Lonmin only for the bold

British Land a speculative buy; Better wait for Merrydown to fizz

Shares in mining companies with exposure to South Africa have been hammered since the summer, when a leaked document suggested that a Black Empowerment Charter would require 51 per cent of assets to be transferred to black-owned businesses within 10 years.

Mining stocks sank on the news and have only recovered a fraction of their value since the Mining Charter indicated a lower level of 15 per cent of assets within 5 years and 26 per cent within 10.

Lonmin is South Africa's third-biggest platinum producer and has felt the full blast of the changes – its shares sank from nearly 1,300p to 710p on the space of a few weeks.

Though the transferred assets must be paid for at full value, not simply given away, there are other costs such as 40 per cent of senior managers to be black by 2007 and improved medical and housing support.

Though Lonmin shares have started to recover since the government detailed the changes (they closed 14p down at 851.5p yesterday), there is still some uncertainty over whether the government may seek further transfers or whether this is a one-off event. All this has clouded Lonmin's outlook, which has already been affected by a 27 per cent fall in the average basket of platinum-group metals in the past year. This alone knocked $225m off operating profits in the year to September. That the full-year profit impact was held to $160m was due to cost control.

On the plus side the dividend has been increased 12.5 per cent, though cover is down to 1.7 times. There is also a strong chance the company will return more cash to shareholders.

But the costs of the new open pit mines will be higher than the existing operations. And though the shares trade on a lowly p/e of 10, assuming current-year profits of $179m, the political risks may deter all but the boldest investors. Avoid.

British Land a speculative buy

Such has been the level of "noise" surrounding the corporate governance issues at British Land that it has consistently drowned out the performance of the business. The problem is that the two are inextricably linked.

Yesterday's full-year profit figures showed a 19p jump in net asset value to 822p and an 8 per cent rise in net rents to £249m. But the shares, up 11.5p at 426.5p, still trade at a 48 per cent discount to NAV compared with Land Securities' 39 per cent.

The big discount is partly due to higher debts with gearing of 100 per cent at British Land, if joint ventures are included, compared with Land Securities' 50 per cent. Another factor is its high exposure to the City of London office market which accounts for 39 per cent of British Land rentals. But the management issue is vital with uncertainty over when John Ritblat will separate the roles of chairman and chief executive and how this will be done weighing on the shares.

Without management and strategic change the discount will not narrow significantly, though the buy-back of 900,000 shares at 426p yesterday is helpful. Real value will only be delivered by a change of board structure and the subsequent sale of some assets or the splitting up of the company.

The key here is the announcement of two new non-executive directors who start in the New Year. Their credibility will be on the line if they fudge the corporate governance issues. British Land has quality assets and there is upside in the shares if the board does its job. A speculative buy.

Better wait for Merrydown to fizz

With cider losing out to ready-to-drink tipples such as Barcardi Breezer and Smirnoff Ice, Merrydown has had to rethink its strategy and now thinks of itself as a soft-drinks company. Almost 60 per cent of turnover comes from the soft drink Shloer brand with the balance from cider – almost the reverse from four years ago.

Financially, that strategy has started to pay off. Pre-tax losses narrowed to £329,000 in the six months to 30 September from losses of £425,000 a year before. Group sales were up 3 per cent at £8.29m including a 17 per cent rise in sales of Shloer compared with a 5 per cent increase in Merrydown Vintage cider. Merrydown reckons there is much more to come from Shloer and it has recently launched a dilutable version of the drink, "Real Fruit Blend".

Not that Merrydown is abandoning cider. It acknowledges the market for cider is falling, but says it is also polarising between the "pile'em high sell'em cheap" brands and the premium brands such as its own Merrydown Vintage, which should help keep it growing.

Teather & Greenwood, the company's broker, is looking for a profit of about £1.4m for the year. This puts the stock – up 0.5p at 41.5p yesterday – on a forward multiple of 10.

That rating does not seem particularly demanding. But given the new strategy is still unproven investors would do better to wait a while.