J Smart (LSE:SMJ) is a family-run firm. John M. Smart worked 50 years for the company and dominated it for the 29 years to 2017 as Chairman. He presided over an almost unbroken record of profit. John M. Smart has now retired, but his legacy lives on, in terms of extreme conservatism on the balance sheet, dividend levels and strategic direction.
His sons, David W. Smart, Chairman and Joint Managing Director, and John R. Smart, Joint Managing Director, now dominate the board David, at 49, has been with the company for 23 years and on the board since 2010, and owns 12.8m shares (31.4%). Dividends received from the company in 2022 £0.41m; 2021 £0.41m. John R Smart, 52, joined in 2002 and has been a director since 2013. He too has 12.8m shares. Dividends received from the company in 2022 £0.41m; 2021 £0.41m. Both have experience elsewhere, one in quantity surveying and one in property surveying. They are thought of as slightly more progressive than their father There are two other executive directors: Alasdair Ross, 60, joined the company in 1989 and was appointed a director in 2012 (owns 0.15m shares), and Patricia Sweeney, 53, joined 2011, and was appointed director in April 2017 (owns 0.15m shares). All directors earn the same salary of £123,800, with just a few benefits and pension scheme payments tacked on. No element of their remuneration is based on performance metrics..... ..... Integrity The hiring of non-executive directors is seen by these down-to-earth builder types as unnecessarily increasing costs and administrative burdens for no discernible benefit. Thus, there is no protection for minority shareholders from NEDs should the executives turn on them. 2022 Report: “The Board recognises that it has not complied fully with the Code in the areas of appointment of Non-Executive Directors and the establishment of Nomination, Audit and Remuneration Committees and the re-election of executive Directors. It also has not complied with the principles relating to division of responsibilities, evaluation of the Board and individual Directors. The Board considers that due to the nature of the company including its size, lack of complexity and the ownership of the Company that to follow all the principles of the Code would be onerous and would provide no discernible benefit to the Company or shareholders.” In my experience with these family-dominated firms the NEDs are of limited value. Protection comes from the character of those with power. Are the instinctively decent? Do they have habits of fair dealing? Are they loyal? On this front we have some supportive evidence: Exhibit 1: Waiving dividends. The family have forgone millions of pounds in dividends over the years, simply by refusing to take them. When asked why they do this they express the view that they don’t need it and by waiving “shareholders cannot accuse them of self-dealing” – this shows an extreme impulse to behave well. The former chairman and father of the joint MDs has said of his family’s dividends that they were better off if they were reinvested in the business, and “How much money do you need?!” (an interview by Duncan MacInnes) Exhibit 2: They run a tight ship. Their office is a dated non-descript 1960s o
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Clearly J Smart (LSE:SMJ) has more money than it knows what to do with. The cash in bank accounts, shares and other liquid assets is generally not needed for operations.
Indeed, the investment property holding division could easily take on some borrowing to finance itself and/or add to the cash pile in what I call the “Cash-Land-Shares Division” – after all, investment property produces £4m rent annually so could support a fairly high level of bank debt. The capital held in liquid form produces very poor returns. We can conclude that the directors run a very inefficient balance sheet. We can also conclude that one day that money might be handed to shareholders. The directors have been on the path of distribution for some time, but they have room to accelerate this – see table. If the directors continue to make good profits from rental income and the occasional capital gain then annual pay outs to shareholders could rise far above the current £3.1m. After all, there is £37m in the form of net cash, shares and a pension surplus payment due. Then there is another £12.3m in development land and active developments as well as £77.7m of offices and industrial units collecting rent. Market capitalisation is £1.66 x 40.7m shares = £67.6m.... .... Musing on the future of that cash NCAV is £120.8m and the number of shares is 40.7m therefore NCAV per share is £2.97. By buying-in 1% - 3% of its shares each year at a price below NCAV per share the controlling family and the other remaining shareholders gain an increase in net current asset value per share. Average profit after tax over the last nine years is £4.84m – see below at bottom of the table (the other numbers are before deduction of tax).... .... An attempted valuation – conservative approach Assume to start that the company produces £4.84m after-tax profits in all future years. Assume in each future year that this £4.84m is allocated as follows:
Shareholders who do not sell any shares benefit from,
Call this Scenario one. Scenario one extended: what if J Smart (LSE:SMJ), as well as holding a large portfolio of industrial units and offices to rent out has very large sums stored in bank accounts, in stock market shares, in land, in half-finished buildings and in a pension fund. I regard this capital allocation as if it were to a business largely separate from the core property holding division. Most of this money could be paid out to shareholders without much impact on the investment property holding division.
