FINANCE AND INVESTMENT
By CUSTOS
THE fog that gripped the City for four days has its counterpart in the mist that still enshrouds investment prospects. Unhappily, the groping investor has no market radar to guide him. He can take a very short view, not without risk, and he knows that the outlook will clear some day ; but no one can foresee with any clarity what the market scene will be like in three, six or twelve months' time. The average investor is aware that the drain of gold has been checked and to a modest extent reversed, and he sees that many branches of trade are reviving. On the darker side, he is probably alarmed by the £400 millions excess of national expenditure over national revenue to date in the current Budget year. This deficit is reflected in an expansion of bank deposits, which by their inflationary possi, bilities may imperil the good work that has been performed by the higher Bank rate and credit restriction.
The Budget gap must be narrowed if the dollar gap is to remain closed, since a growth in the Budget deficit and in bank deposits may inflate production costs at a time when overseas competition has become keener. The Chancellor is aware of the risk, but there is no sign yet of a sufficient rise in Budget revenue or a sufficient cut in expen- diture to justify his estimate of a surplus of £400 millions in the current financial year. Revenue should show up well in the first three months of 1953, since company taxation will reflect peak profits ; but the eventual surplus may be as much as £200 millions below the estimate. The prospect of any worth-while tax relief, which would encourage savings and ease the shortage of capital, is hardly encouraging. Against the Budget background hopes of a continued market revival must be correspondingly restrained.
Bolsover Disappointment A few weeks ago Bolsover Colliery Ordinary units were changing hands at over 50s. on supposedly well-founded estimates of a district award of between £9,000,000 and £10,000,000 for the colliery assets. Those who bought at this price, have now been disillusioned. The award is only £7,737,035, and the units have been down to 36s. since the announcement. Of the sum awarded, £5,000,000 has already been received as partial compensation. There remain important ancillary assets including property, land and a large number of houses, which are said to stand in the books at under £200 each. Compensation for these is additional to the award for the colliery assets, and is based upon the estimated market value at January 1st, 1947. Pre- sumably these houses are let at controlled rents, which may have an important bearing on the valuation, but they might be worth considerably more than their book value. There should also be some accrued interest on the compensation sum, less interim payments, to add to the distributable total. On the debit side, allowance should be made for premiums on the 4fepayment of the 6 per cent. First Preference and 8 per cent. Second Preference stocks and the cost of liquidation. While any precise estimate of the final break-up value is out of the question, my impression is that the minimum should not be less than 33s. or 34s., and the actual amount may be several shillings more. 1 hesitate to recommend either a purchase or a sale of the units at the present price, though they may be worth attention if they fall below 33s.
De Beers Preference A high yield on a Preference share normally suggests a fair amount of risk, but I think the market may be over-discount- ing the Tisk attaching to De Beers 40 per cent. Preference shares, which can be bought at just over £14 to yield slightly more than 7 per cent. These shares are of 50s. denomi- nation and are entitled to £20 each in a liquidation, so they are equivalent to a 5 per cent. Preference 20s. share standing at about 14s. There are no debentures, and the Preference dividend, which takes £800,000 a year, is a first charge on profit. Last year's earnings were over £10,000,000, so that the Preference dividend was covered 121 times. The true consolidated earnings were actually much higher, for South African companies are not obliged to show group earnings, and only the dividends received from De Beers' subsidiaries are included in the parent company's profit. Of these subsidiaries, Consolidated Diamond- Mines earned £3,500,000 more than it paid in dividend, while the Diamond Corporation, whose accounts are not published in this country, is believed to have earned £6,000,000 more than was paid in dividend.
De Beers also has large industrial interests, . through De Beers Industrial Corporation and other investments, and its liquid position is now immensely strong. Diamond shares are traditionally highly speculative, but this view should be modified in the light of the remarkable growth in the use of industrial diamonds in drills, grinding wheels and cutting tools. Demand for indus- trial diamonds is likely to remain high owing to the extreme hardness of many alloys now used in industry. In the first nine months of 1952 sales of industrial stones exceeded £19,000,000, or five times the value of diamonds of all kinds sold in 1938. Sales of gem stones have declined slightly this year, but total diamond sales in 1952 should surpass the 1951 record of over £65,000,000.
Anglo-American Trust De Beers Deferred 5s. shares also have attractions at Ms. 6d. to yield 19 per cent. gross after allowance for Dominion tax relief. The interim dividend has been raised from 60 per cent. to 80 per cent., but this does not necessarily indicate an increase on last year's total payment of 200 per cent. Even more attractive than De Beers, I think, are Anglo-American Investment Trust £1 shares at about 81s. to yield 18f per cent. gross after allowing for Dominion tax relief. The Trust's main holding is in De Beers' Deferred, but it also has large investments in the Diamond Corporation, the Diamond Trading Co., the Diamond Purchasing & Trading Co., Industrial Distributors (1946) and Boart Products, in share, so that anyone buying at the current price is paying nothing for the remaining unquoted but valuable assets which, in my view, are worth another £3 a share. Further, the 200 per cent, dividend on the De Beers' shares covers the 60 per cent. dividend on 'the Trust shares. Two points are worth noting: first, the Trust's interim dividend for 1952 was raised from 20 per cent. to 25 per cent., apparently without any warning that the increase did not indicate a higher total dividend for the year; second, the Trust has substantial interests in the marketing of gem and indus: trial diamonds, in addition to its indirect interest via De Beers. I should add that, while the 1952 results should be good, shares of this kind would be vulnerable to .any serious recession in America, which is • by far the most important market for gem and industrial stones.
Ashanti's Rich Strike News of the Ashanti Goldfields' pheno;- menarly rich ore discovery has put the shares up 2s. 6d. to 20s. 3d. The market response might have been even more exuberant in more active markets. The value of 46.8 dwts. (21 ounces) per ton of ore is remarkable in itself, but the 57 feet width ,of the reef is even more exceptional. It is too soon to assess the full significance of one crosscut, and the results of further development must be awaited. The dis- covery, however, lends support to the view that a new and very rich ore-body may lie a few thousand feet from the present ore- body. The news is certainly --welcome to holders of the shares, which went up to 51s. 3d. in 1949 and have since been down to 15s. 9d. Gold shares will continue to be subject to ups and downs on rumours or denials of an impending rise in the dollar price of gold. American opinion is still hostile to any change, but the rumour may prove correct some day if depression should come again to America. Even the best gold shares are inherently speculative, but with this reservation I think Ashanti should eventually prove to be a rewarding holding, both for income and capital gain. At 20s. 6d. the yield is about 91 per cent.
Bradford Topmakers
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