FINANCE AND INVESTMENT
tly CUSTOS
MARKET sentiment generally has been helped lately by 'the strength of sterling and bigger tax collections, which have sensibly reduced the deficit for the financial year to date ; while interest in gold shares, in particular, has been stimulated by the good development results of Freddies North and South and by hopes of an eventual rise in the price of gold. But the most significant recent market influence, I think, is the spate of " take-over " bids to which I alluded last week. These have emphasised the wide disparities between the market prices of many shares and the asset values underlying the shares. Until recently this was an interesting market phenomenon but apparently of only academic significance. I remember, for example, examining J. Sears & Co. 5s. shares just over two months ago, when they were standing at 19s. 3d. The yield of £5 17s. per cent. then shown was not outstanding, compared with yields on similar shares ; the net asset value was clearly higher than the market price, but this attribute was common to many other shares ; the dividend, it is true, was covered over five times by earnings, but some reduction in profits seemed probable, and a higher dividend could hardly be expected in such circumstances.
High Asset Values
At the time this appraisal seemed reason- able, but how wrong it was. Towards the end of November, when the shares had risen to 21s. 3d., the directors of J. Sears & Co. said they had " no knowledge of the circumstances which affect the present prices at which dealings in the Ordinary shares of the company are taking place." They did not say that the shares were not worth the price then ruling, though some shareholders may have drawn that inference. Since then, despite a drop of £129,000 in net profit, the dividend for the year has jumped up from 221 to 621 per cent. ; a 150 per cent. share bonus is proposed ; properties having a book Value of £2,586,000 are now apparently worth at least £6,000,000 ; and the directors say that the offer of 40s. per share made by Investment Registry is inadequate and should be refused. Whether or not the board would have raised the dividend to 621 per cent. and announced a share bonus and revealed the current market value of the properties if no bid had been made for the shares is a matter for conjecture. If I were a shareholder, I should either accept the offer or sell the shares now and reinvest the proceeds in other shares which stand well below their asset value and on which dividends are covered several times over by earnings. Some of these, including Spicers, Ashton Brothers, and Lancashire Cotton, have been mentioned in these notes recently ; others will be examined in future notes. One of the most attractive stocks in this category, Horrockses Crewdson, is dealt with below. I should not be surprised to see further rises in shares with high, asset values and showing high earning;, on the assumption that the directors of many of these companies may seek to forestall take-over bids by a more generous distribution policy.
Carpet Trade Recovery
Nearly a year ago the Chairman of John Crossley & Sons, the Halifax carpet makers and spinners of yarn, warned the share- holders that trading conditions had com- pletely altered, that .there was a buyers' market throughout the world, and that competition would be intense. He believed, nevertheless, that the company was well equipped to meet these conditions and that they would get their share of business. In the light of this prognosis the company has done remarkably well. Trading profit for the year to November 30th is up from £214,446 to £308,518, and net earnings after tax are £42,000 higher at £108,518. The dividend for the year is not only maintained at 20 per cent. but is augmented by a 5 per cent. special bonus to mark the 150ih anniversary of the foundation of the business. The total distribution is well covered by earnings, but on the 20 per cent. dividend alone the £1 shares, now around, 43s. 9d., yield 91 per cent. Despite the substantial rise in the shares since I referred to them a few months ago, they are still worth holding.
£6 of Assets for £2 ' Invesstment information is often found in unexpected places. Here, for example,' is an item from the fashion column of a leading newspaper : " Everyone is talking of the boom in cotton frocks. The manufacturers can hardly supply the stores quickly enough. One hears of several models being sold by the thousand." If this is a lasting boom, and not simply a short-lived phenomenon, it should be of interest to holders of Hor- rockses Crewdson £1 Ordinary units, which are currently quoted around 40s. Hor- rockses, who have long been famous for sheets and pillowcases, have built up a big trade in fashion goods in recent years and now have "fashion" subsidiaries in Canada, Australia, New Zealand and South Africa. Like other cotton textile manufacturers, the company was hit by slumps in demand which started in 1951, and profits for the year to August 31st, 1952, showed a sharp fall, due partly to import restrictions in Australia and elsewhere, and partly to heavy depreciation of stocks. Earnings, never- theless, covered the 121 per cent. distri- bution three times. There has since been some recovery in demand at home, and the partial relaxation of Australian import restrictions should be of help. Another encouraging feature is the statement in the Chairman's annual review that the "demand for our fashion garments continues to increase, and sales for the year reached a record figure." On the 121 per cent. payment, the yield on the stock is 61 per cent. This is on the low side for a cotton textile share, but the main attraction of the stock, in my view, lies in its high asset value. On the basis of the balance-sheet at August 31st, the break-up value is no less than £6 for each Ordinary unit, or three times the current market price. Even this seems to be an under-estimate, since the book value of fixed assets is undoubtedly much below their real value. Net liquid assets—cash, stock, debtors, less all liabilities, including current and future tax provision and Debentures— are about £4 per £1 unit. In other words, you can buy this equity in a prosperous company for half its worth in cash and stocks, with the valuable fixed assets thrown in for nothing.
West African Gold
West African gold shares have been active at rising prices since I discussed the merits of Ashanti and Ariston recently. The factors which have brought about the recent recovery in the shares are clearly set out in a market circular. Fears that the grant of a large measure of self-government to the Gold Coast Colony would bring speedy disaster have so far proved groundless, and Major-General Spears, Chairman of Ashanti Goldfields, on his recent return from the Colony, said he. was well satisfied with the situation and looked hopefully to the future. Apprehensions of nationalisation have also been allayed by the repeated assurances of Mr. Gbcdemah, Minister for Commerce and Industry, that the Government has no intention of taking over the gold mines. I still regard Ashanti and Ariston as the safest purchases in this market, but they would not necessarily offer most scope for appreciation if the dollar price of gold were raised. If this happened, the mines milling low-grade ore, on which the current margin of profit is relatively narrow, should in theory derive most benefit. In this group Amalgamated Banket Areas 3s. shares, now around
104d., seem as attractive a speculation as any. The yield on the 21 per cent. dividend is only 4 per cent., but this dividend was covered six times by earnings for the year to September 30th, 1951—the latest available. Ore reserves have an average value of just over 31 dwt. and represent over seven years' milling supply. The writer of the market circular already referred to regards these shares as an outstanding " gold price " gamble.
Bremang's High Yield There may also be scope for a rise in Bremang Gold Dredging 5s. Ordinary shares which can be bought around 2s. 71d. to yield 141 per cent. on the 74 per cent. dividend paid for 1951. This company obtains its gold by alluvial dredging in rivers in the Gold Coast Colony, and last year it treated over 7,000,000 cubic yards of gold- bearing mud. In 1951 Bremang .acquired alluvial areas from Gold Coast Selection Trust estimated to contain 175,000,000 cubic yards of alluvial deposits, from which, if expectations are realised, 872,000 fine ounces of gold, worth over £10,000,000 at the current price, should be produced. This acquisition should extend the company's operative life by about 25 years. During 1952 some dislocation was caused by the dismantling of one dredge prior to transfer and re-erection on the Upper Offin River, one of the newly acquired areas, and in conse- -quence the total output of gold to the end of November, 1952, was reduced by about 10 per cent. Another dredge will probably be ready for transfer about the end of 1953. These transfers are a lengthy and costly business—about twelve months for each dredge from start to finish of the operation— but, the directors did not expect that they would involve any reduction in dividend. 1 regard these shares as a reasonable speculation offering a generous yield, with a possibility of a still higher return and potential appreciation if the price of gold should be raised.
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