PORTFOLIO COMMENT FOR QUARTER ENDED 31 MARCH 2018
The net effect of valuation adjustments made during the quarter under review is a return of 3.1% after costs. We received fresh capital subscriptions for USD 2.86 million during the quarter, of which USD 400k was applied to increase our investment in Alphamin, and USD 500k was invested into the largest operational subsidiary in the African Alpha stable in Ethiopia. A summary of developments in each investment is set out below:
- Novare Africa Property Fund II (“Novare II”) develops retail and commercial developments in major African cities, comprising of projects in Abuja, Lagos, Lusaka and Maputo. Around seventy percent of the investment commitment towards the fund had been drawn down by 31 March 2018. We expect that the remainder of the undrawn commitments of USD 700k will be called for within the next year to complete building projects. The status of various developments are as follows:
• Novare Lekki (Lagos) which opened in August 2016 grew substantially during the past six months, as reflected in increased footfall and higher occupancy levels although some of the tenants are still under trading stress
• Novare Gateway (Abuja) mall opened successfully on 30 November 2017
• The Novare Central (Abuja) project is progressing well with the multi-use development 75% completed and expected to open its doors for trading in June 2018
• Novare Matola (Maputo) had a very successful opening in December 2017 with 17 shops trading on opening day. Recent access problems due to road construction has resulted in a decline in trading. This is currently being addressed
• The first phase of the Novare Great North (Lusaka) development is completed, which saw the mall opening on the 29th of March 2018. The second phase is in progress
• The Novare Pinnacle (Lusaka) project’s bulk earthworks was successfully completed during December 2017 on time and within budget
• The existing phase of Novare Twin Palms (Lusaka) is trading well with construction on phase 2 expected to commence in March 2018
• The Standard Chartered Head-office (Lusaka) project is soon to commence with anchor tenant agreements being finalised
Significant focus has shifted in the last quarter to getting projects that have recently launched (or are in the process of being launched) fully occupied to achieve the expected rental streams. The Nigerian, Zambian and Mozambican economic contractions that started in 2015 (followed by a foreign currency crisis) had a significant impact on disposable income in all three countries, and the ability of retailers to import stock. The situation is now abating, but we believe it will take another year to eighteen months for this to fully reflect in tenants’ ability to meet original rental expectations. This has been reflected in the latest external valuations of the trading malls (as at 31 December 2017), which resulted in a 9% downward valuation adjustment over the last six months. Overall, and with less than 50% of the properties trading, the portfolio is currently valued at 18% over historical cost. From an eventual realized return point of view, what really matters is how the malls are trading before they are sold in a couple of years’ time. We believe that the originally targeted Novare II annualised IRR of 20% is more likely to turn out in the 15 – 18% range.
- The shares of Alphamin Resources Corp. (“Alphamin”), the new tin mine being developed in the eastern DRC, continued to trade in a close band around CAD 30 cents (our entry price) on the TSX on very thin volume. We do not expect a major rerate of the share price until the mine’s construction is closer to completion in 2019 and a final fund raising of approximately USD 15 million has been completed. Mine construction is progressing well and is on track despite the challenging logistics environment. The global tin price remains stable at a level approximately 15 – 20% above the price used in arriving at the original decision to mine. The security situation around the mine and its access points is calm and under control despite continued concern over the political outlook for the DRC. The mine management have received strong backing from provincial and national government officials who regard the development of the mine in this remote eastern part of the DRC as a high priority. The impact of the newly announced DRC mining code on the company’s future returns is still subject to sensitive discussions between the mining industry and the central government. Alphamin’s management is confident that they will be able to mitigate or absorb any major negative impacts without disturbing the attractive return forecasts. We remain of the view that once tin production starts and the mine proves its mettle as one of the richest tin orebodies around, a significant rerating of the shares is bound to follow.
- Addis Pharmaceutical Factory Share Company (“Addis Pharma”) is a pharmaceutical manufacturer based in Adigrat, Northern Ethiopia. APEO acquired a small share when a co-investment opportunity with other established private equity players presented itself in 2016. Addis Pharma manufactures a large number of products across different therapeutic categories that it supplies to both the Government and private sector in Ethiopia. The operations continued to grow in line with expectation. No adjustment was made to the valuation. The expansion of the production facilities are progressing well. The new plant is expected to be commissioned later during 2018, and will create the necessary capacity to take up a bigger slice of the local pharmaceutical market in line with government stated policy of promoting import replacement.
- African Alpha FCMG group (“African Alpha”) is a fast moving consumer goods (“FMCG”) company in Ethiopia managed by the same equity partner we have in Addis Pharma. It comprises of water bottling plants, a soap and detergent factory, an edible oil bottling plant, a milling and pasta factory, a confectionary plant, and a dairy plant, all situated in and around Addis Ababa. The combined operation is reflecting strong underlying growth in revenue and profitability in line with forecasts for the year, and business units that have received capital injections to modernize or expand capacity have all shown vigor due to the limited competition and strong customer demand for quality products. During the quarter under review, we invested a further USD 500k into the group (directly into a subsidiary) as expansion capital. We increased the valuation of the original investment of USD 259k by 16% during the quarter, in line with the most recent significant capital raising.
- New Look Retail Group Limited (“New Look”) bonds recovered by 14% from its December 2017 valuation following the successful execution by New Look of a scheme of arrangement with some of its UK landlords to significantly reduce future rental commitments. The bond is valued at 27% of its face value, and hence yielding around 30% in annual interest. Interest has so far been serviced on a six monthly basis. New Look revamped its management team, and made changes to its fashion buying process in the 3rd and 4th quarters of 2017. The first results of this is only likely to be evident in the 2nd quarter of 2018. An analysis of New Look’s constitution and bond trust deed reveals that any restructuring of the terms of the bonds are very onerous for New Look to undertake. In order to earn an attractive return as bondholders, we do not need the business to perform, just for New Look to survive.