TIDMAOF
RNS Number : 9108L
Africa Opportunity Fund Limited
30 April 2015
30 April 2015
Africa Opportunity Fund Limited (AOF.L and AOFC.L)
Announcement of Annual Results for the Year ended 31 December
2014
The Board of Africa Opportunity Fund Limited ("AOF", the
"Company" or the "Fund") is pleased to announce its audited results
for the year ended 31 December 2014.
Highlights
-- AOF's ordinary share net asset value per share of US$1.011 as
at 31 December 2014 decreased by 17% from the 31 December 2013 net
asset value per share of US$1.221.
-- AOF's C share net asset value per share of US$0.912 as at 31
December 2014 decreased by 9% from the 17 April 2014 placing price
of US$1.000.
-- AOF closed a share placing which raised US$29.2 million through the issue of C shares.
-- AOF's Ordinary shares and the C shares were admitted to
trading on the London Stock Exchange's Specialist Fund Market
("SFM") effective 17 April 2014. Concurrent with the listing on the
SFM, the Ordinary shares were cancelled from admission to trading
on AIM.
-- As at 31 December 2014, AOF's investment allocation for its
Ordinary shares was 76% equities, 20% debt and 4% cash and for its
C shares was 40% equities, 14% debt and 46% cash.
The Company
Africa Opportunity Fund Limited ("AOF" or the "Company") is a
Cayman Islands incorporated closed-end investment company traded on
the SFM market of the London Stock Exchange ("LSE"). Effective 17
April 2014 AOF was cancelled from trading on AIM and admitted to
the Specialist Fund Market of the LSE. Additionally, on 17 April
2014 AOF raised US$29.2 million in the form of a "C" share
offering. AOF's net asset value on 31 December 2014 was US$69.7
million and its market capitalisation was US$64.9 million.
Chairperson's Statement
2014 Review
2014 was an eventful year for the Africa Opportunity Fund (the
"Fund" or "AOF"). Shareholders voted to extend AOF's life until
2019 and, at the same time, AOF also raised new capital in the form
of a $29.2 million "C" share offering and moved its shares from AIM
to the Specialist Fund Market of the London Stock Exchange. Those
corporate decisions of our shareholders endorsed AOF's status and
record as a rare Africa-focused, dividend paying, closed-end
investment company - and therefore one that positions our investors
as patient acquirers of excellent companies on the African
continent at reasonable to cheap prices.
2014 was a buoyant year for world markets and a difficult year
for the Fund. To provide some basis for comparison, South Africa
rose 1%, Nigeria fell 24%, Kenya rose 17%, and Egypt rose 20%. In
non-African emerging markets, China rose 54%, Brazil fell 13%,
Russia fell 42%, and India rose 35%. In developed markets, Japan
fell 4%, the US rose 14%, and the UK fell 5%.[1]
AOF's 2014 results incorporated the effects of tougher financial
conditions in some of AOF's investment countries such as Ghana,
Nigeria, Zambia, and Zimbabwe. In certain instances such as in
Ghana, those conditions included declining currencies and, with
nearly 30% of AOF's portfolio invested in Ghana at the beginning of
the year, AOF suffered its share of Ghana's tribulations. Ghana's
nominal gross domestic product declined 17% from $42.5 billion in
2013 to $35.2 billion in 2014(2) while its currency the Cedi
declined 26%. Declines in nominal GDP in the 15%-20% range in a 12
month period hinted at a contraction in economic activity more
reminiscent of the Great Depression than even the Great Recession
of 2008 and 2009. Although quietly and reluctantly, Ghanaian
households have had to accept their straitened circumstances,
deferring for many dreams of a middle class life, yet, quietly and
persistently, policyholders of Enterprise Life Assurance Company, a
subsidiary of Ghana's Enterprise Group in which the Fund is
invested, maintained the premium payments for their policies to
protect their families and to save for their futures; while modern
shopping malls and office towers continued to open in the midst of
Ghana's woes. Both these trends pointed to the steady African
demand for the amenities of an orderly urban existence, suggesting
that Africa should prove no different from other continents like
Asia and South America where investing in companies providing
services to satisfy that demand has been a reliable path to
long-term profits.
Although AOF's audited net asset value for its ordinary shares
(or "A shares") declined by 17%, including dividends, while the A
share price fell by 25.5% and the net asset value of the "C" shares
declined by 9% and its share price fell by 4.9%, the 2014 results
must be taken in the context of AOF's long-term orientation. In
that context AOF's thesis and strategy of seeking to purchase the
strong growth prospects of various African industries without
paying too much for them at the time of investment means the Fund
remains an excellent investment vehicle for the long term
investor.
A long term investor pays much less for the income stream of a
profitable African company than he would on almost any other
continent.(3) This thesis is supported by the experience of another
of AOF's investee companies. Sonatel, a company working in the
telecommunications sector - a sector that continues to grow
profitably in Africa - was able to more than double its net profits
in Guinea to $71 million. Guinea is one of the centers of the Ebola
virus epidemic in West Africa. Guinea has lost, tragically, 2365
people to the virus.(4) Despite that epidemic, Sonatel increased
its investment in Guinea by 54% and its Guinean subscribers by 39%
from 3.2 million subscribers to 4.5 million subscribers at the end
of 2014 thereby illustrating the resilience of those industries
focused on sating Africa's thirst for modern amenities.
AOF's strategy in 2014 focused on searching for inexpensive
entry points into industries with strong growth prospects in Africa
- a strategy that drove its regional exposures. One region of
Africa which had a strong 2014 was East Africa. AOF's investments
in Tanzania and Uganda -Tanzania Breweries, enjoying a total return
of 96% in 2014, and Stanbic Uganda - benefited from the benign
macro-economic settings of those two countries. This at a time when
inflation in Tanzania in 2014 was 4.75%(5) and the Tanzanian
shilling depreciated 8% against the US Dollar. Uganda's 2014
inflation was 4.3% while its currency depreciated 9% against the US
Dollar.(6) The Fund expanded its North African exposure through
purchases of investment-grade debt issued by Moroccan phosphate
fertilizer producer and the equity of a Moroccan telecommunications
company. Its Southern African additions were in Zimbabwean real
estate, consumer finance, and electric utilities.
Outlook
2015 promises to be a challenging year for African investors.
The gross export proceeds of Africa, as a primary
commodity-exporting continent, are set to decline sharply in tandem
with its deteriorating terms of trade. The oil price and iron-ore
price collapses of 2014, continuing in 2015, are emblematic of the
loss of export earnings. Even if Nigeria's loss as an oil exporter
is Botswana's gain, the tightening financial conditions in the
United States of America will be felt on African shores. Gradually,
but inexorably, many African central banks will raise interest
rates, dampening the performance of their capital markets. Three
notable exceptions should be the central banks in francophone
Sub-Saharan Africa which follow the monetary policy of the European
Union, North African countries like Morocco which strive to keep
their currencies competitive with the Euro, and net oil importing
countries like Egypt and Kenya that are also not major commodity
exporters to China. AOF's investment approach in this environment
will be to focus even more on identifying goods and services for
which African consumers are willing to spend scarce US Dollars or
their local currency equivalent, regardless of domestic political
or economic conditions. Sectors which have been dominated by the
state, but are opening up to private sector participants are of
especial interest. Many of those sectors were viewed as "natural
monopolies" that have evolved into havens of inefficiency,
subsidies, and losses. Pent-up and unsatisfied demand of African
companies and consumers has been the inevitable outcome in those
havens. Thus, infrastructure and suppliers of services to Africa's
infrastructure industries, for example, will be a growing theme in
AOF's 2015 investing activities. In the arena of commodities, there
are a few commodities which remain in short supply even today in a
weak global economy. AOF will seek to gain exposure to those
commodities.
In continuance of its strategy, AOF will pay particular
attention to situations in which it is able to buy natural
resources at steep discounts to their implied net present value
based on spot prices.
AOF's C shares are to be converted into ordinary shares of AOF
when a minimum of 85% of the C share capital has been invested and
a satisfactory outcome has been achieved in the Shoprite matter.
The Board has determined that AOF should await developments in the
Shoprite case before proceeding with this conversion. It is hoped
that this conversion will be consummated in 2015.
Concluding Thoughts
The peaceful and successful conclusion of Nigeria's presidential
elections of March 28, 2015 is a cause for great celebration. As
the largest economy in Africa, with the biggest population and
faced with delivering meaningful economic growth to its ethnically
and religiously diverse population, it serves as a light-house
illuminating Africa's political trajectory. The peaceful transfer
of power from President Jonathan to President-elect Buhari is
positive for Nigeria because it affirms the supremacy of the
Nigerian electorate, the Rule of Law, and Nigeria's constitution.
In memorable contrast to former Ivorian president, Laurent Gbagbo,
President Jonathan's congratulatory call to President-elect Buhari
was a statesmanlike gesture that augurs well for Nigeria's future.
