J Smart – shareholder returns

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:

• £1.6m paid in dividends
• £0.8m on share buy-backs (1.5% x £1.25 x 42.4 shares = £0.8m)
• £1.3m reinvested in the business to add to NCAV – yet another industrial unit or two added?

If NCAV grows by £1.3m over the next year from its current £96m to £97.3m, then NCAV per share rises to £2.33 (£97.3m/41.76m) – the number of shares drops 1.5% by the end of the current year.
Shareholders who do not sell any shares benefit from,

• firstly, the £1.6m/£53m = 3.02% dividend yield,

second, by a ………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1