FINANCE AND INVESTMENT
By CUSTOS As I write on the eve of the poll investors are still registering a confident expectation of a change of Government. It finds expres- sion not only, as everybody would expect, in steady buying of leading industrial equi- ties and commodity shares but in solid sup- port for gilt edged stocks. Fears that a Conservative Chancellor of the Exchequer might raise interest rates are for the moment —or so it seems—less powerful as a market influence than the conviction that a new regime would have a tonic effect on invest- ment confidence. I doubt, however, whether a Conservative victory would enable gilt edged prices, after a temporary lift, to move much higher. There are too many hurdles ahead for that, not least the balance of pay- ments problem of which Britain's heavy deficit with the .European Payments Union is the latest sharp reminder. The outlook for equities ? Assuming the election goes the " right " way, there should be scope for a further moderate improvement, but it will be on highly selective lines.
Paper Makers Profits In the long list of companies who re distributing in dividends only a small c- tion of their available earnings one of the - most striking instances is that of Albert E. Reed, the paper manufacturers. Like many other paper makers, this company has recently announced a spectacular increase in profits. Trading results of the group for the year to March 31st soared from £836,717 to £3,952,471. Net profit, after charging £2,181,160, against £454,172, for taxation, was up from £382,545 to £1,770,611. If one relates this figure to Albert Reed's Ordinary capital, after deducting the Preference divi- dend requirements, earnings on the Ordinary capital work out at well over 200 per cent. In view of the threatened dividend freeze, however, Ordinary stockholders merely get 10 per cent. for the fourth successive year. The group puts £1,100,000 to stock reserve, asinst possible future falls in values, and £330,000 to fixed assets reserve for additional cost of replacements. I think it can be assumed that with such a huge margin of earnings in hand this company will not delay long in passing on some part of the group's prosperity to the Ordinary stockholders. This confident expectation in the market doubtless explains the current price of 70s., at which the £1 Ordinary units are now quoted. At this level they are yielding only a trifle over 3 per cent. on the 10 per cent. dividend, but the earnings yield is about 60 per cent. The units have obvious possibili- ties on the assumption that the threatened freeze does not materialise.
Rhokana Dividend These are prosperous days for the Rho- desian copper producers. While the City had confidently expected a substantially higher profit and dividend from Rhokana Corporation for the year to June 30th, the actual results fulfil the most optimistic esti- mates. Rhokana's profit, before tax, has jumped from £6,687,165 to £10,483,687. Net profit, after tax, is more than doubled at £6,765,395, against £3,073,858. On the strength of these figures Sir Ernest Oppen- heimer doubtless feels fully justified– in raising Rhokana's dividend from 120 per cent. to 200 per cent. The effective rate is not the 200 per cent. dividend now declared, since half of this is tax-free and the remainder is subject to U.K. tax at a re- duced rate, which should be approximately 6s. in the pound. What now matters from the Rhokana shareholders' standpoint is the sort of dividend rate which may be expected, allowing for the tax question, for the current year. On the face of it, it looks as though something like 170 per cent. net, which would be equivalent to over 320 per cent. when grossed up at 9s. 6d: in the pound, should be within the company's capacity. A factor which should not be overlooked is that Rhokana now has a general reserve of nearly £9 million, or more than twice its total issued share capital. Recently the directors of Tanganyika Concessions, another emigrant company, declared a 10 per cent. special dividend out of revenue reserves accumu- lated up to the time when control of the company was transferred abroad.• It will be recalled that Tanganyika Concessions' shareholders were informed that, as these reserves had already borne U.K. taxation, the company was not liable for further tax on any distribution made from these reserves. It seems to me to be a fair inference that Rhokana is in much the same position. Following the publication of the latest figures Rhokana £1 shares have risen £1 10s. to £27, thus establishing a new peak. If one takes the effective divi- dend rate as something over 320 per cent. gross the shares still yield 12 per cent. I see no reason why they should be sold.
Richard Crittall Outlook There is light and shade in the latest accounts covering the year to June 30th of the reorganised Richard Crittall and Com- pany, the heating engineers. On the one hand, trading profits of the group, as fore- cast by the chairman a year ago, have fallen. They are down from £45,481 to £23,246. In his statement Mr. Geoffrey Eley, who has taken on the arduous task of putting the company back on to a reasonable earnings basis, points out that the results of the pre- vious year were derived mainly from the completion of old contracts. He makes a further point that what may be called the " true " trading profit in the latest annual report is quite small, since a large part of the consolidated profit has arisen from the utilisation of stocks which had been pre- viously heavily written down and from the release of certain previous provisions. " Further windfalls of this sort, though they may occur, should not be relied on." On the other hand, Mr. Eley discloses that there has been an improvement in the position of the group in the first few months of the current financial year, as a result of which the forward order book is substantially higher than it has been at any time since the reorganisation. He also calls attention, with good reason, to the strength of the liquid position. A glance at the consolidated balance sheet shows that at June 30th the company had short-term deposits of £185,881 and £51,892 in cash. These liquid funds, the chairman points out, are more than sufficient for the company's present require- ments or for what it is likely to need in its business for a long time ahead. It is not surprising, therefore, to find that the board are investigating the possibility of using part of these surplus resources in acquiring a further investment in the industry, with a view to increasing the group's turnover.
In its reorganised form Richard Crittall has an issued capital of £350,000 in ls. Ordinary shares. The present market quotation is around ls. 2{d. Although the shares give no immediate dividend yield, they look to me to be worth holding for the group's recovery possibilities.
A Textile Share In the rayon share market the equities of Courtaulds and British Celanese, the two leading units in the industry, have latterly held the centre of the stage. Both shares have moved up on the ltrength of the excellent earnings cover behind current divi- dend rates and yields, especially in the case of Celanese, are now down to a meagre level. While I do not suggest that either of these shares is over-valued, the pre-occupa- tion of investors with these market leaders has meant that the shares of some of the smaller rayon concerns has been overlooked. The 10s. Ordinaries of North British Rayon are a case in point. This company has just announced its results for the year to June 30th. Group profits, after providing for all charges and taxation, have risen from £103,824 to £140,021, even though the U.K. taxation charged was substantially higher at £96,550, against £53,640. But for the threatened freeze the directors could easily have paid a substantially higher dividend than the 10 per cent. which is now declared. I calculate the earnings on the Ordinary capital at over 70 per cent. North British Rayon 10s. Ordinaries are now quoted at 17s. At this price they are yielding nearly 6 per cent. on the 10 per cent. dividend and about 40 per cent. on earnings. They seem to me to have spedulative possibilities.
Offer for Lavells Scarcely a week passei without news of a purchase bid for one company or another. The latest instance is afforded by Lavells, the confectioners and tobacconists, who have received an offer of 5s. a share from Nuttalls, the toffee manufacturers. Although this bid is substantially above the 4s. 3d. which shareholders were offered by another group only a little time ago, there appear to be many Lavells shareholders who regard Ss. as inadequate. They are doubtless the investors who acquired their shares at the placing around 5s. ltd. in 1948. I think they should keep in mind, however, the fact that before news of a bid reached the market the shares were being dealt in around 3s. 3d., which seemed a reasonably fair valuation on the basis of the latest accounts. There is this other point as regards the desirability of remaining a minority shareholder—that the buyers have already intimated that it is their intention to pursue a cautious distri- bution policy. In my view the bid of 5s. should be accepted.
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