FINANCE AND INVESTMENT
By CUSTOS FOLLOWING the news of the widespread floods the markets became subdued on Monday, and the effect was accentuated later by concern about the withdrawal of the American fleet from Formosa. The market influence of the floods was partly psychological, but it also reflected estimates of the high cost of restoration and fears that the claims to be met may curtail new invest- ment by the insurance companies for a short time. The further rise in the gold and dollar resdrves and the substantial excess of national revenue over expenditure announced in mid- week had only a mildly beneficial effect- possibly because both had been generally expected. The undertone, however, is still reasonably firm.
Budget Hopes There is a growing impression that the Chancellor's Budget estimates may lean towards optimism in order to justify tax concessions to industry. Apparently the Government now realises that it is economic suicide to deprive industry of the funds needed for the re-equipment and modernisa- tion of plant. There is also a strange case for a reduction in the spiteful 2 per cent. transfer stamp duty, which has failed miser- ably as a revenue producer. The duty has been a direct deterrent to investment' in equities; it has made the markets less fluid, caused wider prices and thus added to the effective cost of buying and selling; it has certainly led to a drop in the tax and surtax yields from the City generally; and by diverting funds from the Stock Exchange to banks and building societies it has depressed market values and diminished the yield from death duties. By reducing the duty to 1 per cent., Mr. Butler could assist the flow of risk capital at little cost to the Exchequer.
Central Wagon (Holding) After charging depreciation and legal expenses and providing more for tax, the Central Wagon (Holding) Co. recently reported a small rise in the net profit of the group. This is a satisfactory result in view of the 21 per cent. reduction in charges for repairing railway wagons which took effect a year ago. The 20 per cent. dividend for the year is covered twice by earnings, and the £1 shares, now around 60s., yield 61 per cent. Following the recent distribution to shareholders of British Transport 3 per cent. stock 1968/73, there is still about £1 a share surplus cash which the directors hope to distribute eventually, but this may entail some reorganisation within the group. Meanwhile, taking the fixed assets at the balance-sheet value, which is probably well below their market worth, I estimate the net asset value at about 75s. a share. A buyer at about £3 should get £1 back in cash, thus reducing the cost to £2 a share. With net assets of at least 55s. a share and a reasonable prospect of a 20 per cent. dividend, I think the shares should then be worth something more than £2.
Anglo-Trust Dividend The drop of 8s. 9d. to 86s. 3d. in Anglo- American Investment Trust shares which followed the announcement of a final divi- dend of 35 per cent., against 40 per cent., is a reminder that the market is influenced more by dividends than by earnings. The total payment for the year is unchanged at 60 per cent., but the market had been hoping for 75 per cent. for the year since the interim dividend was raised from 20 to 25 per cent. Estimated profit after tax is £1,424,000 higher at £3,670,000. As this is equal to 146.8 per cent. on the capital, compared with 89.8 per cent. for 1951, I feel that some explanation of the directors' parsimony should have accompanied the dividend announcement. If, as is generally assumed, the group is conserving its cash for invest- ment in O.F.S. mines, the shareholders should be told. They might also lilce to know why a "scrip dividend" from the Diamond Corporation of shares in De Beers Investment Trust valued at £500,000 is included in the profit. Normally a scrip bonus would be treated as a capital item and would not be brought into the P. and L. account. Possibly the full accounts will shed some light on these questions. Meanwhile the shares have made a partial recovery to 90s. 71d;, at which the gross yield, allowing for Dominion tax relief, is 161 per cent. The current break-up value of the trust's shares should not be far short of £8. For this reason and because the earnings would clearly warrant a bigger dividend, I think they are worth retaining.
