Putting the discount into perspective

Volta’s share price discount to NAV (26%) is now back to the levels seen in the early stages of the pandemic. This appears anomalous with 6.3% total shareholder return in 1Q’24, the annualised cashflows in excess of 20%, the consensus outlook, as well as the structured debt finance and all investment company averages (11% and 6%, respectively). In our view, any discount reflects investor concerns that either the current NAV is unrealistic or that it cannot be achieved in the future. In this note, we examine what may drive such concerns, concluding they are more sentiment- than reality-driven; as such, they may be less likely to be sustained.

• Why the current NAV is realistic: Volta adopts a mark-to-market approach. The NAV should be real unless the pricing sources are inaccurate, which appears unlikely. The MTM approach captures sentiment risk in the asset valuation. In our view, the risk of yet-to-be-identified losses affecting the current NAV materially are low. There are multiple checks and reviews to ensure the process is robust.
• Resilience: In previous notes, we have outlined why CLO structures have incremental risk controls and that the expected losses from such vehicles are well below corporate credit markets as a whole. We further outlined that AXA IM has consistently picked CLO managers with below-average losses.
• Valuation: Volta trades at a double discount: its share price is at a 26% discount to NAV, and we believe its MTM NAV still includes a further sentiment-driven discount to the present value of expected cashflows. Volta targets an 8% of NAV dividend (10.2% 2024E yield on current share price).
• Risks: Credit risk is a key sensitivity. In this note, we examine the valuation of assets, highlighting the multiple controls to ensure its validity. The NAV is exposed to sentiment towards its own and underlying markets. Volta’s long $ position is only partially hedged.
• Investment summary: Volta is an investment for sophisticated investors, as both the NAV and the discount to NAV may be volatile over time. Fundamental long-term returns have been robust: 8.0% p.a. (dividend reinvested basis) since inception. Volta’s performance relative to that of its peers has been strong, and returns for investments made after the financial crisis were double those in prior years.

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