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J Smart (LSE:SMJ) is a family-run (4th generation) company in the property game, based in Edinburgh but extending its activities across the Central Belt and Kirkcaldy. I see the company as having three divisions (the directors and other analysts probably do not see things the same way):
- Investment property holding division.
This owns industrial property worth about £65m. It is rented out (with a few voids) for an annual income of £5.5m. Also, J Smart levy service charges on their tenants of £0.6m.
After deducting the costs of running this property portfolio we have an annual income of about £3.4m.
- Cash, land and shares division.
This has £26.5m of cash sitting in various bank accounts. If we deduct £8.8m overdraft (the only borrowings) then net cash is £17.7m.
But that is not the end of the story. It has so much liquid resource floating around that the directors have placed it elsewhere, £1m into shares on the LSE and £2.5m into deposits requiring more than three month’s notice to release.
On top of this it has £2.4m invested in land held for development.
All in all, there is a net (after paying off borrowings) liquid resources, fairly liquid anyway, in this division of more than £23m.
- The busy-but-unprofitable division.
A great grandfather started this business in 1947. It builds things – mostly for other organisations such as local authorities and housing associations (the directors call it the “Construction” part of the business).
It also produces concrete slabs, and builds houses for sale.
In some years it is profitable, but in most years it makes losses.
Its saving grace is that it uses very little of the company’s capital. It only has some property, plant and equipment (£1.4m), money in joint ventures (£0.3m), inventories (£0.5m) and receivables (£5.7m). Much of this is financed by other organisations, so we can deduct deferred tax (£1.9m), payables (£4.4m) and corporation tax owed of (£0.2m) to leave net assets committed to these activities at £1.4m.
So, in sum, there are £65m + £23m = £88m of assets producing various forms of income and capital gains, plus a busy-fools business that has occasional burst of profitability, but mostly loses a few hundred thousand in a year.
Now I’ll tell you the market capitalisation: with its shares at 106p -110p MCap is £47.2m – £49m.
(I’m very grateful to Duncan MacInnes who generously put me onto J Smart and provided a lot of insight into the company and the people running it.)
Net current asset value
A straight forward, “mechanical”, NCAV would let us down in this case because Smart’s property portfolio happens to be classified as non-current. Thus, I first calculate the normal NCAV and then add assets with great market value but which are not counted as current assets, i.e. property and stock market listed shares.
To be true to Benjamin Graham’s conservative margin of safety principle we should reduce inventory by one-third and receivables by one-fifth.
But in the case of J Smart, of the total inventory of £2.88m most (£2.4m) is land held for development. It is therefore unlike inventory in say a manufacturing company or a retailer, where it makes sense to allow for director over-optimism regarding valuations.
This land is valued by J Smart directors at the lower of cost or net realisable value. But the company regularly applies for planning permissions for these plots. So, in reality the land could be worth a lot more than the balance sheet amount rather than less. Thus I will not carry out the usual Ben Graham reduction.
I cannot make a similar argument for receivables, and so I reduce their value by 20%, or £1.145m in 2017.
| £000s July | 2017 | 2016 | ||
| Inventories (mostly land held for development) | 2,881 | 2,684 | ||
| Receivables |
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