The cash pile is very large, at £31.2m, for a business with a market capitalisation of £67.6m. Land held for development and work in progress is valued at the lower of cost and net realisable value). The Construction division This generally engages in building social housing when a deal can be made with a housing association, and in private housing. Much of the time there is no project. The directors describe this industry as “competitive”. So, despite having good relationships with potential clients and a good reputation they seem to have gone through long periods of either low activity resulting in a large group of underemployed tradesmen receiving full wages or periods of work on low margin. When John M Smart was in charge (he retired in 2017) there was a philosophy of holding onto around 170 full-time employed tradesmen rather than outsourcing the main parts of a project – this approach improves quality but pushes up fixed costs horrendously. The new generation of Smarts now in charge say they expect to do more subcontracting, lowering the numbers of full-timers. Between July 2016 and July 2022 the number of employees across the Group fell from 298 to 147. A large element of the drag on the construction division, concrete slab making was closed four years ago – it had 70 workers. We could be getting to the point where J Smart employs about 25 people in head office plus another 100 or so on building sites, often building more industrial units for J Smart to rent out, or in managing rented offices, etc. The numbers from the last eight years show why radical surgery was needed – see table. Construction revenue and operating profit....... I bought into J Smart (LSE:SMJ), the Edinburgh-based property company, at a price of £1.66 a share or a market capitalisation of £1.66 x 40.7m shares = £67.6m. The main attraction, apart from being well-run and nicely profitable is the exceptionally strong balance sheet with 297p of net current asset value per share providing a good margin of safety.
Net current asset value The company classifies its office holdings and industrial units as “non-current”. I regard this as unreasonable in the case of a company which invests in commercial property to receive a rental income and is always open to selling buildings if the price is right – they are tradable assets. So, in the table below I include all its “Investment properties”. These are revalued each year. I have followed Benjamin Graham’s automatic distrust of the receivables by deducting 20% as unlikely to be paid. However, I have not reduced the inventories number because, in this case, the inventory is mostly recorded in the balance sheet as the cost of developing land and half-built industrial units and offices. It is reasonable to suppose that the market value of these is at least the expenditure laid out on them so far........ ...... The current share price is at a 44% discount to NCAV. But we still need reassurance on financial stability; managerial ability and integrity, and; business soundness. J Smart’s investment property holdings At one time J Smart concentrated on being a constructor of commercial property for other organisations. Today, that business is diminishing after years of losses. Now the main attraction for share investors is the large collection of industrial units and offices it owns and rents out in the Scottish Central belt. The company holds about 1m sqft of property available for letting. Three-quarters of the value is in industrial units; the remainder offices. Investment property is revalued by the directors each year, with a sample checked by professional valuers.................................................................. The twin crises of Covid and the 2022 recession have caused me to go into and out of this company twice in the last four years – and last week I bought in for the third time.
