Market Approach Is More Realistic

Press, Volume CVI, Issue 31317, 13 March 1967, Page 17

Market Approach Is More Realistic

Although last week’s firm share market recovery came as something of a surprise, the reasoning behind it may have been more realistic than the pessimistic atmosphere that pulled down rapidly the market in the first two months of this year.

Against the background of excellent company news it seemed that the market was too concerned with the bad forecasts for the balance of payments and the gloomy economic prognosis, and that prices had fallen too low.

Now that the taxman has been and gone —itself enough to pre-occupy the investor at this time of the year—the market could give some thought to the economic situation, and its reappraisal was now favourable.

All indications are that there is quite an amount of money around, and that investors are tired of waiting. The announcement that Parliament may not be convened until May 3, and that the Government wants to see how the present measures work out, has given a strong impression that no further restrictive measures will be announced.

Overseas Loans

The overseas assets position has strengthened lately, and the Government has borrowed very successfully.

When these factors are taken into account together with buoyant company reports, the optimistic appraisals of the two companies— J. Wattie Canneries and Unit Subdivisions—that are floating debentures, and the high yields now obtainable on many shares (51 shares in February yielded more than 7 per cent) it is perhaps not surprising that in preference to waiting any longer many investors are choosing the devil they know.

N.Z. Steel

New Zealand Steel’s performance in holding its price since listing in January should give satisfaction to those who took up shares in the placement last year. The 10s shares, at present paid to 2s 6d, have fluctuated between 2s 6d and 2s 9d. At this price shareholders —who have a five-year wait before their first dividend—can sell out without a capital loss if their patience or circumstances run short.

With such a long wait ahead before payment of the maiden dividend, it is perhaps unusual that these shares should keep near to their par value, especially considering the weak state of the market this year. As an example, Property Securities, whose 10s shares are at present paid to 7s 6d, sold on Friday for ss. The company expects to pay its maiden dividend this year—its third year in business.

Firming Points

But there are several points that place New Zealand Steel in a unique, if not an immediately rewarding, position. The first “bull” point is that the company must eventually be one of the leading, if not the top company, in New Zealand, and a “must” as a blue-chip share. Because of this, most of the 7000 shareholders would ignore the absence of immediate returns in the way of dividends, for the long-term advantages that include profitability as well as security. This, and the fact that 45 per cent of the £6.5 million share capital is held by the Government (which will not sell if not in the interests of other shareholders) and another 7.6 per cent is held by Guest, Keen and Nettlefolds, of Britain, means that there could be little selling pressure. When then, would be the best time to buy into N.Z. Steel, bearing in mind the present lack of return? The chance of gaining entry into such a major industry at around par value is too good an opportunity for a new investor who wants

such a stable share in his holding. It seems at present that N.Z. Steel will stay around par value for some time, especially with present economic conditions. Payment of calls usually brings an easing tendency to shares, and calls, each of 2s 6d, are due on May 31 of this year, 1968 and 1969. The intending investor must weigh the share price against prospects of capital gain and the closeness to the time of payment of maiden dividend, in deciding when to buy into N.Z. Steel. Selling Assets Two listed companies— Petrous Industries of Dunedin and M.K. Manufacturers

of Auckland—have decided on the unusual step of selling their assets. Both companies have been concerned about their affairs and it seems that such a move, if successful, will be more beneficial to shareholders than the alternative of attempting a recovery. Petrous Industries has made losses since 1962 and shareholders last received a dividend (8 per cent) in 1960. According to its balance sheet as at August 31, the company’s ordinary capital is £45,000 but shareholders’ funds were £33,318. The reason for this erosion of shareholders’ equity was accumulated losses, amounting to £15,646, offset by a capital reserve of £3964. This would mean theoretically, that each 20s share is worth 14s lOd. They last sold in 1965 for 6s. M.K.M., on the other hand, last year made a profit of £21,510 in the year to December 31, 1965, which did not cover the 10 per cent dividend which took £25,305. Directors said in February that they were not happy with the affairs of the company. Sales and profitability in most departments had declined. Each of the 5s shares had a net tangible asset backing of 8s 4d at the end of 1965, but directors said that they expected to realise the assets to the equivalent of 6s 6d for each share which last sold at 6s 6d. Results Interesting The results of these moves will be most interesting, if only to see what the assets realise. Accounting convention is that assets be valued at cost, current replacement value, or net realisable value, whichever is the lowest. Theoretically then, the assets could realise more than their book value, because of this conservative approach. Selling a company’s assets is not to be confused with voluntary liquidation which leads to cash being returned to shareholders. However, this is usually the step after realisation but this will be up to the respective companies.