The heavyweights
PORTFOLIO JOHN BULL
In the past week there have been two develop- ments which affect my portfolio. First, John Brown : the half-yearly report published last Friday was mostly encouraging. The interim dividend has been restored. This year it will be 3 per cent. I expect, therefore, that the total for the year will be at least 8 per cent, compared with 5 per cent last year and 11 per cent the year before. Profits before tax are running at £4 million per annum, but losses on outstanding contracts take that figure down to £2 million. The loss-making subsidiaries are now being hived off into joint companies with outside shareholders. So, as the old business (egg. shipbuilding, land boilers) runs off. John Brown's strongest assets (namely, machine tools and chemical engineering) will shine through. Realisation that John Brown is changing in this way has brought the shares up from 27s 14d earlier this year, the level at which they entered my portfolio, to 35s 6d now.
You can, however, add two important ele- rnents to the case for the shares. The group has an important holding in Westland Aircraft amounting to 21.6 per cent of the equity. West- land has been a buoyant market recently. In terms of John Brown shares, the Westland holding now amounts to 13s a share. Thus, in effect, buyers of the shares at, say, 33s. are paying only 20s for the group's main assets. Assuming, further, that these hit the £4 million a year rate quite soon, then the shares are sell- ing at only six years' purchase of earnings, which is a ludicrously low multiple. The average for machine-tool companies is 16f years' purchase.
I also believe that now is the right time to buy machine-tool shares. There are just the slightest signs that the trade cycle is turning up once again. The November statistics for the industry recorded the highest intake of home orders for sixteen months. That does not revolutionise the situation, for home orders out- standing were still a third lower than a year ago and represent no more than five months' work. And it is worth bearing in mind the Machine Tool Trades Association warning that five months is only an average and that for many types of machine and many firms the figure is 'dangerously' lower. And here I must quote the chairman of John Brown, who refers in the interim statement to `slender' order books. All the same, the tide looks to have turned. And some confirmation that this is so came this week from two industrial surveys, the Board of Trade on capital spending and the National Institute on post-devaluation trends. The former talked of a 'decided upturn' in industry's spending; the latter revealed the
big output increases expected by the engineer- ing sector. I shall, therefore, return before long to the capital goods producers for invest- ment situations.
The second development of interest is the merger of the National Provincial and West- minster Banks, and all that follows from it. The news came a few days after my purchase of one hundred shares in Barclays Bank. The first result was that all bank shares were marked upwards in a market taken completely by surprise. Although Barclays is undoubtedly too big to be on the receiving end of a bid, I am pleased by this sudden burst of rationalisa- tion among clearing bankers. It may hasten the day when full disclosure of profits will be required. In any case, investment attention is now focused on banking shares—which will be to their advantage. And the swift upward adjustments in National Provincial and West- minster will in turn mean a higher rating for Barclays.
Valuation at 31 January 1968 100 BAT at 109s
100 Empire Stores at 59s 6d • • • • 50 Phoenix at 176s 3d ..
225 Lyle Shipping at 19s 44-d • • • .
600 John 1. Jacobs at 8s 1 Id • • • •
100 Unilever at 51s • • • • £2,000 War Loan at 491 . . . .
150 Witan at 32s 9d .. 100 English Electric at 57s Gd 100 E. Scragg at 57s ..
250 John Brown at 35s 6d 100 Barclays Bank at 73s 9d Cash with local authority at 74 per cent £5,429
Deduct: expenses
Total £5,347 £545 £297 £441 £218 £244 £255 £985 £246 £287 £285 £443 £369 £814 £82
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