COMMERCIAL Market Hopes For Gains Once Price Freeze Goes

Press, Volume CVIII, Issue 31761, 19 August 1968, Page 10

COMMERCIAL Market Hopes For Gains Once Price Freeze Goes

The lifting of the price freeze today, and the possibility that many companies will be able to pass on increased costs to the consumer—in higher prices—injected renewed buying pressure on an already firm New Zealand sharemarket last Friday. As a result, the Reserve Bank’s share-price index for New Zealand shares is likely to be around the 1290 mark, against a record 1340 level reached in February, 1965.

Also helping to keep the market buoyant last week was an optimistic report by Henderson and Pollard, the large Auckland-based timber merchant and joinery manufacturer, that it might not be able to meet demand, and better-than-expected profit results from Lane Walker Rudkin, and Wright Stephenson.

However, the basic two reasons for the sharp rise on Friday surround today’s end to the price freeze—after its imposition two months ago when the Arbitration Court refused the first application for a general wage increase.

The first bullish point is that the price freeze will be lifted. There was a possibility that it would be extended, when it was first introduced—but this fear has been removed.

The second point is that the 5 per cent general wage increase now granted by the Arbitration Court means that companies may be able to pass on some of their increased costs to the consumer. This might not have been possible had no wage rise been allowed. Inflation Threat And arising from this increase in costs, and perhaps prices, is the threat of inflation. Equity stock, if well selected, can be a good hedge against this. Certainly, cash held now will not be able to buy as much as this time next year. Lane Walker Rudkin recovered from the slight profit fall of 2.2 per cent in 1967, when it increased its profit by 4.7 per cent, to about $689,000 in the latest year. The immediate effect was to increase the share price by 10c to 152 c. The yield at this is 4.1 per cent on the steady 12) per cent dividend. Wright Stephenson Wright Stephenson’s shares rose 12c to 133 c, after the company announced a profit only 1.1 per cent lower at $1,985,000. However, the profit can hardly be compared to the previous year’s when an apparent fall in gross earnings can be offset by a

change in accounting policy. In the latest year, the benevolent fund has carried the bonus payment to the staff-pension account instead of being paid by the company. A truer picture of how the company fared may be gauged by the relationship of the profit-and-loss account to the balance-sheet when the full accounts are released. But the main point of interest from the investors’ view is the maintenance of the 9 per cent dividend which, because of the low cover in 1967 (1.4 times), could have been reduced if the profit had been significantly lower. On the latest price, the dividend yields 6.8 per cent It appears that many had expected a dividend reduction to either 8 or 7 per cent Consolidated Brick Another share to show a good rise during the week was Consolidated Brick, which also has recently released its full accounts. The share rose 31c ex dividend to 230 c, and yields 3.5 per cent on the 8 per cent dividend. Two factors appear to lie behind this price rise. The first is the joint venture with the Georgia Kaolin Company of the United States into the investigation of china-clay deposits, but the second and more important factor is the possibility of a bonus issue. In the past, the company has adopted a most conservative dividend policy. The steady 8 per cent dividend has been covered at least twice since 1965, and profits have steadily risen. In the latest year, land and buildings of subsidiaries have been written up to the latest Government valuations, resulting in capital reserves rising $804,631 to $1,094,373 This would support a bonus

issue as generous as one-tor-three. If profitability can be maintained, then a steady 8 per cent dividend on such an issue would still be adequately covered.

No bonus issue has been made in the last 10 years. This and the conservative dividend policy have kept the price of the share consistently below the 200 c mark, while the profits and future prospects, especially in exporting, would suggest a price well in excess of this. Retail sales in Australia should exceed slm this year. Shareholders may be rewarded for their patience. Charles Begg Charles Begg’s loss of $131,189 is insignificeant alongside the reported fall of $453,622 in shareholders’ funds, shown in the advance report to shareholders. Because of this, it is surprising to see the shares reach 75c last week, although they eased to 70c at the close on Friday. Although the directors are confident of paying an interim dividend in the current year, it might first be wiser for the invester to look closely at the contents of the annual accounts (yet to be released) before becoming optimistic over the chances of an interim dividend. At around 70c, an investor has better prospects in finance companies, both for income and capital growth. K.P. Drug It is also difficult to reconcile the capital and revenue profits made by K.P. Drug on its sale of the Westfield land and buildings to New Zealand Farmers’ Fertilizer. These profits amounted to $547,718, yet shareholders’ funds, after discounting retained profits of $206,816, rose only $218,918. A note to the accounts shows that the land and buildings appreciation capital reserve is $332,386 lower at $745,660. The explanation for this is another note that says that this reserve was reduced

after the sale of the Westfield works to cover disposals of land and buildings since the last revaluation.

One might conclude from this that although a capital profit of $285,247 was made on the sale of the Westfield land and buildings on the cost price, the sale price was somewhat less than the appreciation amount estimated and shown in the appreciation-reserve account Or, in other words, although the assets were sold for $285,247 more than their purchase price, they fetched $332,386 less than their estimated value. Excellent Position K.P. Drug, by virtue of its 34 per cent holding in Dominion Fertiliser and 16 per cent holding in N.Z. Farmers’ Fertilizer, is in an excellent position to take its share of any increase in fertiliser use in the future. The company in its latest report is relatively optimistic over its future prospects, and the planned one-for-three issue of convertible notes will be used partly to continue the heavy expansion of the last few years. At 165 c, the shares yield 4.8 per cent on the 8 per cent dividend, cum rights to the convertible note issue. The dividend would have to return soon to about 10 per cent to make the shares attractive in the short-run.