12 MAY 1950, Page 33



Now that the Budget groundswell, which never reached impressive proportions, has subsided the City is attempting once more to appraise- the investment outlook. I cannot record that any clear-cut view has yet emerged. There are, on the one hand, the optimists —for the most part the chart-minded—who are impressed by the fact that since early April the Financial Times index number of industrial Ordinary share prices has been climbing slowly from 105.5 to 108.1. They argue that there is evidence here of the sort of stability which, after a time, gives place to a sharp improvement. While I do not look for any serious fall in markets, I confess that I should be surprised if the optimists were right, at least in the next few weeks. On the political front, admittedly, things still seem to be going badly for the Socialist Government, so that the election outlook seems reasonably bright. Industrial news from America is also surprisingly good. What appear to me to preclude any sustained rise in industrial share prices are rising costs, the growth of competition and the pressure of heavy new capital requirements on limited investment resources. Markets must remain highly selective.

DunloP Earnings Setback

Following closely on the heels of the setback in earnings announced by Imperial Chemical Industries, preliminary figures for 1949 of the Dunlop Rubber Company also show that last year's profits fell substantially below the peak level reached in 1948. Consolidated operating profit of the group was down last year from £10,768,376 to £9,480,850. This seems to point clearly to reduced profit margins arising from a further increase in costs, rather than to any appreciable setback in the volume of sales. From the shareholders' standpoint the reduction in the taxation, charge provides an effective set-off to the fall in profits, the provision for U.K. and foreign taxation having fallen from £4,327,807 to £3,458,867. Net profit of the parent company, thanks to this tax cushion, was actually rather higher at £2,947,390, against £2,924,280.

Against the background of a fall in-profits nobody would expect the Dunlop board to choose this occasion to raise the Ordinary dividend. In fact, the total distribution on the Ordinary stock is being maintained for the fourth successive year at 15 per cent. This payment is being made out of available earnings of well over 50 per cent., the directors having decided to increase the transfer to general reserve from £1,615,176 to £2 million and to raise the carry-forward by nearly £50,000 to £1,440,562. Following the results, Dunlop £1 Ordinary units have been a steady market around 61s. 3d. At this level, which compares,with a peak price of 81s. in 1947, the yield is 5 per cent. In my view the units are fairly valued.

Troubles of the Kaffir Market After the sharp improvement which took place immediately preceding and in the weeks which followed the devaluation of sterling, South African gold mining shares have proved a dis- appointing market. Judged by investment standards the shares of the well-proved producing mines looked attractive, even after the devaluation rise, for those prepared to take a long view, and substantial lines of 'these shares went into strong hands in the early months of this year. Unfortunately, not all the buying of gold shares—and this applies especially to the shares of some of the developing mines of the Orange Free State—was of the solid type. With most of the other speculative sections of the Stock Exchange offering little scope gold shares naturally. -attracted .a ragged following, and during February and March some substantial com- mitments on the " bull " side were built up in the hope that something like boom conditions would return. As is now apparent, events did not develop in that way. The public proved apathetic and the heavy new capital requirements of the Orange Free State field have loomed as a depressing market factor. In consequence some City groups have latterly been lightening their load and as market prices have fallen back heavy losses have been incurred. As is usual in such circumstances, the Kaffir finance houses have not been too ready to help out the over-enthusiastic speculators and there is a certain amount of wreckage about. The process of tidying up the over-bought positions is bound to take time but I still see nothing in the fundarnental situation "of the gold mining industry which need prevent a slow recovery. Stilfontein Loan Stock Full details are now available of the plans which I outlined on April 21st for the raising of £2 million by the Stilfontein Gold Mining Company, which is one of the promising propositions on the Far Western Rand. Sponsored by Philip Hill and Partners, with two leading Stock Exchange firms acting as brokers, this issue comprises £2 million of 5f per cent Convertible Unsecured Loan Stock priced at par. As an indication of the confidence in the future of this mine held by important City interests it is worth noting that £650,000 of the stock has been underwritten firm. From the investment standpoint the interesting feature of the new stock is that it carries two conversion options. One confers on holders the right to take up Ordinary shares in the company between October 31st, 1950, and January 1st, 1952. at the equivalent of 31s. 3d. a share. The other, exercisable at a later stage when development work will have been completed, is at the equivalent of 45s. With Stilfontein 5s. Ordinary shares now quoted in the market around 27s. these options are clearly only of academic interest at this stage. The important point which gives the new stock its speculative attraction is that the options may well acquire a substantial value; if the mine opens up satisfactorily. For investors who do not mind shouldering some of the risks inseparable from the develop-, ment of a gold-mining proposition, the loan stock now being issued, which carries interest at 5f per cent., will make a powerful appeal.

Hambros Bank Liquidity Outstanding in the latest report of Hambros Bank, covering the, year to March 31st, is the evidence which the figures contain of a striking expansion of this company's traditional business with the Scandinavian countries. At just over £16 million the total of acceptances has risen by over £4 million during the year. In his statement Mr. Olaf Hambro explains that this increase is a reflection partly of a further growth of business and partly of the rise in prices, as a result of which much larger sterling amounts are now involved in financing a given physical volume of goods. At just short of £34 million, deposits are up by £3,300,000. Cash and bills amount together to over £12,500,000, once again providing the basis of a position of immense liquid strength.

Net profit was slightly lower at £303,285, against £304,541, which suggests that the benefits of handling a larger volume of business were counter-balanced by a further increase in costs. As a year ago, £185,000 is allocated to reserve for contingencies, while the dividends on the £10 shares and the £1 "A" shares are maintained at 15 per cent. and 6 per cent. respectively. Hambros Bank £10 shares, on which £2 lOs a share is paid up, are now quoted in the market around £8 10s. This is well below the peak of just under £10 in 1948 and of £13 in 1947. The yield on the 15 per cent. dividend, which is being paid out of available earnings of just under 50 per cent., is the attractive one, on a share of this kind, of 44 per cent.

Low-Priced Rubber Share With rubber quoted at over ls. 1 ld. a pound the rubber share market is showing a wise restraint in refusing to hoist prices to levels which would be appropriate to an average selling price of anything approaching that figure. In the great majority of cases, good rubber shares can still be bought to give indicated earnings yields of anything between 30 and 40 per cent. on rubber selling at only ls. 6d. This seems to me to afford an attractive basis for a purchase on medium-term prospects. Among the low-priced shares standing well below par Malayan Para look a cheap pro- position with scope for improvement. These are 2s. shares, quoted around Is. 3d. On the 5 per cent. dividend paid for 1949, when the average selling price for the company's crop was only 9d., the yield is 8 per cent. For 1950 the board has ensured satisfactory earnings by selling forward 65 per cent. of the estimated April- December output at a price 44d. a pound above the 1949 average. It can be calculated that on Is. 6d. rubber the company should earn about 35 per cent. on its issued capital, so that at Is. 3d. for the 2s. shares, the indicated earnings yield would be over 60 per cent. The scope for a substantial increase in the current dividend rate is obvious.