The Investment Column: Lonrho takes unfair beating

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The Independent Online
Conglomerates have been on a hiding to nothing recently. The market dislikes diversified groups and has marked the shares of companies such as BTR, Hanson and Tomkins down accordingly.

If that is the case, you might have thought, breaking up would be the way to win investors' hearts. Not a bit of it - as Hanson, and now Lonrho, have found, news of a demerger has tended to put further pressure on the share price. Lonrho has more reason than most to feel hard done by. Dieter Bock has done a good job over the past three years in rescuing the eccentric rag-bag of unrelated businesses Tiny Rowland put together.

His efforts have been rewarded with steady outperformance in the share price but since last month's announcement that the company was pressing ahead with plans to spin off its hotels and African trading businesses from its core mining operations, the shares have fallen 16p to yesterday's 169p, underperforming the rest of the market in exactly the same way that Hanson did after it detailed its own four-way split.

The comparison is harsh on Lonrho, because in the case of Hanson details of the demerger set alarm bells ringing on the group's dividend paying potential.

For a yield stock like Hanson that was disastrous for the shares, highlighting as it did the fact that, contrary to market wisdom, the company might actually be worth more than its constituent parts. In Lonrho's case, the reverse would appear to be true.

Charles Kernot, an analyst at Paribas Capital Markets, has run a model of Lonrho that suggests a combined value of its three main divisions of approaching 235p a share, even assuming a discount for the mining arm to account for the uncertainty surrounding the involvement of Anglo American in what will, after the split, be the continuing Lonrho business.

Even after that discount, Kernot believes the mining side could be worth 115p a share. In addition the hotels arm, expected to be sold off in an offer of shares in September might be worth an additional 78p and the African trading interests, which Dieter Bock plans to head up, chip in a further 80p.

A total valuation of 273p, or 235p net of central debt.

The fact that the shares have actually fallen since the demerger announcement suggests that the market simply does not believe that it will take place as promised, or that the company will be unable to achieve the sort of prices Mr Kernot has detailed in an increasingly nervous market.

In the light of recent problems with the new issues market, some caution would seem appropriate, but the potential upside seems adequate compensation and the shares are good value.