Expanding Regulated THC Markets Will Support Durable Yields And Stable Long Term Returns

Catalysts

About Chicago Atlantic BDC

Chicago Atlantic BDC provides senior secured private credit to cannabis and select non-cannabis companies in the lower middle market, targeting above market risk adjusted returns.

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

• Expanding state level legalization and the closure of hemp related loopholes are expected to shift demand into regulated THC markets, supporting healthier pricing and volumes for borrowers, which should sustain high portfolio yields and gross investment income.
• Growing demand for private credit in the lower middle market, combined with banks retrenching from cannabis and smaller borrowers, enhances Chicago Atlantic BDC's ability to maintain strong underwriting standards while deploying its nearly $100 million of available liquidity. This supports loan growth and interest income.
• The mix of predominantly senior secured loans with high interest rate floors and a meaningful share of floating rate exposure positions the portfolio to retain elevated yields even as benchmark rates normalize. This helps protect net interest margins and dividend coverage.
• Direct origination and internally agented structures deepen borrower relationships and improve covenant control, which should help preserve the current record of no non accruals and support stable net asset value and earnings quality over time.
• Diversification into non cannabis credits while keeping average investment size modest reduces concentration risk and broadens the addressable market. This enables a more consistent deployment pace that can support steadier revenue and smoother net income.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Chicago Atlantic BDC's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 62.6% today to 55.1% in 3 years time.
• Analysts expect earnings to reach $35.6 million (and earnings per share of $1.55) by about December 2028, up from $33.0 million today.
• 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 9.3x on those 2028 earnings, up from 7.4x today. This future PE is lower than the current PE for the US Capital Markets industry at 23.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.82%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is deliberately maintaining significant dry powder with approximately $97.8 million of liquidity and only $11 million of debt outstanding. If management accelerates deployment toward the $610 million pipeline, earnings and net investment income could grow meaningfully, which would likely put upward pressure on the share price through higher revenue and expanding net income.
• Secular shifts in cannabis regulation, including the closure of hemp related loopholes and potential migration of hemp derived THC demand into regulated markets, are expected by management to be an unequivocal positive for their target borrowers. This could lift portfolio yields and credit quality, driving higher gross investment income and more resilient net margins.
• The portfolio is almost entirely senior secured with no current non accruals and a weighted average yield of 15.8%, well above the broader BDC industry. If this differentiated risk profile continues to translate into outsized returns relative to peers, investors may re rate the stock upward via a higher earnings multiple and rising net asset value per share.
• With 69% of loans floating and most already at interest rate floors, the company is positioned to defend yields even if benchmark rates fall. This means that net investment income and dividend coverage may remain robust, which could support dividend increases or special distributions that push the share price higher.
• Record originations, growing diversification into non cannabis sectors, and the ability to lend to smaller, less served borrowers with strong covenant packages give the platform ample runway for disciplined growth. If this translates into sustained book value accretion and consistent dividend payments, long term total returns and the share price are likely to trend upward rather than remain flat, supported by rising revenue and earnings.

Valuation

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

• The analysts have a consensus price target of $11.0 for Chicago Atlantic BDC based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be $64.6 million, earnings will come to $35.6 million, and it would be trading on a PE ratio of 9.3x, assuming you use a discount rate of 9.8%.
  
• Given the current share price of $10.77, the analyst price target of $11.0 is 2.1% 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.