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On Tuesday, UBS began coverage on shares of Morgan Stanley Direct Lending (NYSE:MSDL) with a Buy rating and a price target of $23.50. The firm highlighted the company’s focus on middle market and upper middle market companies, with EBITDA up to approximately $200M. UBS predicts that Morgan Stanley Direct Lending will generate attractive returns of around 12.5% in 2024 and is expected to avoid significant credit issues, provided the economy does not enter a recession.
According to UBS, Morgan Stanley Direct Lending’s defensive portfolio is positioned to outperform the sector, with a 94% first lien portfolio and a loan-to-value (LTV) ratio of 44%, making it one of the most conservative business development companies (BDCs). The coverage notes that the company benefits from its association with the broader Morgan Stanley platform, which offers robust deal sourcing, differentiated due diligence capabilities, and cost efficiency.
UBS also pointed out that Morgan Stanley Direct Lending entered the public markets with a substantial market capitalization of $1.8B, which is advantageous compared to smaller BDCs that often face discounted valuations due to their sub $1B market cap. The firm anticipates that while the total dividend may be adjusted as interest rates change, Morgan Stanley Direct Lending should be able to maintain its base dividend of $0.50, which corresponds to a yield of approximately 10%.
The price target of $23.50 set by UBS is based on a target multiple that includes a roughly 5% premium to the firm’s one-year net asset value (NAV) estimate. This price target suggests a total return potential of about 25% for investors.
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