FINANCE AND INVESTMENT
-.By CUSTOS IT is scarcely surprising that markets have appeared to lose a little momentum this week, but, apart from gilt edged, they have held impressively firm. Steel vesting has re- mained—with the behaviour, of Wall Street an essential background factor—the domi- nant influence on prices, depressing gilt edged stocks and sustaining, and indeed raising, quotations of a wide range of securi- ties selected for reinvestment. The question now being asked is naturally: What will happen when this special influence has dis- appeared 7 Well, I doubt whether we shall see the end of it for some little time, since large numbers of iron and steel shareholders have not yet faced the reinvestment problem, but there may be quieter markets ahead. Industrials should hold their ground, but the real activity may switch to overseas securi- ties and commodity shares between now and Budget day.
Imperial Tobacco Profits Mild disappointment has been the Stock Exchange reaction to the latest results cover- ing the year to October 31, 1950, announced by the Imperial Tobacco Company. Con- solidated net profit at £8,252,032 compares with £9,085,433 in the preceding year and brings down the earnings on the Ordinary stock from 411 per cent. to 371 per cent. As expected, the Ordinary dividend is main- tained at 32 per cent. by means of a final of 181 per cent., but clearly, on the latest figures, the margin has become somewhat slender. The market's disappointment has probably been induced in part by the apparent contrast between the experience of Imperial Tobacco and that of Carreras. For the same period Carreras' profit rose from £1,170,000 to £1,420,000, raising earnings on the Ordinary civital from 56 per cent. to 68 per cent. What is being ignored in making this comparison is that in the case of Carreras the increased profit was in part due to the company having at its disposal the American tobacco acquired before devaluation. This point was specifically mentioned by Sir Edward Baron in his annual statement to Carreras' shareholders and he also issued the warning that this year's results will have to bear the burden of heavier costs. In the case of Imferial Tobacco a net surplus of just over £3 mil- lion, after tax, arising from devaluation has been excluded from the group's net profit and credited direct to leaf replacement reserve. It seems clear, therefore, that the apparent discrepancy between the results of the two companies reflects a difference in accounting Procedure. We shall know more of the trading conditions which have pro- duced the moderate fall in Imperial Tobacco's profits when the full accounts are published and Sir Robert Sinclair has made his review. What already seems clear is that unless there is an increase in selling prices lower profit margins brought about by steadily rising costs must find reflection in a lower level of earnings. Imperial Tobacco £1 Ordinary units have fallen by a shilling or two since the profit statement was issued and are now quoted at £54-. At this level they arc yielding not far short of 6 per cent., which is a full 11 per cent. more than can be obtained on the general run of first-class industrial equities. In my view the risks are adequately allowed for at this level and the units should not be sold.
Guest Keen Affairs It is now becoming clear that not only Vickers and Cammell Laird but Guest, Keen and Nettlefolds must be included among the companies which stand to receive a large block of steel compensation stock. Already compensation amounting to well over £6 million has been agreed between Guest, Keen and Nettlefolds and the Ministry of Supply as the price of two classes of securities which vest in the Iron and Steel Corporation. For its holding of Preference shares in Guest Keen Baldwins the parent company will receive compensation stock worth £921,644. Another £5,250,000 has been agreed as the valuation of Guest, Keen and Nettlefolds' holding of Guest Keen (South 'Wales), a wholly-owned subsidiary. There now remain to be valued the 57.1 per cent. interest in the equity of Guest Keen Baldwins, which comprises 2,100,000 II Ordinary shares, the 590,763 £1 Ordinary shares in Brymbo's Steel Works and 2,023,217 £1 Ordinary shares in John Lysaght's Scunthorpe Works. Of these assets the most valuable appears to be the holding of Ordinary shares in Guest Keen Baldwins, since these shares have recently been paying a 10 per cent. dividend out of earnings of well over 30 per cent. It will be surprising if the compensation value, when it is agreed, turns out to be less than £6 million. If one makes a cautious guess at the value of the Scunthorpe Works and Brymbo's Steel Works shares one can easily reach a total figure of something between £12 million and £15 million as the com- pensation value of the whole of the assets in the Guest, Keen group which are scheduled for take-over. Guest, Keen and Nettlefolds issued Ordinary capital amounts to £11,283,150. It is apparent, therefore, that something well in excess of £1 a share should go into the company's coffers in the form of British Iron and Steel stock.
Repayment Problem As in the case of Vickers and Cammell Laird it is no easy problem to decide what the company is likely to do with this com- pensation money. Part of it will undoub- tedly be retained to help finance expansion programmes, but that should not preclude the possibility of a substantial repayment
of capital to the stocicholde,rs. Reeehtfy Guest, Keen and Nettlefolds £1 Ordinary units. have moved up and are now quoted around 53s. On the basis of the 11 per cent. dividend paid for 1949 the yield is only 4 per cent, but the interim on account of 1950 has been increased from 4 per cent. to 5 per cent. A total of at least 121 per cent, and possibly 15 per cent., which would be well within available earnings, may there- fore be expected when the annual accounts are issued. Meantime, on assets and on the likely dividend, the £1 units cannot be said to .be over-valued.
Cable and Wireless Surprise
In its first year as an investment trust Cable and Wireless (Holding) has done well for its Ordinary stockholders. In the light of Sir Edward Wilshaw's estimates made at the time of the capital reorganisation the market had thought it safe to budget on an Ordinary dividend of not more thah 5 per cent. for 1950. The 6 per cent. now announced has therefore come as a pleasant surprise. On the Stock Exchange the effect has been seen in a jump in the price from just under £100 to 1111. Profit is shown at £477,000 after allowing £405,000 for taxation, but it is not easy to work out the true earnings, in that profits have yet to bear the full burden of interest on the loan. stock. Again, revenue will be affected as the portfolio is diminished when the 34- year Unsecured loan stock is repaid. Even allowing for this special factor one is entitled to draw the inference that this trust corn- pany, which has alert management, has got off to a satisfactory .start. The £100 Ordinary stock now quoted to yield about 54- per cent, is very reasonably valued.
A Cheap Rubber Share With the commodity still fetching record prices and the Far Eastern situation at least no worse than threa months ago---I should say that it is rather better—it is not surpris- ing that rubber shares are attracting more bnying. From recent dividend announce- ments it is clear (1) that in spite of higher costs the plantation companies are making handsome profits ; and (2) that the directors are adopting a generous distribution policy. Yet in many instances shares in good Malayan companies can be bought to offer yields of anything from 15 to 25 per cent. At these levels I regard these shares as good speculative purchases after making full allowance for the Malayan risk and for the probability of a lower average selling price than that now ruling. Harpenden (Selangor) £1 shares quoted around 18s. 9d. look good value following the 10 per cent. interim recently declared on account of the year ending on March 31. This points clearly to' a total for the year of at least 20 per cent., on which basis the yield is over 21 per cent. The company has sound manage. ment, has been making satisfactory forward sales and good progress with Its replanting programme.
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