Lonrho profiting from African growth, but delays can be frustrating.

I was expecting an RNS from Lonrho today to announce the start-up of operations for their subsidiary company FLY540 in Angola. However as of yet no RNS has been submitted and there is no news to indicate that service has started. This is not new however as there are frequent delays in the start-up of new operations by Lonrho. I believe this is due to the bureaucracy that still persists in Africa. It can however make this a frustrating share. I will however try and explain why I believe in the potential of Lonrho.

About Lonrho

Lonrho is an Africa focussed investment company and they are actually over 100 years old and at their peak were one of the biggest companies in the UK. However their subsequent demise was extraordinary and they ended up in 2005 with just a majority stake in a hotel in Mozambique. New management took over with the aim of restoring Lonrho to some of its former glory. Significant funds were raised and an expansion plan was implemented. The company now comprises of businesses in 5 strategic areas; Agribusiness, Transport, Infrastructure, Hotels and Support Services. I will explain in more detail each of these business areas.

Agribusiness

The agribusiness comprises of; A 100% stake in Rollex, a company that sources, packs and delivers fresh fruit, vegetable, meat and fish produce from across Africa, delivering to an expansive, international network of retail clients. A 51% stake in Oceanfresh Seafoods a company that processes and exports fresh fish mainly sourced from Mozambique. A 51% stake in Johne Deere Angola the exclusive distributor of John Deer equipment in Angola and a 100%stake in John Deere Mozambique the exclusive distributor for Mozambique. The company is also developing agricultural projects and bringing land back into production. Mainly to source additional produce for Rollex, but in certain instances also for the local market. This division is currently Lonrho’s biggest and has an enormous growth potential as new agricultural projects are brought on stream across Africa and new export markets are established.

Tranportation

Lonrho’s transportation division comprises of a 100% stake in Lonrho aviation, which in turn owns 49%of FLY540 Kenya, 90% in FLY540 Tanzania, and 60%in each of FLY540 Angola and FLY540 Ghana. These last two are yet to commence flights, but the start-up of the Angola operation should be imminent. FLY540 flew 250,000 passengers last year and is expected to show strong growth this year. Air travel in Africa is essential as often roads are in bad condition and go through a hostile environment. FLY540 is aiming to be a Pan-African carrier with regional hubs in Kenya, which is already established and Angola and Ghana which are not yet operational. Once these hubs are operational FLY540 aim to offer connecting flights between the hubs and then easy transfers to local destinations, this would give them a strong competitive advantage.

 Infrastructure

The infrastructure division comprises of 2 investments; A 63% stake In Luba Freeport, a port in Equatorial Guinea servicing the Oil industry. A 62% stake in Kwikbuild a supplier of prefabricated buildings. Luba Freeport is based on Bioko Island and offers a deepwater port which services the growing oil industry in the Gulf of Guinea. It has a string competitive advantage in that is island based and therefore there is less chance of unrest as there is for example in nearby Nigeria. The port is seeing steady growth as it attracts more customers and it has the potential to grow as it is not surrounded by other buildings. This is potentially a very lucrative asset for Lonrho. Kwikbuild is a South-Africa based company which supplies pre-fabricated buildings to schools, mining operations and medical clinics. As the global economy grows the company should see an increased demand, especially from the mining sector.

 Hotels

The hotels division comprises of a 59.04% stake in Hotel Cardosa in Mozambique and a 50% stake in the Grand Karavia hotel in the Democratic Republic of Congo. In addition to the stakes the company also has a hotel management division which manages these 2 hotels as well as the Leopard Rock hotel in Zimbabwe. The hotel Kardosa is an established hotel and after renovation is seeing it’s average rate per room increase and it’s occupancy rates are also high. The Grand Karavia, is a recently renovated hotel which has only just reopened. It is the only international class hotel in Lubumbashi and as such has set rates at $350 a night.

Support Services

The support services division comprises of a 65% stake in Mozambique based IT company Bytes and Pieces, a 50% stake in IT companies CES South Africa and CES Zambia and a 50% stake in South African based IT company Indit. Apart from investments in these IT companies this division also comprises a 100% stake in Swissta a company that is supplying bottled water via stakes in various bottling plants throughout Africa. As the African economy grows, the need for high quality IT services will increase and Lonrho is in a good position to benefit from this. Water is also a necessity and apart from the one off capital investment in bottling plants it does not use up much working capital.

Other interests

Apart from the 5 operating divisions Lonrho also hold a 24.65%stake in Aim listed Lonzim (LZM) which is a Zimbabwe focussed investment company. They also hold a 15.04% holding in Lonrho Mining (LOM), which is a diamond explorer with a project in Angola.

New phase in development

Over the last few years there has been significant dilution as the company has bought new companies and invested in the current ones to bring the towards profitability. In the future there should be less need for further dilution as all the companies are cash-flow positive on a operational level and should be able to self fund bolt on acquisitions. That is not to say that the company won’t raise more equity if an attractive opportunity arises. Now that the basis for the company has been established it will be interesting to see how it progresses in the future. I for one believe that the company is well placed to benefit from future growth in Africa and the market seems to agree as it is capitalizing the company at a premium to its net assets. However I believe they have a competitive advantage and it will be hard to replicate and create such a diversified Africa play without spending a lot more money that the current Lonrho market capitalisation.

What one needs to understand with this company is that they often over promise and under deliver when it comes to time scales, but that ultimately the company is moving in the right direction. I’m not going to go too much into specifics when it comes to figures and what the company could be worth as I believe Amstel securities have done a much better job than I could hope to achieve. You can download their research report(from December last year) here.