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When Covid first struck I took a cautious approach, turning many of my investments into cash. Then the massive fiscal, monetary and, later, the vaccine stimuli came to the fore and I turned buyer. Here is a list of all the shares I’ve bought and written about on ADVFN in the Covid period. I’ve been fortunate.
Company Purchase date Purchase price Divs to 31.3.21 Price 31.3.21 Return to 31.3.212021 Connect (Smiths News)18.3.20 £0.151 zero £0.365 142% Character 5.6.20 £2.52 5p £4.50 81% McCarthy & Stone 1.10.20 £0.718 0 Sold 7.12.20 £1.185 65% Cap|Co 6.11.20 £1.032 0 £1.714 66% Dewhurst “A” 11.11.20 £5.94 9.25p £7.00 19% MS International 16.12.20 £1.292 1.75p £1.60 25% Wynnstay 29.12.20 £3.405 zero £4.80 41% Lloyds Bank 12.3.21 £0.4169 zero £0.427 2% J Smart 18.3.21 & 24.3.21 £1.253 zero £1.22 -3%Longer run performance Almost eight years ago that I left a tenured professorship to concentrate on investment. Back then the FTSE 100 was around 6,600. It is now 6,900 – a slow rise but there have been dividends of around 3-4% per year. 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 almost eight years ago. The tables show the results (so far) of all the shares bought for the portfolios 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 Company Purchase date Purchase price Divs to 31.3.21 Price 31.3.21 Return to 31.3.21 French Con.25.7.13 £0.3047 zero Sold July15 £0.4378 44% Caledonian T 25.7.13 £0.70 zero Sold April20 £1.391 99% Fletcher King 6.8.13 £0.30 14.25p Sold June16 46p 101% Northamber 22.8.13 £0.287 1.6p Sold Oct16 £0.303 11% Titon 5.9.13 £0.379 6.5p Sold May16 £1.06 197% Mallett 12.11.13 £0.7682 12.7p Sold Nov14 £0.60 -5% AVERAGE 75%The 2014 NCAV portfolio Company Purchase date Purchase price Divs to 31.3.21 Price 31.3.21 Return to 31.3.21 Holders Tech 10.10.14 & 3.11.14 £0.47 1p Sold Mar17 £0.33 -28% Airea 4.11.14 £0.1195 0.9p Sold Sept16 £0.309 166% Northamber 17.11.14 £0.4265 0.7p Sold Oct16 £0.303 -27% Caledonian T 30.12.14 £1.39 zero Sold April20 £1.391 0 AVERAGE 28%The 2015 NCAV portfolio Company Purchase date Purchase price Divs to 31.3.21 Price 31.3.21 Return to 31.3.21 PV Crystalox 15.1.15 £0.122 zero Sold Dec16 £0.237 94% Arden Partners 1.9.15 £0.422 1p Sold May18 £0.364 -11% Northamber 4.9.15 £0.443 0.4p Sold Dec16 £0.303 -31% AVERAGE 17%The Buffett-style portfolio This type of share is rarer than the others, and so I combine all years. Company Purchase date Purchase price Divs to 31.3.21 Price 31.3.21 Return to 31.3.21 Dewhurst 9.4.14 £3.18 70.5p Sold Feb20 £7.217 149% MS International 9.10.19 £1.723 5.25p £1.60 -4% Character 20.1.20 & 5.6.20 £2.811 13p £4.50 65% Dewhurst 11.11.20 £5.94 9.25p £7.00 19% MS International 16.12.20 £1.292 1.75p £1.60 25% AVERAGE 51%(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 Company Purchase date Purchase price Divs to 31.3.21 Price 31.3.21 Return to 31.3.21 Haynes 11.2.15 £1.159 33.5p Sold 2.10.19 £2.9175 181% AGA 11.3.15 £1.002 zero Taken over June 2015 £1.456 45% Hogg Robinson 10.4.15 £0.4709 2.37p Sold June 2016 £0.656 44% MS International 3.7.15 £1.86 37.75p £1.70 12% BHP Billiton 24.9.15 £10.43 127p Sold May 2018 £16.90 74% TClarke 5.11.15 £0.7916 13.61p Sold Feb 2020 £1.1215 59% Premier Farnell 8.4.16 £1.222 3.6p Taken over 20.6.16 £1.632 36% AVERAGE 64%The AGA holding was doubled 30 April 2015 at a price of £0.9466. Modified price earnings ratio portfolio 2017 CompanyPurchase.................To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
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Joseph Piotroski published academic work showing nine accounting variables were useful in differentiating between those firms whose share returns are negatively affected by potential financial distress and those that are likely to outperform based on a good score regarding financial distress indicators.
