The Smart Stuff

Stephen Bland picks a Scottish property and construction company as a value play.

Smart is a Scottish company in the Real Estate sector which I am picking as a value play. It runs a substantial business of contracting for others as well operating as a property developer. It develops both residential homes for sale and commercial sites as investments for its own account. In addition, it manufactures and supplies certain building materials such as precast concrete items and joinery. It has been around since 1951 and floated in 1965.

I couldn't find any forecasts for the shares, so I worked out the expected eps of 42p above for 06 myself. It required some higher math. I can tell you. What I did was to look up the interim accounts to 31/01/06 where the directorspeak referred to profit for the second half being expected at not less than the profit for the first half subject to blah blah. With eps for the latter at about 21p, I managed to figure out that 42p was a reasonable forecast for the full year.

No reference is made to the forecast dividend but the interim was increased from 2.9p to 3.0p. Over the last few years Smart has steadily increased its annual payout but only by a modest 2-3% or so. A guess for 06 might therefore be something like 12.8p to give a forecast yield of a measly 1.7%. Not exactly a high yielder then.

My 42p eps forecast delivers a forward P/E for 06 of 17.9 which is high, but note my view that property companies in general are valued principally on an assets, not an earnings basis. In any case the advent of the new International Financial Reporting Standard will tend to make eps rather volatile for property companies because it includes fluctuations in the valuations of their portfolio as well as fluctuations in the pension scheme deficit if they have one. Smart does have a deficit which stood at around £7m at 31/01/06, not worrying in relation to net tangible assets of about £76.2m.

Those net assets are made up of investment properties alone of some £73.8m held as fixed assets. Net current assets stood at £9.3m with the negative difference between the sum of these two and the £76.2m comprising other fixed assets less other liabilities. So when I say net assets, I mean net assets, principally the real stuff, not a load of old rusting construction machinery.

So property assets are the principal attraction here and the company has managed to increase its net assets per share very nicely over recent years. There are no intangibles. At an offer price of 750p, it trades almost at its last asset value that I can calculate, which was 756p at 31/01/06. But bear in mind that a lot of property shares now trade well over book and moreover many of them are loaded with debt. Smart actually had net cash at 31/01/06 and also at its last annual accounts to 31/07/05 and previously at 31/07/04. Even before that, the three earlier years for which I have data show only a very small level of debt, no more over than about £2.7m - £5m, equivalent to gearing of between 4 and 9% of shareholder's funds.

Smart's share price has increased steadily over the last few years, on the back I'm sure of its regular rises in net asset value, the key to future share price gains too. Note that the company is director controlled which puts off some people though I'm not convinced that it is always a bad thing. It can go wrong, for instance where controlling directors take a company private at an advantageous price -- for them. Also it means that a contested takeover bid is ruled out.

The situation of net cash or very low debt is unusual in the property business. Combine this with the achievement of regular and decent gains in asset value, a share price around book and I smell a very conservatively managed and successful operation here which is a little too cheap I'd say. Unfortunately the yield is very low but nevertheless I see this as a share which ought to deliver good rewards over time though don't expect short term fireworks.