WISE INVESTMENT
WHEN will somebody put the market out of its misery by ending once and for all the Great Gold Scare ? Uncertainty about the future price of gold has now supplanted the N.D.C. as an investment factor, and it will continue to dominate both invest- ment and speculation until it is removed. The holder of gold shares is scared for obvious reasons, since the whole structure of share values has been built up in recent years on an expecta- tion of the metal fetching something like mos. an ounce, or the equivalent in dollars or francs. Investors and speculators in other markets are disturbed because they feel," quite justi- fiably, that if, by chance, the sterling price of gold falls sub- stantially, it will only happen as part of a definitely deflationary chain of events which could not do other than involve the whole structure of commodity and share values.
I will venture my purely personal view that neither President Roosevelt nor the authorities here, as holders of the bulk of the world's gold, are anxious to write down its value in turn; of their paper currencies, and for this business reason, as well as for :Alter policy reasons, I cannot think that the gold price scaremongers are right. But I wish something authoritative could be said to clear the matter up and put an end to crystal- gazing in Throgmorton Street. * * * * A CANADIAN INCOME BOND
Investors who are seeking a stake in Canadian recovery without wishing to shoulder any substantial risk might consider the position of the Dominion Steel and Coal Corporation. This company is an amalgamation of several big. concerns and owns a well-integrated organisation. It has coal and iron mines, shipbuilding and ship repair yards, steel mills and plants manufacturing a wide range of steel products. Apart from its domestic trade it has a large export section. Last year the plant was operating virtually at capacity and net available earnings were equivalent to just under 6 per cent. on the 61 per cent. Income bonds. Only 31 per cent. was paid on these bonds in 1936, but a further 41 per cent. has been paid in March, 1937. Interest is dependent on earnings, but is cumulative, with the result that arrears now outstanding amount to 4 dollars per too dollar bond. Allowing for the arrears included in the price, the bonds, obtainable at t to dollars, offer a yield of just under 6 per cent.
In my view this is an attractive return in relation to the earnings prospects. With its integrated organisation, the company is partially safeguarded from rising costs of materials and should benefit this year from the installation of an electric furnace which makes possible the production of special steels, one of the most profitable branches of steel manufacture. The range of selling prices in the Canadian steel and shipbuilding industries is also considerably higher this year than last. I anticipate, therefore, that the 1937 earnings will cover the full 61 per cent. rate and that some progress will be made towards clearing off the arrears. An additional attraction, from the speculative standpoint, is that the bonds are con- vertible into the company's " B " common shares on the basis of 25 dollars per share at any time. For the moment this option is only of academic interest, the " B " shares being quoted at a dollars, but it could conceivably become valuable at a later stage of the company's recovery.
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A TRUST DEBENTURE
Since I outlined the possibilities of the Armstrong Whitworth position in March further progress has been made towards the goal of liquidation which the board has in view. Arrange- ments have now been completed for the sale of the company's ironfounding business and of the pneumatic tool and air- compressor business of the engineering company, which means that Armstrong Whitworth Securities is now left with virtually the whole of its assets consisting of cash. When the trading commitments of the locomotive business have been met, the board should be well on the way towards proceeding to a formal liquidation. The terms of the recent sales of assets have not yet been disclosed, but it may safely be assumed that there is enough in hand to cover the repayment at par of the £2,100,000 of preference capital.
The really interesting stock in relation to this position is the 5 per cent. Income Dt-benture of the A.W. Second Stock Trust, now quoted around 112. The 'capital of this debenture is
covered almost pound for pound by the Trust's holdings of gilt- edged securities, apart from which there are 1,000,0oo £z First Preferences and 350,00o £x Second Preferences in Armstrong Whitworth Securities which, when repaid at par, would cover the debentures over 21 times. As soon as either of these prefer- ences is repaid, the Trust will have enough in hand and to spare to repay the debentures, the redemption price being, not Too, but par plus all arrears of interest which, at the end of June, will amount to £22 Jos. net per '£Too of stock. How long the Armstrong Whitworth liquidation will lake I cannot predict with certainty, but it should be completed within a year, allowing for all likely delays. A buyer of A.W. Second Stock Trust debentures at /12 should therefore reap a capital profit of roughly 9 per cent. on his outlay in twelve months' time.
RUBBER MARKET POSITION
The rubber market is getting more than its share of hard knocks. First President Roosevelt, and now Herr Hitler, with a zoo per cent. import duty. In an atmosphere which is far from favourable to Mincing Lane speculators, it is scarcely surprising that rubber should have slithered down to little more than nod. per lb., and rubber shares have also failed to hold their ground. Recovery will probably be slow, but I cannot help thinking that it will come. Even if Germany did succeed in making herself completely independent of the rubber-producing industry, the loss to world ccniumption would be no more than 7 per cent. Meantime, demand from other quarters is growing, and the statistical position is healthier tl-aa for many years. Rubber shareholders should refuse to be intimidated and decide to hold on. Speculative invzstors who have not yet taken a hand may now find plenty of good shares at reasonable prices.
One of them is Kepong (Malay) Rubber Estates 2s. Ordinaries, quoted at 4s. 6d. The 1936 accounts have just been issued ; they show that net profits rose from £25,481 to £81,012, and the dividend, payable on a larger capital, has been raised from 4 to 1 rl per cent. The company has therefore fully justified the ambitious policy of expansion carried through in recent years, as a result of which its planted area has been quadrupled and the par capitalisation per cultivated area brought down to the low figure of £28. For 1937 the company's export- able crop should amount to roughly 8,735,000 lbs., against 6,397,500 lbs. last year. About 2,346,400 lbs. have been sold forward at 8.35d. per lb., and if, as a conservative guess, the remainder realises tod. per lb., and costs are unchanged, profits should reach £470,003, or 25 per cent. on the capital. In its original form the National Defence Contribution would bear hardly on this company, but it is safe to budget on some revision. * * * * Venturers' Corner The reaction in tanker freight rates, understandable as it is, has brought a sharp fall in the shares of the tanker companies. British Oil Shipping LI shares, quoted around xis. 9d. a fortnight ago, can now be bought for los. 3d. They should be a good speculation at this price. Under a capital reconstruction scheme now submitted, these £1 shares are to be written down to 12s. 6d. each, in consequence of which the debit on profit and loss account will be wiped oul and the way cleared for resump- tion of dividends. Last year, with freight rates averaging less than one-half of even the reduced level now in force, the company made a net profit, after depreciation, of £16,o58, equivalent to just over to per cent. on the figure of £156,250 to which the capital is being written down.
There is one more hurdle to be jumped, the mortgages, amounting to £112,485, still outstanding on the company's fleet. Last year, partly through the sale of a vessel and partly out of profits, these mortgages were reduced by £72,000, but it is apparent that unless another vessel is sold, further reduction must come out of revenue, thereby limiting immediate dividend possibilities. This factor, however, seems to be liberally allowed for in the current price of the shares, which, on the basis of earnings alone; would be worth something 'more than their [Readers' enquiries, or requests for advice, regarding particular shares will be answered periodically as space permits. Corre- spondents who do not desire their names to appear should append initials- or a _pseudonym_ to, their ovestians,]
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