FINANCE AND INVESTMENT By CUSTOS FOR no very obvious reasons
the setback in gilt-edged stocks has now degenerated into a debacle. Just as in the summer months investors were apparently prepared to give their hopes the benefit of any doubts, so now they seem determined to allow their fears full rein. What has touched off a delicately poised situation is undoubtedly the resumption of new issue activity accom- panied • by talk of a large-scale funding operation by the Treasury. As I see things, the fall in gilt-edged is now being overdone and it will be surprising if the market does not steady in the next few days. But in- vestors have had a fresh reminder, if any were needed, that these are times for cautious and discriminating buying.
Bowater Finance Plan In these days of scarce investment resources and far from easy stock market conditions those responsible for new indus- trial financing are having to think along original lines. A month ago Rugby Cement broke new ground in issuing a loan stock with a detachable conversion option and achieved a resounding success. The same sprt of plan is now being followed by the Bowater Paper Corporation, whose new financing is sponsored by the London and Yorkshire Trust. Bowater Paper is issuing £5,400,000 of 54 per cent, unsecured loan stock, with redemption dates 1963-67, at par on " rights " terms to the Ordinary stockholders. They will have the right to take up at par £3 of loan stock for every £2 of Ordinary stock held. The loan stock itself wilt carry an option, to be evidenced by registered certificates, under which holders will have the right to subscribe in cash at par between March 31st and May 31st, 1954, for one new Ordinary £1 share in respect of each £3 of loan stock allotted. If these options are exercised in full, the effect will be, of course, to give the company another £1,800,000 of new money ' in 1954 on top of the £5,400,000 now being raised. This money is required to finance the group's various development schemes, among which the most ambitious is the project in the United States to construct and operate a newsprint and sulphate pulp mill near Charleston, Tennessee.
Loan Stock Attractions Already in the market Bowater £1 Ordinaries are being quoted ex " rights " around 31s. and dealings have begun in the new loan stock cum option around £7 premium. It is difficult, against the back- ground of a falling gilt-edged market, to put a precise value on the 54 per cent. loan stock as an investment without the option attached. I think, however, that the price of 95, at which the stock would yield about Si per cent. flat and about 6 per cent. to redemption in 1967, is a reasonable valua- tion. On this assumption the options are being valued at around 6s. 6d., with the cum option quoted at 107. The discrepancy between this value for the option, allowing for the 20s. which an option holder will ultimately be called on to put up, and. the ex " rights " price of 31s. may seem too wide. One must allow, however, for the fact that a buyer of the options, as distinct from a buyer of the Ordinary shares, will not be entitled to the dividend for the next two years, presumably equal to 30 per cent. less tax or about 3s. a share net. In early dealings it may well be that the opportunity will occur, both for the staid investor look- ing for a good fixed-interest investment and for the more speculatively-minded, to get a stake in the Bowater company on cheap terms. If, for example, the loan stock should become available, as it well may, at prices between 90 and 95, it should certainly prove a worth-while purchase as a 15-year 54 per cent. stock of sound investment quality repayable at par in 1967. There may also be chances to pick up the options on dull days around 6s. At this level they should turn out a good speculation, seeing that the £1 Ordinaries are yielding a full 10 per cent. at 30s.
Celanese Profits Fall In the textile share market just now it is a tug-of-war between unfavourable results of the past and hopes of improved trade in the future. This week British Celanese have provided a good example of what I mean. Preliminary figures for the year to June 28th show a very sharp setback in earnings. On the other hand, the directors tell shareholders that since the end of the company's financial year there has been a definite improvement, the implications of which will be reviewed in the chairman's annual statement. Net profit of the group, after allowing for a special stock write-down of £900,000— mainly on raw materials—has tumbled from £7,299,578 to £2,546,233. For the first half-year, which ended in December, the group's turnover was higher than for the corresponding period of the previous year, and earnings, before tax, established a new peak. That explains why the board was led to make the new " rights " issue of Ordinary shares last November at what now appears to be the high price of 30s. It was only in November and December that the first signs appeared of a falling off in home and export markets. In the third quarter, as the recession developed, the group's production had to be progressively reduced, which added considerably to costs. Earnings fell sharply and in the final quarter small profits gave place to an actual loss.
