FINANCE AND INVESTMENT
By CUSTOS THE City was prepared for a tame Budget and it has certainly got one. Admittedly, the Chancellor had little room for manoeuvre and must be commended for resisting the temptation to make vote-catching concessions, but in any constructive or imaginative proposals the Budget is woefully and conspicuously lacking. The prisoner of his own Government's excessive expenditure, Sir Stafford has been driven, in pursuit of his disinflationary policies, to deny any fresh incentive to business enterprise—and, what is worse, to defend the crushing burden of taxation as no heavier than industry can reasonably be expected to bear. So, while there is relief at the absence of any 'fresh backhanders at the equity investor as such, the City finds the outlook bleak indeed. Even a Socialist Chancellor of the Exchequer now admits that the rising trend of revenue receipts is ending, but I fail to detect anything more than a pious expression of hope that the increase in expen- diture is being or can be arrested. It is clear from this Budget statement that under the present political regime hopes must be abandoned of any worth-while reduction in the total burden of taxation.
As for the proposed changes, the absence of any cuts in beer, entertainment and tobacco duties has naturally disappointed investors in the industries concerned, but I would advise holding on to tobacco and cinema shares at today's prices. The future price increase will make a hole in the profits of road transport operators, but the garage and car-distributing companies should benefit from the doubling of the basic ration. Gilt-edged stocks have done well to hold their recent improvement. This section of the market must now be expected to hesitate with so many borrowers waiting for their turn to launch new financing operations.
Kaffir Finance—New Style
Plans for the raising of £2 million by the Stilfontein Company, one of the gold mining propositions on the Far Western Rand, break new ground in the financing of the sold mining industry. Normally, the substantial sums required for development purposes are raised by making an offer of new shares as rights to the existing shareholders. Many of the developing mines in the Orange Free State have conducted their new financing along these lines in the past two years under the aegis of the Kaffir finance houses. In this instance, however, the Stilfontein board has arranged with influential City interests to make a public issue in May of £2 million of 52 per cent. Convertible Unsecured Loan Stock. This issue. which will be made simultaneously in London and Johannesburg, is being underwritten by Philip Hill and Partners, with two leading Stock Exchange firms acting as brokers.
This is a significant new departure, as may be judged from the fact that this will be the first gold mining issue. to which Philip Hill and Partners. normally associated with industrial financing, have lent their name. On the evidence there are now important investors, other than the big 'mining finance houses, who have become interested in the development of the South African gold mining industry and who are now prepared to take a hand in new financing operations. To what extent this alternative method of raising money will be adopted in the Kaffir field it is too early to judge, but it will doubtless be wrong to assume that the Kaffir finance houses themselves contemplate the abandonment of the traditional formula of making rights issues to shareholders in the developing companies concerned. The new Stilfontein Unsecured Loan Stock, of which full details will be available next month, will be given interesting conversion options, conferring on holders the right to take up Ordinary shares in the company at future dates, when further development work has been completed. The first option, which will be exercisable between October 31, 1950, and January 1, 1952, will entitle holders to convert part of their stock into Ordinary 5s. shares at the equivalent of 31s. 3d. a share. At a later .stage options will be exercisable at the equivalent of 45s. At present Stilfontein 5s. shares are quoted in the market at 27s. 9d. As a lock-up speculation they seem to have interesting possibilities.
Brazil Bond Surprise
Pleasant surprises are all too rare in the stock markets these days, especially in the foreign bond field. All the more agreeable is the announcement by Brazil of her intention to pay off six of (Continued on po"e 554)
FINANCE AND INVESTMENT—(continued from page 552) her sterling loans in this market. The pay-off prices, which are 100 for the Plan .A bonds and 80 for the Plan B bonds, are in all cases materially higher than the quotations recently ruling in
the market, and the effect has naturally been to stimulate a sharp improvement in Brazil bonds generally. With these loans eliminated, the amount available for sinking fund operations on the remaining issues will be substantially increased and will thus expedite repay- ment. The money to implement Brazil's pay-off plan will come from Brazil's sterling balances, the size of which has not recently been officially disclosed. Towards the end of last year, however, it was suggested in well-informed quarters that after the payment involving about £14 million for the purchase of the Leopoldina and Great Western of. Brazil Railway Companies Brazil would still have sterling balances of approximately £20 million. That figure has probably been increased substantially in recent months through Brazil's sales' of coffee at high prices, so that it begins to look as if, even allowing for the £18 million involved in the bond redemption plan, Brazil's total sterling consisting of blocked and free balances will be at a comfortable level. The time can surely not be far off when some attempt will be made to pay fair compensation for British-owned utilities, such as Ceara Light and Power, Para Electric and Manaos Trams, which have been expro- priated in recent years. Ceara debenture stock, at £56, looks to me the most promising proposition in this field for anyone who has plenty of patience and who is not averse from shouldering some risk.
British Oxygen Finances It seems a reasonable inference from the latest balance-sheet of the British Oxygen Company that the time may not be far off when this progressive concern may decide to raise fresh permanent capital. At December 31, 1949, the increased trading of the group was reflected in a rise of just under £1 million to £5,361,000 in stock-in-trade and work in progress, while a fall in cash from £800,748 to £613,653 was flanked by the emergence of bank over- drafts amounting to £2,120,539, against £5,000 at the end of 1948. There was also an increase last year in fixed assets at cost from £14,442,000 to £17,564,000, and at the end of the year there were projects for further expenditure on capital account, against which orders had been placed up to £3 million. It will be surprising, therefore, if at the forthcoming annual meeting the chairman does not give some hint of coming new financing arrangements. Last year the group achreved a record turnover, but rising costs, which were not matched by a corresponding increase in selling prices, resulted in a fall in consolidated profits from £2,403,000 to £2,032,000. Even so, the net figure. after tax, etc., covers the 20 per cent. dividend on the Ordinary capital over 2f times and has left a comfortable surplus for making a further allocation to already large reserves. At 93s. 9d. the £1 Ordinary units are yielding 4f per cent. This seems to me a fair valuation in present conditions for the equity of a first-class industrial concern.
A Ceylon Rubber Share With the commodity still advancing steadily in Mincing Lane —at the moment of writing spot rubber is quoted at the highest level since 1927 at Is. 8d. a lb.—rubber shares are still lagging behind on the Stock Exchange. I am not suggesting that it would be safe to discount the full benefits of the present price of rubber in rubber-share quotations, but at present levels many shares can still be bought at what seems to me to be ridiculously low prices in relation to this year's earnings prospects. For those who are not enamoured of the Malayan political risk Ceylon rubber shares have special attractions. They have scarcely participated in the recent improvement mainly because it is well recognised that Ceylon is a higher-cost producer than Malaya. Even making allowance for this factor, however, the £1 shares of the Hewagam Rubber Company, whose estates are in Ceylon, look under-valued at today's price of 6s. 3d. Last year the crop increased slightly from 1,005,000 lb. to 1,049,325 'lb. and the company turned out a substantial proportion of sole crepe. No dividend has been paid since 3 per cent was forthcoming for 1947, but at anything like the present price of rubber this company should be able to resume dividends this year As a measure of the scope for recovery in the shares it is worth noting that they were up to 14s. in 1948 and as high as 16s. 6d. in 1947. The balance-sheet is healthy, net liquid 'assets at: December 31, 1948, being equivalent to over 2s. a share.
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