A few weeks ago I included Pollen Street Secured Lending, PSSL, on my funds trading list – at 750p a share. Today its trading at around 832p, which represents a roughly 10% increase, putting the shares above my short term target price for the fund. The discount is now around 12.5% and the current yield is 5.8%. With a new manager imminent at PSSL, its possible we could see the shares go higher but I think that’s unlikely given the looming chance that we may see some big impairments as the wider economy stalls in the autumn.
My own suggestion would now be to sell into this strength at PSSL and trade into Honeycomb (HONY) also managed by PollenStreet. This swap between PSSl and HONY is not my idea – Alan Brierley and Ben Newell suggested it in a note this week in a note for Investec. That note elegantly crystallises my own observations: Honeycomb for many years traded at a huge premium which I felt was entirely unjustified while PSSL languished at a huge discount, which also felt unjustified. For much of the last few years I’ve been suggesting buying PSSL and shorting Honeycomb, which would have been a very profitable trade.
I’ve had my issues with the stand off between the board at PSSL and the manager but that shouldn’t obscure the fact that the manager Pollen Street is clearly an impressive operator and knows the credit and lending space very well. As the Investec paper from this week suggests, Honeycomb – the original Pollen St vehicle – has a more than decent long term track record of steady NAV returns. The Investec report suggests that monthly returns have been 42 bps, 42 bps and 75 bps in the past three months alone which has taken the H1 NAV total return to 4.1%. Crucially that premium on the Honeycomb share price has now turned into a cavernous 25% discount which strikes me as an over reaction – the earlier premium was equally over cooked and my sense is that a sensible discount is probably around 10 to 15%. Crucially the current dividend yield is now 10.5% although whether it stays that high as the recession intensifies is a moot point. I’m adding Honeycomb to my trading list at 765p a share with a target price of 900p.