FINANCE AND INVESTMENT
By CUSTOS Ir says a good deal for the adaptability of City ideas that a /150,000,000 issue of electricity stock can now be announced without so much as setting up a ripple on the surface of the gilt- edged market. Admittedly, new financing on this sort of scale is only put through at decent intervals, but the technique appears to have been skilfully developed. The terms-31- per cent. at 99 on a stock with an average life of 28 years—look just about right. They are certainly realistic, and with a little help from the public departments the operation should be a "success." With this loan out of the way we may well see a modest revival in the industrial issue market which has latterly been making creaking noises.
I.C.I. Earnings Setback Reports from British industry continue to provide evidence of the unevenness of trading conditions. Whereas there is nothing in the 1949 results of leading units in the iron and steel industry to indicate any change from sellers' market conditions in which large profits are being made, preliminary figures for 1949 issued by Imperial Chemical Industries afford clear proof that last year witnessed the transition from a sellers' to a buyers' market. Only such a change, of which Lord McGowan gave a plain warning in his annual statement last June, can explain the fall in the group's profit from the 1948 peak level of £22,955,579 to £17,323,509, although a further increase in general working costs must doubtless have contributed to last year's setback.
On the face of it a fall of £5,630,000 in the group's profits looks quite severe, although it has to be kept in mind that the 1949 figure was struck after providing £4,500,000 as central obsolescence and depreciation provision, whereas in 1948 the provision under that head was £1,000,000 less at £3,500,000. So far as stockholders are concerned, the reduction in profits is cushioned to a very large .extent by the fall in the charge for taxation, which was down last year from £11,058,523 to £6,496,828. Group profit, after tax, was therefore only just over £1,000,000 lower at £10,826,681, against £11,897,056. Net profit of the parent concern has fallen from £10,850,414 to £9,791,503, but thanks to the increase in the carry- forward a year ago the amount available for reserves and dividend shows only a trifling reduction at £13,800,938, against £14,100,589. The 10 per cent. dividend on the Ordinary capital is maintained, with a handsome margin in hand, and is again consistent with large transfers to reserve and an increase of £320,000 to £4,328,249 in the carry-forward. At 42s. I.C.I. £1 Ordinary units, which are rightly accorded " blue-chip " investment status, are now priced to yield roughly 41 per cent. Although in the light of the group's heavy capital requirements and increasingly competitive trading conditions the dividend outlook does not appear exciting, the units are a worth-while industrial holding.
Cunard Replacement Problems More difficult operating conditions are also reflected in the 1949 results of the Cunard Steam Ship Company Consolidated net profit, after depreciation and tax, fell from £4,246,652 to £3,501,642. Gross profit at £8,862,228 was £670,000 below the 1948 level. In his annual statement Mr. F. A. Bates, the Cunard chairman, takes as his principal theme the problem of replacing ships at current high building costs. He points out that although the impressive sum of £2,455,203 was allocated out of last year's profits for depreciation, even that heavy charge will not be adequate to provide the funds required for ship replacement. The constructive proposal he makes is that such an annual sum should be allowed to be charged as a reserve, before taxation, as will cover replacement, but that this reserve should be brought back into tax computation unless, in due course, it is spent in building ships. He points out that in shipping the replacement problem, as it affects fixed assets, presents itself in a more quickly recurring and acute form than in any other major essential industry.
It is doubtless the necessity for ploughing back a large slice of current earnings which explains the Cunard board's decision merely to maintain the Ordinary dividend at 10 per cent. Against a con- solidated net profit, after tax, of over £3,500,000 the net sum of less than £430,000 which it takes to pay the 10 per cent. Ordinary dividend looks meagre to the point of being niggardly. From the consolidated balance-sheet it is clear that the chairman's statement that 1949 marks a culminating point in the consolidation of the Cunard group's finances is fully justified. At £28,704,865, total current assets, which include £17,481,405 in cash and £3,776,118 in marketable securities, showed a surplus of £6,000,000 over current liabilities. The Cunard group is therefore facing the more keenly competitive conditions in the shipping industry which lie ahead with strong finances. The fl Ordinary units, which are now quoted at 32s., offer a yield of 61 per cent. In the light of the ample cover behind the dividend and the strong financial position of the group, the units must be regarded as very reasonably priced.
Rising Newspaper Costs Although it would be wrong to imply that the newspaper industry is not enjoying prosperous trading conditions, it is now becoming clear that profits are falling away from the peak levels of 1947 and 1948, chiefly because costs are steadily moving up. I notice that in his annual statement to stockholders of Kemsley Newspapers Viscount Kemsley makes it clear that although revenue of the group increased last year, that improvement was more than absorbed by higher wages and salaries, a heavier newsprint bill and an increase in general costs. Trading profits of the group have fallen from £2,291,413 to £1,892,440, a drop of 17 per cent. Much of this fall has been counterbalanced by a reduction in tax requirements from £1,249,224 to £1,004,450, so that earnings on the Ordinary capital still work out at over 35 per cent., against the 12 per cent. dividend. The £1 shares at 38s. 6d. offer the reasonable return of 61 per cent.
A Ceylon Rubber Share In the more speculative markets interest is still confined mainly to rubber shares whose prices are being adjusted to the earnings prospects held out by the strength of the commodity in Mincing Lane. Even on what should be a conservative assumption—an average selling price of ls. 6d. a pound—many rubber shares still look undervalued. Ambng the shares of the Ceylon companies which are not only offering a good income yield but should have scope for capital, appreciation are the 2s. shares of Woodend (Kelani Valley) Rubber, which are quoted around Is. lid. This company succeeded in increasing its estate profits last year from £3,505 to £8,285, and has raised its dividend from 3f per cent. to 7f per cent. Even on last year's results, which were derived from a selling price of rubber substantially below current levels, the shares are offering a return of 91 per cent. In his statement the chairman reviews the current year's outlook in encouraging terms and points out that the company has continued its policy of replanting a modest acreage each year, with the result that 181- per cent. of the total planted acreage is now budded rubber, giving high yields. The company has a sound balance-sheet.
A Cheap Industrial Share For investors who like a good income return combined with the prospect of an improvement in capital value, the 10s. shares of Herrburger, Brooks, the makers of pianoforte actions, look a promising proposition at the current level of 15s. This company has a successful trading record in peace-time conditions, and after a lean period during the war years is now emerging strongly with increased trading profits. For the year ended June 30, 1949, profits were the equivalent of just over 20 per cent. on the present capital, and a 15 per cent. dividend was paid. On this dividend rate the shares at the present price of 15s. are offering the high return of 10 per cent. This seems to me to do less than 'justice to the equity of a sound business which enjoys first-class manage- ment and has an unusually strong balance-sheet. Net liquid assets at June 30, 1949, allowing for the capital repayment of 5s. a share, which took place after the balance-sheet date, are equivalent to about 12s. 6d. a share on the capital as it now stands. The company has steadily developed its export trade in recent years.
Previous page
