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Caledonian Trust (LSE:CNN) has just reported its annual results to June, and very pleasing they are too.
Profits are not the focus of attention. This is a Scottish property development company which held on to its properties for the past eight years or more. During this time it has added considerable value without selling anything of significance.
What is does is buy farms, small holdings and office/industrial sites in key locations (mostly around Edinburgh and Glasgow), gaining planning permission for change of use, extensions and new houses.
For the largest part these properties have lain undeveloped despite having planning permission, and their balance sheet value is stated as the “unimproved amounted”, i.e. the value without planning permission.
We all know that there is a vast difference between the value of land without planning for, say, a dozen houses, and the value with planning.
Even using the balance sheet numbers we find that the current market capitalisation (£16.5m) is below the net asset value (£17.9m).
There are only two groups of assets of significance in the BS:
1. Trading Properties, stated at £11.5m. Valued at the LOWER of cost or net realisable value. So, even if the property now has planning permission for an additional 20 houses the BS value stays at what it cost the company in the first place plus a few expenses capitalised such as interest and professional fees.
2. Investment Properties, stated at £10.5m. These properties are revalued each BS date and uplifted to “fair value”.
All liabilities amount to £4.3m.
I first bought into CT in July 2013 when the Scottish housing recession was biting hard in July 2013. At that time, there was little prospect of realising the value in the properties by selling them after renovation or construction – it did not make economic sense to spend money on the builds.
Therefore we shareholders had to wait, and still do, until the market conditions are right to turn all those permissions into hard cash.
I bought at 70p when the market capitalisation was about £8m. Then the Trading Properties were valued in the BS much as they are today at £11.6m. However, the Investment Properties – those that are stated at fair value – were only £8.1m. Overall NAV in 2013 was £16.9m and Net Current Asset Value was £8.8m at BS valuations.
Note that since then the directors have been forced to increase the BS value of the Investment Properties by around £1m per year. This reflects value creation through planning permissions.
What they don’t do is increase in a similar manner the BS valuations of the Trading Properties.
Since July 2013 the share price has moved to 120p to buy and 140p to sell.
I have no intention of selling because I estimate the hidden value in this company……. To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here.