Yet, the rejection of incumbency by Nigerian voters continues a
trend that is becoming more common in Africa. Ghana has changed its
parliamentary majority twice in 2000 and 2008. Senegal denied
former President Abdoulaye Wade a third term in 2012, replacing him
with current President Macky Sall. Most recently in December of
2014 Mauritian voters threw out their former Prime Minister - Navin
Ramgoolam - in a landslide to express their displeasure at
constitutional proposals to increase the powers of the Mauritius
presidency in preparation for his occupying that office. Over the
years, the Fund has evinced a strong preference for investments in
African countries which are becoming stronger democracies. AOF's
view is that the institutional and legal setting in which
investment decisions are made becomes more durable and predictable
with repeated experiences of peaceful transfers of power in
experienced democracies, leading to a wider range of potential
investments for AOF. Today, the dominant powers in each Sub-Saharan
Africa region are all tested democracies, entrenching relatively
predictable and peaceful environments for the conduct of commerce
and investments. Therefore, as always, we remain optimistic about
AOF's prospects.
In closing, we extend our thanks to our shareholders for their
support and partnership and look forward to continuing to work with
you in the years to come.
Dr. Myma Belo-Osagie
Chairperson
April 2015
[1] Reference indices are calculated in US Dollars using:
Nigeria NSE Allshare Index, South Africa FTSE/JSE Africa Allshare
Index, Nairobi NSE Allshare Index, Egypt Hermes Index, Russia MICEX
Index, Brazil IBOV Index, the Shanghai composite index, the India
SENSEX Index, the S&P 500, the FTSE 100, and the Nikkei
225.
2 Ghana's 2014 Bond Prospectus, p. 16. The Budget Statement and
Economic Policy of the Government of Ghana for the 2015 financial
year, delivered November 19, 2014, Appendix 1C, Nominal GDP for the
Medium Term. Ghana's 2014 nominal GDP of 113.4 billion Cedis
converted into US Dollars at the end of year rate of 3.22
Cedis/$.
3 MSCI Africa Index, ex South Africa had a P/E ratio of 12 and a
dividend yield of 3.35%; MSCI Africa Index had a P/E ratio of 16.66
and a dividend yield of 2.75%. MSCI Asia, ex Japan had a P/E ratio
of 13.42 and a dividend yield of 2.4%. Comparable P/E ratios and
dividend yields for MSCI Latam (14.66 and 2.76%), MSCI North
America (18.84 and 1.98%), MSCI Emerging Europe and Middle East
Index (8.2 and 3.9%), MSCI Emerging Asia (13.9 and 2.18%). Data as
of April 20, 2015.
4http://www.cdc.gov/vhf/ebola/outbreaks/2014-west-africa/case-counts.html.
5 Tanzania National Bureau of Statistics, Press Release of
January 8, 2015: National Consumer Price Index for December
2014.
6 Uganda's 2014 Composite Consumer Price Index, Uganda Bureau of
Statistics.
Manager's Report
2014 marked the seventh full year of operation of Africa
Opportunity Fund ("the Fund" or "AOF"). During the year the Fund
issued shares, which trade currently as "C shares" until they are
merged with the original issue of the Fund's shares (hereinafter
referred to as "A shares"). The A shares had a return of -17.7%,
including dividends, while the C shares had a return of -9.0%. At
year-end, AOF held $51.7 million in equity securities, $12.1
million in debt securities, $16.8 million in cash; and derivative
and short sale liabilities equal to $11.5 million. In class terms,
the A shares held $40.6 million in equity securities; $6.7 million
in debt securities; $5.7 million in cash; and derivative and short
sale liabilities equal to $10.5 million. The C shares held $11
million in equity securities; $5.4 million in debt securities;
$11.1 million in cash; and derivative and short sale liabilities
equal to $1.0 million. The Fund's underlying end-of-year holdings
were in Botswana, Cote d'Ivoire, the Republic of Congo, Egypt,
Ghana, Morocco, Nigeria, Senegal, South Africa, Tanzania, Uganda,
Zambia, and Zimbabwe. Our lodestar for measuring the Fund's
portfolio is our estimate of its appraisal value per share. That
somewhat subjective estimate measures the Manager's view of the
long-term attractiveness of the portfolio. It was $1.22 per share
at the end of 2014 for the A Shares, in comparison to a closing
price of $0.86 and a 2013 appraisal value per share of $1.32; and
$1.04 per share for the C Shares.
2014 was a difficult year for the Fund. Not only did the Fund's
two classes suffer large losses, but the Fund's performance lagged
several Africa indices. This unsatisfying performance has continued
in 2015. An amalgam of mark-to-market losses that are the likely
concomitants of rising real interest rates in mismanaged economies,
losses in our portfolio of commodity producers, errors, and slow
progress on the Shoprite front were the ingredients for our humble
pie. AOF's 2014 performance notwithstanding, we remain optimistic
because the underlying free cash flow in the Fund's major holdings
continues to grow at a decent pace in US Dollars. Many of AOF's
companies are continental leaders in their industries, whether
measured by profitability or balance sheet quality or market
position. Sooner or later, AOF will enjoy the market's
acknowledgement of those underlying financial data.
We are steadfast in believing that Africa's own secular
prospects remain undimmed, positive, and powerful.
The 2014 performances of different African capital markets were
molded by the worsening terms of trade of most African exporters
caused by a decelerating Chinese economy, the end of the US Fed's
QE program, and displays of fiscal profligacy by some African
governments. This triple cocktail of macro causes undermined the
living standards of African consumers, reduced the profitability of
the African corporate sector, and lowered the external value of
most African currencies. It was brutal. In order of depreciation
against the US Dollar: the Ghanaian Cedi fell by 26%; the Zambian
Kwacha by 14%; the Naira by 13%; the CFA Franc by 11%; the Moroccan
Dirham by 10%; the Rand by 9%; the Ugandan shilling by 9%; the
Tanzanian shilling by 8%; the Botswana Pula by 8%; the Kenyan
shilling by 5%; the Egyptian Pound by 3%; and the Guinean Franc by
1%(7) . The depth of the respective drops in the external value of
those African currencies depended on a few variables: the sobriety
of a government's budget; whether a country was an oil, precious
metals, or base metals exporter; whether a country was a net
importer of oil; whether a country exported other goods or services
enjoying rising prices; whether bilateral or multilateral donor
inflows to a country were rising or falling; and the degree to
which a country's currency was pegged to the Euro. Ghana had the
complete set of poisonous variables: huge budget deficits; net
exports of both oil and gold; and declining donor inflows. Botswana
was the opposite: sober government finances; a net oil importer;
and an exporter of diamonds, a commodity which bucked the general
pattern of declining commodity prices. Interest rates and inflation
tend to rise in the typical African open economy experiencing a
fall in the external value of its currency, leading to a tightening
of its domestic monetary conditions. Tightening monetary
conditions, in turn, repress the valuations of listed securities
while easing monetary conditions lead to buoyant markets. Thus, the
stock markets of net oil importers like Egypt and Kenya, swaddled
in loose monetary conditions, soared in 2014 while oil and metals
exporters like Ghana, deficient in fiscal discipline, suffered
steep falls.
We owe AOF's shareholders an explanation for AOF being
underweight in soaring markets and overweight in sinking markets.
We hunt for the best African opportunity in a specific industry. An
ideal industry has a product or service in short supply. If the
best opportunities are in one region of Africa, so be it, in our
view. Having found an investment prospect, we study the
macro-economic and macro-political patterns in its country (or
countries) of operation to estimate an appropriate cost of capital,
or discount rate, for the selected prospect. The enterprise value
of that investment prospect may be less than the intrinsic value of
that prospect, applying the selected discount rate, in which case
we acquire securities of that prospect. Alternatively, that
intrinsic value of that prospect may be less than its enterprise
value, forcing us to ignore that prospect. One of the more
subjective aspects in assessing a country's patterns is
understanding how its electoral cycles shape the quality of its
political and economic governance. We tend to overestimate the
dangers in a country recovering from political calamities, such as
Cote d' Ivoire, Egypt, or Kenya, thus imposing an unduly high cost
of capital screen for potential investments. Furthermore, in some
cases, strong companies in soaring markets were less attractive
than competitors in other markets. For example, AM Best, the
leading credit rating agency for the American insurance industry,
preferred the catastrophe assessment system of Continental
Reinsurance listed in Nigeria over that of Kenya Re listed in
Kenya. We paid a performance price for owning Continental
Reinsurance instead of Kenya Re since Kenya Re's total return in
US
Dollars was positive in 2014 while Continental Reinsurance
posted a negative total return.
One of the intermittent conundrums we face as long-term African
investors is whether to invest in, or divest from, a profitable
company blessed with strong prospects and an attractive valuation
because it operates in a country suffering severe macro-economic or
political difficulties. The sheer ubiquity of African economies
reliant on one or two primary commodities such as cotton or copper
for export earnings exposes investors to the dangers of gyrating
interest rate cycles or steep decelerations in economic activity in
any one of those economies. "Severe" refers to national problems
like Mali plunging into civil war in 2012 or Zimbabwe devoting more
than 70% of its current government budget to wages for its civil
servants or the Arab Spring or Nigeria losing half its export
proceeds in a year from the plunge in oil prices. One solution to
those conundrums is to avoid all companies located in severely
troubled countries. In other words, "better safe than sorry". We
prefer to focus on whether an industry in a country has a capacity
to maintain or grow its profits in US Dollars over a 3 to 5 year
period. Enterprise Group in Ghana presented that dilemma to AOF in
2014, as we suffered a total return of -23% in US Dollars. So did
Copperbelt Energy in Zambia, Continental Reinsurance in Nigeria,
and Sonatel in Mali and Guinea to name a few other AOF investments.
