FINANCE AND INVESTMENT

By CUSTOS

THE recent course of the stock market has been as uninspiring as the weather. Events at Spithead, Nottingham and Ascot have, no doubt, diverted some attention from the City and provided an excuse for escapism ; but the main explanation of the restricted volume of business and the subdued ten- dency in markets lies in the general inability to form any really reliable view of the future of the markets. Wall Street, on the whole, has exercised a depressing influence on London, and even gilt-edged lost some of • their recent bloom on the' news of the £100 milliOn issue of 3 per cent. Exchequer Stock 1960, which is offered at par. Sentiment has also been affected by the weekly national revenue figures, which show a drop of about £35 million from the corresponding figures a year ago.' Elsewhere gold mining shares have made a modest recovery on one or two good dividends. But the riddle of the world's political and economic future is still unsolved, and the ,daily developments, such as the proclamation of martial law in Berlin and the agreement on the truce line in Korea, seem only to make the problem more baffling.

Courtaulds' Prospects

Both the rayon giants—Courtaulds and British Celanese—have recently issued pre- liminary profit figures which continue the story of the astonishing ups and downs of the industry since the beginning of 1951. Two years ago the combined output of continuous filament and staple fibre yarn was about 35 million lb. a month. A year ago it had fallen. to less than 12 million lb., while the output of staple fibre alone in June, 1952, was only 15 per cent. of the June, 1951, figure. The latest returns show that output is now slightly above the June, 1951, level. Courtaulds' results for the year to March 31st, 1953,.reflect six months of low output and six months of growing recovery. Group trading profit' is £8,463,000 lower at £10,555,000, but as the tax provision is reduced by almost £5,000,000 to £5,242,000 the net group profit shows a fall of only £3,483,000 to £5,242,000. Even this drop is alleviated by the absence of any need to provide for the extra cost of replacing raw materials which absorbed £2,800,000 in the previous year. The dividend of 11I per cent., as for the two preceding years, is covered comfortably, and the £1 Ordinary units, now around 39s. 6d., yield nearly 5.7 per cent. While the outlook both at home and abroad has improved this year, the price factor is of increasing importance in export markets. Nevertheless, if output and profit margink can be maintained, the results for the current Year should be decidedly better, and I think the stock should be retained.

Higher Celanese Dividend

The British Celanese results cover the nine months to March 31, 1953. Accordingly, the difficult April-June peribd of last year was included in the previous accounts. The directors state that only, a small, profit was was made in the July-September, 1953, quarter, but earnings improved progressively during the following six months, and prac- tically the whole of the net profit was earned in that period. Consolidated net profit, after tax, for the nine months is £744,852, against £933,622 for the previous year, and a dividend of 12 per cent. actual is to be

paid on the Ordinary stock. This is equal to an annual rate of 16 per cent., compared with 11 per cent. for the previous twelve months. Earnings have further improved since March, and profits in the current year will be relieved of any charge for the redemp- tion of funding certificates, since full pro- vision has now been made for redeeming all the certificates outstanding. Earnings available for dividend will benefit accordingly. The 10s. Ordinary units are now around 25s., and on the basis of an annual dividend of 16 per cent.—which can, I think, be reasonably expected unless recession again overtakes the industry—they would yield nearly 6jr per cent. British Celanese Ordinary stock is more highly geared than that of Courtaulds since the ratio of Deben- tures and Preference stocks to the equity is much higher than in the case of Courtaulds. For this reason Celanese Ordinary probably offer more scope for appreciation if the recent revival in the industry is sustained.

Good Yield from B.E.T.

Two months ago, when I discussed the prospect of a higher dividend on British Electric Traction A ” Deferred stock, I suggested that the price, then around 465, could easily rise above 500 in a favourable market environment. Although market conditions since then have hardly been propitious, the price is now 530. The explanation of the rise lies in the final divi- dend of 25 per cent., making 35 per cent. in all for the year to March 31st, against 25 per cent. for each of the two preceding years. Net profit of the group after provid- ing £86,000 more for tax, is only £15,000 higher at £1,191,635, but the 35% dividend is covered more than twice by earnings. The distribution is even more conservative than the earnings seem ..to indicate, for an appreciable part of the income represents dividends from general investments and from holdings which do not carry control. It is proposed to convert the Preference and Preferred stocks into £1 units, and the Deferred and A " Deferred stocks into 5s. units. On the basis of the present price the 5s. units should stand around 26s. 6d. to yield over 66- per cent. In their new and more marketable form the stock units will appeal to a wider circle of investors, and in my view they still have attractive possi- bilities.

