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Castellum - Sleeping Beauty
Could this stock move from 242 to 345 in the coming months?
At the end of my last post I hinted at a current situation where a merger might have created an artificially cheap stock. That stock is Castellum, which probably doesn’t surprise anybody familiar with my recent writings.
Castellum launched a bid for Kungsleden in August and is now in the final stages of that process. During this time period, Swedish real estate has been on fire. The combined company will be an office and logistics giant.
The former CEO of Castellum announced his resignation shortly after Rutger Arnhult ousted the old board and took control of the company, leaving the company without senior management. Somewhat creatively, Arnhult conjured up the Kungsleden deal to achieve more scale for Castellum and also get a new eager CEO for this much larger company. The acquihire component probably didn’t hurt Castellum in price negotiatons preceding this merger deal.
Ever since Arnhult’s ascension to the chairmanship during the spring, Castellum has been a dog relative to the sector, reflecting some likely significant institutional money aversion. For many years, Arnhult’s companies have been trading at a lower valuation than peers to the point where this phenomenon was dubbed the “Rutger discount”. His modus operandi of buying shares in public companies using other public companies created some misalignments with minority shareholders. Arnhult never had a huge interest in helping the stock price go up in Corem and Klövern before this year. I accurately predicted a change in that dynamic back in January, although I got several details wrong. Still, the consolidation is in full swing. Both in the Swedish and Nordic real estate sector generally and in Arnhult’s empire.
Corem has now significantly overshot any of my price expectations. I would have thought a bump up to a smallish discount to NAV could help Castellum take it out at NAV or slightly over with a stock-for-stock offer. This currently seems way harder to achieve, unless either Corem falls back in price or Castellum rises. Why do I think so? Well, Arnhult’s incentives are pretty clear: he owns a significantly higher proportion of Corem than Castellum. But if he does something completely egregious (which I DO NOT claim that he intends to), he will hurt himself with capital markets. Castellum’s outside shareholders are already lukewarm on him. He can’t afford to appear to give away too much value to himself.
Therefore, the path of least resistance is that Castellum makes up some ground against its peers. Additionally, this is of course a commonly seen pattern following mergers. Even more importantly, Arnhult made insider purchases in September at higher prices than today’s. Since, he has hardly had a chance to make more buys between a quiet period and insider information on acceptance rates in the bid for Kungsleden. There is no reason to think that he will stop buying shares unless Castellum trades up very signficantly. In fact, rather the opposite seems to be true.
Between September 30 and October 22, Arnhult somehow appears to have significantly rearranged his stock holdings in his only major passive holding, Sagax. Don’t ask me how he did it — I have no clue — as the moves are way too large to have been conducted over the market. I also haven’t found a plausible counterparty to either the sale of B-shares or the purchase of D-shares. Importantly, he still stayed above the 10% voting power threshold, keeping him entitled to tax free dividends from his now yield heavy Sagax shareholdings.
For the sale of 18.5 million B-shares, my best current guess is that they may have been placed with a bank in exchange for a swap (like SBB recently did with a couple of holdings), awaiting sales over the market. This would be nice for Arnhult as those shares have since moved up to 380 a pop. As for who could have sold all those D-shares - I have no real clue. But the net is at least about 5 billion SEK of liquidity for Arnhult’s discretionary use.
What would be the logical target for the bulk of that liquidity? Corem and Castellum shares, both of which have seen buys from Arnhult lately. There is the potential for a proverbial torrent of purchases from M2, Arnhult’s holding company. And Castellum can probably soak up a lot more of those buys than Corem can.
In addition to all of this, Castellum’s figures will start looking better going forward. The Q3 was met with a big yawn, as Entra was not consolidated for the full quarter and the asset base had been trimmed, resulting in “poor” headline numbers. Castellum is now a very boring stock with low leverage that is primarily held for its near-status as a dividend aristocrat. Those yield chasing investors got a bit worried about their precious dividends by stagnant profits. This is likely just a blip, as Arnhult is apt to make more drastic moves, utilizing Castellum’s probably unparallelled financing options.
Something as simple and dumb as converting the dividend into a monthly payment could also be a catalyst for a rerating of the stock. This move was recently utilized by Cibus and Samhällsbyggnadsbolaget (SBB) to outstanding stock price effects.
Castellum trades at a slight premium to NAV, but well below levels where the relative strength of its portfolio should put it. The day Corem is merged into Castellum, it would not be at all ridiculous to compare Arnhult’s company to Balder. Yes, Selin may be the media darling dealmaker. But Arnhult has done an amazing job with little to no real public recognition, in spite of all the wealth that he has amassed for both himself and his shareholders. I think his and Castellum’s time to shine may soon be here. At Balder’s valuation — 1.5 times NAV — Castellum would trade at 345. Is that number a bit of a stretch? Well probably, but looking at the other companies that trade way higher than Castellum makes it less so. A lot of them are smaller with way higher interest expenses and fewer opportunities for value-adding developments.
Perhaps the trigger will be monthly dividends or insider purchases or the Corem merger or becoming a dividend champion. Who knows the ways of the market?
What will finally awake this sleeping beauty?