Ghana's sovereign debt was downgraded in March six rungs below
investment grade to B3, with a negative outlook, by Moody's. The
Ghana government was running budget deficits of "Greek" proportions
even before the collapse of the oil price in the second half of
2014. As a percentage of Ghana's gross domestic product, its budget
deficit was 4.0, in 2011, 11.5 in 2012, 10.1 in 2013, 9.5 in 2014,
and is forecast to be 7.5(8) in 2015. Current account deficits, as
a percentage of gross domestic product over the same period, were
9.0, 12.3, 13.4, and 9.9 (for 2014)(9) . Those percentages can be
explained partially by the 28% decline in the gold price since the
beginning of 2013, the 50% decline in the oil price since June
2014, power outages, and the steady reduction in donor funding over
the last few years. Thus, heading into 2014, it was predictable
that the Cedi would suffer a crisis of confidence manifest in its
losing value against the US Dollar. We were taken aback, though, by
the 25% depreciation of the Cedi against the Dollar. Unfortunately,
2015 and 2016 suggest that the Cedi will continue its depreciating
fall. Why should AOF's shareholders own the securities of a
Ghanaian company? Two reasons. The first reason is that, since the
trauma of Ghana's economic difficulties is not spread evenly among
the industries and companies in Ghana, some industries and
companies will emerge stronger from those difficulties. Private
power generation is one such industry. Property and casualty
insurance constitutes a second example as the rising replacement
value of existing assets raises the cost of self-insurance and
under-insurance. The second reason is that a few Ghanaian companies
continue to report some of the strongest returns within their
respective African industries, in the midst of Ghana's woes and
despite their own subdued results. For example, Standard Chartered
Bank Ghana's return on equity declined to 41% in nominal terms (and
25% in real terms) and its return on assets was 6.4%. It should
struggle to maintain those return ratios in 2015 as non-performing
loans climb in a tough Ghanaian operating environment. Still, it
should remain one of the most profitable banks on the African
continent. Investing over the long haul in the best African
companies should be rewarding, in US Dollar terms, despite storms
of national difficulties that have to be navigated
periodically.
Enterprise's 2014 revenue was 203.9 million Cedis ($66.5
million) versus 157.8 million Cedis ($76.3 million) in 2013.
Reported cash flow from operations plummeted from $20.1 million in
2013 to $5 million in 2014. However, after adding back investments
made by Enterprise in those periods and recognizing the profits
belonging to Enterprise shareholders disclosed in its embedded
value statement, but yet to be recognized in its financial
statements, Enterprise's gross operating cash flow before
investments attributable to shareholders declined 8% from $18.3
million in 2013 to our estimate of $16.8 million in 2014.
Furthermore, it is deepening its US Dollar earning capacity by
entering the commercial office real estate market. It also remains
the largest private insurance group in a country with an insurance
penetration rate slightly above 1% of its gross domestic product,
much less than Kenya's approximate 3% of GDP. As per capita income
rises, the consumption of savings and insurance products in a
country rises more rapidly until a country's insurance penetration
rate reaches global norms. Ghana is far from global norms,
therefore investing in Enterprise should prove to be an investment
in a company facing vistas of rapid and profitable growth in real
terms for several years. Should AOF divest from Enterprise because
of the lowly credit rating of its sovereign? Our answer is to take
advantage of Ghana's abysmal sovereign credit status to add to our
Enterprise holdings so long as we believe that Enterprise is both
materially undervalued and will be able to increase its profits in
US Dollars at a decent clip in the next 3 to 5 year. Through its
partnership with Santam - South Africa's largest property and
casualty insurance company - in property and casualty insurance,
Sanlam - South Africa's second largest life assurance company -,
its focus on introducing new insurance products, and its top
position in Ghana's new private pension administration industry, it
should be able to meet our expectations. Collateral confirmation of
the potential of Ghana's insurance industry comes from the entry of
all the top South African insurance groups into Ghana, as well as
the arrival of Allianz from Germany, Prudential from the United
Kingdom, and the recent announcement of Axa of France about its
intent to enter Ghana. It must be admitted, though, that we are
assuming that a peaceful democratic Ghana will accept the sober
fiscal straitjacket of the International Monetary Fund to
strengthen its capacity to raise rapidly its per capita income and
economy in the future.
Another sector guaranteed to enjoy years of rapid profitable
growth in Africa is the electric utility industry. Almost every
African country today is busy fashioning its own lexicon to
describe the unpredictable interruptions in the supply of
electricity from its national electricity grid. The sound of diesel
generators can be heard in all regions of sub-Saharan Africa. Yet,
all of Africa consumes less electricity than Spain. For years, the
sale of electricity at tariffs which were too low to support
continuous reinvestment to keep up with African population and
industrial growth has been the continental norm. That norm is under
assault because of the constraints on economic activity and social
well-being imposed by the insufficient electricity generation,
transmission, and distribution facilities. The days of state-owned
electricity monopolies are ending. Therein lies a type of
investment opportunity which appeals to AOF: regulatory regimes in
transition clouding over several years the eventual emergence of a
profitable private industry. Copperbelt Energy PLC in Zambia
presented AOF with the same dilemma as Enterprise. Our Copperbelt
investment experienced an 18% decline in value in 2014. Zambia's
economy has been under stress, as its principal
export-copper-suffers from the declining appetite of China for
infrastructure and real estate investment. Copper prices dropped
17% in 2014. Yet, Copperbelt Energy is a conduit not only into
electricity transmission to Zambian and Congolese copper mines, but
also an electricity distribution company for Nigeria's capital city
- Abuja - and an investor in Nigeria's newest hydroelectric dam -
the Shiroro Dam. Its product-a kilowatt/hour of electricity-is
denominated in US Dollars or the local currency equivalent of US
Dollars. Copperbelt invested $200 million in Nigeria. What is
intriguing is that, as a consequence of the large amount of debt
assumed by Copperbelt to make its Nigerian investments and its $198
million loss incurred in 2014 in Nigeria, the Zambian markets
accords a negative value to its Nigerian portfolio. The market is
willing to pay for only its profitable Zambian operations, despite
its Nigerian operations generating $4 million of cash flow from
operations.
We elected to increase AOF's holding in Copperbelt Energy,
despite Zambia's macro-economic difficulties.
It is time to make some observations about AOF's portfolio of
commodity producers. 2013's steep decline in the gold price was
exceeded in 2014 by an even steeper collapse of the oil price in
2014. Crude oil declined 50% in 6 months. In US Dollar terms,
platinum fell 12%; copper fell 17%, manganese fell 14%; rubber fell
41%; and palm oil fell 18%. The underlying reason? Somnolent global
growth, in spite of an awakening US economy, encountered surging
supplies stimulated by several years of high commodity prices. It
is painful irony to recite commodity price declines since AOF's
chairman expressed misgivings about the dangers faced by African
commodity producers from a weakening China as far back as 2010 and
we expressed some anxiety in last year's report. It has taken
longer than we expected for the harsh price implications of those
misgivings to mature into low export earnings for African companies
and countries. The A Shares had a 28% allocation to the commodity
sector at the beginning of 2014, primarily in bonds. We elected to
keep our equity holdings of low cost producers like Zimplats and
Societe de Caoutchoucs de Grand-Bereby ("SOGB") because of their
record of generating profits even in a low price environment. They
have not disappointed us in that regard. But, their
valuations have been crushed. SOGB was acquired in 2010 and 2011
at an average share price of 30,717 CFA Francs or $67. It is a
rubber and palm oil plantation subsidiary in the Bollore Group. A
few years ago, we owned also shares of its Nigerian affiliate -
Okomu Oil Palm Company PLC , and Societe Africaine de Plantations
d'Heveas. SOGB was the lowest cost plantation operator in our
plantation portfolio. Like many other companies listed on the
Bourse Regionale de Valeurs Mobiliers in Abidjan, average daily
trading volume is miniscule. Accumulating shares of African
companies with average daily trading volumes under $10,000 is
difficult and of unpredictable duration. Selling those shares, with
the expectation of reacquiring disposed shares at reasonable
prices, is fraught with as much peril because shares may not be
waiting to be summoned on to the market at reasonable prices when
one wants to own those shares. Thus, our approach is to ask whether
we are willing to be long-term owners of those companies. If we are
so willing, then we try to take advantage of mark-to-market losses
to add to our holdings over time instead of selling our holdings in
times of low prices. SOGB is one of the most productive of the
African rubber or palm oil plantations. Its palm oil yields per
hectare are higher than West African yields and approximate to
Malaysian and Indonesian yields because its palm oil trees grow in
water-logged troughs. Palm oil plantation productivity is higher in
South East Asia than in West Africa whereas rubber plantation
productivity is higher in West Africa than in South East Asia.
