Lonrho expansion plans gathering pace

Lonrho's (LON:LONR) deal to expand its budget hotel business, under the easyHotel umbrella, is the latest in a series of new developments that are expected to push the African conglomerate through an exciting period of growth.

The group’s agri-distribution business will also be integral to these plans and an acquisition last week was a major step forward.

The £4.5 million deal to acquire a leading airborne export business: Grindrod PCA, sealed Lonrho’s position as one of Africa’s major food exporters.

The combination of Lonrho’s existing logistics business and its newly acquired assets will create South Africa’s largest airfreight exporter, which will in-turn drive a whole host of synergies for the enlarged unit.

Through its expansion, the acquisitive firm is building the necessary infrastructure to meet high levels of demand from major international food retailers in the USA, Europe and the Far East.

A deal to supply fish to 500 Wal-Mart stores in the United States, announced on Monday, is the another example of the growing demand for African produce.

While there is much more to Lonrho - it is a bona fide African conglomerate that recently stepped up from AIM onto the main market of the LSE - it is the high-growth potential of the agri-business that is currently the main focus for investors.

We spoke to chief executive Geoffrey White about the group’s exciting expansion plans.

Zooming in on the potential for the agri-business, chief executive Geoffrey White said: “There is a well know statistic that’s worth repeating. Around 60 percent of the world’s arable land is in Africa, and only 10 percent of it is productive.” 

“As such there is a real opportunity for Africa to become a significant supplier of produce to the world. So the potential scope for us to continue developing a major agricultural export business is huge. 

“Our philosophy is that we want to deliver from the field to the global retail shelf.”

He added: “We’ll plant it, grow it, nurture it, fertilise it, pesticide it, process it, pack it and send it off to the supermarket shelves, and that may be a shelf in Cape Town, in London, New York or Beijing .”

“We are seeing very strong growth in demand from the food retail sector,” White said.

“There are around a billion consumers in Africa, and the continent's major supermarkets are in the middle of major expansion programmes to meet growing consumer demand from the continent. It is estimated that African consumer spending will top US$ 1.6 trillion by 2020.

Specifically, White pointed out that two of South Africa’s largest supermarket chains, Shoprite and PicknPay, both of which are supplied by Lonrho, are rapidly expanding through the rest of Africa. 

“As a supplier of fruit and vegetables to supermarkets we are seeing that market grow very strongly,” White said.

“We are seeing this growth within Africa and also we see our export business growing incredibly strongly.”

Indeed Lonrho recently started exporting fruit from Africa to retailers in the Far East, and White reckons this could become a very strong market for the company.

It is in this context of export growth that yesterday’s acquisition is particularly important. Crucially, with airside apron access the new business unit enhances the group’s existing infrastructure, so it will also provide a material boost to the Lonrho Logisiticsbusiness.

Grindrod PCA, headquartered at Johannesburg International Airport (JIA), is a leading exporter of fruit, vegetables and fish. As well as its facilities at JIA it also operates international standard cold store and logistics facilities in Cape Town, Port Elizabeth and George.  

Damian McNeela, analyst at Lonrho’s broker Panmure Gordon, reckons the Gridrod deal is an excellent strategic fit for the company, and he expects the enlarged business will have access to improved freight rates with international airlines and improved purchasing power.

In a note to clients yesterday the analyst repeated a ‘Buy’ recommendation with a 23p price target, which suggests the potential for a 35 percent rise from the current price of 17p.

Wednesday’s deal is the acquisitive conglomerate’s latest add-on within its agriculture business unit, following on from last month’s acquisition of South African fish processing and cold store business, Fish-on-Line. 

“Fish-on-Line was a natural add-on for us,” White explained. “It has a strong and experienced management team in the wholesale fish business. 

“But more importantly the deal gave us access to the infrastructure, expertise and the volumes to meet the kind of international export demand that we’ve been seeing from the supermarkets.”

Speaking about the potential for more acquisitions in the future, White added: “The core business is there, and when bolt-on opportunities present themselves, we have the appetite to take them.

“We will continue to expand the agri-business, through both internal growth and further acquisitions.”

Alongside bolt-on acquisitions and the group’s organic expansion, Lonrho has grown in stature from a corporate level too. A case in point was the group’s recent promotion to the main market of the London Stock Exchange.

“The move up from AIM to the Main Market has raised our profile an awful lot, and it has also brought several new large institutional investors onto the share register. From a corporate perspective that has been a very strong bonus for us.”

Lonrho carried out a share placing in May, shortly after April’s main market listing, to accommodate a clutch of significant new investors.

“Financially we were in a good position, so the funding was about bringing on board these new blue-chip investors, who had become more interested in Lonrho in light of the premium main market listing.”

Indeed the City’s growing appetite for African investments is perfectly aligned with Lonrho’s strategy.“There is an increasing amount of interest from more significant, mainstream investors who are looking at the growth opportunities in Africa.”

“We’ve seen very, very strong interest.”

White added: “In my opinion Lonrho is a very good way to be invested in Africa. We are a proper conglomerate. 

“We diversify risk, not only geographically by being active in seventeen different countries, but also by sector,” Chief executive Geoffrey White told Proactive Investors. “We’re involved in several sectors that are all growing fast. Importantly these are standalone businesses to mitigate emerging market risks. If one sector or region gets into trouble it is not going to drag any of the other businesses down with it.”

“This is not like European markets. I’m not squabbling with my competitors for a few perentage points of market share, these are fundamental growth opportunities to meet huge new and existing demand. 

“As far as revenues are concerned we see very strong growth opportunities between now and the end of the 2012 financial year.”

“Next year is going to be very strong for us.

“We’ve settled down the foundations for all the businesses we want to be in, we understand the sectors well. The market is incredibly strong in terms of both the domestic markets in Africa and our export markets."