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.......
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