Silver-Steel Lining
By JOHN BULL
AI write, equity prices have begun to crack under the weight of fears that the forth- coming Budget will contain a demand for higher taxes. Nobody can blame investors for feeling nervous about the present Government's fiscal exercises. Uncertainty will remain a market factor for the next six weeks.
Undeterred by this gloomy background, how- ever, I have deliberately looked this week for shares to buy now that values are well down again. I refuse to believe that there are no oppor- tunities in the present situation. Those much- vaunted professionals, the insurance companies and pension funds, have been buying—on and off—right through the crises of the past two and a half years. The private investor continues to pump funds into the unit trust movement, which has been doing the same. What are the hopeful picking up today?
Government spending on fixed assets is rising sharply: that is certainly an investment pointer of some significance, whatever else one may feel about it. Mr Callaghan analysed the position for the House of Commons last week. Looking down his list, three items caught my eye: the Gas Council appropriation during 1967-68 will rise from £197 million to f280 million; the Post Office is going to step up its budget during the same period from f268 million to f303 million; and Richard Thomas and Baldwins, the steel com- pany which has never been de-nationalised, is to spend £13 million against £8 million.
Of these, the last, steel company spending, is perhaps the most thought-provoking, for investors have already cottoned on to the fact that North Sea gas and Post Office modernisation mean more work for their suppliers. But companies making steel plant have long been in the doldrums, neg- lected by all. Are Richard Thomas and Baldwins' plans any guide to what the rest of the industry has in mind?
The United Steel annual report issued four weeks ago shows that it is not alone. United Steel 'intends'—if steel companies can 'intend' any- thing on the eve of nationalisation--to spend £80 million on modernising its Appleby-Froding- ham plant. Two points are worth noticing about this exercise. In the first place, the Appleby- Frodingham plant is a highly efficient outfit by its own standards. What has upset its cost basis is the development of cheap ore from abroad and advances in oxygen steel making at home. The second point is that the present Appleby-Trading- ham complex cost £62 million, so the modernisa- tion programme is going to prove an expensive operation.
To find a third example of increased steel industry spending, one has to look no further than Stewarts and Lloyds, which is hoping to merge with South Durham and Dorman Long before the final curtain on private enterprise steel comes down. The plans involve a good deal of new plant on Teeside, particularly for making pipes.
Indeed the whole logic of the induistry4a present situation is that heavy spending' on. modern
equipment, on building-up plant groupings to a more economic size (and closing down much old fashioned capacity) must mark the remaining years of the deirade. Last Thursday, for instance, the Common Market countries announced that in future they would subsidise local coking coal suppliers selling to EEC steelworks. This leaves the British industry looking alarmingly 'high cost.'
To return to the equity market: what I am suggesting is that those companies which specialise in making plant for steelworks will find their order books filling up again quite soon. As soon as that happens, share prices in that sector will follow suit. To be specific, it seems to me that Davy-Ashmore might be worth backing in this situation. The shares at 8s. lid. yield 6.8 per cent and the dividend is covered one and a half times by earnings, far from a fancy valuation. There are two steel plant companies in the group. At the moment orders are scarce but the highly competent teams of engineers involved are being held together in readiness for the start of the next re-equipment cycle. The chairman of Davy- Ashmore has stated publicly what he is bank- ing on: 'in due course there must be a substantial reconstruction of the British steel industry to embrace the new technology, quite irrespective of ownership. One can visualise this lasting for a decade or more and the principal question is when the process will be fully under way.'
Power Gas, the Davy-Ashmore subsidiary making plant for the gas, chemical and non- ferrous metallurgical industries, completes the picture. This side of the group has also had its shaky moments, but Power Gas now seems to be doing very well. Altogether profits will be much higher this year than last. If you want a share for the late 1960s and early 1970s, Davy-Ashmore might be the one, though there will undoubtedly be minor set-backs on the way.
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