SOGB's rubber output began to rise in 2013 as rubber trees
replanted in 2005 and 2006 delivered their first wet cups of latex.
SOGB has also been encouraging small scale farmers living around
its plantation to expand their rubber tree holdings. Several years
of generally rising output lie ahead for SOGB, but probably
insufficient to compensate for the continuing drop in rubber
prices. An additional negative fact is that the Ivorian government
has increased the tax burden on plantations. What did we miss in
the global rubber industry? We failed to link the controversial
Thai payment schemes under which Thai small scale farmers sold
their agricultural produce above world prices to the Thai
government with a probable dumping of those stocks on to the world
market when the Thai government ran out of
money. Those schemes were harbingers of declining prices.
The 2014 journey of our senior secured Tizir bonds showed how we
reacted to the deteriorating revenues of a mining investment. Tizir
is a joint venture of Eramet of France and Mineral Deposits of
Australia. The joint venture was established by Eramet contributing
100% of its ilmenite processing plant in Tyssedal, Norway (one of 5
such smelters in the world and the only one in Europe), $95 million
in cash, and a commitment to provide a subordinated $45 million
loan to Tizir. Mineral Deposits contributed its 90% interest in the
Grande Cote mineral sands dredging project in Senegal, (the
Senegalese government holding the remaining 10%). Tizir had spent
$783 million on building the Grande Cote mine by the end of 2014.
The strategic basis for the joint venture is that the Senegalese
mine will supply the feedstock of the Tyssedal smelter. Tyssedal
currently smelts ilmenite to produce 200,000 tonnes of high TiO
sulphate titanium slag sold to pigment producers and 100,000 tonnes
of high purity pig iron sold to ductile iron foundries. Grande
Cote's nameplate capacity contemplates annual production of 85,000
tonnes of zircon and 575,000 tonnes of ilmenite, plus minuscule
quantities of rutile and leucoxene for a minimum period of 25
years. In fact, the current mineral resource statement of Grande
Cote discloses 21.7 million tonnes of heavy mineral sands
sufficient to support a 40 year life of mine. The Tyssedal smelter
is to be closed for 3 months in Q4 2015 for the relining of its
electric furnace, a 15% expansion of its smelting capacity, and
upgrading to allow Grande Cote's ilmenite to be smelted into
chloride titanium slag. Then, Tyssedal will be able to oscillate
between supplying sulphate titanium slag and chloride titanium slag
in response to market conditions. At Grande Cote's nameplate
capacity, Tizir will account for 7% of both global zircon and
titanium feedstock supply. Commissioning of the Grande Cote mine
commenced in Q2 of 2014. Despite delays caused by problems with
impellors and mining seals, the first shipment of ilmenite from
Senegal to Norway occurred in October and Grande Cote achieved 51%
of its nameplate capacity in Q4 2014, moving Tizir closer to its
goal of becoming a vertically integrated operation. That strategic
progress occurred amidst weakening zircon and ilmenite prices which
slashed Tizir's cash flows, forced it to increase its debt levels,
impaired the economic value of its mineral rights, and diminished
its asset and interest coverage ratios. Notwithstanding Tizir's
operational progress, it lost $156 million in 2014 and wrote down
to zero the entire $108.4 million value accorded to its mineral
rights in 2013. Tizir's 2014 book value was $502 million.
Anemic residential construction activity in China and Europe
have cast a pall over the mineral sands industry. The A shares had
8.8% of their December 2013 net asset value invested in Tizir bonds
priced at 104. That pricing dropped to 81 by December 2014. A 22%
drop in price for a bond is material bad news because it is the
equivalent of losing a few years' worth of interest. We sold half
of the A shares' Tizir bonds in August and September 2014 above
100. By the end of the year the bonds declined to 75% of par,
delivering significant mark-market losses. Including mark-to-market
losses and interest income, the A shares had lost 8.25% on their
Tizir bond holdings and constituted 4.3% of the net asset value of
the A shares. Two errors are obvious in retrospect. The first one
is that our valuation of the creditworthiness of Tizir's bonds
accorded excessive weight to the successful end of the Grande Cote
mine construction and insufficient weight to the downward glide of
mineral sands prices. The second one was investing more than 5% of
AOF's capital in one high yield debt issue around par. Profit is
capped in bonds priced at par and downside can be substantial. We
reduced our holdings as it become evident that Tizir's cash flows
were weakening. Nevertheless, we remain optimistic about the
soundness of the Tizir bonds.
One of AOF's rewarding commodity investments in 2014 was its
holdings in Pallinghurst Resources ("Pallinghurst"). Pallinghurst
is a specialist natural resources investment company which has
invested in new long life and low cost mines in emeralds and
rubies, manganese, and platinum. Pallinghurst owns indirectly 48%
of Gemfields. Gemfields extracts one quarter of the world's
emeralds from the Kagem mine in Zambia and mines Mozambican rubies.
It owns also 100% of Faberge, a small but iconic name in the luxury
jewelry segment. Pallinghurst entered the colored gemstones
industry because of a belief that the demand for colored gemstones
outstripped supply. Supply is constrained by a lack of uniformity
in the classification of rough gemstones that inhibits sales.
Gemfields introduced a proprietary grading system akin to that of
De Beers in the diamonds industry, coupled with auctions of its
graded rough gemstones. Its grading innovations have led to
gradually rising volumes and prices of rough gemstones sold at its
auctions. Faberge, by contrast, continues to bleed losses. Overall,
Gemfields has served as a profitable catalyst of a growing colored
gemstones industry. Pallinghurst's manganese and platinum mines are
shallow operations in South Africa. Pallinghurst's platinum mine in
South Africa incurred a loss for the 9 month period ended September
30, 2014 of $21 million. Its new manganese mine - Tshipi Borwa in
the northern Cape - doubled its annual mine production to 2.4
million tonnes in 2014 to become the 5th largest manganese mine in
the world. We chose to become shareholders of Pallinghurst from
March 2012 because it traded at a substantial discount to the value
of underlying mines and development projects, allowing AOF to get
exposure to new low cost and large mining assets at steep discounts
to the enterprise values of those assets. That discount gave AOF a
margin of safety. Subsequently, the underlying manganese and
platinum operations have moved from development into production,
reducing the risk-profile of Pallinghurst and leading to a rise in
its market capitalization.
One way of satisfying our orientation to seek absolute positive
returns for AOF, regardless of market conditions, is to invest in
mispriced securities. Early in 2014, the Fund bought shares of
Naspers, the South African print, pay-tv, and internet company, and
sold short its proportionate interest in Tencent, the spectacularly
successful Chinese mobile internet company. The pay-tv Africa
business of Naspers is a de facto monopoly and a generous source of
cash flow. Our goal was to accentuate the Fund's exposure to
Naspers' cash-generating Africa operations at a time when the
market accorded them a negative valuation. The Africa operations of
Naspers was overshadowed by the tilt of Naspers towards loss-making
e-commerce and the Internet. The Fund's gross long and short
positions in this paired trade constituted 14.6% of its end-of-year
net asset value. By the end of the year, this paired trade had
earned a gross return on capital of 10.6% and a 21x return on its
modest quantum of equity. It began to dawn on the markets that the
non-Tencent and Mail.Ru Internet investments of Naspers had a
private market value materially higher than what the stock markets
had been willing to recognize. The stock markets went from
temperamental pessimism to tepid optimism about the Internet
investments of Naspers and AOF obtained decent returns. It was the
initial mispricing of this paired trade which enabled the Fund to
prosper as a shareholder of Naspers.
Our review of 2014 would be incomplete without an update about
the Shoprite litigation. AOF sued Shoprite in the Western Cape High
Court of South Africa for its failure to pay dividends due to AOF
since August 2011. It sued in its capacity as a beneficial owner of
the Shoprite shares because Standard Chartered Bank, custodian of
those shares, refused to sue Shoprite in its capacity as the
registered owners of those Shoprite shares. Unsurprisingly,
Shoprite has challenged AOF's standing as beneficial owner, to
institute legal proceedings against it, acknowledging the right of
Standard Chartered, but not AOF. It will be a matter of first
impression under South Africa's new Companies Act whether
beneficial owners have a standing to enforce shareholder rights.