The indicators fall under three headings: (1) Profitability; (2) Leverage, liquidity, and source of funds, and; (3) Operating efficiency Profitability factors If the firm is profitable and produces positive cash flow it has a capacity to generate funds internally. A positive earnings trend suggests an improvement in the firm’s ability to generate positive future cash flows.
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 47, has been with the company for 21 years and on the board since 2010, and owns 12.8m shares (30.2%), up from 11.9m in July 2017 John R Smart, 50, joined in 2002 and has been a director since 2013. He too has 12.8m shares, up from 11.9m in July 2017. 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, 58, joined the company in 1989 and was appointed a director in 2012 (owns 0.15m shares), and Patricia Sweeney, 51, joined 2011, and was appointed director in April 2017 (owns 0.15m shares). All directors earn the same salary of £116,000, with just a few benefits and pension scheme payments tacked on. No element of their remuneration is based on performance metrics. There has been downward pressure on employee numbers and remuneration in the last five years, assisted by closing the concrete products business and reducing construction activity. 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. But, 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 ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Clearly J Smart (LSE:SMJ) has more money than it knows what to do with – see yesterday’s newsletter. The money 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 £4.8m rent annually so could support a fairly high level of bank debt. The capital held in liquid form produces very poor returns – less than 1% on the cash. 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 produce earnings north of £3.6m but distribute £1.6m to shareholders then they will accumulate an ever larger cash pile or warehouses. A special dividend anyone? Or a large rise in annual share buy backs? Market capitalisation is 42.4m shares x £1.253 = £53.1m Musing on the future of that cash NCAV is £96m and the number of shares is 42.4m therefore NCAV per share is £2.26. By buying-in 1.5% 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 five years is £3.7m – see bottom of the table (the other numbers are before deduction of tax). The Group profit number has been dragged down by the losses made in the Construction division which averaged an operating loss of £1.9m over seven years. If these losses are now being dealt with by the directors then the average annual profit after tax will be over £5.6m, all else equal. An attempted valuation – conservative approach Assume to start that the company produces £3.7m after-tax profits in all future years. Assume in each future year that this £3.7m is allocated as follows:
Shareholders who do not sell any shares benefit from,
J Smart (LSE:SMJ), as well as holding a large portfolio of industrial units and offices to rent out has money stored in bank accounts, in stock market shares, in land and in half-finished buildings. I regard this capital allocation as if it were to a business largely separate from the core property holding division (see yesterday’s newsletter).
Most of this money could be paid out to shareholders without much impact on the investment property holding division. You can see from the table that the cash pile is very large, at £23.1m, for a business with a market capitalisation of £1.253 x 42.4 shares = £53m. It also has £0.9m in shares and another £4.2m in land. Working in progress property developments chip in another £1.9m. Even after deducting an overdraft of £10.1m the company is left with £20m in these fully, or fairly, liquid assets. Yesterday I showed that J Smart had £78.6m of property with no debt on that, producing a net income of £4.8m. To this we can add £20m of net liquid assets. But there is a third division which is perennially loss-making, so we need to take that into account when judging the firm’s 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 ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 At one time J Smart (LSE:SMJ), the Edinburgh-based family-controlled property company, 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 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. Market capitalisation of J Smart: £1.253 x 42.4m shares = £53.1m. Net income from renting and servicing offices is around £5m. This source of income decreased in 2020 because a lease on one industrial unit came to an end and J Smart directors took the opportunity to demolish with the view of building later. The vacant land is held with inventories as “land held for development”. In 2020 “Excluding the rent from this property, over the remainder of our investment property portfolio our rental income has increased due to both rental growth and increased occupancy” (2020 Report). Not many landlords can say that for the pandemic year. Notwithstanding the 2020 dip, note the steady rise in net rent income in recent years. ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 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.
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 Lloyds Banking Group’s (LSE:LLOY) main business can be simplified to taking in customer deposits through Halifax, Bank of Scotland and Lloyds and then lending that money out, mostly for people buying houses but also for credit cards, unsecured personal loans, for buying cars, for businesses.
