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Amstel Securities says 'buy' Lonrho with 18p target, forecasts £502 mln revenues within 5 yrs

Last updated: 20:21 22 Dec 2009 GMT, First published: 21:21 22 Dec 2009 GMT

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Broker Amstel Securities initiated coverage of Africa focused investor Lonrho (AIM: LONR), giving it a 'buy' rating and setting the target price at 18 pence per share, or an 80% premium to the stock’s current market value of around 10 pence per share.

The premium in valuation was largely due to the value of Lonrho’s 63% stake in Luba Freeport on Bioko Island, Equatorial Guinea, which Amstel said was “the most interesting element of Lonrho’s asset story,” putting its value at £125 million. The valuation was based on its favourable location, the underlying 25 year concession with an option to extend it for another 10 years along with growth opportunities, invested capex (capital expenditures) and forward-looking EBITDA (earnings before interest, taxes, depreciation and amortisation).

The value of the group’s other assets was estimated at £90.1 million, which, along with the unused cash proceeds from recent private placements, estimated at £23.9 million, puts Lonrho’s value at £114 million, or a 10% premium to the current market price. Amstel concluded that this meant that any investor in Lonrho gets the 63% stake in Luba for free.

The broker’s valuation of 18 pence was a mix of sum-of-the-parts and a discounted cash flow valuation. The 2011 estimates were used as a base year as this is expected to be the first year that the company will be free cash flow positive. The target price of 18 pence would imply an enterprise value/EBITDA multiple of 5x, while the recent IPO (initial public offering) of African CFAO with what Amstel called much lower growth opportunities than Lonrho was completed at a forward looking ratio of 9.

The broker expects the company’s capex to grow to £25 million in 2010 as a result of expansion capex of the Luba Freeport and aircraft purchases (for low-cost airline Fly540) from £16.8 million in 2009, also expecting an annual growth of £1 million in 2011-2014, leading to an amount of £29 million by 2014.

As a result of a growing profitability, Lonrho will be able to fund additional investments internally with Amstel forecasting revenues to reach £503.8 million within five years.

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