J Smart – shareholder returns

Clearly J Smart (LSE:SMJ) has more money than it knows what to do with.  The cash 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 £4m rent annually so could support a fairly high level of bank debt.


The capital held in liquid form produces very poor returns.  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 make good profits from rental income and the occasional capital gain then annual pay outs to shareholders could rise far above the current £3.1m.
After all, there is £37m in the form of net cash, shares and a pension surplus payment due. Then there is another £12.3m in development land and active developments as well as £77.7m of offices and industrial units collecting rent.
Market capitalisation is £1.66 x 40.7m shares = £67.6m....
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Musing on the future of that cash
NCAV is £120.8m and the number of shares is 40.7m therefore NCAV per share is £2.97.
By buying-in 1% - 3% 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 nine years is £4.84m – see below at bottom of the table (the other numbers are before deduction of tax)....
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An attempted valuation – conservative approach
Assume to start that the company produces £4.84m after-tax profits in all future years.
Assume in each future year that this £4.84m is allocated as follows:

• £1.5m paid in dividends
• £2.5m on share buy-backs
• £0.84m reinvested in the business to add to NCAV – yet another industrial unit added?

If NCAV grows by £0.84m over the next year from its current £120.8m to £121.64m, then NCAV per share rises to £3.10 (£121.64m/39.18m) – note, with £2.5m going to buy back shares the number of shares drops 3.7% (from 40.7m to 39.18m) by the end of the current year.
Shareholders who do not sell any shares benefit from,

• firstly, the £1.5m/£67m = 2.2% dividend yield,
• second, by a rise in NCAV per share, (£3.10 - £2.97)/£2.97 = 4.4%

A total of 6.6%.
Call this Scenario one.
Scenario one extended: what if ​