FINANCE AND INVESTMENT
By CUSTOS
AFTER the setback which followed the outbreak of the Korean war, it is now. a case of about-turn in the stock markets. Nervous selling has ceased—even in gold shares—and buyers have gradually been tempted away from the sidelines as the view has gained ground that temporarily, at least, the international political situation has taken a turn for the better and at the same time, inflationary forces are operating with renewed strength. As I suspected, commodity shares have enjoyed most of the speculative limelight, and rubber shares now occupy the centre of the stage. It has taken a long time for investors to show their recognition of the earnings and dividend prospects of the rubber producing industry in present conditions, and, as so frequently happens, now that the buying movement has broadened out, Stock Exchange dealers find themselves short of shares and quotations have rocketed. Those who picked up many of the leading rubber shares two or three months ago will obviously feel tempted to snatch the handsome profits now obtainable, but in spite of the rise in quotations, I still take the view that good rubber shares should be held for still higher levels. Even at today's prices the earnings and dividend possibilities are by no means over- valued in the market.
It is much less easy to make a case for gold shares, which are also in the throes of a recovery movement. Since devaluation costs of the South African gold mining industry have risen by about 12 per cent., and it seems certain that further increases, especially in the field of wages, lie ahead. On the other hand, any hopes of an early rise in the price of gold have been punctured by the decision taken at the recent meeting of the International Monetary Fund in Paris. The Fund officials made it clear that the United States, who call the tune in gold price fixing, have set their minds against any upward revision of the dollar price of the metal. At some later stage it is possible, of course, that new conditions will lead to a change in the American attitude, but in my view it would be unwise to look for any relief from this source for at least another twelve months. I do not wish to suggest, however, that the present recovery in gold shares is wholly unjustified, since it could reasonably be regarded as a corrective movement following the unduly severe slide in the early months of the year. The shares of the well- established producing mines still look reasonably valued, offering yields, allowing for amortisation, of between 7 and 10 per cent.
Gilt-edged and Industrials Gilt-edged stocks, after regaining the whole of the ground lost immediately following the Korean shock, are now showing hesitancy. This is attributable partly to the normal phase of consolidating after a rise and partly to the knowledge that further borrowing operations, involving substantial sums, are waiting to be carried through in this section of the market as soon as favourable con- ditions develop. Early in October gilt-edged should get some help from the publication of the latest gold reserve figures showing the position at September 30th. There can be little doubt that during the third quarter of this year the sterling area has earned a record net gold and dollar surplus. Heavy sales have been made at high prices of wool, rubber, tin, cocoa, jute and other primary products, while there has also been some improvement in Britain's exports of manufactured goods to the dollar area. Even if one allows for the probability that expenditure on dollar imports has risen some- what above the abnormally low level in the second quarter, it seems a safe estimate that the current statement will show a net gold and dollar surplus in excess of $250 million. Once again the Treasury will doubosless emphasise the abnormally favourable influences which have been behind this improvement, but so far as one can see the danger of a fresh external currency crisis, such as might upset gilt- edged prices, seems now to be pushed well into the background.
Buying of home industrial Ordinary shares is still selective, although prices have moved up in most of the leading groups, including tobaccos, breweries, engineering and shipping shares. Investors are naturally mindful of what next April's Budget may bring in the shape of increased taxation, but I do not think that prices have yet made full allowance for the recent improvement in earnings prospects. The shipping group seems to offer as much scope as any. In the tramp section, which now has the benefit of a sharp recovery in tramp freight rates, shares such as Stanhope 5s. Ordinaries, quoted at 12s. and offering a 10 per cent. yield, are definitely under-valued. Lever Bros. Financing After the private placing operations put through by Imperial Chemical Industries and the Distillers Company, involving the raising of £30 million of money without any approach either to the Stock Exchange or the general investing public, the City will welcome the decision of Lever Bros. and Unilever ,to raise £10 million by the more traditional method of a public offer. Sponsored by Lazard Bros. and Company, this offer comprises £10 million of 3+ per cent. Debenture Stock, 1955-75, at a price of 98f. Sub- scription lists will open on Tuesday, and it seems a safe guess that there will be a keen response. This money is needed to help to meet the company's current programme of capital expenditure, which includes modernisation of existing factories and the construction of new ones, and also to provide further working capital for the financing of stocks of raw materials carried at today's high prices. Bearing in mind the fact that Lever Bros. and Unilever has reduced its long-term liabilities by £10 million between 1941 and 1946, and through the years has added £10 million to depreciation reserves, created £17,500,000 of reserves against renewal of fixed assets, stock values, etc., and ploughed back another £34 million out of profits into the business, it seems natural that the board has now decided to restore some element of long-term borrowing into the company's financial structure. The raising of this new money on Debentures thus seems to me to be a rational step. It is also appropriate, in the case of a company which already has 230,000 shareholders on its book and whose trading organisation has acquired a world-wide name, that the method of making a public offer should be adopted. The prospectus shows that as to capital the new stock is covered over fifteen times by net assets of the company and its subsidiaries. As to interest, average profits over the past ten years gives a cover of forty-two times. In the light of these figures, it is clear that this Debenture stock ranks as a top class prior, charge industrial investment. Those seeking a security of this type should avail themselves of the opportunity, and make application for the new stock before the lists open on Tuesday morning.
Bangaw•an Rubber In the rubber share market prices have at last begun to move up over a broad front, in response to the selling price of the commodity, and it is now becoming more and more difficult to find shares still quoted below par. Among the laggards in the market recovery are the Is. Ordinary shares of Bangawan Estates, a rubber producer whose property is in British North Borneo. These ls. shares, standing in the market around 5d., have received no dividend for a long number of years, and the company was until recently in arrears with its Preference dividend. Under a scheme carried through in July the Preference arrears have been eliminated, and results recently announced for 1949 showed earnings on the Ordinary capital of just over 2f per cent. Those figures were achieved on an average selling price of rubber of under Is. a lb. It is readily calculable that earnings which would permit the re- sumption of Ordinary dividends should be well within the company's reach, even if rubber were quoted at only around, say, Is. 9d. The main trouble with this company has been, and still is, the shortage of labour, which has resulted in falling output. Whereas the potential crop is put at as much as two million lb., last year's actual output was only 722,598 lb., and there has been a further moderate reduction so far this year. Even allowing for these handi- caps and for the fact that forward sales have been made at what now look low prices, it seems to me that there is scope for improve. ment in the Is. shares from today's level. In 1947 they were quoted just over par.
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