With a population now approaching one billion, Africa is delivering strong economic growth driven by increasing political stability and burgeoning oil, natural resource and agriculture sectors. The continent provides significant investment opportunities. Starting from an incredibly low base, everything a developed nation takes for granted is required; infrastructure, power, transport, consumer goods, financial services. All of these sectors are needed for successful development of the growing African economy which is forecast to grow 6 - 8 % in 2010. Leading the way is China, already injecting US$ billions for off-take agreements to secure long term access to oil and resources.
A London listed company, Lonrho ( LONR ) has a one hundred and four year history of investing across the continent and as a result the skills, local knowledge and credibility to access this emerging market. Lonrho was reinvented from a standing start in 2006, and in three years has developed a business that operates in five sectors across seventeen countries. Lonrho is only focused on African growth and only invests in Africa.
The Lonrho strategy is to develop core service industries that are central to enabling economic development and to deliver these with international standards of management and operations supported by modern equipment and decades of Lonrho experience. By focusing on five key sectors that are integral to the development of the continent, in seventeen countries, Lonrho believes that it significantly reduces and diversifies the political and commercial risks associated with a young developing market such as Africa.
Lonrho assets in infrastructure comprise of 63% equity ownership in Luba Freeport, in Equatorial Guinea and 56% equity ownership in Kwik Build, in South Africa. The Free Port acts as logistics centre for oil and gas industries and has been developed to take advantage of growing production levels in the Gulf of Guinea (USA have stated their intention to source up to 25% of their oil needs from the area). Revenues are up 12% on last year and two major clients are currently negotiating tenant contracts. Kwik Build specialises in construction of building structures from lightweight materials. These are insulated/pre-fabricated permanent or movable structures (school rooms, clinics, worker rooms etc). Revenues have been lower in last reportable quarter, as the South African government had slowed orders during the period of elections.
The agriculture assets comprise of 51% equity ownership in Rollex Pty in South Africa and 51% equity ownership in John Deere distributorship in Angola. Rollex sources produce from southern Africa, processes it and delivers to local and international markets. Revenues have increased 44% over last year with supply volumes growing strongly for three of South Africa’s large domestic supermarkets, Woolworths, Spar and Pick n Pay. The John Deere franchise is to be launched shortly in Angola and the level of sales enquiries has so far been encouraging, according to the management.
The transportation assets comprise 49% equity ownership in a low operating cost airline, Fly 540 which is based in Kenya and a 100% equity ownership in Lonrho Air. The strategy for the airline is to provide south to north and east to west coverage of the continent, as well as provide a distribution network for long haul carriers flying into Africa. The company is managed by ex-British Airways personnel and currently operates in four countries, with operations in Angola and Ghana set to start in 4Q2009.
The natural resources assets comprise of 24% equity stake in Lonrho Mining which holds a diamond concession at Lulo in Angola, 7% equity stake in Consolidated Africa Mining in Cameroon and 2% equity in South West Energy in Ethiopia.
The support services assets include 100% equity ownership in a bottled water operation called Swissta, in Mozambique and DRC, as well as a 65% equity stake in an IT solutions business called Bytes & Pieces in Mozambique which has also been rolled out in South Africa and Zambia.
The hotel assets comprise of 59% equity ownership in Hotel Cardoso in Mozambique (around $105 a night tariff and some 80% occupancy level), and a re-development and management contract awarded to Lonrho by the government of DRC on Karavia Hotel (to start operations in late 2009).
Lonrho also owns 27.9% of London-listed Lonzim Plc (LSE: LZM), a Zimbabwe investment vehicle (assets include a pharmaceutical distribution business, the recently acquired Leopard Rock Hotel and Lonrho’s Fly540 airline in Zimbabwe).
The company’s capital is made up of £14.9m worth of debt (£2.8m of this being current) and £85.4m worth of equity. Gearing is low at Debt to Capital ratio of 14.9%. The estimated cost of capital is 16.4% (including the continent risk premium of 5%).
In six months to 31 March 2009 Lonrho’s revenue came in at £42.7m (£17.8m in previous comparable period). High operating costs consistent with the development cycle of the business caused the EPS for the period to be nil (loss of 0.8 pence a share in previous comparable period). It must be noted that these figures (come from published accounts) include gains on disposal of intangible assets and gains on disposal of discontinued operations, and hence must be adjusted if intrinsic and not indicative value is sought.
Total assets at 31 March 2009 were £138.5m (£108.1m in previous comparable period). The increase is due to the impact of acquisitions (Rollex and Kwikbuild) and the raising of £14.6m through the issue of 308.8m new shares in December 2008. Cash stood at £13m (£19.4m at 31.3.08). Total liabilities came in at £53.1m (£26m in previous comparable period). The increase is also explained by the effect of acquisitions. Current ratio was 1.1 at 31 March 2009 (weaker than the ratio of 1.7 in previous comparable period).
Net cash from operating activities at 31 March 2009 was negative at £10.7m (negative £17.7m in previous comparable period). The improvement is largely attributable to the improved trading performance with working capital movements and foreign exchange movements largely offsetting each other. CapEx in six months to 31.3.09 amounted to £8.3m. Operational losses and CapEx investments were financed by the issue of share capital (see above). Lonrho currently pays no dividend.
Based on the company’s £85.4m of equity and 799m shares outstanding we have a net book value of £0.11 a share. The current share price of £0.07 is discounting this value pretty deeply. To close the gap, management needs to continue to demonstrate a road to profitability of its existing asset. If it can do that (income margin needs to get well above 15% of revenue), Lonrho’s Pan-African dream may well come true.