Valuation and risk at Lonrho18 Mar 2013 13:47
"Valuation and risk at Lonrho"
18 March 2013
In valuing Lonrho as an investment, it's difficult to know what to believe and where to check. Lonrho's management obviously values their plantations and Fastjet. But can their judgement be relied on? Under Accounting Standard IAS 41 they were able to book in a large profit (effectively recognising advance profit on 'biological assets') which, while legal, adds to the risk metrics. A few months later Geoffrey White reported unexpected local weather damage but, curiously, "no impact on the biological asset valuation."
Likewise, an enormous sum in the accounts hangs on Fastjet's success. The risks of this venture seem to mount daily as goodwill and management's credibility become increasingly undetectable in the face of unfavourable international press and looming courtroom battles.
Occasionally, the dry rot of creeping bad news bursts through the thick brushstrokes of Lonrho's rosy PR painters and we have an update such as that of 4th February. Shareholders suffer again as the price collapses.
The current price is now below the directors' options and it's therefore timely to highlight how those options were scandalously repriced. Before repricing in 2009, the directors options were mostly priced at 44p and 34.5p. Lonrho's share price had fallen so disastrously after four years of their management that the options were no longer 'incentivising' and they decided to reprice them - to 6.5p. Just over three years on, and further value destruction, their options are back underwater. Management may, yet again, be lacking an incentive and be a potential 'flight risk.' This is surely one risk that should not trouble any long-term investor or fan of good corporate governance.
kibu
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