Cambria Africa: Lodges $10 million claim against Lonrho

Southern Africa focussed investment company Cambria Africa has launched legal proceedings in the High Court against Lonrho, the Africa-based conglomerate, issuing formal claims totalling around $10 million. Cambria is alleging fraud in two of the claims and we believe that an out-of-court settlement is a likely scenario. For the time being, we prefer to be prudent and keep our forecasts unchanged and keep our target price unchanged at 14.63p. While legal cases can at times be very costly and unpredictable, we note that a settlement could lead to a significant increase in our target price.

Legal proceedings

Cambria is seeking to rescind the settlement agreement previously reached ($2.7m), resulting from alleged fraudulent misrepresentations made by Lonrho during the settlement negotiations. It is also making claims in relation to monies which are alleged to have been unlawfully transferred by Lonrho for the benefit for one of Lonrho’s subsidiaries. Finally, Cambria is claiming for $8.8m related to three of Cambria’s previously owned aircraft, which were leased to subsidiaries of Lonrho. Cambria alleges that Lonrho made fraudulent misrepresentations to the company relating to the purchase of one of the aircraft by Cambria from Lonrho. In addition, it is alleged that Lonrho committed breaches of contract, negligence and breaches of fiduciary duty resulting in unpaid maintenance reserve and lease charges; the diversion of insurance claims proceeds by Lonrho to one of its subsidiaries which were properly due to Cambria; and loss of value of the aircraft, which amongst other things had missing engines, avionics and propellers when repossessed. Interesting, Cambria, in conjunction with its advisors, is continuing to make further investigations into the situation. Watch this space.

Valuation

Any income from the legal proceedings is not currently factored into our forecasts, so any successful outcome will increase our target price. We do note that the potential value of the claims is in excess of the company’s current market cap. Of course the outcome, the costs and timing of any legal settlement is uncertain. Using the DCF as our preferred method of valuation, we have derived a target price of 14.63p based on the business alone. Also, we have associated no value for the firm’s Southerton properties, which have been valued at up to $1m or 0.62p/share. We see the settlement of the legal claims and possible sale of the firm’s Leopard Rock Hotel as potential drivers of the shares in the short/medium term. Key risks to our forecasts relate to the execution of Cambria’s growth plan and the improvement in the Sub-Saharan Africa region taking longer than expected.