FINANCE AND INVESTMENT
By CUSTOS
INSPIRED by a conjunction of good news items, the stock market opened cheerfully after the holiday. The end of petrol rationing has had an exhilarating effect which may be disproportionate to the actual benefit to trade, but it is welcomed in the City as a further sign that the Government, after years of planned austerity, has agreed with Mr. Webb (and Marie Lloyd before him) tat " a little of what you fancy does you good." It may perhaps be foolish to welcome something designed tb ' capture votes for Labour ; but the City does not always scrutinise meticulously the mouths of gift horses or suspect to the point of fear those who bear acceptable gifts. The freeing of petrol follows quickly on the relief from the burden of double taxation which pressed heavily on companies operating in countries-notably Ceylon and South American States-which have not yet concluded double-taxation agreements with Britain. It is in line with the ending of steel rationing and the abolition of food points, and it has aroused hopes of an early disappearance of other controls. The markets have also been helped by the news of an unexciting week-end in Berlin ; by the jump in spot rubber to 2s. 3d. a lb. ; and by a modest revival in Kaffirs on reports that £20 million of new finance is to be put , up for the O.F.S. mines of the Anglo-American Corporation group. A few big transfusions of new money are what this market needs to restore its vitality.
Industrial Output Rising Another market influence of wider significance has been the rise of 9 per -cent. in Britain's industrial production in the first three months of 1950 compared with the first quarter of 1949. This index covers only part of the nation's economic activities and is subject to a wide margin of error-particularly when used to justify claims of a marked increase in productivity since the pre-war years-but over a short period it provides a reasonably accurate measurement of changes in output. In America the Federal Reserve Board's index of industrial production has risen about 4 points to 191 since March and is now within 4 points of the post-war peak reached towards the close of 1948. The dollar gap is still the' Achilles heel of Britain's economy ; but while American industrial activity remains high, our own trade prospects should also be satisfactory.
Kaffir Dividend Estimates The recovery in Kaffirs will be hailed with relief by many share- holders who have been perturbed by the prolonged weakness in this market. The half-yearly dividends due this month will be the first to show the full effect of the higher price of gold and the lowering by some mines of the grade of ore milled. Estimates of the June payments vary considerably. Some authorities suggest that Consoli- dated Main Reef may pay 5s. a share, while others expect only 3s. 6d., as in December. Estimates for Crown Mines range from 5s. to 6s., compared with 4s. 6d. in December ; for Durban Deep, from 2s. 9d. to 3s. 3d. (December 2s. 9d.); Randfontein, Is. 6d. to Is. 9d. (December ls.) Rose Deep, 3s. to 3s. 6d. (December ls. 9d.); West Rand Consols, ls. 6d. to ls. 9d. (December ls. 3d.); Brakpan, Is. to Is. 4d. (December 9d.). If the highecestimates are fulfilled-some, I think, are a trifle optimistic-the market should regain some of its lost buoyancy. Gold-mining shares have their special hazards, but the better-class dividend-payers, whose earnings can be gauged ahead with a fair degree of accuracy, are probably no more speculative than many industrial equities. For those who like break-up prospects offering little risk of loss and a chance of appreciable gain, New Modderfontein, which rose to 9s. last year when the pound was devalued, look attractive at the current price of 5s. In the course of its career, now drawing to a close, this mine has paid out over £35 million in dividends, and is still making a small monthly profit. In 1946 the break-up value was estimated at 13s. a share. Since then 4s. a share has been repaid, so that the residual break-up value of the shares, now of 6s. denomi- nation, should be about 9s.-possibly more in view of the higher prices for used mining plant and machinery since devaluation.
Good Steel Results The full accounts of Guest Keen and Nettlefolds for 1949 confirm the good- impression created by the preliminary figures, announced early this month. They show that the dividend of 11 per cent., together with the Jubilee bonus of 11 per cent., is covered about two and a half times by earnings, after the deduction of special credits. These results in a year of advancing costs are heartening, but the rise in costs is by no means ended. As Mr. J. H. Jolly, the chairman, points out, the cumulative effect of rising costs of coal, electricity, gas and railway rates and the shorter working week is likely to_ be very serious in face of the increasing competition of low-cost producers abroad. In his view, colossal Government spending is a major cause of inflation. Guest Keen Ordinary units, now around 43s., yield 5* per cent. on the dividend alone, without allowing for the bonus. William Beardmore and Co. also report good results. The trading balance appears to be nearly £10,000 lower at 1077,634 ; but if we exclude income arising fro-m the settlement of final prices on Government contracts relating to previous years, earnings would show a rise of about 40 per cgnt. Net profit after tax is almost £52,000, higher at £206,190, and 'the 17+ per cent. Ordinary distribution, including a 5 per cent. bonus, is covered almost twice. Thanks to an increase in orders in recent months, the substantial order book is about the same as a year ago. At 42s. the Ordinary units yield £5 19s. per cent. on the dividend alone and £8 6s. 6d. per cent. on the combined dividend and bonus. : • Ten Per Cent. Yield Many companies might envy the stable profits of Lancashire Handbags. For thirteen of the past fourteen years earnings on the present Ordinary capital of £120,000 (enlarged last year by a 300 per cent. capital bonus) have exceeded 25 per cent. The exception was 1939, when earnings were equivalent to 181 per cent. on the present capital. The company makes ladies' handbags by mass- production methods, and until 1938 the whole output was taken by Marks and Spencer, who are still the principal customer, and with whom there is close co-operation. Since 1947 output and sales have grown considerably, buL_prices have been reduced, in spite of higher labour costs, in order to provide good value for money. The original ls. shares, introduced to the market around 13s. in 1947, are now 4s. units and are quoted around 8s. to yield a clear 10 per cent. on the 20 per cent. dividend for 1949, which was paid out of earnings of 30 per cent. In the light of the excellent record this high yield seems almost too good to be true. My impression is that the link with Marks and Spencer offers a clue to the stability of earnings and provides an indication of the company's competitive efficiency._ Even on the conservative balance-sheet figures the current price of the units is fully repre- sented by net assets.
A Cheap Rubber and Coffee Share An even higher yield-no less than 12* per cent.-is obtainable on the £1 units of Bajoe Kidoel Rubber and Produce, now around 16s. 6d., on the interim dividend of 10 per cent. for the year to March 31st, 1950. This dividend was intended for the previous year, when 16.1 per cent. was earned, but was held up by a delay in remitting earnings from Indonesia. Shares of companies operating in Indonesia are not over popular at present, but these, I think, are exceptional. The chief products are rubber, coffee and kapok, and nearly one-half of the output comes from estates in Celebes, which has been virtually untroubled by the unrest experienced in Java and Sumatra. The price of rubber in Dutch currency is now more than double that ruling when earnings of 16.1 per cent. were shown, while the price of coffee has soared almost as exuberantly, the current New York price being 75 per cent. above the 1947-48 average. The rise in sterling has been still greater, and the Kenya price of coffee not long ago reached the record level of £1,000 per ton. Another point in favour of Bajoe Kidoel is the strength of the liquid resources, At March 31st, 1949, the consolidated net liquid assets (stocks, cash, Government securities, less creditors and tax provisions) represented'otaity 16s. for every of capital. A purchaser at the current price would thus be buying a stock with remarkably high earnings prospects for little more than the value of the net liquid assets. The company also stands to gain from double taxation relief, since Indonesia and U.K. tax provisions for 1948-49 absorbed about 77 per cent. of the earnings
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