De Beers' Prospects

My expectation that the consolidated accounts of De Beers for 1952 would show earnings of at least 400 per cent. on the Deferred shares to cover the 200 per cent. dividend, and that the surplus liquid assets might amount to £35,000,000, has been duly fulfilled. Sir Ernest Oppenheimer, the chairman, revealed at the recent meeting that current assets exceeded all liabilities to the public by £34,927,000. But this impres- sive display of strength has not helped the price of the shares, for Sir Ernest went on to say that the boom times have come to an end, that customers are more cautious, and that some reduction in sales is to be expected. Gem sales to the end of May, however, have totalled £21,000,000, or about the same Is for the first five months of 1952. The total of gem sales for 1953 is expected to show some reduction from the 1952 figure of

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FINANCE AND INVESTMENT—continued.

£45.7 million, but should still be satisfactory. Sales of industrial stones have fallen more sharply, but Sir Ernest thinks they will be about £13,000,000 for this year, and " until there is further expansion in the use of industrial diamonds, annual sales are likely to be within £2,000,000 or £3,000,000 of that figure for some years to come." Even under " normal " conditions, therefore, there seems to be a reasonable prospect that annual sales of gems and industrials will not fall much below £50,000,000, which has been exceeded only in 1950, 1951 and 1952. For 1950, when sales reached £50.9 million, De Beers earned 162 per cent. and paid 110 per cent. on the Deferred units. Even if the dividend should fall to 100 per cent., the gross yield on the shares at 59s. 3d. would be close on 10 per cent. after allowing for Dominion tax relief. In present conditions I do not advise a purchase, since diamond shares are temporarily out of market favour, but I think they are worth retaining for income.

De Havilland AttractiOns As I have often pointed out, opportunities arise in dull markets to pick up good indus- trial equity shares cheaply when new financ- ing plans are being carried through. A case in point is provided by the new £1 Ordinary shares of De Havilland Aircraft which can be bought around ls. 41d. premium. As the issue price is 22s. 6d., this means that a buyer is getting in at 23s. 101d. This seems to me an attractive level at which to acquire a stake in the equity of a " growth " busi- ness. Only a little time ago De Havilland Ordinary shares were quoted at over 34s. They have come down, partly as a reflection of some disappointment that the company merely maintained its dividend at 71 per cent., but much more on account of this .one-for-one " rights " issue at 22s. 6d. The directors record their view that on the doubled capital they will be able to main- tain the 71 per cent. rate and,' although I would not pitch dividend hopes too high for the next year or two, the earnings pros- pects, in the light of the company's large- scale expansion programme for the Comet, look good. The new shares have the special attraction that they are free of the 2 per .cent. stamp duty.

Millspaugh New Shares

Another company whose shares have been ibrought to an attractive level as a result of 'heavy new financing is Millspaugh Ltd., one of the leading manufacturers of paper- making machinery. This company has issued new Preference shares as well as new Ordinaries to its Ordinary shareholders. In consequence, the market price for the Ordinaries has come down from 7s. 6d. last 'year and 6s. earlier this year to just over '4s., which is the issue price for the new shares. The premium over the issue price in the market is now only about Id. which means that the company's 2s. 6d. Ordinaries can be obtained 'free of stamp for 4s. Id. At this level, the yield offered is not far short of 10 per cent. on the 16 per cent. dividend forecast by the board on the larger capital. For the current year, profit is esti- mated at £400,000 against £344,000 last year. The company is not only firmly jntrenched in the home market but has well established Canadian subsidiaries with sub- stantial earning capacity. Once the new financing is out of the way the shares should stage a useful recovery.