FSK - FS KKR Capital: Technical Upside Momentum Set To Persist

2023-11-13 05:38:42 ET

Summary

• FSK Capital Corp demonstrated a solid financial performance in Q3 2023, with increased net and adjusted NII and a marginal rise in NAV per share.
• The stock is exhibiting robust price movements, suggesting a likelihood of continued upward momentum.
• The robust price movement seen in November 2023 is expected to sustain the upward trend in prices.

FS KKR Capital Corp ( FSK ) demonstrated a robust financial performance in Q3 2023 , marked by an increased net and adjusted net investment income ((NII)), indicating a consistent enhancement in the company's profitability. There was also a marginal rise in the net asset value ((NAV)) per share, reflecting the resilience and effective management of FSK's investment portfolio in fluctuating market conditions. The period saw a shift from a net loss to a gain in total net realized and unrealized gains, with adjusted figures showing an even more significant improvement. This article offers a technical examination of FSK's stock price to discern its future trajectory and identify potential investment opportunities. It is noted that the stock is exhibiting robust price movements, suggesting a likelihood of continued upward momentum.

Financial Performance

FSK showcased a solid financial performance in Q3 2023. The period saw a rise in NII, reaching $0.84 per share, up from $0.82 in Q2 2023. This upward trend was also evident in the adjusted NII, climbing from $0.78 to $0.80 per share. These figures signal a consistent enhancement in FSK's profitability. Moreover, there was a marginal increase in the NAV per share from $24.69 in Q2 2023 to $24.89. Although slight, this increment indicates a resilient and effectively managed investment portfolio amid fluctuating market conditions. A shift in total net marked the quarter's realized and unrealized gains, moving from a loss of $0.31 per share in Q2 2023 to a gain of $0.11 per share. The adjusted figures were even more striking, showing a gain of $0.14 per share.

Earnings per share ((EPS)) rose significantly, reaching $0.95, compared to $0.51 in Q2 2023. This substantial growth highlights FSK's operational efficiency and strategic investment decisions. Regarding portfolio activities, FSK recorded $504 million in purchases against $675 million in sales and repayments, including notable transactions with its joint venture, Credit Opportunities Partners JV, LLC. The company's net debt-to-equity ratio showed a modest improvement, decreasing from 113% to 110%, indicating a sound leverage strategy.

The board of FSK declared a cash distribution of $0.70 per share for Q4 2023, consisting of base and supplemental distributions. Additionally, the company plans to pay special distributions totaling $0.10 per share in 2024, following a similar pattern of special distributions in 2023.

As for the portfolio composition as of Q3 2023, FSK maintained a total investment fair value of $14.7 billion, focusing predominantly on senior secured securities (68%). The weighted average annual yield on accruing debt investments held steady at 12.7%, reflecting a consistent investment return. Exposure to the top ten largest portfolio companies slightly increased to 20%. At the same time, the proportion of non-accrual investments remained a minor part of the total portfolio, suggesting a generally robust credit quality.

Overall, FSK's financial results for Q3 2023 exhibit a company in robust health, with significant improvements across key metrics. The increase in NII, a higher NAV per share, and the transition from a net loss to a gain per share underscore a period of strong performance and operational efficiency. With strategic portfolio management, a sound leverage strategy, and consistent investment returns, FSK is well-positioned to maintain its growth trajectory and deliver value to its shareholders in the coming quarters.

Technical Performance

The monthly chart below depicts a highly bullish technical perspective for FSK. This is evidenced by the descending broadening wedge pattern, outlined in blue, which was breached in April 2021 following a vigorous rally. This rally came after FSK hit its low point in March 2020 at $4.90.

The sharp price decline in March 2020 to hit the low point was primarily due to the unprecedented global financial uncertainty triggered by the onset of the COVID-19 pandemic. Fear gripped investors as the pandemic disrupted global supply chains, halted travel, and led to widespread lockdowns, severely impacting businesses across various sectors. This sudden economic turmoil caused a broad market sell-off, affecting FSK, which provides capital to middle-market companies. However, following the initial shock, FSK's stock price began to rally higher, buoyed by government stimulus packages, the easing of lockdown measures, and the adaptation of businesses to the new normal. These factors gradually restored investor confidence, leading to a recovery in the stock market, which positively impacted the share price of FSK.

This positive recovery breached the descending broadening wedge pattern in April 2021, propelling prices to new heights. However, this upward trajectory was halted by significant resistance at the level previously seen in March 2017, leading to a correction to the breakout point of the descending broadening wedge. This retracement created a compelling buying opportunity at $14.34, indicated by the red circle. Following this signal, the price surged, breaking through the red trend line and setting a new all-time high at $20.15. In October 2023, the stock price underwent another correction, returning to the red trend line and generating a strong buy signal at $18.60. As of November 2023, the price exhibits efforts to maintain these elevated levels.

To gain a deeper insight into the optimistic market perspective, the weekly chart below reveals the price dynamics at play after the April 2021 breakout. A symmetrical broadening wedge pattern is developed following the breakout, signifying increased market volatility. Although this heightened volatility brings about price uncertainty, the recent weekly candlestick demonstrates robust price movement, suggesting a potential breach of this symmetrical pattern which could pave the way for further upward momentum. Additionally, the RSI rebounding from the 50 midpoint highlights the bullish potential. A price breakout above the $20.50 mark would further solidify this bullish trend.

Observing the symmetrical broadening wedge pattern on the short-term daily chart is interesting. Here, the RSI indicates a recovery from oversold conditions, indicating an impending price rise.

From this analysis, it's evident that the stock has exhibited strong bullish behavior across both long-term and short-term charts, indicating a likely acceleration in its upward trajectory. Investors might consider entering the market at the current levels in anticipation of further gains, with the option to increase their holdings should the stock experience a pullback.

Market Risk

FSK's portfolio is sensitive to interest rate fluctuations. Any sharp changes in interest rates could impact the valuation of these securities and FSK's investment income. With $504 million in purchases against $675 million in sales and repayments, FSK's liquidity management appears sound. However, maintaining this balance is crucial, especially in unpredictable market conditions where access to capital can become constrained. Moreover, the changes in regulatory policies or tax laws, particularly concerning investment companies, could impact FSK's operations and financial performance.

From a technical standpoint, the appearance of broadening wedges on the monthly, weekly, and daily charts suggests significant volatility, potentially leading to substantial price fluctuations in either direction. The monthly closing fall below $18.60 could trigger a further price decline, possibly reaching the $14 zone. Additionally, the weekly chart shows resistance near the $20.50 mark. If the price cannot surpass this threshold, it might impede a potential rally in FSK.

Bottom Line

In conclusion, FSK has demonstrated a commendable financial performance in Q3 2023, marked by a significant increase in net and adjusted NII, a marginal rise in NAV per share, and a positive shift in total net realized and unrealized gains. These metrics underscore the company's robust profitability, effective portfolio management, and operational efficiency. The strategic investment decisions, sound leverage strategy, and the company's ability to maintain consistent investment returns further bolster FSK's financial health and outlook.

Moreover, the technical analysis of FSK's stock price aligns with its strong financial performance. The bullish patterns observed in the monthly, weekly, and daily charts suggest a favorable trajectory for the stock, indicating potential for continued upward momentum. The strong price movements observed in November, characterized by robust weekly candlestick patterns over the last two weeks, suggest the potential for ongoing upward trends, rendering FSK an attractive option for investors. Investors might consider purchasing FSK at its current price, anticipating further increases. Should there be any market corrections, it presents an opportunity for investors to further accumulate their positions around $14.

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