Venture Debt Demand And Monroe Merger Will Support Fair Long Term Outlook

Catalysts

About Horizon Technology Finance

Horizon Technology Finance provides venture debt solutions to high growth technology and life sciences companies and seeks to generate attractive returns through a high yielding, primarily floating rate portfolio.

What are the underlying business or industry changes driving this perspective?

• The pending merger with MRCC and deeper alignment with Monroe Capital are expected to materially increase assets under management and operating scale. This may support higher net investment income and improved operating margins as fixed costs are leveraged over a larger portfolio.
• Growing demand for venture debt as an attractive alternative or complement to equity financing, particularly for VC backed technology and life sciences companies preparing for exits, may sustain strong onboarding yields and support revenue growth.
• The reopening of IPO and M and A exit markets for technology companies, including those benefiting from artificial intelligence and defense technology investment, is likely to enhance warrant and equity monetization opportunities, which could lift earnings and net asset value over time.
• A robust pipeline and committed backlog of larger venture loans, supported by newly added originators and Monroe Capital’s sourcing capabilities, positions Horizon to grow its portfolio toward target leverage. This may increase interest income and potentially stabilize or expand distributions.
• The high proportion of floating rate loans with interest rate floors, combined with industry leading portfolio yields and disciplined credit underwriting, may help preserve portfolio yield and protect net interest margins even as the rate environment evolves.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Horizon Technology Finance's revenue will grow by 16.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from -24.2% today to 95.0% in 3 years time.
• Analysts expect earnings to reach $149.1 million (and earnings per share of $2.16) by about December 2028, up from $-23.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $131.3 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 3.5x on those 2028 earnings, up from -12.5x today. This future PE is lower than the current PE for the US Capital Markets industry at 25.0x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.82%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The planned NAV for NAV merger with MRCC and deeper integration with Monroe Capital could unlock meaningful operating leverage and origination scale, which may increase net investment income and support a higher valuation multiple. This could push the share price above current levels and contradict a flat price outlook by improving earnings and net margins over time.
• A structurally stronger venture ecosystem with rising VC investment, a reopening IPO and M and A market, and growing demand for venture debt, particularly in AI and defense technology, could drive sustained high onboarding yields and greater warrant monetization. This would support faster revenue and earnings growth than implied by a stable share price assumption.
• The company’s ability to consistently originate larger, high yielding floating rate loans while maintaining strong credit performance, demonstrated by recent successful resolutions of stressed investments and a high proportion of 3 and 4 rated credits, may lead to durable portfolio yields above the long term 14.5 to 15 percent norm. This would be a positive surprise for net interest income and net asset value growth that markets could reward with a higher share price.
• Material balance sheet capacity, including significant unused credit facilities, a net leverage ratio below the 1.2 to 1.3 target, and $151 million of liquidity, gives Horizon ample room to grow its $603 million portfolio toward its potential $460 million of new investment capacity. This could scale earnings and improve return on equity, challenging the assumption that the share price will remain unchanged.
• If exit markets continue to improve and equity and warrant positions in 95 portfolio companies begin to realize more frequent and higher value outcomes, the incremental gains to net asset value and non interest income could cause book value per share and earnings per share to recover toward prior highs, making a flat share price inconsistent with improving long term fundamentals.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $6.8 for Horizon Technology Finance based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $7.5, and the most bearish reporting a price target of just $6.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $156.9 million, earnings will come to $149.1 million, and it would be trading on a PE ratio of 3.5x, assuming you use a discount rate of 11.8%.
  
• Given the current share price of $6.73, the analyst price target of $6.8 is 1.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.