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What I heard at Caledonian Trust’s (LSE:CNN) AGM on Friday confirmed my conviction that Mr Market undervalues this share. Its market capitalisation is £13m but one property alone would at least match that, even after paying off all the liabilities. And it has dozens of other properties on top – see earlier Newsletters (particularly 10.1.17) for my estimate of value.
A worry
While the net current asset value is north of £30m my greatest fear when walking into the meeting was that the directors would be tempted to plough-back money released from maturing developments into new projects somewhere near the peak of the next property upturn (which is already well underway in Edinburgh, especially for flats).
But I received many reassurances on this point both in the formal meeting and in discussion with the two principal actors, directors Douglas Lowe and Mike Baynham, in the three hours after the meeting.
My belief is that neither of these very experienced property developers wants shareholders to suffer the purgatory of another property slump, where nothing can be sold, at least, not at a profit. Far better to pay large sums to the patient shareholders as major developments come to fruition.
The value you do not yet see
Douglas and Mike have astutely added shareholder value by cumulatively improving the sites held by Caledonian both by physical changes to the land or buildings and by improving planning permissions.
For example, Douglas kindly showed me around the site in an exclusive part of Edinburgh in Belford Road – it has an historic village feel and yet is within easy walking distance of the City centre.
The site has planning permission for 20 flats. These will be on six floors with a car park at ground level. The site was regarded by other property developers as high risk because it was occupied by a burnt-out Victorian church filled with rubble with who knows how many complications with the authorities impacting on the development potential (there might still be an issue if archealogists find something of interest).
More problematic than that was the bedrock. It was thought to be very hard. This would require expensive removal to form a base for the foundations and car park in basement. After removing hundreds of skips of rubble the team have now got to the bedrock and much to their relief have found a firm rock, but one that can be removed by an ordinary JCB. This is ideal to shape and to build upon.
The third problem with the site was the very narrow entrance. This has now mostly been cleared of previous building work and resulted in a perfectly adequate, if steep, entrance for cars.
Assuming no more problems, then the twenty flats will be built and could be worth £9m – £10m. Admittedly it’ll cost a few million to build them to the specification required of high end property, say £1,500 per sqft or £3.15m in total, but it’ll be worth it.
Once this land is fully cleared and build-ready the directors are faced with options: they could advertise it for sale (say £5m?); form a joint venture, or; raise the build money themselves and hire a main contractor.
The property that is probably worth more the MCap……..To read the rest of this article, and more like it, subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
