10 DECEMBER 1948, Page 40



FROM being a topic for academic discussion the problem of assets replacement in conditions of high costs and heavy taxation has now become an issue of major practical importance to the business community. As shareholders read their chairmen's annual statements they are constantly reminded that under existing taxation arrange- ments it is no longer possible to replace assets out of what are euphemistically described as "available net profits." Some com- panies have made large allocations out of earnings to meet this special replacement cost without encroaching on current rates of dividends, but it is already plain that the problem will have to be tackled from the taxation end. There is an unanswerable case for the intro- duction of special depreciation allowances, on the lines suggested by Mr. S. P. Chambers, finance director of Imperial Chemical Industries, in the next budget. The Chancellor of the Exchequer is not likely to overlook such an opportunity, thrust upon him by the realities of the business situation, to soften the blow of a prolonga- tion of dividend limitation.


One by one Britain's investments in public utility undertakings in foreign countries are passing out of British ownership under the pressure of events. The latest instance is the Monte Video Water- works Company, which is being taken over by the Uruguayan Government for £3,000,000. The purchase price covers not merely the physical assets but the liquid resources of the company in Uruguay, but there will be small additions for capital expenditure since the beginning of this year and for cash and investments held in London. After allowing for the repayment of the debenture stocks I estimate that the break-up value of the ordinary stock should be round £17o, but the problem is complicated by a possible tax-liability to the Inland Revenue Authorities here. At this stage the market quotation, which is around £15o, is a reasonable one, and seems to allow a fair margin for uncertainties.

If reports from Brazil are to be trusted, it looks as though the next overseas asset to be disposed of will be the Leopoldina Railway Company. For over 18 months there have been take-over talks which have given rise to considerable speculative activity in this company's stocks but recently developments in the company's affairs have become more significant. A Commission appointed by the Brazilian Ministry of Transport to consider the future of the undertaking hat now reported, and according to well-informed people in the City an expropriation has been recommended. From some points of view the transfer of the undertaking to the Brazilian Government must be regarded as welcome, in that, thanks to steadily increasing costs accompanied by only very modest rises in fares and freight charges, the railway is no longer able to earn a profit sufficient even to cover the interest on its debentures. Brazil as purchaser will doubtless seek to capitalise this situation by offering a low price, but if precedent affords any guidance, final settlement is likely to be based on a reasonable compromise. The debenture stock now quoted around 82 should certainly be worth holding, since it should receive par on any reasonably fair take-over terms, The preference stock around 4o is much more speculative although at this level I would rather buy it than sell it.


I referred on November 26 to the merits of Perak River Hydro- Electric Power LI Ordinary shares as a recovery investment. This view is amply confirmed by the results just announced for the year to July 31. Revenue from the sale of current was more than doubled and net revenue has increased from £228,743 to £454,223. These are remarkable results, which have enabled the board to put L60,000 to depreciation account, £66,000 to contingency reserve and eliminate the £82,236 debit balance brought forward from the previous year. There are still heavy arrears of Preference dividend to clear up and liabilities to the guarantors of the debenture stock, but with revenue so vastly improved and the prospect of a settlement of the company's large claim for war damage, the long-term outlook for the Ordinary stockholders is beginning to appear distinctly promising. Quoted around 13s. 9d. the £r Ordinary units have scope for capital appreciation.