Special Situation || K2A Preference Shares trading at 13.89% dividend yield
Actionable Special Situation on K2A Preference Shares
Dear Readers,
I hope this article finds you well. A few weeks ago, I published an article about K2A. I will not reiterate the thesis here, but if you have not yet read it, you can find it below:
Since the publication of the previous article, the stock has appreciated by over 100%, driven by several positive developments.
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Here is a summary:
1. Interest Rate Reductions by the Swedish Central Bank:
The Swedish Central Bank has announced several interest rate reductions this year. This is highly beneficial for the company, as its profitability has been under pressure in recent years due to increased interest expenses. As interest rates decrease, the financial strain on the company's profits is expected to ease.
2. Sale of Student Accommodation Building:
The company has announced the sale of a 40% stake in a student accommodation building, generating SEK 660 million at 100% of its book value. This transaction not only reinforces shareholder confidence in the value of the company's net assets but also provides the liquidity needed to meet upcoming bond repayments. The company is now well-positioned to repay the two bonds maturing within the year.
3. H1 2024 Results:
The company published its H1 report yesterday, showing continued year-over-year revenue growth despite the sale of several assets. This performance underscores the robustness and capability of the company's assets to generate consistent revenues and returns.
These developments have significantly improved market sentiment towards the company. With sufficient liquidity to cover expiring bonds and a more favorable interest rate environment, the business outlook has become considerably more optimistic.
I would like to inform you that I continue to hold the shares I acquired at 4.13 SEK. Presently, all the issues that previously surrounded the company have been resolved, and there is potential for further appreciation of the share value.
I am writing this article to inform you that today I acquired a 1.91% portfolio position in K2A preference shares at a price of 144 SEK.
K2A Preference shares
The company issued a total of 1,804,800 preference shares, each entitled to receive a yearly dividend of 20 SEK per share.
In May this year, the company decided to suspend the dividend due to liquidity constraints and the need for financial flexibility in light of the bond maturities in June. At the time, the preference shares were trading at 200 SEK.
The price of the preference shares dropped by 50% following the announcement.
The dividends for the preference shares are treated like debt for the company, as all unpaid dividends accrue and must be paid in the future, including a 12% penalty on the unpaid amounts. Thus, the company has strong incentives to resume paying dividends.
Why do preference shares hold value?
With the majority of liquidity issues now resolved, it would be prudent to consider resuming the payment of dividends on preference shares, as they constitute a liability for the company.
At the current price of 144 SEK per preference share, the dividend yield stands at 13.89%. This yield is notably high, especially considering that there are no imminent risks anticipated in the company's operations. Once the company resumes dividend payments, the price of preference shares is expected to appreciate, reflecting the increased return. Therefore, at these prices, investors can benefit from a 13.89% yield plus potential share price appreciation, with minimal foreseeable risk.
The thesis remains that the preference shares are undervalued, offering a substantial margin of safety. The margin of safety is reinforced by the recent developments discussed at the beginning of this article, which have significantly improved the company's liquidity and operational outlook, making the resumption of preference share dividend payments inevitable.
I would classify this as a special situation, with the catalyst laying not far ahead in time. The potential compound annual growth rate (CAGR) is substantial when considering both the potential appreciation of the preference shares and the dividend payments. However, I do not intend to hold K2A preference shares for the long term once the situation unfolds.
This article will be concise, as the thesis is straightforward and builds upon the previous analysis. Thank you for reading and for your continued support.
If you’re thinking about signing up for Seeking Alpha, you can do it through this link: Seeking Alpha. It helps me keep writing content like this—thank you for the support!