FINANCE AND IN VESTMENT
By CUSTOS
FOR no very obvious reasons stock markets have at last succeeded in staging a moderate recovery. Although the improvement in prices has not gone very far, it has been fairly broad. It has included gilt-edged, industrial equities, especially the textile groups, commodity shares and gold shares. The very fact that it has been so broad suggests that it has derived from a sudden swing in sentiment from apathy to cautious hope and has been given effect mainly by a covering of " short " positions. The " bears," who in this context include not only professional speculators who have made outright short sales but jobbers with over-sold positions, have decided that the chances of a further fall in the near future have diminished and have acted accord- ingly. Add to those re-purchases a trickle of investment and speculative buying, by the public and in today's " thin " markets prices are apt to rebound quite sharply.
More Hopeful Views
What has happened to cause this sudden veering of sentiment ? 1 think one must keep in mind, first, that Stock Exchange, prices had previously taken a nasty toss. Gilt-edged, after giving every appearance of having adjusted themselves to the 4 per cent. Bank Rate, had tumbled to new low levels. In the same mood of bewildered disillusion there had been persistent selling and heavy falls in the industrial and commodity share groups. Prices had thus been brought down to levels at which any further slide could only have meant that all confidence had been lost and the market would be making its dispositions to meet not a moderate recession but a crisis and slump. The rally thus betokens a recrudescence of confidence at least in the sense that investors are prepared to indulge their hopes that the recession will not intensify and that, in con- sequence, market prices may now be fairly close to the bottom. In this view they have been fortified in recent days by the improvement in some commodity prices, notably rubber, wool, copper and lead, by mildly opti- mistic reports of better things from the textile centres, and by the more solid evidence of an improvement in the balance of payments position of the sterling area. At this stage 1 still advise caution in making fresh purchases but I think it would now be possible to 'invest modest sums in leading industrial equities, commodity shares and a small percentage in gold mining.
Patons and Baldwins Jolt The sort of news with which the optimists will have to contend over the coming months has been well exemplified this week in the results announced by Patons and Baldwins, the manufacturers of knitted wools and
' hosiery yarns. Although shareholders had received a warning, first in the chairman's statement last July and subsequently when the interim dividend was reduced in January this year, that they must be prepared for a reduction in earnings, the announcement of a trading deficit for the year to May 3rd of £916,500, ar,...nst a surplus for the preced- ing year of £3,252,023, has come as a nasty jolt. Even after allowing for compensating factors in the way of lower provisions for taxation the net deficit for the group comes out at £482,660, against a net surplus of £1,278,235. The Ordinary dividend, which has been maintained at 20 per cent. for each of the preceding six years, is cut to 10 per cent. The cause of this severe setback is, of course, the precipitous fall which has taken place in wool prices, necessitating a' heavy writing down of stocks. The directors point out that the impact of the fall in wool prices on the trading results of the company has been considerable, owing,to the peculi- arly vulnerable position of the company as a purchaser of raw wool in the primary markets of the world and as a seller princi- pally of hand knitting yarns on non-contract terms. Fortunately, Patons and Baldwins' have built up a substantial contingencies reserve to meet just the sort of risk which has matured. Over the years 1948 to 1951 this reserve was raised to £2,800,000. It is now being drawn on to the extent of £700,000 to enable the company to pay its fixed Preference dividends, make a distribution of 10 per cent. on the Ordinary stock and to carry forward £428,530, a reduction of only £30,590 from the previous year. These results are disappointing but must not be judged catastrophic, They have depressed the price of the £1 Ordinary units from 47s. 3d. to 43s. 3d. At this level the yield on the 10 per cent. dividend is still well under 5 per cent. and compares distinctly unfavourably with the returns now obtain- able on other leading wool textile shares. Even allowing for the company's financial strength I would not recommend a purchase at this juncture.
British Plaster Board ' Although at current replacement prices the fixed assets of every industrial 'company mutt now be substantially under-valued in the balance-sheet, few boards of directors have so far taken the step of writing up the book figures. Among the exceptions is British Plaster Board, who have embodied the results of a recent revaluation in the latest consolidated balance-sheet. Fixed assets now appear at £6,602,758, whereas a year ago the book figure was only £2,078,396. A " surplus " arising from this revaluation, amounting to £4,220,612, is put to capital reserve. This company announces a sub- stantial improvement in group trading profit for the year to March 31st from £1,054,607 to £1,259,077. This has enabled the board to raise the dividend from 161 per cent, to '17k per cent., as well as to put substantial sums to reserves. A study of the balance- sheet shows that, in face of an increase of • over £400,000 to £1,182,513 in stocks and
work in progress, the company has been able to maintain a strong liquid position, which suggests that there is little likelihood of any early raising of fresh permanent capital. The 5s. shares at 12s. 9d. are priced to yield just under 7 per cent. I regard them as a sound holding.
Industry's Capital Needs Scarcely a day passes without some new indication of the needs of British industry for new capital, either to finance plant extensions and improvements or the carry- ing of larger stocks. Among the latest additions to the rapidly lengthening list of potential industrial borrowers are Hazel! Watson and Viney, the printers and binders, and Broadcast Relay Service. Hazell Watson and Viney has a long and successful trading record and has nearly completed its immediate post-war capital programme. In his annual statement Col. Viney discloses that other improvement plans are being considered and that the £400,000 of new money raised on last year's issue of 10-year Notes has now been spent. If the present level of costs is maintained it may, there- fore, be necessary to provide more working capital. As to prospects, Col. Viney fore-, casts some modest falling off in profits. On the. one hand the reduction in paper prices will help printing generally. On the other, there has been a considerable reces- sion in jobbing printing.
The need for new financing by Broadcast Relay is evident from the latest consolidated balance-sheet, dated March 31st, which shows a jump in bank overdraft from £337,032 to £1,120,329. This is a striking reflection of the rapid expansion of this group's overseas business and increasing rearmament activities. To repay these temporary borrowings and furnish fresh working capital the company is now seeking Treasury consent to a substantial new issue. The directors do not disclose what method of new financing they intend to adopt but with the 5s. Ordinaries now quoted in the market around 20s. a new Ordinary share issue on " rights " terms could be success- fully carried through.
Preference Under Par Several months ago I referred to the merits as a semi-speculative investment of the 7 per cent. £1 " A " Cumulative Preference shares of Whiteaway, Laidlaw and Com- pany, the merchanting concern with interests in Argentina, Africa and the Far East. The shares were then quoted only a little under par but have now come down to 15s. In part this fall is an adjustment to the new basis of stock market yields, but in the light of the position now disclosed in the com- pany's latest accounts I think the downward movement has been overdone. This com- pany's trading profits for the year to February 29th show a further'improvement from £313,203 to £398,456, and net profit, after tax, depreciation, etc., is up from £79,066 to £116,386. As the full dividends on the company's 6 per cent. First Prefer- ence shares and the 7 per cent. " A " shares together involve only a net sum of £21,787 it is clear that the pay4nts are amply covered. It may also be talon as an indi- cation of the board's confidence in the out- look that the Ordinary dividend is being increased. From the capital standpoint the Preference position also looks strong. Against the total Preference capital of £650,000—there are no Debentures—net liquid assets alone appear at over £1,300,000, made up largely of stocks valued at
£1,328,043. Of the cash balance of £448,000 about £380,000 is subject to exchange restrictions. Apart from the liquid assets there are fixed assets with a written down book value of £554,334. Investors looking for a high-yielding Prefer- ence share under par with some prospect of moderate capital appreciation might well consider the 7 per cent. " A " Preference shares of this company. At today's price the yield is over 9 per cent.
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