Shoprite requested that both parties submit their dispute to
arbitration in South Africa. We have in principle agreed to that
request because arbitration is more flexible and time efficient so
that it is highly likely that the arbitration will be concluded in
2015. Furthermore, in arbitration, the parties would usually agree
on a senior legal practitioner, with expert commercial background
in the subject matter, to sit as the arbitrator versus a court
process where parties do not have any control over which judges
should preside over their dispute. Meanwhile, the background of
judges on the bench is diverse and many of them do not have an
expert commercial background. Shoprite has civil and criminal
actions pending against its former transfer agent, Lewis Nathan
Associates, in another court in Zambia. The Lusaka High Court
decided that it was best for all the actions to be heard by the
same court to avoid possible conflicting judgments on the Shoprite
claims. Shoprite has joined the Fund's custodian and other
defendants to its other legal suits in Zambia. Shoprite has
conceded in its pleadings in our South Africa lawsuit, as well as
in its new statement of claims in the Zambian litigation, that
title to Shoprite shares acquired through stockbrokers other than
Stockbrokers Zambia was legally acquired. The effect of Shoprite's
concession is that AOF's title to 240,402 shares out of AOF's
679,145 Shoprite shares are no longer subject to challenge and
dispute. Shoprite is however insisting in its pleadings that it is
entitled to withhold unilaterally the payment of dividends in
respect of all of AOF's shares until the dispute in respect of
title has been settled. According to Shoprite, 438,743 of AOF's
shares, representing 10% of the year-end net asset value of the A
shares, were acquired in allegedly unauthorized trades in Shoprite
shares. To recap, we bought shares on the Lusaka Stock Exchange via
open market purchases only to learn later that some of the shares
sold were allegedly treasury shares of Shoprite and allegedly sold
in breach of Shoprite's mandate to its transfer agent. As a result,
Shoprite argues that valid title did not transfer to the Fund. Our
view remains unchanged. We are confident that AOF's action against
Shoprite will have a favorable outcome and title to all of the
Fund's shares will be confirmed.
The remainder of this report comprises commentary on two of the
Fund's largest investments and a restatement of the Manager's
investment philosophy.
Sonatel. This Senegalese integrated telephone operator listed on
the Bourse Regionale de Valeurs Mobiliers is the largest investment
of the A Shares. Sonatel has operations in Senegal, Mali, Guinea,
and Guinea-Bissau. It has 100% of Senegal's fixed line market and
58 of Senegal's mobile telephony market (a gain of 1 percent in
market share from last year), 54% of Mali's mobile telephony market
(a decline of 10% in market share from last year), 51% of Guinea's
mobile telephony market (an increase of3 percent), and 48% of the
mobile telephony market in Guinea-Bissau (a 2 % increase). Sonatel
continues to hold the number 1 position in all its markets, except
for Guinea-Bissau where it is the second out of three operators.
Its subscribers grew by 18% in 2014 to 26.3 million. At 27% for the
2014 financial year, Sonatel's net margin remains among the highest
in Africa. Sonatel's average revenue per user ("arpu"), a monthly
revenue statistic, declined by 5% to $5.20 from $5.50. Its
operating cash flow per subscriber declined modestly from $39 to
$38. Free cash flow per subscriber, after capital expenditure,
declined to $22. Data accounts for only 5% of Sonatel's revenues;
therefore, the pattern of rising arpu associated with telephone
operators with large consumers of data services through
smartphones, is yet to appear in Sonatel. Nevertheless, it is
encouraging that Sonatel has begun to test 4G services in Senegal.
Measures of Sonatel's profitability and financial sobriety continue
to be exemplary: a debt to equity ratio of 0.5%, a debt to total
assets ratio of 0.3%; and a return on average equity of 33%.
Indeed, as of March 31, 2015, with an enterprise value around $4.6
billion and a market capitalization of $4.8 billion, Sonatel had a
valuation, with a PE ratio of 14.5X and an enterprise value per
subscriber of $210, which acknowledged its superb financial
characteristics.
Stanbic Uganda. This is the largest bank in Uganda and a
subsidiary of Standard Bank of South Africa. It is the second
largest investment of the C Shares. Uganda is an inland oil
importing country which has discovered a couple of billion barrels
of crude oil. It is expected to become an oil exporter within the
next 5 years. Today, it benefits handsomely from the collapse in
crude oil prices. Years ago, Stanbic Uganda was owned by the
Ugandan government. Consequently, it has an extensive national
branch network which is useful in the retail banking sphere.
Control by Standard Bank of South Africa, as well as its own strong
balance sheet, qualify it as one of the best corporate banking
operations in Uganda. Inflation in Uganda is 1.5%, although it is
expected to rise to about 5% in the next 12 months. Based on its H1
2014 results, Stanbic Uganda's return on average equity is 33% and
its return on average assets is 4%. Stanbic's cost-to-income ratio
is on the high side at 52%, but it has a wide net interest spread
of 10%. Uganda's currency depreciated by 20% in 2011, when
inflation rose to 27%. Stanbic's impairment charges rose, in
response to the 2011 macro-economic stresses, and only started to
decline in 2014. Unsurprisingly, Stanbic's loans to customers rose
by 16% in H1 2014 versus H1 2013, as impairment charges diminished
in size. Equity capital, as a percentage of total assets, stood at
12.5% on June 30, 2014 while its loans to deposits ratio was 80%.
Stanbic's valuation is reasonable. Its market capitalization of
$574 million places it on a Price/Book ratio of 3.5x and a
Price/Earnings ratio of 12.4x. An investment in Stanbic Uganda
gives AOF diversified exposure to a current African oil importer
before its transformation into an oil exporter. There are two
principal drawbacks to an investment denominated in Ugandan
shillings. The first one is that the Ugandan shilling is
depreciating quite rapidly. It has depreciated by 9% against the US
Dollar since the beginning of this year. The second is that
Uganda's exports have been harmed by the civil war in southern
Sudan because that country imports many of its goods from Uganda.
Nevertheless, it seems axiomatic that Stanbic Uganda will be one of
the major banking beneficiaries of Uganda's strong economic
growth.
We end with a statement of our investing philosophy. The key
elements of the investment strategy for the Fund are:
Material discounts to intrinsic value: The Fund invests
primarily where and when an investment can be made at a material
discount to the Manager's estimate intrinsic value.
Company preference: The Fund prefers companies which demonstrate
both high real returns on assets and an earnings yield higher than
the yield to maturity of local currency denominated government
debt.
Industry focus rather than country focus: The Fund seeks to
invest in industries it finds attractive with little regard to
national borders.
National resource discounts: The Fund seeks natural resource
companies whose market valuations reflect a discount to the spot
and future world market prices for those natural resources.
"Turnaround" countries: The African continent is home to a large
number of reforming or "turnaround" countries. "Turnaround"
countries combine secular political reform with the opening of
industries to private sector participation.
Balkanized investment landscape: The Fund seeks to invest in
companies with low valuations in relation to peers across the
continent and uses an arbitrage approach to provide attractive
investment returns.
Point of entry: The Fund seeks the most favorable risk adjusted
point of entry into a capital structure, whether through financing
a new company or acquiring the debt or listed equity of an
established company.
Africa offers several attractive investment opportunities,
albeit planted in a briar of deepening doubts emanating from a
slowing China and a tightening US Fed. China's slowdown will reduce
the terms of trade of many an African exporter to China while
rising US interest rates will dissolve the enthusiasm with which
many institutional investors accepted low yields on African
sovereign bonds. Still, the Fund's own portfolio of undervalued
companies exemplifies Africa's appeal. As of the end of March 2015,
AOF's combined top 10 holdings juxtaposed high operational returns
with reasonable valuation ratios, signifying strong earning power.
Those holdings had a weighted average dividend yield of 3.8%, a P/E
ratio of 16X, a return on assets of 6.6%, and a return on equity of
13.4%. We remain interested in industries which have products in
short supply in Africa that rely more on domestic African demand
than global growth. We are hunting in those terrains for compelling
equity investments. We are unhappy about the losses inflicted on
our shareholders in 2014, but shall continue to build a portfolio
that delivers both capital growth and
income to the shareholders of the Fund.
Francis Daniels
Africa Opportunity Partners
March 30, 2015
7 Bloomberg
8 Ghana Minister of Finance Statement to Parliament on the
Implications of the Fall in Crude Oil Prices on the 2015 Budget on
March 12, 2015.
9 September 2014 Bond Prospectus for the Republic of Ghana
8.125% Bond
Responsibility Statements
The Board of Directors confirm that, to the best of their
knowledge:
a. The financial statements, prepared in accordance with
International Financial Reporting Standards, give a true and fair
view of the assets, liabilities, financial position and profit or
loss of the Company.
b. The Interim Investment Manager Report, and Condensed Notes to
the Financial Statements include: i. a fair review of the
information required by DTR 4.2.7R (indication of important events
that have occurred during the first six months and their impact on
the financial statements, and a description of principal risks and
uncertainties for the remaining six months of the year); and
ii. a fair review of the information required by DTR 4.2.8R
(confirmation that no related party transactions have taken place
in the first four months of the year that have materially affected
the financial position or performance of the Company during that
period).
