For a mature FTSE 250 stock to have a double-digit percentage move in a day, something big is usually going on. So when I saw the news this morning regarding Assura (LSE:AGR), it naturally caught my attention. Here’s what investors need to know and what I’m thinking about doing from here.
The long story short
Before we get into things, let’s run through the story with Assura. The real-estate investment trust (REIT) has been performing poorly over the past few years. Even though the stock is only down 7% in the last year, it’s down 37% over the past three years. The decline can be linked to rising interest rates, higher borrowing costs, and weaker property valuations over this period.
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In part due to the low valuation, the business has attracted potential suitors to buy the firm. US private equity firm KKR has already made multiple takeover offers, which have been declined.
The latest offer, which was submitted last Thursday (13 February), valued Assura at approximately £1.56bn. This works out at roughly a 28% premium over Assura’s closing share price prior to the offer. Even with the premium, Assura’s board unanimously declined the proposal again today. The share price jumped when investors heard the news.
Why the share price bolted higher
With the rejection of an offer, some might expect the stock to fall. Yet when you think it through, the jump is warranted. When declining the offer, the board spoke about having confidence in the company’s long-term prospects and its ability to deliver value to shareholders. In other words, the management team feel they can get the business going again by themselves.
The fact that companies are offering to buy the business at a premium to the current price indicates that Assura is undervalued. Even though the rally today still leaves it below the offer price, it makes sense that the stock would move close to this level in the short term.
The action plan
I’m seriously thinking about buying the stock for my portfolio. Part of the idea here is a potential recovery in the share price. This could be enhanced if interest rates fall this year and property values tick higher. Yet the other angle is the dividend income. The current yield is 7.60%, which is well above the index average. So even if the share price takes a long time to recover, I could pick up good income in the meantime.
A risk is that another company comes in and buys the business. Even though I might make a quick buck on the sale price, it would mean that I would have to sell my stock and try to find another opportunity. Another risk is if interest rates stay evelated for longer than I expect, putting further pressure on borrowing rates for Assura.
