FINANCE AND INVESTMENT
By CUSTOS SIEEL vesting day has come and gone, but not without causing something more than a ripple in the gilt-edged market. The pessi- mists who forecast that the new British Iron and Steel stock would start life at a discount have proved right. Although the terms- 31 per cent. at par, with repayment dates 1979-81—were exactly in line with prevail- ing market conditions, the launching of something over £200,000,000 of new stock has had the inevitable result of bringing prices down. In consequence, iron ana steel investors have shared the fate of railway and electricity investors in being unable, at the start of business, to get par for their com- pensation stock. In other words, the Government has fulfilled the letter but not the spirit of its obligation under the Act. As I see this problem, investors can only be given their full due if compensation is paid in hard cash or if the gilt-edged market is so buoyant that it can take the sudden creation of a large slab of new stock in its stride.
The prospects for markets in general ? Still, in my view, reasonably good, even though, for the time being, reinvestment demand from recent sellers of iron and steel shares may have spent its force. If market estimates can be trusted, there is still a good deal of steel money awaiting investment, and it will doubtless find its way into active employment as suitable opportunities occur. Some investors of the more cautious type are not letting out much sail before the Budget, whose shadow is bound to lengthen across most sections of the Stock Exchange in the coming weeks. I shall be surprised, all the same, if we see a really material set- back in quotations while the indications accumulate of growing inflationary pres- sures and more and more companies increase their dividends. The commodity share groups, with rubber shares as cheap as any, seem to me to have scope.
Imperial Tobacco Finances
. I can find no reason in the full accounts of the Imperial Tobacco Company for 'modifying the view I put forward last week that " IMPS" £1 Ordinary units are good value for money at £5136. On the contrary. my suggestion that, failing an increase in selling prices,_ one might have to be pre- pared for some reduction in profit margins and the group's earnings appears to have been over-pessimistic. From the full report it is apparent that the company is still succeeding in achieving manufacturing economies and that the process of increas- ing the use of non-dollar leaf has continued. Stockholders will be encouraged by the directors' statement that " manufacturing economies have been effected during the year, which go a considerable way towards meeting the full eventual increase in costs resulting from devaluation." There is no reference here to any urgent need to raise
sellim prices. ; As expected, the balance-sheet again reflects the steady pressure on liquid resources of the financing of large stocks of leaf at high prices. The consolidated figures at October 31st, 1950, show a further jump in stocks from £93,552,850 to £111,061,563. This increase, which, it is explained, was mainly the effect of higher prices and especially of the higher sterling cost of dollar leaf, is flanked by a rise in bank over- drafts from £18,954,977 to £28,344,923. Against this formidable increase in tem- porary borrowings must be set the fact that at the balance-sheet date the company had actually received only £5,200,000 of the £20,000,000 issue of 4 per cent. loan stock made last October. . The balance of £14,800,000 is receivable during the com- pany's current year. Even so, it seems doubtful whether this money will not be rapidly absorbed in the financing of a further increase in stocks, which points to the probability that sooner or later fresh money will need to be raised. The general impression one gets from the accounts is that Imperial Tobacco has had a good year and it is clear that in their treatment of the so-called " special surplus" arising out of devaluation the board has followed a con- servative policy. As to the outlook, which will depend, of course, on the coming Budget, it is difficult to imagine that even a hard-pressed Chancellor will see fit to add to the heavy tax burden already borne by the tobacco consumer. There is, in fact, plenty of evidence that the gap between tobacco demand and tobacco supply has narrowed and that the two are now very nearly in equilibrium.
Bowater Dividend Decision
As a consistent advocate in recent years of the investment merits of Bowater's £1 Ordinary units, I am well satisfied with this company's latest results. Consolidated profits have risen by £1,700,000 to a new peak of £5,400,000, an increase which is easily the sharpest in recent years. With characteristic caution, Sir Eric Bowater predicted at the annual meeting a year ago that results for 1949-50 might well be as good as those for the previous year, a fore- cast which he confirmed when fresh capital was raised last September. Against the background of the profit figures now dis- closed the board's decision merely to increase the Ordinary dividend rate from 124 per cent. to 15 per cent. looks decidedly conservative. Earnings on the capital as enlarged by the recent new issue appear to be well over 100 per cent. Doubtless the company is anxious to plough back large sums to reserves, a policy which is justified by past vicissitudes and by the uncertainties inherent in the newsprint trade. For the present, however, the outlook can obviously be describedI good, as there are no
cations that the newsprint shortage is purely a temporary affair. The £1 Ordinary units are now quoted around 54s. At this level they give the satisfactory return of nearly 54 per cent. on a dividend which, as 1 have pointed out, is covered many times over by available net earnings. The shares still look well worth holding.
Borax Profit Doubled From the latest profit figures of Boras Consolidated it is apparent that the buyers' market which was just beginning to emerge for this company's products a year or so ago has undergone a marked change, thanks to the world-wide rush for raw materials. After a steady decline since 1946 profits of the group for the year ended September 30th. 1950, have established a new record. Trading profit at £1,637,537, against £809,686, has more than doubled, and although profit on exchange was down from £362,836 to £172,960 and taxation absorbed £907,000, against £612,000, the net profit shows a substantial advance at £651,601, against £408,667. The Borax directors have rightly judged the time opportune to pass on some small part of this good fortune to the Deferred Ordinary shareholders, whose total distribution is raised from 124 per cent. to 15 per cent. That this is not an extrava- gant distribution of profits may be judged from the fact that the carry-forward is being raised by nearly £400,000 to the impressive sum of £1,066,573. Following these results Borax Deferred Ordinary £1 units have moved up Is. 3d. to 62s. 6d. and are now priced to yield approximately 5 per cent. A sound holding.
A Low-Priced Rubber Share The continued buoyancy of the com- modity in Mincing Lane, reinforced by a steady stream of good profits and dividends. has put fresh life into the rubber share market this week. Prices of most of the better-known shares have risen quite sharply, although even now they do not discount the earnings and dividend possibilities by any means fully. Among the low-priced shares the 2s. units of Kuala Kubu Rubber Estate, a Malayan producer, have speculative attractions around ls. 44d. This company has not yet returned to the dividend list, but for the year ended June 30th, 1950, it earned just over 20 per cent. on its capital. That was with an average selling price of under Is. 2d. a lb. and with a crop of 371,644 lbs. For the current financial year to date the
average selling price has been nearly 40d. a lb. and up to the end of January the com-
pany's crop was 27,000 lbs. up on the corresponding period of the previous year. It looks, therefore, as if for the whole year the crop may well be around 400,000 lbs
and that the average selling price—this com- pany has not entered into forward sales—
may be in the neighbourhood of 45d. Even if one allows a profit of only 2s. a lb., the company should net something over £20,000 after tax, which would be equivalent to over 80 per cent. on its capital. There is a small rehabilitation loan of £5,250 to pay off, but obviously with earnings around the present level this should be quickly eliminated. A dividend of at least 20 per cent. would seem to be well within prospective earnings and would justify an improvement in the shares to a price around par
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