FINANCE AND INVESTMENT
By CUSTOS
le any fresh proof were needed of the underlying firmness and resilience of investment markets it has surely been afforded this week in the brisk response to better news from Korea. Although there has understandably been no wild rush to buy, there has been enough investment support, with sellers keeping to the sidelines, to set up rallying tendencies over a wide front. What may seem surprising is the strong lead given by gilt-edged stocks which have now recovered the whole of the ground lost since the Korean thunderbolt. A week 'ago I emphasised the unfavourable factors in this section of the market in the shape of an inadequate volume of savings and a growing pressure from the borrowing side, now strengthened by rearmament needs, on available investment resources. These factors should not be ignored and, in my view, set fairly close limits on any further rise in gilt-edged prices which is likely to take place. There is no denying, however, that the recovery in prices has now acquired a considerable momentum mainly, it seems, because it is widely believed that Britain's dollar problem—latterly the Achilles' heel of our whole economy—can be regarded as well under control.
The reasoning, with which I do not quarrel, is that in the new conditions of rearmament the sterling area's sales of primary com- modities to the United States must continue at a high level and that, in any event, we shall not be allowed to suffer fresh embarrassments from a dollar shortage. So, for the present, anxiety about the external balance is allayed and gilt-edged prices move up. I still feel, from the investment standpoint, that the case for commodity shares is at least as good as the arguments put forward to support gilt-edged. Over the coming months commodity share prices should gradually move into higher ground.
£5,300,00o for O.F.S. Gold Mines To raise £5,300,000 for the development of two gold mining propositions in the Orange Free State in the present conditions of the stock markets is obviously no easy task. It is a tribute both to the courage and ingenuity of the Johannesburg Consolidated Invest- ment Company and the other mining finance nouses associated with them that arrangements have been made for raising finance on this ambitious scale for Freddies North Lease Area and Freddies South Lease Area, the two offshoots of the Free State Development and Investment Corporation formed in 1947. Each of these mining propositions has already raised £3,750,000 and also has another £1,650,000 under option to holders of option certificates exercisable until September 12. In each instance another £2,650,000 is now required to bring the mine into production at the rate of 50,000 tons milled per month.
The financial arrangements which have now been completed in the City are identical for both companies. Subject to the necessary consent of the Capital Issues Committee being obtained, it is the intention to raise approximately £600,000 for each company, together with any amount not subscribed for by the option holders, through an issue of convertible notes. These notes wilt be for a term of 10 years, carrying interest at 5 per cent., and will also have conversion rights into shares at par at any time up to December 31,.. 1952, i.e. after the milling stage has been reached. In addition, each company proposes to borrow about £400,000 on mortgage of houses to be constructed for European employees.
Convertible Note Attractions What this plan ensures is that Freddies North and Freddies South will both receive £2,650,000, though the proportion which is raised on shares through the exercise of options to the existing share- holders and the proportion which is raised on convertible notes cannot yet be known. It is believed that £250,000 will be put in by the exercise of options held inside the " Johnnies " group of companies, but that still leaves in each case the large sum of £1,400,000 due from the public holdings of the options. With the existing shares standing only about Is. over par the response of the option holders to the scheme is difficult to gauge. As for the long-term prospects, these clearly depend on the values encountered when the mine is opened up. On the face of it, however, the new convertible notes should have definite speculative attractions, in view of their conversion rights at par into shares which already command
- a premium. One interesting fact which emerges from the announce- ment is that De Beers Industrial Corporation, an important sub- sidiary of Sir Ernest Oppenheimer's De Beers Consolidated Mines.
the diamond undertaking, is participating in the underwriting of the new convertible notes. This is the first use made by Sir Ernest of. the surplus funds of the De Beers group in the development of the O.F.S. gold mining industry. What the commitment amounts to it is impossible to tell. It may well be fairly substantial but certainly not unduly so in relation to the surplus resources available. It will not be surprising if the launching of this plan is followed by a better feeling and some improvement in prices in the O.F.S. gold market as a whole.
Heavy Industrial Financing Scarcely a day passes without bringing a reminder of the heavy and continuing financial requirements of industry to meet capital expansion programmes and to cover the carrying of large stocks at to-day s high prices. In some instances the problem is being dealt with by recourse to temporary borrowings from the banks ; in others, short-term notes are being issued, which have the advantage of 'ensuring the availability of capital over a specified number of years and also of enabling the borrower to repay at comparatively early dates. In a great number of cases, however, recourse is being had to the raising of fresh permanent capital, some of which is being obtainesi by issues to the public and some by means of " rights " issues to the existing shareholders. Where " rights" issues are made it often happens that the price of the companies' existing shares is temporarily depressed, and here the opportunity sometimes presents itself of acquiring a stake in a good company on attractive terms.
One instance which comes to mind is that of Lancashire Dynamo and Crypto, an undertaking which manufactures a wide range of electrical equipment. This company has just issued new Ordinary £1 shares to the existing Ordinary shareholders, in the proportion of one new for every six held, at 80s. each. These new shares can now be purchased at 64s., with a final payment of 30s. due on October 1. In other words, the total purchase price is 94s., which represents a moderate setback from the level of over £5 reached last year. At 94s. the yield offered is just over 4a per cent. on the 221 per cent. dividend rate. The return is by no means spectacular, but these shares look attractively priced in relation to the strong earnings cover, the sound balance-sheet and the progressive manage- ment.
Spurling Bodies Expansion
Another much smaller undertaking, whose shares look under- valued as a result of an impending new financing operation, is Spurling Motor Bodies. This company manufactures standard and special types of bodies for nearly all classes of commercial vehicles, and has sale and service arrangements for Vauxhall cars and Bedford trucks. It has made steady progress in recent years, during which the Ordinary dividend has been stepped up by gradual stages from 10 per cent. to 371 per cent. Following a policy of steady expansion the company has recently bought Monaco Motors, and a new factory at Coatbridge, in Scotland, built and equipped by the Ministry of Supply, is to be operated by Spurling for the maintenance and reconditioning of Government-owned vehicles. To finance this programme a share issue is to be made in the near future, in which the present shareholders will be given participating rights. Meanwhile, the 4s. Ordinaries are standing in the market around 12s., offering the high yield of 121 per cent. on the current dividend rate of 37{ per cent. which has been in force for the past three rears. When this financing is out of the way the shares should move on to a better basis. The " rights," when they are dealt in on the Stock Exchange, should be worth picking up.
Cheap Rubber Shares In Mincing Lane rubber is still fluctuating wildly and will probably continue to follow an erratic course for a long time ahead. The significant point is that if it averages only Is. 9d., which allows for a sharp fall from to-day's level, the great majority of the plantation companies can make satisfactory profits. • For those willing to take the Malayan risk and the normal risks of investment in a fluctuating industry some of the shares still quoted below par should turn- out good purchases. Among them I would include North Hummock £1 shares at 6s., Jong Landor £1 shares at 15s., and United Patani (Malaya) at 9s. 6d.
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