FINANCE AND INVESTMENT
By CUSTOS
ALREADY the Budget is throwing a lengthening shadow across the stock markets, and turnover is contracting from the sub-normal to the virtually non-existent. It says a good deal for the technical trimmers of markets, in such circumstances, that prices are holding up. The plain truth is that while nobody expects any remissions of taxation on April 18th to set markets moving upward, it would be equally surprising if Sir Stafford Cripps took a fresh backhander at the equity investor by, say, raising the Profits Tax. As for the total burden of taxation, so far as it is possible to judge from the revenue-expenditure picture for the past financial year and the obvious adjustments for 1950-51, my guess is that the Chancellor will have only a narrow field of manoeuvre unless, of course, he decides that it is no longer necessary to budget for a substantial surplus. I doubt whether he will feel justified in making any striking changes from the investors' standpoint.
Meantime, the latest quarterly gold reserve figures are encourag- ing, so far as they go. For the first time since these official statistics were made available, the sterling area is shown to be standing on its own feet, but I still feel that this is not yet the time to throw one's hat in the air and assume that the dollar gap has been closed. There must have been a continuation of the non-recurring factors, such as re-stocking by American importers, which contributed to the improvement in the final quarter of 1949, and seasonal influences are now at work. Moreover, the gold reserve has not yet been restored to the minimum safety level. We must wait and see what the coming weeks and months hold for key commodity prices— and for the volume of our sales to the United States. There are bound to be fluctuations here.
Steel Share Valuations One consequence of the election stalemate has been to depress the shares of steel companies scheduled for take-over under the intended nationalisation plan. These shares were bought before polling day for their attractions as a " hedge " against a Socialist victory. It seems that some of the buyers have decided to unload now that the thinness of the Government's majority makes it unlikely that the Iron and Steel Act will be implemented during the life of this Parliament. I see that Partridge Jones and Paton 11 ordinaries, whose merits I outlined on February 10th, can now be bought again around 17s. Partridge Jones is, of course, primarily a coal share, although the shares were scheduled for take-over under the steel nationalisation plan at 19s 10d. If there is no take-over, the position will be that the company will receive its-compensation for the colliery assets, already vested in the Coal Board, and will be left with the production of steel bars and billets of silicon steel for the electrical industries and iron foundries. As the coal com- pensation has been estimated on the basis of the company's past output at a minimum of 12s. 6d. a share, after allowing for the repayment of debentures, the extra 4s. 6d. which a buyer at today's price is paying represents the value put on the various steel interests. This, in my view, is not much to pay for the steel side of the business and if, after all, the steel plan should go through in the fullness of time, the " hedging " element comes in and one is left with a handsome profit.
Richard Thomas Yield
Turning to another iron and steel share, the 6s. 8d. ordinaries of Richard Thomas and Baldwins, these have been as high recently as 13s. 9d. and are now down to 12s. 6d. At this level they are substantially below the threatened take-over price under the nationalisation plans of 15s. 3d. and look to me to be undervalued on their trading prospects as the equity of a steel company in competitive conditions. On the current dividend rate of 15 per cent., which on recent earnings has been covered by a large margin, the shares are yielding 8 per cent., or about 1+ per cent. more than the general run of iron and steel equities. While one must recognise that Richard Thomas and Baldwins are engaged in what is normally a highly competitive section of the steel industry, one should also (Continued on page 482)
FINANCE AND INVESTMENT {continued from page 480) - not lose sight of the fact that the company has up-to-date plant, and the demand for sheet steel is still well in excess of supply. It seems to me that on a yield basis of 8 per cent. these ordinary shares are undervalued in relation to trading prospects, and if the worst should -befall and the Socialists should regain a political position in which they could implement nationalisation, any buyer at today's price-would reap a substantial profit.
Coming Yukon Railway Plan
Preparations are now well advanced for the submission of a capital reorganisation plan to stockholders in the White Pass and Yukon Railway. Under the aegis of Close Brothers, the City investment bankers, a scheme has been formulated to deal with the maturity at the end of this year of the 5 per cent. consolidated debentures and the 6 per cent. income debenture stock. It will also set up a new capital structure and replenish working capital resources. What are the prospects for stockholders ? So far al the 5 per cent. consolidated debentures are concerned, I think it is safe to assume that they will be paid off at par plus interest arrears. These arrears now amount to approximately £135 gross per £100 of stock, or £74 net allowing for tax deduction. On the face of it, therefore, the current market quotation of £185 looks too high. The explanation of the apparent discrepancy is that when the repayment terms have been formally approved the stock will appeal to charitable institutions who by their special position in relation to income tax are able to collect the arrears net. I do not suggest that the stock will immediately command its full net value of £235, but it should certainly become saleable to these institutions at upwards of £200 once the scheme goes through.
In the market the 6 per cent. income .debentures are quoted around £75. Here again I think there is scope for improvement. If reports can be trusted, holders will be offered £40 in cash, about £45 in new second mortgage debentures and 40 common shares of no par value in the reorganised company for every £100 deben- ture now held. If one values the £45 of second mortgage debenture at £40, which should be a conservative estimate, and the 40 common shares at £10, the total adds up to £90. I base these estimates on the company's current earnings position. Thanks to a steady increase in gross traffics, net earnings will cover the new second debenture interest with an ample margin and leave about 30 cents a share earned on the reorganised common shares. The equity of a company with considerable potentialities in a dollar territory is surely worth 5s. when it is earning at an annual rate of over Is. These income debentures look attractive as a speculative purchase.
Cheap Rubber -Share With the commodity at a new post-war peak in Mincing Lane, rubber shares are making a disappointing response in Throgmorton Street. Not even the surprisingly good results announced by United Sua &tong, a recognised market leader and the principal company in the Guthrie group, have kindled much enthusiasm. Investors still seem to be obsessed by the political risks of acquiring a financial stake in Malaya and are holding off. In relation to the yields now obtainable on first-class rubber shares this attitude seems to me to be over-cautious. Take the case of United Sua Betong whose operating profits for 1949 rose from £146,400 to £259,900 and which has just announced a dividend of 174- per cent. against 12+ per cent. for 1948. At £2, which still includes the dividend of ls. 10d. net, the £1 shares are offering a yield of nearly 9 per cent. Just about right, most people would consider, assuming that last year's profits are close to what may reasonably be expected for 1950. But were they ? I doubt it. The average price of rubber in the London market in 1949 was just under ls. a pound, or lfd below the 1948 average. The sharp increase in the company's earnings was due to a reduction in costs through more efficient methods of production, an increased dividend from its investment in Oil Palms of Malaya and better results from the tea crop. So far this year rubber has been fetching an average of 3d. a pound more than last year ; a still higher dividend expected from the Oil Palms investment, and tea prospects are good, The indications are, therefore, that the 1950 results will outstrip last year's by a substantial margin. United Sua Betong around 40s. no* look one of the outstandingly cheap shares in the rubber market. They have this advantage over many others—that they command a firm market, and it is usually possible to get a close quotation for them.
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