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.....
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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

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.
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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........
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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.

1. Investment property holding division.

This owns property worth £......

​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.

1. Positive net income before extraordinary items for the year to end July 2020? J Smart (LSE:SMJ) is profitable (£3.6m) and has been for many years. A score of one is given.
2. Positive cash flow from operations before investment in working capital? Yes (£4.9m), so we can add another one to the score.
3. Improvement in return on assets employed in the business from the previous year?  Net profit/beginning of year total assets: 2019: £6.2m/£114m = 5.4%, 2020: £3.7m/£118m = 3.1%.  A reduction, therefore no point.
4. Is cash flow greater than profit (so profits are not driven primarily by positive accruals, which may be ‘managed’)? Yes, so a third Piotroski point.

Leverage, liquidity, and source of funds

1. Change in leverage over one year. Has the firm’s long-term debt reduced relative to its total assets?  At 31st July 2020 the company had net cash of £13m. Fourth Piotroski point.
2. Has the firm’s current ratio (current assets divided by current liabilities) improved over the past year? 2019: £37.8m/£16.4m = 2.3,  2020: £32.7m/£13.2m = 2.5.  The current ratio has improved for J Smart. Fifth Piotroski point.
3. Has the firm avoided raising fresh equity capital (e.g. rights issue or placing) in the last year? J Smart has not had to raise money this way.  This takes us to six points.

Operating efficiency

1. Has the gross………………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
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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