In today’s article, I’ll explain why I believe that platinum miner Lonmin (LSE: LMI) and fashion firm French Connection Group (LSE: FCCN) could both deliver 100% gains for shareholders at today’s prices.
Lonmin
Lonmin shares seem to have settled at around 1.2p, following the firm’s recent rights issue. This price was the theoretical ex-rights price for the firm’s stock, based on a pre-rights issue price of 10p.
This is relatively good news for shareholders. If Lonmin’s shares had fallen dramatically below 1.2p, this would mean that the rights issue had failed to stop the share price falling.
Lonmin shareholders are now in an interesting position. The company has minimal debt and has committed to cutting costs to make the company “sustainable and viable”.
The City has turned more positive on the firm over the last month. Broker forecasts for 2016/17 have risen sharply and suggest the firm will make a post-tax profit of $20m next year.
However, I think that shareholders need to be cautious. These forecasts could be based more on hope than reality. After all, many of the analysts producing these forecasts work for institutions who will have been involved in the rights issue, either as advisers or investors. It’s not in the City’s interest for Lonmin shares to collapse again immediately.
During the year ending 30 September, Lonmin’s production costs fell by 24%. The firm is promising more cuts but we don’t yet know whether it can generate positive cash flow at current platinum prices.
However, if Lonmin’s restructuring is successful, then I think the shares could easily double in value quite quickly.
French Connection
French Connection shares rose by 21% this morning, after the firm reported strong sales of its winter collection. The group remains a turnaround investment, but today’s update could be a sign that shareholders may be rewarded for their patience in 2016.
Like-for-like sales rose by 0.2% during the last quarter, compared to a fall of 6.1% during the same period last year. Gross profit margin was 1.5% higher than last year, thanks to an increase in the level of full price sales.
There was good news elsewhere, too. French Connection’s licensing agreement with DFS for furniture sales has been extended for another five years.
Best of all, perhaps, the firm has managed to close another seven loss-making stores and will receive a £2.4m compensation payment when it vacates its Regent Street store in London in March.
This is a significant step towards dealing with the company’s biggest problem, its loss-making chain of shops. French Connection clothes are sold through its own stores and wholesale to other retailers. The wholesale division is profitable, but the retail division is not.
Many of the firm’s shops are tied into costly long-term leases. Exiting these and focusing on profitable wholesale and licensing sales is the key to the group’s recovery. Today’s figures suggest that real progress is being made in this area.
In the meantime, the shares remain backed by net cash and trade at a 25% discount to book value, even after today’s gains. In my view, French Connection shares could easily double over the next few years, as the firm’s transformation continues.
