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.
I'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
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