Per Order of the Board
30 April 2015
AFRICA OPPORTUNITY FUND LIMITED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2014
Notes 2014 2013
--------------- -------------
USD USD
Income
Interest revenue 1,047,599 936,925
Dividend revenue 2,388,453 1,520,373
Net gains on financial assets and liabilities
at fair value through profit or loss 2 (c) - 13,330,102
Other income 333,657 180,000
Net foreign exchange gain 1,059,102 40,928
--------------- -------------
4,828,811 16,008,328
--------------- -------------
Expenses
Net gains on financial assets and liabilities
at fair value through profit or loss 2 (c) 12,092,559 -
Placing agent fee 8 937,987 -
Performance fee 5 - 2,361,064
Management fee 5 1,196,481 933,052
Brokerage fees and commissions 681,880 570,495
Net foreign exchange loss - -
Custodian, secretarial and administration
fees 343,193 286,545
Dividend expense on securities sold not
yet purchased 178,917 70,710
Marketing fees 25,137 -
Other operating expenses 8 452,009 73,660
Directors' fees 144,422 80,000
Audit fees 40,265 32,840
16,092,850 4,408,366
--------------- -------------
Profit before tax (11,264,039) 11,599,962
Less withholding tax (238,339) (154,652)
Decrease in net assets attributable to
shareholders from operations/ Total Comprehensive
Income for the year (11,502,378) 11,445,310
=============== =============
Attributable to:
Shareholders/Equity holders of the parent (11,436,911) 11,333,272
Non-controlling interest (65,467) 112,038
-----------
(11,502,378) 11,445,310
============= ===========
Basic and diluted earnings per share attributable
to the equity holders of the Company during
the year 2013 - 0.266
AFRICA OPPORTUNITY FUND LIMITED
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2014
Notes 2014 2013
----------- -------------
USD USD
ASSETS
Cash and cash equivalents 16,848,480 3,413,104
Trade and other receivables 1,036,802 1,114,001
Financial assets at fair value through
profit or loss 2(a) 63,822,689 55,473,931
----------- -------------
Total assets 81,707,971 60,001,036
----------- =============
EQUITY AND LIABILITIES
LIABILITIES
Trade and other payables 131,467 2,497,233
Dividend payable - 85,291
Financial liabilities at fair value
through profit or loss 2(b) 11,501,094 4,963,864
----------- -------------
Total Liabilities 11,632,561 7,546,388
----------- -------------
TOTAL LIABILITIES (excluding net assets
attributable to shareholders) 70,075,410 -
=========== ===========
EQUITY
Ordinary share capital 3 - 426,303
Ordinary share premium - 37,921,452
Retained earnings - 13,701,196
----------- -------------
.
Equity attributable to equity holders
of parent - 52,048,951
Non-controlling interest 340,230 405,697
----------- -------------
Total equity 340,230 52,454,648
----------- -------------
Net assets attributable to shareholders 3 69,735,180 -
Total equity attributable to equity
holders of parent and total net assets
attributable to shareholders 70,075,410 -
=========== =============
Net assets attributable to:
- Ordinary shares 3 43,099,112 -
- Class C shares 3 26,636,068 -
-----------
Net assets attributable to shareholders 69,735,180 -
Net assets value per share:
- Ordinary shares 3 1.011 1.221
- Class C shares 3 0.912 -
AFRICA OPPORTUNITY FUND LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2014
ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT
Share Share Retained Non-controlling Total
capital Premium earnings Total interest equity
-------- ----------- ----------- ----------- ---------------- -----------
Notes USD USD USD USD USD USD
At 1 January 2013 426,303 38,262,525 2,367,924 41,056,752 293,659 41,350,411
Profit for the year - - 11,333,272 11,333,272 112,038 11,445,310
Dividend 7 - (341,073) - (341,073) - (341,073)
At 31 December 2013 426,303 37,921,452 13,701,196 52,048,951 405,697 52,454,648
Profit for the
period - - 282,153 282,153 1,711 283,864
Dividend 7 - (76,859) - (76,859) - (76,859)
At 17 April 2014 426,303 37,844,593 13,983,349 52,254,245 407,408 52,661,653
Transfer to consolidated
statement
of changes in net assets
(note 10) (426,303) (37,844,593) (13,983,349) (52,254,245) - (52,254,245)
Loss for the period - - - - (67,178) (67,178)
At 31 December 2014 - - - - 340,230 340,230
=========== ============= ============= ============ ======== ===========
AFRICA OPPORTUNITY FUND LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED 31 DECEMBER 2014
Ordinary Class C Net assets
Number of Share shares attributable
units to shareholders
----------------- ------------------ ------------ -----------------
USD USD USD USD
At 17 April 2014 -
transfer from equity
(refer to note 10) 42,630,327 52,254,245 - 52,254,245
CAPITAL TRANSACTIONS:
Issue of C shares 29,200,000 29,200,000 29,200,000
OPERATIONS:
Decrease in net assets
attributable to shareholders
from operations for
the period - (9,155,133) (2,563,932) (11,719,065)
At 31 December 2014 71,830,327 43,099,112 26,636,068 69,735,180
================= ================== ============ =================
AFRICA OPPORTUNITY FUND LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 2014
Notes 2014 2013
--------------- ---------------
USD USD
Operating activities
Decrease in net assets attributable
to shareholders from operations/ Total
Comprehensive Income for the year (11,502,378) 11,445,310
Adjustment for non-cash items:
Unrealised loss/(gain) on financial
assets at fair value through profit
or loss 2(a) 10,339,284 (9,760,083)
Realised loss/(gain) on sale of financial
assets at fair value through profit
or loss 2(a) 2,132,906 (1,364,934)
Unrealised loss/(gain) on financial
liabilities held for trading 2(b) 135,784 (1,757,400)
Realised gain on financial liabilities
held for trading 2(b) (515,415) (447,685)
Effect of exchange rate on cash and
cash equivalents (1,059,102) (40,928)
--------------- ---------------
Cash (used in)/ generated from operating
activities (468,921) (1,925,720)
--------------- ---------------
Net changes in operating assets and
liabilities
Purchase of financial assets at fair
value through profit or loss (32,760,408) (25,490,028)
Proceeds on disposal of financial
assets at fair value through profit
or loss 11,939,459 23,300,414
Proceeds on derecognition of financial
liabilities held for trading 6,916,861 4,927,383
Purchase of financial liabilities
held for trading - (2,304,319)
Increase in trade and other receivables 77,198 (513,843)
Increase in trade and other payables (2,365,766) 2,111,323
--------------- ---------------
Net cash (used)/generated from operating
activities (16,192,656) 2,030,930
--------------- ---------------
Financing activities
Proceeds from issue of redeemable 29,200,000 -
shares
Dividend paid (162,149) (366,621)
--------------- ---------------
Net cash flow generated/(used in)
financing activities 29,037,851 (366,621)
--------------- ---------------
Net increase/(decrease) in cash and
cash equivalents 12,376,274 (261,411)
Effect of exchange rate on cash and
cash equivalents 1,059,102 40,928
Cash and cash equivalents at the start
of the year 3,413,104 3,633,587
Cash and cash equivalents at the end
of the year 16,848,480 3,413,104
1. GENERAL INFORMATION
Africa Opportunity Fund Limited (the "Company") was launched
with an Alternative Market Listing "AIM" in July 2007 and moved to
the Specialist Funds Market "SFM" on 17 April 2014.
Africa Opportunity Fund Limited is a closed-ended fund
incorporated with limited liability and registered in Cayman
Islands under the Companies Law on 21 June 2007, with registered
number MC-188243.
The Company aims to achieve capital growth and income through
investment in value, arbitrage, and special situations investments
in the continent of Africa. The Company may therefore invest in
securities issued by companies domiciled outside Africa which
conduct significant business activities within Africa. The Company
has the ability to invest in a wide range of asset classes
including real estate interests, equity, quasi-equity or debt
instruments and debt issued by African sovereign states and
government entities.
The Company's investment activities are managed by Africa
Opportunity Partners Limited, a limited liability company
incorporated in the Cayman Islands and acting as the investment
manager pursuant to an Amended and Restated Investment Management
Agreement dated 12 February 2014.
To ensure that investments to be made by the Company and the
returns generated on the realisation of investments are both
effected in the most tax efficient manner, the Company has
established Africa Opportunity Fund L.P. as an exempted limited
partnership in the Cayman Islands. All investments made by the
Company are made through the limited partnership. The limited
partners of the limited partnership are the Company and AOF CarryCo
Limited. The general partner of the limited partnership is Africa
Opportunity Fund (GP) Limited.
The consolidated financial statements for the Company for the
year ended 31 December 2014 were authorised for issue in accordance
with a resolution of the Board of Directors on 30 April 2015.
Presentation currency
The consolidated financial statements are presented in United
States dollars ("USD").
2. FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
2(a) Financial assets at fair value through profit or loss
2014 2013
------------- -------------
USD USD
Designated at fair value through profit
or loss:
At 1 January 55,473,931 42,159,300
Additions 32,760,408 25,490,028
Disposals (14,072,366) (21,935,480)
Net (losses)/ gains on financial assets
at fair value through profit or loss (10,339,284) 9,760,083
------------- -------------
At 31 December (at fair value) 63,822,689 55,473,931
Analysed as follows:
* Listed equity securities 50,685,167 43,574,212
* Listed debt securities 11,887,510 10,949,719
1,000,012
* Unlisted equity securities -
* Unlisted debt securities 250,000 950,000
----------- -----------
63,822,689 55,473,931
Net changes on fair value of financial assets at fair value
through profit or loss
2014 2013
------------- -----------
USD USD
Realised (2,132,906) 1,364,934
Unrealised (10,339,284) 9,760,083
-------------
Total (losses)/ gains (12,472,190) 11,125,017
2(b) Financial liabilities at fair value through profit or loss
2014 2013
----------- ------------
USD USD
Written call options - 141,400
Written put options 132,883 428,072
Listed equity securities sold short 11,368,211 4,394,392
----------- ------------
Financial liabilities at fair value through
profit or loss 11,501,094 4,963,864
2014 2013
----------- ----------
USD USD
Net changes on fair value of financial liabilities
at fair value through profit or loss
Realised 515,415 447,685
Unrealised (135,784) 1,757,400
----------
Total gains 379,631 2,205,085
2(c) Net gains/ (losses) on financial assets and liabilities at
fair value through profit or loss
2014 2013
--------------- ------------
USD USD
Net (losses)/gains on fair value of financial
assets at fair value through profit or loss (12,472,190) 11,125,017
Net gains on fair value of financial liabilities
at fair value through profit or loss 379,631 2,205,085
Net gains (12,092,559) 13,330,102
2(d) Fair value hierarchy
The Group uses the following hierarchy for determining and
disclosing the fair value of the financial instruments by valuation
technique:
Level 1: quoted (unadjusted) market prices in active markets for
identical assets and liabilities.
