FINANCE AND INVESTMENT

WHAT with holidays and a heat wave at home and fresh rumblings in the Far East, who can wonder that Throgmorton Street is a very dull place ? Wall Street is doing its best —and it is a surprisingly good best—to keep us all recovery- minded but I am afraid that, for a few weeks at least, London will be content to do a quiet jog-trot some way behind. Partly on that assumption, the writer of these columns will be watching, not too keenly, the ebb and flow of the financial tides from distant shores until September brings the City back to work. There may be some excitement in between if the Russo-Japanese situation gets really nasty, but my guess is that markets will oblige by remaining quiet and reasonably good.

Looking back over the past two months, one must feel that solid progress has been made. Apart from the home- rail disappointment, the industrial market has recovered about 7 per cent. ; gilt-edged have been steady as a rock ; the commodity groups have responded fairly sharply to Wall Street's clarion call ; and sentiment, which, along with the technical position, fixes the " tone " of markets, has definitely improved. A pause now will do no harm ; indeed, it is justified in relation to the American position. Wall Street's rise, as everybody knows, has latterly outstripped the recovery in business, and most people here would now like to see the business statistics catching up. Perhaps when I return next month the American steel operating ratio will be over so per cent. If it is, and the political horizon is still as clear as one can expect in these days, we should have better markets in the autumn.

RICHARD THOMAS PROSPECTS

Well, Sir William Firth has made his confession to Richard Thomas shareholders—his worst sin was one of over- optimism—and the financing scheme, with its attendant capital modifications, has gone through. As Sir William said, the bankers had right as well as might on their side, and there was really nothing to do but accept the terms imposed and hope that when the new plant gets into its stride condi- tions will have improved enough to allow big profits to be earned. Then the bankers can be gradually paid off and shareholders will have a chance of reasonable dividends.

This, however, is looking rather far ahead. For the current year, shareholders were told very frankly, the prospects are not favourable. The company is carrying heavy standing charges on the uncompleted Ebbw Vale works ; demand in recent months has fallen away, necessitating a curtailment of operations ; and profits to date are disappointing. Obviously, it would be foolish to budget for any payment on the Prefer- ence capital this year and the chances of an Ordinary dividend must be very slender indeed. The truth is that the company's prospects are now more closely bound up than ever with a genuine world revival which must begin in the United States. At 75 the 41 per cent. debenture stock seems to me to be an attractive 6 per cent. risk, but the Preferences, at 8s. 6d. and the Ordinaries at 2S. 9d., must now be regarded as essentially long-term speculations. At current prices the Preferences are the better value for money and, if I were a holder, I should grit my teeth and see things through.

* * * * L.M.S. PREFERENCE PROSPECT

As I suspected, there is nothing in the London, Midland and Scottish or the Great Western statements to relieve the gloom from Waterloo and King's Cross. The L.M.S. has done its best to keep the scoring down on the expenditure side, but the batting has been too good. Increased wage rates, plus higher costs of raw materials, have raised total expenditure by £1,o4o,000, against which there has been a saving of £503,000, representing economies due to the reduction in the volume of traffic. Thus, the L.M.S. expenditure bill has risen by £537,000, and as receipts have fallen by L959,000, net revenue is down by £1,496,000 for the half-year.

This is less disastrous than the £1,780,000 decline on the L.N.E.R., but that is the best that can be said of it. The market's fears that the board would postpone any payment on the 1923 preference stock until the end of the year have been realised, and frankly it is difficult to see how more than 3, per cent., at the outside, is going to be earned. During the current half-year, as I explained last week, the expenditure side will make a better showing, but I do not feel happy about gross receipts. The passenger section may hold up reasonably well, but unless trade takes a sharp upward turn there will be another heavy fall in goods and coal. Still, I would not sell L.M.S. preference stocks or, for that matter, the ordinary, at today's levels. Although there is nothing immediate to go for, the stocks have fallen to prices from which there is scope for recovery later on.

*

GREAT WESTERN PROBLEMS

Relatively, the fall of L818,000 in the net revenue of the Great Western is steeper than that of the L.M.S. In this case gross receipts from railway and ancillary businesses fell by £306,000, largely a reflection of the setback in the South Wales coal and tin plate trade, while expenditure was £522,000 higher. The board does not tell us how to apportion the rise in costs as between wages and materials or to what extent it was possible to effect economies on the operating side, but the inference for stockbrokers is fairly plain. For the first time an interim payment on the Con- solidated Ordinary stock is being omitted, which inevitably raises the question : Will the 3 per cent. rate necessary to preserve the full trustee status of the Great Western's prior charge stocks be forthcoming at the end of the year ?

The market's guess, based on the passing of the interim, is that the board does not intend to pay 3 per cent. if this should involve drawing heavily on reserves and this seems to me a fair deduction from the facts. Admittedly, the board has maintained the 3 per cent. rate in past years in face of considerable criticism from the purists, but if this policy is to be continued, why depart from the tradition of a small interim payment ? On present indications Great Western is not likely to earn more than r to per cent. on its ordinary stock this year. My own feeling is that unless the trade outlook has improved very substantially by the end of the year, it will be wise to assume that earnings will condition the rate of dividend distributed.

Venturers' Corner

Without pretending to any expert knowledge of photo- graphy, I am impressed by the possibilities of the Dufay- Chromex company. On the strength of the latest report of progress the 5s. ordinary shares have risen sharply from 3s. to 5s. 6d. and part, at least, of the buying has been very solid. It is obviously going to take time before colour photo- graphy or cinematography really gets a hold, but the long- distance prospects seem promising. Meanwhile, it seems to me that a speculative buyer might do worse than consider the £r ordinary shares of Ilford, Ltd., at 26s. These shares have been neglected during the recent excitement about Dufay-Chromex, although Ilford has a substantial investment in the new enterprise.

The point is that Ilford ordinaries are very conservatively valued at the current price without making any allowance for the possibilities of the Dufay-Chromex holding, from which, of course, no revenue has yet been raised. For the year ended October 31, 1937, Ilford raised its net profits from £108,630 to £135,175 and its dividend from 7 to 8 per cent., so that the yield is over 6 per cent. The company has a good balance-sheet, is strong on the technical aide and enjoys progressive management. There should be chances of capital appreciation in the shares over the next twelve months.

CUSTOS.

(Financial Notes on page 248)