FINANCE AND INVESTMENT
By CUSTOS POLITICAL and economic uncertainties are now hanging heavily over stock markets. Quite apart from the larger issues of peace or war which make investment decisions at the present time so difficult, evidence is accumulating in company reports that a mild recession in trade is already in being. In this sort of movement one would look for a firm gilt-edged market and a down- ward trend in equity share prices and that is how things appear to be working out. In my view this is a time for caution—at least on a short- or medium-term view—apart from special situations.
Cunard Strength Ordinary stockholders in the Cunard Steam-Ship Company, many of whom may recollect the lean times through which this giant of the ship industry has passed, should derive great satisfaction from the position disclosed in the latest accounts. Not only have operating profits, at £10,709,000, reached a new record—they have even out- stripped what were considered the abnorm- ally high figures of 195.0—but the financial position disclosed in the consolidated balance-sheet is one of immense strength. Quite apart from the large hidden reserve which lies in the heavily written-down figure of just under. £29 million at which the fleet is carried in the books, cash and investments together amount to over £32,500,000. Here is proof, if 'any were needed, of the prudent policy which has guided the group's fortunes in recent years. As stockholders are reminded, however, this position has been built up in face of excessive taxation. In his annual statement Mr. F. A. Bates again emphasises that the wear and tear allow- ances permitted to be set off against the tax computation of profits provide an insufficient money total each year to pay for the renewal of ships as they wear out. He also points out that the large liquid resources are no more than is adequate to cover the ship- building contracts which lie ahead. The balance-sheet shows that at December 31st, 1952, the group had liabilities on contracts for new ships of about £15,425,000. Mr. Bates, who is a cautious prophet, makes it clear that on the cargo side the influences on this year's prospects are mixed. On the other hand, he takes a confident view of the outlook for the North Atlantic passenger trade in Coronation year. Cunard £1
Ordinaries are now %toted around 40s. 6d., yielding close on .8 per cent. on the 16 per cent. dividend for 1952, which is shown to be covered by a wide margin of earnings. I do not think that holders should sell.
Hudson's Bay Prospects Yielding less than 3 per cent. gross at the current price of £5, Hudson's Bay Ordinary £1 shares are clearly discounting a bright future. If the rate of progress shown in the latest report is kept up, the market assess-
ment of the possibilities of the shares should in time be fully justified. Large increases in turnover are reported by the retail stores, the wholesale department and the fur trade, and an appreciable rise is shown in income from oil royalties. Group earnings, before tax, are £845,000 higher at £2,764,095, and net profit has risen by £355,000 to £1,114,104. Including the tax-free payment from land sales, the total distribution for the yeAr is equivalent to 141 per cent. gross on ,the present capital and is covered very com- fortably by earnings. While the results in general reflect the progress of this virile Dominion, the market's hopes are largely centred in the rapid development of the Canadian oil industry and particularly in the company's holding of 25 per cent. of the capital of Hudson's Bay Oil and Gas Com- pany. This, however, is a long-term venture, since there is a considerable time - lag between the discovery of the oil \and the creation of costly distributing and marketing facilities. As Mr. W. J. Keswick, the governor, points out, " it will be some years before we take out more than we' put into Hudson's Bay Oil and Gas Company." By that time profits on land sales will prob- ably have shrunk considerably, and the prospects for oil producers generally may have lost some of their recent lustre. It should be noted also that Canadian trade activity is closely influenced by conditions in the U.S.A. and that fears of a possible American trade recession have been revived by the conciliatory gestures from Moscow. While, therefore, I regard Hudson's Bay shares as a promising long-term holding, it may be possible to buy them cheaper later on.
A Budget Beneficiary
Laurence Scott and Electro Motors should be added" to the list of companies which will benefit from the prospective lapse of the Excess Profits Levy: Last year's trading profit was £98,000 up at £593,281, but taxation at £307,000 absorbed £79,000 more than in the previous year, largely owing to an E.P.L. provision of £54,000. After setting aside £24,336 for pensions, net profit is only £16,606 better at £1-85,313. •The unchanged 15 per cent. divi- dend on the " A " and " B " Ordinary shares takes no more than £33,000 net and would be covered about seven times by earnings if the E.P.L. provision were not required. The " A " and " B " share- holders are being offered new " A " Ordinary 5s. shares at par—one new share for every ten shares now held. On the basis of the current price of 14s. 6d. cum dividend and' rights, the ex-all price would be about 13s. 3d. If, as the higher earnings seem' to indicate, the dividend is maintained at 15 per cent., the yield at 13s. 3d. would be 5.6 per cent. Since the outlook for' this type of enterprise still seems favourable, I should not oppose a purchase.
Low-Grade Gold Mines What investment conclusions may be drawn from the delay in granting a U.S certificate of airworthiness to the Comet III and the failure of English Electric to get the Chief Joseph Dam contract ? These dis- appointments are related to the fading hopes of a rise in the dollar price of gold, and the views of well-informed observers that the Commonwealth plan to restore sterling convertibility by stages stands little chance of acceptance by Washington. Will sterling remain strong in spite of these disturbing facets of U.S. economic policy ? Only a tentative view is possible at this
stage. Sterling will be helped by large off-shore orders for Hunter fighter planes and,
for a time, by lower prices for imported commodities. But if prices of commodities continue to' fall, the ability of primary producers to buy British goods will suffer 1 and a recession in America would make the task of earning dollars even harder. In this uncertain environment I think 'a case can be made for moderate speculative purchases of relatively low-grade South African gold mines, such as Springs, now around 5s. 9d., and Robinson Deep at about 10s. 6d. Both shares are now almost at their lowest prices for many years. If commodity prices con- tinue to fall, mining costs should decline 1 and if there should be a recession in America, opposition to a higher U.S. gold price may vanish. Finally, Professor Colin Clark, who has some remarkably accurate forecasts to his credit, not long ago expressed the view that the true value of the pound today is a most $2.50 and that it will probably fall to $2.25. A rate of $2.40 would involve a rise of over 40s. per fine ounce of gold and would make a great difference to the low- grade mines.,
Cheap Textile Share
Investors who like to combine a high income yield with a strong asset position might do worse than consider the £1 Ordinary shares of Jeremiah Rotherham, the drapery warehousemen. In recent years this company's dividend has fluctuated between 81 per cent, and 10 per cent. ; and for the year to January 15th, 1953, 8 per cent. was paid even• though this involved some draft on reserves. At 14s. the £1 Ordinaries are therefore offering the high return of over 12 per cent. The balance- sheet shows that net liquid assets alone, amounting to £57-8,173, were equivalent to over 18s. on the £1 shares. On top of that there were freehold properties standing in the books at a written-down figure of £128,000, or the equivalent of another 4s. 3d. a• share, apart from fixtures and leaseholds with a book value of another £30,000. Like other textile warehousemen this company had to Write down its stock values last year, but in his recent annual statement the chairman pointed out that conditions improved in the second half of the year. He also disclosed that orders in hand were in excess of those of a year ago. The shares should, therefore, have a reason- able prospect of recovery from the current low level. Any take-over would obviously have to be at a level well above the current market price.
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