J Smart, purchased as a net current asset value investment

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I’ve bought J Smart (LSE:SMJ) at 125.3p for my Net Current Asset Value portfolio.  Market capitalisation is 42.4 shares x £1.253 = £53m.  I estimate its net current asset value, NCAV at £96m.  It is consistently profitable and has a very low-risk balance sheet.

The lion’s share of its assets are industrial properties (e.g., modern warehouses and light industrial units on modern estates).  The market value of these is £57.9m and they are 100% let even after a year of Covid.

It also holds £20.6m of offices and has £23.1m of cash.

Rent collection levels at the last rent quarter date before the year end (June 2020) are an impressive 96%. The annual report for the year ending 31st July 2020, published in November, stated:

“Rental growth and occupancy levels have continued to improve, as have property valuation levels. Concerns were raised regarding payment of rent, but rent collection levels at the last rent quarter payment date prior to the financial year end, currently sit at 96%. Regrettably, we have lost some tenants whose businesses have been affected by the coronavirus crisis. However, we have been able to fill these vacancies with new tenants.”

Its only liability of any significance is an overdraft of £10.1m.  There is a tiny pension deficit of less than £1m.

And the key directors, members of the founding family, show remarkably good character by frequently waiving their dividend, by taking only modest remuneration, and by deciding that the company should repurchase around 1.5% of its shares each year.

I held J Smart’s shares from 30th January 2019, bought at £1.13, until 15th April 2020 when they were sold at £1.102 as my fear of deep recession made me very cautious and I raised cash. I’m very pleased to be able to buy back in at a good price now that the risk of deep recession has diminished dramatically.

(Earlier newsletters on J Smart: 1st – 7th March 2018, 23rd 30th January 2019).

The three businesses

The directors see the company as having two divisions.  The first holds property which is then rented and sometimes traded, the second permanently employs about 100 tradesmen skilled in building houses, offices and industrial units for external organisations such as housing associations and councils.

To gain greater clarity I prefer to split the company into three by drawing out from the two divisions mentioned above the cash, shares and land not directly supporting either the property portfolio nor the construction business.

  1. Investment property holding division.

This owns property worth £78.6m.  It is rented out (with a few voids) for an annual income of £6.4m.  Also, J Smart levy service charges on their tenants of £0.8m.

After deducting the costs of running this property portfolio we have an annual income of about £5m.

2. Cash, land and shares division.

This has £23.1m of cash sitting in various bank accounts.  If we deduct £10.1m overdraft (the only borrowings) then net cash is £13m.

But that is not the end of the story.  It has so much liquid resource floating around that the directors have placed it elsewhere, £0.9m into shares on the LSE and £0.05m into deposits requiring more than three month’s notice to release.

On top of this it has £4.2m invested in land held for development and £1.9m in work in progress which is mostly land and buildings.

All in all, there is a net (after paying off borrowings) liquid resources, fairly liquid anyway, in this division of more than £20m.

3. The busy-but-unprofitable Construction division.

A great grandfather started this business in 1947.  As well as building h………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1

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