At any one time it has about £410bn - £450bn of customer deposits and it lends to customers about the same – see Figure 1. Note the stability over time in both deposits and loans granted. The pie chart – Figure 2 – shows that the majority of the money owed to Lloyds, Halifax and BoS is in the form of ultra-safe and secure mortgages. An important metric used to assess banks is the proportion of its lending that is financed through deposits rather than by the bank borrowing money in the financial markets (going for “wholesale funding”). In the case of Lloyds Group loans to customers are pretty well entirely financed from deposits: Its “loan to deposit ratio” was 107% in 2019 and 98% in 2020. This is good. Funding a substantial amount from financial markets leaves a bank vulnerable to the market suddenly drying up in times of stress. Ordinary people’s deposit money is a much more reliable source. Lloyds does borrow some money from the financial markets, and does have some exposure to derivatives, but this is relatively small and offset by financial assets such as bonds, derivatives and cash. Leverage ratio Figure 3 shows the ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 Yesterday’s Newsletter pointed out that Lloyds’ current share price of 41.69p (LSE:LLOY) is only 9.9 times underlying earnings averaged over the last ten years. At face value, it therefore seems cheap if we assume merely that EPS over the next ten years will match those of the last ten. However, there are reasons to believe that Lloyds could do better in the future. If it does, and it checks out on financial stability and qualitative factors then it would seem exceptionally cheap.
Reasons we might see a significant growth in earnings per share:
At the same time investors in the long-term bond market currently earning 0.8% pa will worry that inflation is going to erode the real value of their savings. The result may well be a rise in long-term interest rates and a suppression of short-term rates. This “steeping of the yield curve” is music to the ears of bankers because one of their key societal roles is “borrowing short and lending long”. In other words, depositors usually have access to their money within a few hours or days – banks borrow from them for short periods. These liabilities for banks therefore pay puny interest rates, if any at all. On the bank asset side – mostly lending to businesses and home-owners – they lend for many years. As long-term interest rates rise so will the gap between what banks have to pay to access money at the short end and what they receive by lending it out at the long end. Even over the last ten years this gap, called the “net interest margin” has been respectable, generally in the range 2% to 3% - see table. Now we have reasons to believe that, at least for a while, NIM could exceed the top end of this range. Each 50 basis point (i.e. 0.5%) rise in the NIM should add roughly £2bn to Lloyds earnings before tax. That is around 2.8p per share. Average EPS over the last ten years were 4.2p, so an uplift of 2.8p is considerable. How long the wider gap will last before short-term interest rates are raised is anybody’s guess, but at the moment central bankers seem really determined to hold rates down. Net interest income, £bn Net interest margin Impairment, £bn 2020 10.8 2.52% 4.2 2019 12.4 2.88% 1.3 2018 12.7 2.93% 0.9 2017 12.3 2.86% 0.8 2016 11.4 2.71% 0.6 2015 11.5 2.63% 0.6 2014 11.0 2.40% 1.1 2013 10.9 2.12% 3.0 2012 10.3 1.93% 5.7 2011 12.2 2.07% 9.8The other major element in bank profitability is the “loan impairment” rate, i.e., a provision which estimates the hit caused by loans going bad. Loans are shifted into the impaired category when it becomes probable that not all of the related principal and interest payments will be collected. During the Covid year the directors’ estimate of impairment rose to £4.2m or almost 1% of loans to customers. In more normal years the figure is under £1bn. The directors are targeting impairments for 2021 to be below £2bn. If the economic recovery builds up steam that should be easy to accomplish. Quote from a February FT article: “But this domestic retail and business lender is nevertheless a particularly useful window on the nation. The UK now expects to recover faster from the pandemic than most business planners recently imagined…Lloyds, whose emblem is a black horse, is cantering out of trouble at pace. Loan loss provisions of £4.2bn pushed full-year pre-tax profits down 70 per cent to £1.2bn. But fourth-quarter impairments of £128m were light…core tier one equity, therefore, rose to 16.2% of risk-weighted assets. Allow for software and accounting charges and that is still some way above the minimum target, equivalent to about 3.5p a share. No one suggests Lloyds will pay the lot back to shareholders as soon as the payout cap comes off. But there is plainly plenty of firepower for returns and for investment. Lloyds’s net interest margin is a stout 2.46 per cent. This suggests the pandemic has suppressed price competition, as well as consumer spending. A consequence of the latter is a flood of deposits. A stimulatory grassroots splurge is already apparent in soaring holiday bookings.”
It has the largest UK branch network and is the largest digital bank with 17.4m online active customers (12m are mobile app users). It concentrates in the geography where it has competitive advantage with 97% of revenue coming from the UK. It claims a one-quarter share of UK consumer credit cards, slight less than one-quarter of share of personal current accounts and deposits, mortgages and small business len………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1 |
Prof. Glen Arnold
I'm a full-time investor running my portfolio from peaceful Leicestershire countryside. I also happen to be UK´s best selling investment book author and a Financial Times Best selling author. Originally, I wrote all my ideas out in full on this website. Now that ADVFN publish them they are entitled to display the full version for six months – you can see them here. Thus can I only post the first few paragraphs here for anything younger than six months.
I write 2 to 3 newsletters per week - investing is about making the right decisions, not many decisions. Categories
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