Level 2: Valuation techniques for which the lowest level input
that is significant to the fair value measurement is directly or
indirectly observable.
Level 3: Valuation techniques for which the lowest level input
that is significant to the fair value measurement is
unobservable.
Recurring fair value measurement of assets and liabilities -
2014
31 December
2014 Level 1 Level 2 Level 3
------------ ---------- ---------- ----------
USD USD USD USD
Financial assets at fair value through profit or loss:
Equities 51,685,179 43,999,833 7,685,346 -
Debt securities 12,137,510 - 12,137,510 -
------------ ------------ ----------- ----
63,822,689 43,999,833 19,822,856 -
============ ============ =========== ====
Financial liabilities
at fair value through
profit or loss 11,501,094 11,368,211 132,883 -
============ ============ =========== ====
Recurring fair value measurement of assets and liabilities -
2013
31 December
2013 Level 1 Level 2 Level 3
------------ ---------- ---------- ----------
USD USD USD USD
Financial assets at fair value through profit or loss:
Equities 43,574,212 35,858,047 7,716,165 -
Debt securities 11,899,719 - 10,949,719 950,000
----------- ------------ ----------- --------
55,473,931 35,858,047 18,665,884 950,000
=========== ============ =========== ========
Financial liabilities
at fair value through
profit or loss 4,963,864 4,394,392 569,472 -
=========== ============ =========== ========
3(a) ORDINARY SHARE CAPITAL
2014 2014 2013 2013
-------------- ----------- -------------- -----------
Number USD Number USD
Authorised share capital
Ordinary shares with
a par value of USD
0.01 1,000,000,000 10,000,000 1,000,000,000 10,000,000
============== ===========
Share capital
At 1 January 42,630,327 426,303 42,630,327 426,303
Reclassification (42,630,327) (426,303) - -
-------------- ----------- -------------- -----------
At 31 December - - 42,630,327 426,303
The directors have the general authority to repurchase the
ordinary shares in issue subject to the Company having funds
lawfully available for the purpose. However, if the market price of
the ordinary shares falls below the Net Asset Value, the directors
will consult with the Investment Manager as to whether it is
appropriate to instigate a repurchase of the ordinary shares.
3(b) NET ASSETS ATTRIBUTABLE TO SHAREHOLDERS
Ordinary Class C
Shares Shares Total
----------- ------------ --------------
USD USD USD
Reclassification from equity
at 17 April 2014 52,254,245 - 52,254,245
Changes during the year:
Issue of shares - 29,200,000 29,200,000
Redemption of shares - - -
Loss for the period (9,155,133) (2,563,932) (11,719,065)
At 31 December 2014 43,099,112 26,636,068 69,735,180
============ ============ =============
Net assets value per share in
2014 1.011 0.912
------------ ------------
Net assets value per share in 1.221 -
2013
------
C shares
AOF closed a Placing of 29.2 million C shares of US$0.10 each at
a placing price of US$1.00 per C share, raising a total of $29.2
million before the expenses of the Issue. The placing was closed on
11 April 2014 with the shares commencing trading on 17 April
2014.
AOF's Ordinary Shares and the C Shares from the April placing
were admitted to trading on the LSE's Specialist Fund Market
("SFM") effective 17 April 2014. Simultaneous with the listing on
the SFM, the Ordinary shares were cancelled from admission to
trading on the AIM.
C Shares are a transient class of shares: the assets
representing the net proceeds of any issue of C Shares will be
maintained, managed and accounted for as a separate pool of capital
of the Company until those C Shares convert into Ordinary Shares
(which will occur once 85 per cent. of all of the assets
representing the Net Placing Proceeds have been invested in
accordance with the Company's existing investment policy (or, if
earlier, six months after the date of issue of the C Shares)).
Under the Articles the Directors have discretion to make such
adjustments to the timing of Conversion as they consider reasonable
having regard to the interests of all Shareholders. In this regard,
although Conversion was anticipated to occur no later than six
months after Admission, the Directors considered it is in the best
interests of all Shareholders (being at that time Ordinary
Shareholders and C Shareholders) to extend the Conversion Date
beyond the six month period as the Shoprite case was still
unresolved as at year end. On such conversion, each holder of C
Shares will receive such number of Ordinary Shares as equals the
number of C Shares held by them multiplied by the Net Asset Value
per C Share and divided by the Net Asset Value per Ordinary Share
(subject to a discount of 5 per cent.), in each case as at a date
shortly prior to Conversion. As at 31 December 2014, the dispute
with Shoprite is still unresolved and the Conversion has not yet
been made.
The Net Placing Proceeds is the aggregate value of the C Shares
issued under the Placing at the Placing Price less the applicable
fees and expenses of the Placing.
The Company does not have a fixed life but, as stated in the
Company's admission document published in 2007, the Directors
consider it desirable that Shareholders should have the opportunity
to review the future of the Company at appropriate intervals.
Accordingly, Shareholders passed an ordinary resolution at an
extraordinary general meeting of the Company on 28 February 2014
that the Company continues in existence.
In 2019, the Directors will convene another general meeting
where an ordinary resolution will be proposed that the Company will
continue in existence. If the resolution is not passed, the
Directors will be required to formulate proposals to be put to
Shareholders to reorganise, reconstruct or wind up the Company. If
the resolution is passed, the Company will continue its operations
and a similar resolution will be put to Shareholders every five
years thereafter.
At the same time as the continuation vote in 2019, the Company
will provide Shareholders with, without first requiring a
Shareholder vote to implement this policy, an opportunity to
realise all or part of their shareholding in the Company for a net
realised pro rata share of the Company's investment portfolio.
The directors have the discretion to defer the conversion
indefinitely. Hence, there could be two classes of shares (the
Ordinary and the C Class shares) that could be realised in a forced
liquidation by the shareholders, and then the requirements of IAS
32.16C and 16D would need to be applied to both classes. Due to the
fact that there are two separate pools of assets and liabilities
attributable to the C Class and Ordinary shareholders respectively,
the requirements of IAS 32.16C(a) would not be met. Therefore both
the classes have been classified as financialliabilities as from
April 17, 2014 upon issuance of a Class C shares.
The equity attributable to ordinary shareholders (classified as
equity) amounting to USD 52,254,245 have been reclassified to "net
assets attributable to shareholders" as from 17 April 2014
(reclassified now as "financial liabilities" under IAS 32) upon
issue of C shares where two separate pools are now being managed
(note 6).
3(c) FAIR VALUE OF NET ASSETS ATTRIBUTABLE TO SHAREHOLDERS
Recurring fair value measurement of financial liabilities
The below table shows the fair value hierarchy of the Net assets
attributable to shareholders. This has been presented for 2014 only
as the shares were classified as equity instruments and not
financial liabilities in 2013.
Level 1 Level 2 Level 3
USD USD USD
Ordinary shares - 43,099,112 -
C Class shares - 26,636,068 -
At 31 December 2014 - 69,735,180 -
=================== ===============
The Ordinary and C Class shares are quoted on the SFM of the
LSE. The shares are traded on the exchange at the quoted price as
determined by the participants on the LSE. In a liquidation
scenario or if investors elect to initiate their opportunity to
realise all or part of the shareholding at the time of the
continuation vote in 2019, the proceeds to the shareholders would
be determined by the net realisation of the net asset value.
Therefore, the Directors have concluded that the most
appropriate estimate of fair value of both classes of shares is
their net asset value per share, without adjustment, at the
reporting date. This price is calculated by taking the net assets
attributable to shareholders and dividing by the number of shares
in issue.
4. EARNING PER SHARE
In the prior year, the ordinary shares were classified as equity
and as such the earnings per share have been disclosed on the face
of the consolidated statement of comprehensive income for 2013 as
required by IAS 33.
Following the classification of the ordinary and C shares as
financial liabilities during the current year, the disclosure of
the earning per share on the face of the consolidated statement of
comprehensive is not required in terms of IAS 33 as the instruments
are no longer classified as equity. However, the Company has
voluntarily disclosed the earnings per share as per below.
Earnings per share is the prior year was calculated by dividing
the profit attributable to equity holders of the Company by the
weighted average number of ordinary shares in issue during the year
excluding ordinary shares purchased by the Company and held as
treasury shares.