New Dividend Yield Fortunately, from the shareholders' stand- point, the reduction in profits has been cushioned to some extent by the lower pro- vision necessary for taxation. This charge is down from £3,851,894 to £1,374,757, but, even so, net profit, after tax, shows a steep decline from £3,154,092 to £933,622. When in May the British Celanese directors cut the interim dividend from 6 per cent. to 4i per cent., shareholders received a warning that the total for the year must be expected to fall far short of the previous 16 per cent. rate. The announcement of a final of 64 per cent., making a total of 11 per cent., has therefore come as -a shock. This payment leaves little margin available for reserve appropriations, but the carry-forward is increased by £35,000 to £731,126. Since the announcement of these figures the 10s. Ordinary shares, so far from falling, at first rallied sharply from 21s. 9d. to 23s. 9d. This movement was due mainly to covering of short positions in the market, and now quoted at 22s., yielding about 5 per cent., these shares look fairly fully valued for the present. Although stock losses have doubt- less been adequately- provided for, the recovery in earnings is likely to be a gradual process. I advise holders of the shares, however, to see things through.
Losses on Films It emerges only too clearly from the latest accounts of the British Lion Film Corpora- tion that this company, in contrast with Mr. Rank's Odeon group, is still in the process of making provision for heavy losses on film productions. Whereas trading profit has shown a fairly sharp fall from £363,144 to £237,811, the result, after allowing for depreciation, taxation and providing for estimated losses on film productions started after March 31st, 4949, is a group loss of £157,048, against a loss of £1,294 in the preceding year. Once again, there are no dividends on either the Preference or the Ordinary shares, and the debit carried forward is increased to the disconcerting figure of £2,066,755. Mr. H. C. Drayton, the-City financier, who took on the task of rehabilitating the Corporation's affairs three years ago, admits that although some reduc- tions have been made in costs of distribu- tion they have not been anything like sufficient to offset the fall in gross income. Like Mr. Rank, he puts in a strong plea for a reduction of entertainments duty and for a continuation of the Eady Fund after 1954.
Preference with Arrears Shareholders in Hesketh Estates, the propety-owning company, who have had several years out in the cold, seem at last to be within sight of better times. In his state- ment accompanying the latest accounts, which cover the year to February 29th, 1952, Mr. Edgar Lane has several hopeful things to say. He discloses that the parent company has disposed of some of its property at a considerable profit ; that the unprofitable London business of Gorham (Contractors), the contracting subsidiary, has been cleared up and that the company's compensation claim under the Town and Country Planning Act has been agreed at £238,100. Since the accounts show that the company has now returned to a profit- earning basis, it is not surprising that Mr. Lane hints at the probability of adjustments in the financial structure of the group, which will pave the way to a resumption of divi- dend payments. Arrears on the company's 7 per cent. Cumulative £1 Preference shares date back to February, 1949, and now amount to approximately 2s. 6d. net per share. With £250,000 of Ordinary capital ranking behind the £250,000 of Preference shares the position of the Preference holders is obviously quite strong, and it seems to me that in any reorganisation scheme the Prefer- ence holders should not be called on to make any sacrifice. If it should be judged desirable to fund the dividend arrears, then Preference holders should be given full compensation through the transfer of a slice of the equity from the Ordinary share- holders. Meanwhile, the £1 Preference shares quoted around 16s. 9d. look to me an attractive purchase. Assuming that the arrears are dealt with, one can deduct the 2s. 6d. net from the present price, which would mean that, ex the arrears, a buyer would be giving 14s. 3d.
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