ratio of 132% when excluding the transaction expense [20] - SSIC's dividend of 0.25 was not covered during the latest quarter, but the company has no debt and 33.2millionincash,allowingittocontinuefundingdividendsifnecessary[20]AcquisitionImpact−SSICisexpectedtocloseanacquisitionwithChicagoAtlanticRealEstateFinance,whichwilladd27companiesworthapproximately33.2 million in cash, allowing it to continue funding dividends if necessary [20] Acquisition Impact - SSIC is expected to close an acquisition with Chicago Atlantic Real Estate Finance, which will add 27 companies worth approximately 187 million to its portfolio [19] - This acquisition is anticipated to enhance SSIC's scale and liquidity while diversifying its portfolio, although it will dilute existing shareholders [19] Market Valuation - SSIC is currently trading at 12pershare,whichis512 per share, which is 5% above Wall Street's price target of 11.40, indicating it may be overvalued [22] - Despite the potential for further upside due to the growth of the cannabis industry, the stock may see a pullback in price [22]