In the current year, following the classification of the
ordinary and C shares as financial liabilities, the earnings per
share is calculated by dividing the decrease in net assets
attributable to shareholders by the weighted average number of
ordinary and C shares in issue during the year excluding ordinary
shares purchased by the Company and held as treasury shares.
The Company's diluted earnings per share are the same as basic
earnings per share, since the Company has not issued any instrument
with dilutive potential.
Ordinary shares C shares
------------------------- --------------------
2014 2013 2014 2013
------------ ----------- ------------- -----
Decrease in net assets
attributable to shareholders
(2014)/Earnings attributable
to equity holders
of the Group (2013) USD (8,872,979) 11,333,272 (2,563,932)) -
Number of shares in
issue (2014)/Weighted
average number of
shares in issue(2013) 42,630,327 42,630,327 20,640,000 -
Change in net assets
attributable to shareholders
per share (2014)/Basic
and diluted earnings
per share (2013) (Note
17) USD (0.208) 0.266 (0.124) -
============ =========== ============= =====
5. RELATED PARTY DISCLOSURES
The Directors consider Africa Opportunity Fund Limited (the
"Company") as the ultimate holding company of Africa Opportunity
Fund (GP) Limited and Africa Opportunity Fund L.P.
The financial statements include the financial statements of
Africa Opportunity Fund Limited and its subsidiaries as
follows:
% equity % equity
Country of interest interest
Name incorporation 2014 2013
------------------------------ ---------------- ---------- ----------
Africa Opportunity Fund (GP)
Limited Cayman Islands 100 100
Africa Opportunity Fund L.P. Cayman Islands 99.09 99.09
During the year ended 31 December 2014, the Company transacted
with related entities. The nature, volume and type of transactions
with the entities are as follows:
Balance
Type of Nature of at
Name of related 31 Dec
parties relationship transaction USD 2014
-------------------- -------------- -------------- ----------- --------
USD
Africa Opportunity Investment Management
Partners Limited Manager fee expense 1,196,481 -
Africa Opportunity Investment Performance
Partners Limited Manager fee expense - 36,532
During the year ended 31 December 2013, the Company transacted
with related entities. The nature, volume and type of transactions
with the entities are as follows:
Balance
at
31 Dec
Type of Nature of Volume 2013
Name of related parties relationship transaction USD USD
------------------------- -------------- -------------- ---------- ----------
Africa Opportunity Investment Management
Partners Limited Manager fee expense 933,052 -
Africa Opportunity Investment Performance
Partners Limited Manager fee expense 2,361,064 2,361,064
The Investment Manager is considered to be key management
personnel as it plans, directs and controls the operations of the
fund.
Key Management Personnel (Directors' fee)
Except for Robert Knapp who has waived his fees, each director
has been paid a fee of USD 20,000 per annum plus reimbursement for
out-of pocket expenses through the placing on 17 April and a fee of
USD 35,000 per annum plus reimbursement for out-of pocket expenses
thereafter
Francis Daniels (resigned 28 February 2014) and Robert Knapp who
are directors of the Company are also shareholders of the
Investment Manager.
Robert Knapp who is a director of the Company also forms part of
the executive team of the Investment Manager. Details of the
agreement with the Investment Manager are disclosed in Note 5. He
has a beneficiary interest in AOF CarryCo Limited. The latter is
entitled to carry interest computed in accordance with the rules
set out in the Admission Document.
Details of investments in the Company by the Directors are set
out below:
No of shares Direct interest
held held %
2014 9,113,000 12.69
2013 10,875,827 25.51
The decrease in director shares in 2014 is a result of Francis
Daniels resigning from the board. Mr Daniels remains a shareholder
of the Investment Manager.
6. ANALYSIS OF SHARE OF PROFIT AND LOSSES ATTRIBUTABLE TO ORDINARY SHARE AND C SHARES
6(a) STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2014
Ordinary shares C shares
---------------- -----------
USD USD
ASSETS
Financial assets at fair value through
profit or loss 47,402,194 16,420,495
Trade and other receivables 895,714 141,088
Cash and cash equivalents 5,742,924 11,105,556
---------------- -----------
Total assets 54,040,832 27,667,139
================ ===========
Ordinary shares C shares
---------------- -----------
USD USD
EQUITY AND LIABILITIES
Liabilities
Financial liabilities at fair value
through profit or loss 10,516,966 984,128
Trade and other payables 84,524 46,943
---------------- -----------
Total liabilities 10,601,490 1,031,071
---------------- -----------
Equity
Non-controlling interest 340,230 -
Total equity 340,230 -
---------------- -----------
Net assets attributable to shareholders 43,099,112 26,636,068
---------------- -----------
6 (b) STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE PERIOD ENDED 2014
Ordinary
shares C shares
------------ -------------
USD USD
Revenue
Income 4,110,811 718,000
Net gains on financial assets at fair value
through profit or loss - -
Net gains on financial liabilities at fair
value through profit or loss 408,605 -
------------ -------------
4,519,416 718,000
------------ -------------
Expenses
Management fees 863,898 332,583
Net losses on financial assets at fair
value through profit or loss 10,752,965 1,719,225
Net losses on financial liabilities at
fair value through profit or loss - 28,974
Other expenses 1,631,757 1,172,053
------------ -------------
13,248,620 3,252,835
------------ -------------
Loss before taxation (8,729,204) (2,534,835)
Taxation (209,242) (29,097)
------------ -------------
Decrease in net assets attributable to
shareholders from operations (8,938,446) (2,563,932)
Attributable to:
Equity holders of the Company (8,872,979) (2,563,932)
Non-controlling interest (65,467) -
-------------
(8,938,446) (2,563,932)
============ =============
Decrease in net assets attributable to
shareholders per share attributable to
the equity holders of the parent during
the year (0.208) (0.124)
============ =============
7. DIVIDEND PAYMENT
The Company expressed in the Admission Document for the
Alternative Investment Market of the London Stock Exchange on which
it was listed an intention, subject to having sufficient cash
resources, to pay an aggregate annual dividend of an amount equal
to the product of the net asset value of the Company on January 01
in each year multiplied by the three month US Dollar London
Interbank Offered Rate (derived from Bloomberg) on the same date,
payable in four equal quarterly installments. However, the dividend
payments made in 2013 and 2014 were in excess of the basis stated
in the Admission Document, as the Company utilises the one year US
Dollar London Interbank Offered Rate for the calculation of the
dividend rate. This was the dividend policy when the Fund was
listed on the AIM.
As from 17 April 2014 subject to the Fund's admission and
listing on the Specialist Fund Market of the London Stock Exchange,
the new amended Private Placement Memorandum stated that subject to
market conditions, compliance with the Companies Law and having
sufficient cash resources available for the purpose, the Company
intends to pay the following dividends on the Ordinary Shares at an
amount equal to the total comprehensive income of the Company as
that expression is used in international accounting standard
(excluding net capital gains/losses in accordance with Investment
Management Association Statement of Recognised Practice), such
amount to be paid annually
Investors in C Shares should note that it is not currently
envisaged that any dividend will be paid on the C Shares to be
issued pursuant to the Placing prior to their Conversion into
Ordinary Shares.
2014 2013
------- --------
Dividend - payable USD USD
Dividend declared and paid 76,859 255,782
Dividend payable - 85,291
------- --------
76,859 341,073
======= ========
Dividend per share US cents 0.17 0.80
8. PLACING AND ADMISSION EXPENSES
The Company incurred costs associated with the April 2014 C
share placing and with the admission of the ordinary shares and the
C shares to the SFM of the London Stock Exchange. The total costs
incurred were USD 1,246,441 of which USD 937,987 related to placing
agent fees and expenses and USD 308,454 related to admission fees
and expenses. The placing agent fees are shown separately on the
Consolidated Statement of Comprehensive Income. The admission fees
and expenses are shown within the Other operating expenses
line.
9. EVENTS AFTER REPORTING DATE
Shoprite filed a revised consolidated statement of claims in the
Kitwe High Court in Zambia in March 2015. Shoprite's revised
statement of claim reduced the number of AOF shares subject to
challenge by Shoprite to the numbers set forth in Shoprite's
various pleadings following legal actions brought by AOF. AOF
sought to clarify which shares are affected by the trades disputed
by Shoprite. The disputed number of Shoprite shares is now 438,743
shares out of a total number of 643,759 Shoprite shares owned by
AOF.
Share Price
Prices of Africa Opportunity Fund Limited are published daily in
the Daily Official List of the London Stock Exchange. The shares
trade under Reuters symbol "AOF.L" and Bloomberg symbol "AOF LN". C
share class shares began trading 17 April 2014 and trade under
Reuters symbol "AOFC.L" and Bloomberg symbol "AOFC LN".
Manager
Africa Opportunity Partners Limited.
Copies of the annual report are being posted to the shareholders
and copies will be available from the Company's registered office
and also from the Company's website.
Website
www.africaopportunityfund.com
For further information please contact:
Africa Opportunity Fund Limited Tel: +2711 684 1528
Francis Daniels
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR SDEFLSFISELL
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