I previously held J Smart’s (LSE:SMJ) shares from January 2019, bought at £1.13, until April 2020 when they were sold at £1.102 as my fear of deep Covid recession made me very cautious and I sought cash. I was very pleased to be able to buy back in at a good price in March 2021 after the risk of deep Covid recession had diminished. Then I bought at 125.3p for my NCAV portfolio. Market capitalisation was 42.4 shares x £1.253 = £53m. But I estimated its NCAV at £96m. I was impressed by its consistent profitability and very low-risk balance sheet, with plenty of solid assets. But worried by the rising risk of high inflation, followed by central banks upping interest rates and a potential recession I sold again at £1.575 in February 2022. Now I’m more optimistic and starting to peer through the macroeconomic murk ahead, looking through the next few bumpy months, to the possibility of growing economy (this may or may not happen, but the odds of a positive outcome improve with each downward movement in energy prices). So, hoping for third time lucky to secure a long-term position, I’ve bought into the company again at £1.66 per share. The market capitalisation of J Smart is higher today than it was in 2021 at £67.6m (£1.66 x 40.7m shares) but the rise in NCAV has been impressive; it is now £121m. It has £32m of cash, offset by an outstanding overdraft of £11m, thus it has about £21m of surplus cash. J Smart’s directors usually ensure that the company has plenty of cash on hand, but the current level was boosted by their prescient selling of three industrial units just before the current economic downturn. They were sold for a total of £24m early in 2022, making a profit above previous book value of £6m - clever stuff. The directors have a history of selling property before downturns, having grown up in a family of property developers. The offices and industrial units remaining in the portfolio are worth £78m and are almost all let. And there is another £12.5m currently under construction or in the form of land awaiting spades in the ground. On the negative side is that the fact that the recession has already hit, with directors expecting both property values and yields to fall. What we don’t know is how far down warehousing, etc., will decline. But it’s reassuring that any fall would have to be as dramatic to cause any serious concern because as much as £62m loss is needed to reduce the current favourable gap between NCAV and MCap to zero. The key directors, members of the founding family, have shown remarkably good character by frequently waiving their dividend, by taking only modest remuneration, and by deciding that the company should repurchase around large amounts of its shares each year. 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 scores of 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.
The market has been having a hard time of it; this year the FTSE250 index of medium-sized companies has fallen 19%. I figured back in February that the economy and the share markets were headed for tough times and so sold a number of holdings, leaving 40% of my portfolio in cash ready to deploy when Mr Market’s fear became really manifest.
Having a significant amount of cash helped the portfolio maintain value, but what gave it a real boost was that the few shares I held onto generally moved up, some by a significant margin. Smiths News’ shares rose by 22% in the last twelve months – a nice rise before accounting for its significant dividend: 2.75p to be paid on 9th Feb 2023 following the interim of 1.4p back in July. Total dividends in 2022 amount to 11% of the year-start share price of 37.6p. bp rose from 400p on 26th January (buying date) to 477p today, a 19% return before a very welcome dividend of 4.7%. The markets are now starting to get to the point where attractive valuations are coming into view, so I’m starting to deploy my cash again. Coping with two major economic crisis, first Covid then inflation/recession Back in early 2020 I followed a strict caution-first value investing approach at the beginning of the Covid-19 crisis and, similar to Feb 2022, went to 40% cash. This pile of cash was very useful later in 2020 and 2021. The shares bought in those years have generally risen nicely – see first