Investment Notes
By CUSTOS Some excellent company reports—still out- numbering the bad ones—could not pull the equity share markets out of their reactionary phase. A bear market in Wall Street and the weight of new issues are the predominant factors. BOWATER and BRITISH OXYGEN are between them raising £27 million and no one trusts the Treasury not to make matters worse by choosing this moment to float the mammoth Richard Thomas and Baldwins denationalisation issue.
Chemical Prospect
The excellent half-year's results of IMPERIAL CHEMICAL support this leader's reputation as a growth stock. Sales advanced by 15 per cent. and gross profits by 38 per cent. before and by 50 per cent. after depreciation. Yet more important, gross and net profit margins have improved despite some lower selling prices, the net from 1.9 per cent. to 9 per cent. Equity earnings are running at oLer 30 per cent. and the minimum distribution expected by the market is now 12+ per cent. against 11+ per cent. The interim has been raised to 61 per cent. for equalisation. At the present price of 74s. the potential yield is 3.3 per cent. In a recent article the chairman, Mr. Paul Chambers, stated that most of the new organic chemicals—plastics, synthetic rubber, synthetic fibres, etc.—are making a vigorous expansion which is likely to last for years to come. The growth of the plastics sector has so far outstripped every other, being at .an average rate of 8.7 per cent. per annum compound. The output of synthetic fibres derived from mineral sources, such as nylon, terylene and courtelle, is now expected to grow over the next decade at 11 per cent. per annum. In short, he put the growth rate for organic chemicals at 5 per cent. and inorganic chemicals at over 10 per cent. per annum for the next ten years. This is the sort of prospect the long-term investor loves. But Mr. Chambers stressed the importance of exports, especially to the industrialised 'common market' in Europe. In the last half-year ICI exports rose by 14 per cent., but it is doubtful whether this can be maintained. On any sizeable fall in these reactionary markets ICI shares would be an excellent purchase.
Nor-Sou-Cron Whither?
Of all the industrial holding companies the most spectacular is NORCROS. In 1956 its 5s. shares were placed in the market at 5s. lid. (on an anticipated yield basis of 12 per cent.) and quickly rose to 30s. After various scrip issues an original holder of the placing would today have a profit of over 1,800 per cent. The company's technique in the expansion race is to acquire the equities of growing or likely-to-grow firms in exchange for its own very highly valued shares. The earnings or potential earnings of the firms acquired go to support the ever-rising market value of the parent's shares, which in their present 5s. form are now quoted at 45s. 6d. (against an equivalent low this year of 20s. 9d.) to yield 2.2 per cent. on dividends and about 5.3 per cent. on earnings. It may be permissible to buy the Norcros business at nearly twenty times its yearly earnings—assutning that its manage- ment is clever enough to go on buying outside firms at about four or .five times their yearly earnings—but personally I would fight shy of investing in so magical a business. The latest development seems more magical than ever. The chairman has stated that the future of the Norcros group lies with the rather large type of business. So the parent has formed a new company called SOUTHCROS to acquire the smaller type of business and other companies whose acquisition might lead to an undesirable concentration of interest in one industry. The bulk of the Southcros shares have been issued to Norcros shareholders at 5s. 6d. as a one-for-nine rights issue, but a block has been issued to directors and executives of the two companies and 100,000 to 'people whom it will be of advantage to have as shareholders.' This is the most extraordinary 'perk' ever given to outsiders by insiders and the shareholders of Norcros would have every right to be indignant—if they had not made so much money themselves out of the market. The two
companies acquired by Southcros provide equity earnings of 131 per cent. for Southcros share-
holders, and the forecast dividend is no more than 3+ per cent. But on the experience of Norcros this will not stop Southcros 5s. shares rising to dizzy heights.
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