Borneo Possibilities A striking discrepancy between market price and break-up value is seen in the Borneo Company's £1 Ordinary shares. These are now standing around 26s. 9d., compared with a net asset value, based on the last balance-sheet, of 90s. a share. For the year to March 31st, 1952, a dividend of 15 per cent. was paid on these shares out of earnings of 276 per cent. The dividend yield is thus over 11 per cent. Why is the market price so low? The explanation lies in the nature and location of the business, for the company works teak forests in Siam, runs a general agency and trading business, and controls, inter din, a tea company in Indonesia, a motor company in Borneo and a brickworks in the Straits Settlements. Last year's profit was a record, but the next accounts are likely to show a substantial fall in earnings. Nevertheless, the chairman, in his annual review last October, saw "no reason to believe that we shall not earn our just reward in the shape of reasonable profits." Another reason for caution is the high level of stocks, which totalled £3,743,000 at March 31st, 1952, compared with £1,894,000 a year earlier. Prices of hardwoods have fallen materially since last March; and if stocks are heavily written down the net asset value of the shares will also be reduced. For this and other reasons the shares carry a high degree of risk. They are not without possibilities at their present price, however, for hardy speculators who do not mind risks.
Pawsons and Leafs For investors who like high yields, Pawsons and Leafs 10s. shares, which have lately changed hands around 15s. 9d., seem worth considering. On the 20 per cent. distribution which has recently been declared for the sixth year in succession, the yield on these shares is over 121 per cent. Pawsons are textile warehousemen and manufacturers of overalls, dresses, rayon and cotton goods and furnishing fabrics. Preliminary figures for 1952 show a fairly sharp drop in profits, as one would expect, but the net earnings are more than sufficient to cover the 20 per cent. payment. The balance-sheet at the end of 1951 showed a strong financial position, and the full accounts for 1952 should, I think, reveal that the current price of the shares is fully represented by assets. While the high yield might seem to reflect some doubt about the permanence. of the 20 per cent. distri- bution, this risk seems to be adequately discounted at the current price. The fact that the company can earn and pay 20 per cent. in a difficult year, as 1952 undoubtedly was, suggests that the shareholders should continue to do well in more normal times.
Chubb Safe Shares As I have often pointed out, investors get opportunities of acquiring a stake in sound companies on attractive terms when new capital is being raised. A case in point is the "rights" issue of new Ordinary shares now being made by Chubb and Son's Lock and Safe Company, who are offering new 4s. Ordinary shares at 9s. each in the proportion of two new for every eleven held; The "rights" can now be purchased in the market around 2s. 3d., which means that a buyer is in fact getting the new Ordinaries at 11 s. 3d. This, in my view, is an attractive level, and a buyer also has the advantage of avoiding stamp duty as well as paying a smaller broker's commission. Since the raising of new capital was first mooted, Chubb's 4s. Ordinaries have come down from around 13s. 6d., and it will be surprising if they do not recover to that level once the new issue is out of the way. The company has an excellent profit and dividend record and, after paying 15 per cent. for seven years, raised its payment to 18 per cent. in 1951 and maintained that rate in 1952. The earnings cover has been ample, the 18 per cent. rate being covered three-and-a-half times for the year to March 31st, 1952. At 1 Is. 3d. the 4s. shares give the attractive yield of 61 per cent. on the 18 per cent. dividend. The shares should pay to put away for income and an improvement in price.
An Assets Share Among the companies whose shares look under-valued on assets investors might like to consider Fore Street Warehouse, the wholesale textile undertaking. This com- pany's 2s. 6d. shares are quoted in the market around 6s. 43d. which puts a value on the whole undertaking of about £350,000. In the last balance-sheet the net liquid assets alone, allowing for the recent repayment of 2s. 6d. a share out of surplus cash, are shown to amount to £465,000 which is equivalent to about 8s. 6d. on the present 2s. 6d. shares. Apart from its net liquid assets the company has freehold premises standing in the balance-sheet at £62,000, a written down figure must be considerably less than the value of the property today. The assets .position, in relation to the market value of the shares, is thus immensely strong. On_ dividend the indicated yield, assuming that last year's 10 per cent. is doubled on the capital as halved by the repayment, is nearly 8 per cent. which looks reasonable on a textile share now that the worst of the recession seems to be over.
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