Cheap or good value?

Yesterday South Somerset District Council announced a new property deal. A £7m investment in a unit in a business park in Christchurch, Dorset.

SSDC were pleased because they believe they have got the investment on the cheap. Their press release says “The Council worked with Lambert Smith Hampton’s Southampton based investment team and Shoosmiths LLP, the Lawyer’s National Firm of the Year 2019, to acquire the 68,327 sq ft D1 Christchurch Business Park for £7,050,000 reflecting a net initial yield of 7.07%.”

Impressive. yes but there is more, “The property is currently let at a rent of £531,299 to Kondor Limited, which is a marketing and distribution partner of Samsung. It was identified by the council as an attractive investment with potential for capital growth due to the supply and demand imbalance in the Solent industrial market.  The purchase reflects £103 per square foot capital value at a point where other prime investments in the same market are achieving up to £130 per square foot.”

So why has SSDC got such excellent value? The company, Kondor Limited, sounds like a good bet. Until of course you look at their accounts.

The first thing that stands out is the resignation letter of their auditors KPMG. This draws shareholders attention to the fact that at the point of their resignation KPMG have £388,000 in unpaid fees.

Kondor’s latest set of accounts had an audit qualification as the auditors could not be sure of the value of stock. Stock is shown on the latest filed balance sheet at £18.6m.

For the year to 31st March 2018 the company showed a loss of £5m. But it also showed a prior year adjustment of £13.6m because it now believes that previous years figures had been overstated.

It is true that the company still has £36m of net assets.

But when you look at the business as a whole, it is not hard to see why the investment may have been obtained at below usual market price.

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