Gallaher growth

PORTFOLIO JOHN BULL

The second-quarter profit figures announced by Unilever (in which I hold one hundred shares in my first portfolio) disappointed, the market, though really there is nothing much wrong with them. The shares are still very much a `hold' or even—for new readers—a `buy.' Combined profits before tax advanced 24 per cent compared with an increase of 46 per cent in the first quarter. As for second- quarter comparisons, it so happens that the second quarter of 1967 was much better than the first.. The upshot is that if the group does as well in the second half of the year as in the first, then at 78s 9d the shares are selling at roughly 17+ times earnings. Com- pared with the market as a whole, which is selling at 221 times earnings, that is a far from expensive rating.

I have a mixture of good and bad news to report on Gallaher, whose shares are in my second, speculative portfolio. I bought the shares, you will remember, after the first bid (from Philip Morris) and before the second (from American Tobacco). What I began to expect was another bid from Philip Morris. But last week Philip Morris announced that it did not intend to make a fresh offer for Gallaher—and went on to buy Godfrey Phillips instead. I understand that the Morris Board did not withdraw because it thought Gallaher was getting too expensive but because it felt a second offer would have to be for 100 per cent of the shares, not for half, as before, and with American restrictions on the transfer of capital overseas fairly tight, it simply was not possible to finance such a deal. The Eurodollar market is not in a mood to put up the whole of the purchase price. There was alsO- the problem of the existing (should I say notorious?) American Tobacco stake in Gallaher. Although it would have offended American anti-trust legislation for both com- panies to have had shares in Gallaher, it is far from clear exactly bow the relevant legisla-

tion would have been interpreted in this case.

All the same, I am not disappointed in Gallaher. The figures for the current year pro- duced at the time of the formal offer from American Tobacco are pretty good. The six- monthly sequence runs as follows: £7.3 million- before tax in the first half of 1967, then £7.5 million in the second half, £7.5 million again in the first six months. of 1968. and £9.25 million expected for the second half. If you assume, as I am inclined to do, that £9.25 million is a sustainable rate of profits, then the shares begin to look pretty attractive.

At the moment the.shares stand at 32s lid. As American Tobacco will take at least 52 per cent of the holding at 35s a share, that means the rump is priced at 29s 3d. And at 29s 3d the shares are selling at roughly ten times earnings. The dividend has been raised to 16 per cent, so the, shares return 5.5 per cent. This valuation seems to me to be much too low, and makes no allowance whatsoever for any extra push which the association with American. Tobacco may give to the company. Indeed, I feel so strongly about this oppor- tunity that I have decided to add another 300 Gallahers to my existing stake, bringing it up to 1,000, so that when I have traded half to American Tobacco I shall still be left with a reasonable holding.

Witan Investment, the only investment trust in my portfolio (chosen for its stake in Wall Street), is proposing to raise £7.6 million by means of a rights issue to ordinary share- holders. The new shares are priced at 20s 6d each and they are being offered on a one-for- ten basis:With the existing shares at 22s the rights are worth about 2d per share. Cazenove is underwriting the issue. I shall take up my allotment in due course.

Valuations at 21 August 1968 First portfolio

100 Empire Stores at 71s .. ▪ £355 50 Phoenix Assurance' at 180s • £450

225 Lyle 'Shipping at 22s 9d .. £256 100 Unilever at 78s -6d £392 £2,000 War Loan at £47i £947 300 Witan at 22s . £330 25% E. Scragg at 27s 6d: £344 50 Barclays Bank at 86s £215 200 Throgmorton Secured Growth (Capital) at 18s 9d £187 100 National and Grindlays Bank at 66s 6d xd .; £332 500 Clarkson (Engineers) at 15s 3d .. £381

60• Rio-Tinto Zinc at 154s 6d .. £463

1,000 Associated British Foods at 12s 9d £637 1,000 Jamaica Public Service at 6s 3d £312 Cash with local authority at 71 per cent £982 £6,583

Deduct: expenses £150

Total £6,433

Note: the 50 5s shares in E. Scragg are now split into 250 Is shares.

Second portfolio 600 Pillar Holdings at 15s 9d £472 500 Negretti and Zambra 'A' at 14s .. £350 1,000 Gallaher at 32s 14d £1,606 15 Kaiser Steel at $101 £636 Cash in hand .. £2,402 £5,466

Deduct: expenses £103

Total £5,363