table. Most of the money I handle is invested in solid shares such as Character Group and Dewhurst which are equipped to withstand a recession. Now I’m starting to dig into the cash pile as I come across deep value shares in this period of economic flux. Orchard Funding Group and Tandem are recent investments. A list of all the shares I bought in the Covid-19 crisis and subsequently (Newsletters published at the time of each purchase set out my rationale for buying) CompanyPurchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 Smiths News (Connect Group)18.3.20 £0.151 2.55p £0.462 223% Character5.6.20 £2.52 27p £4.25 79% McCarthy & Stone1.10.20 £0.718 0 Sold 7 Dec 2020 £1.185 65% Capital & Counties Properties6.11.20 £1.032 0 Sold 19 Aug 2021 £1.743 69% Dewhurst “A”11.11.20 £5.94 27.75p £6.00 6% MS International16.12.20 £1.292 10p Sold 20th Sept 2021 – 7th June 2022. £2.488 100% Wynnstay29.12.20 £3.405 15p Sold 24Mar 2021 – 3 Feb 2022 £5.58 68% Lloyds Bank12.3.21 £0.4169 3.37p £0.4569 18% J Smart18.3.21 & 24.3.21 £1.253 3.22p Sold 7 Feb 2022 £1.575 28% Fletcher KingFeb 2020 – May 2021 £0.3265 0.5p Sold Sept 2021 – Feb 2022 £0.40 24% Orchard Funding7.6.21 £0.568 4p £0.46 -12% Caffyns22.6.21 £4.65 22.5p £4.50 2% Highcroft22.7.21 £8.75 78p £9.10 13% Town Centre Sec10.8.21 £1.426 1.75p Sold 2 Feb 2022 £1.581 12% bp26.1.22 £4.006 18.7237p £4.7685 24% Orchard Funding7.12.22 £0.48 0 £0.46 -4% Tandem2.12.22 £2.8221 0 £2.50 -11% AVERAGE 41%Longer run performance Nine and a half years ago that I left a tenured professorship to concentrate on investment. Back then the FTSE 100 was around 6,600. It is now 7,452 – a slow rise. In addition, there have been dividends of around 3% per year. The FTSE 250 index has moved from around 15,000 to 18,853. I believe the numbers in the tables below show that I have outperformed, which is quite a relief given the salary and security sacrifice I made all those years ago. The tables display the results (so far) of all the purchases I’ve been writing about in my newsletters. The comments I made at the time explaining the rationale for each investment are available for you to read in older newsletters - there is nowhere for me to hide from my appraisals I made three, four or seven years ago – all the errors of omission and commission are there in broad daylight. I present the returns after taking the hit on broker costs, stamp duty and bid/offer spread. (Some of you have joined us recently so, in case you are not familiar with them, I briefly describe the criteria for my portfolios following the portfolio performance tables.) The 2013 Net Current Asset Value, NCAV, portfolio CompanyPurchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 French Con.25.7.13 £0.3047 zero Sold July 2015 £0.4378 44% Caledonian T25.7.13 £0.70 zero Sold April 2020 for £1.391 99% Fletcher King6.8.13 £0.30 14.25p Sold June 2016 for 46p 101% Northamber22.8.13 £0.287 1.6p Sold Oct 2016 £0.303 11% Titon5.9.13 £0.379 6.5p Sold May 2016 £1.06 197% Mallett12.11.13 £0.7682 12.7p Sold Nov 2014 £0.60 -5% AVERAGE 75% The 2014 NCAV portfolio CompanyPurchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 Holders Tech10.10.14 & 3.11.14 £0.47 1p Sold March 2017 £0.33 -28% Airea4.11.14 £0.1195 0.9p Sold Sept 2016 £0.309 166% Northamber17.11.14 £0.4265 0.7p Sold Oct 2016 £0.303 -27% Caledonian T30.12.14 £1.39 zero Sold April 2020 £1.391 0 AVERAGE 28%The 2015 NCAV portfolio CompanyPurchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 PV Crystalox15.1.15 £0.122 zero Sold Dec 2016 £0.237 94% Arden Partners1.9.15 £0.422 1p Sold May 2018 £0.364 -11% Northamber4.9.15 £0.443 0.4p Sold Dec 2016 £0.303 -31% AVERAGE 17%The Buffett-style portfolio This type of share is rarer than the others, and so I combine all years. CompanyPurchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 Dewhurst9.4.14 £3.18 70.5p Sold February 2020 £7.217 149% MS International9.10.19 £1.723 13.50p Sold 20th Sept 2021 – 7th June 2022. £2.488 52% Character20.1.20 & 5.6.20 £2.811 35p £4.25 64% Dewhurst11.11.20 £5.94 27.75p £6.00 6% MS International16.12.20 £1.292 10p Sold 20th Sept 2021 – 7th Sept 2022. £2.488 100% AVERAGE 74%(I bought some more of Dewhurst in June 2014 at £3.11, December 2014 at £3.75, November 2017 at £5.46, February 2019 at £5.54 and April 2019 at £5.64. These were sold Feb 2020). Modified price earnings ratio portfolio 2015/16 CompanyPurchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 Haynes11.2.15 £1.159 33.5p Sold 2.10.19 £2.9175 181% AGA11.3.15 £1.002 zero Taken over June 2015 £1.456 45% Hogg Robinson10.4.15 £0.4709 2.37p Sold June 2016 £0.656 44% MS International3.7.15 £1.86 46p Sold 20th Sept 2021 – 7th June 2022. £2.488 58% BHP Billiton24.9.15 £10.43 127p Sold May 2018 £16.90 74% TClarke5.11.15 £0.7916 13.61p Sold Feb 2020 £1.1215 59% Premier Farnell8.4.16 £1.222 3.6p Taken over 20.6.16 £1.632 36% AVERAGE 71%The AGA holding was doubled 30 April 2015 at a price of £0.9466. Modified price earnings ratio portfolio 2017 CompanyPurchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 Braemar28.6.17 £2.848 20p Sold June 2018 £2.639 0% Caffyns10.8.17 £5.012 52.5p Sold July 2020 £2.389 -42% Connect/Smiths News27.9.17 £1.046 13.35p £0.462 -43% MS International14.11.17 £1.84 30p Sold 20th Sept 2021 – 7th June 2022. £2.488 52% AVERAGE -8%The 2017/18/19 NCAV portfolio Purchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 Caledonian Trust7.11.17 £1.23 zero Sold April 2020 £1.391 13% J Smart30.1.19 £1.13 4.14p Sold Mar/Apr 2020 £1.101 1% Northamber6.12.19 £0.504 0.3p Sold Mar 2020 £0.5717 14% AVERAGE 9%More Caledonian Trust shares bought in February 2019 at £2.29. More J Smart bought 30.4.19 at £1.16 The 2018/2019 modified price-earnings ratio portfolio Purchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 Connect/Smiths News14.6.18 £0.285 6.65p £0.462 85% N Brown17.8.18 £1.42 9.93p Sold Sept 2021 £0.557 -54% Spaceandpeople31.10.18 £0.224 0.5p Sold Dec 2020 £0.128 -43% Tandem2.4.19 £1.59 9.49p Sold Aug 2020 £3.707 139% MS International6.6.19 £2.22 20p Sold 20th Sept 2021 – 7th June 2022. £2.488 21% Character25.10.19 £3.506 40p £4.25 33% AVERAGE 30%More Connect Group shares bought in February 2019 at 40.86p, March 2019 at 38.29p and May 2019 at 39p. More N Brown bought May 2019 at £1.30. The 2020/21/22 modified price-earnings ratio portfolio Purchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 Wynnstay7.1.20 & 29.12.20 £3.33 29p Sold 24Mar 2021 – 3 Feb 2022 £5.58 76% Daejan5.2.20 £52.90 zero Sold 21 Feb 2020 £79.41 50% Connect/Smiths News18.3.20 £0.151 2.55p £0.462 223% Lloyds Bank12.3.21 £0.4169 3.37p £0.4569 18% bp26.1.22 £4.006 18.7237p £4.7685 24% Tandem2.12.22 £2.8221 0 £2.50 -11% AVERAGE 63%The 2020/21 NCAV portfolio Purchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 McCarthy & Stone1.10.20 £0.718 0 Sold Dec 2020 118.5p 65% Capital & Counties Properties6.11.20 £1.032 0 Sold 19 Aug 2021 £1.743 69% J Smart18.3.21 & 24.3.21 £1.253 3.22p Sold 7 Feb 2022 £1.575 28% Fletcher KingFeb 20 – May 2021 £0.3265 0.5p Sold Sept 2021 – Feb 2022 £0.40 24% Orchard Funding7.6.21 £0.568 4p £0.46 -12% Caffyns22.6.21 £4.65 22.5p £4.50 2% Highcroft22.7.21 £8.75 78p £9.10 13% Town Centre Securities10.8.21 £1.426 1.75p Sold 2 Feb 2022 £1.581 12% AVERAGE 25%Bought more Orchard Funding 7.12.22 at 48p The return reversal portfolio Purchase date Purchase price Divs to 31 Dec 2022 Price 31 Dec 2022 Return to 31 Dec 2022 Havelock Europa20.5.15 £0.14609 zero Sold Dec 2016 £0.0915 -37% AVERAGE -37%Brief description of criteria for the portfolios Shares are allocated to portfolios designed around ideas flowing from research conducted when my PhD students and I asked the question “what works in investment?” These investigations were often inspired by the ideas of great investors such as Benjamin Graham. More detail on these ideas is presented in earlier posts (if you put key words into the search box those Newsletters will appear). Net current asset value, NCAV, criteria
Return reversal
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Glen ArnoldI'm a full-time investor running my portfolio. I invest other people's money into the same shares I hold under the Managed Portfolio Service at Henry Spain. Each of my client's individual accounts is invested in roughly the same proportions as my "Model Portfolio" for which we charge 1.2% + VAT per year. If you would like to join us contact Jackie.Tran@henryspain.co.uk investing is about making the right decisions, not many decisions.
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