The portfolio has shown modest growth of 2.0% after costs in challenging conditions in the last quarter. We have invested an additional USD 500k into New Look in the past quarter. Having provided an in-depth review of the portfolio in the previous quarterly report, a short summary of developments in each investment is set out below:
6. NOVARE AFRICA PROPERTY FUND II (“Novare 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 30 September 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. Novare is currently reflecting an annualised IRR of 7.2% in the APEO portfolio
During the last quarter the currencies which affect Novare’s operating malls being the Nigerian Naira, Zambian Kwacha and Mozambican Metical have remained under pressure. Local currency strength is needed to see consumer spending capacity recovering to levels where smaller tenants can fully afford the original USD rentals negotiated at inception of the operating malls.
Novare II acquired land and built (or is building) properties at relatively low cost given the quality of project management that has been applied. The leasing management, mall marketing, and mall maintenance activities continue to be tightly controlled by the Novare in-country teams. Very little new rental property stock has been developed by other developers in the target countries since 2015, putting Novare in a great position to realize good value for its properties once positive market sentiment returns. We only expect the investment to be significantly revalued upwards once rentals start to improve.
7. ALPHAMIN RESOURCES CORP. (“Alphamin”)
Alphamin owns the richest known orebody of tin in the world, situated in North Kivu Province, DRC. The company drilled out and proved only a small portion of its prospecting licensed area, large enough to start a small mine and prove the concept. Alphamin is listed on the Toronto Stock Exchange where it traded in low volumes at 0.25 CAD on 30 September 2018.
Setup of the mine is running within budget and currently slightly ahead of schedule. We expect the share price to reflect the mine’s inherent value once uncertainty over the DRC national elections in December 2018 has been removed, and construction of the mine has been completed and becomes operational, currently scheduled for Q2 2019.
8. ADDIS PHARMACEUTICAL FACTORY SHARE COMPANY (“Addis Pharma”)
Addis Pharma manufactures a broad range of pharmaceuticals at good EBITDA margins for the Ethiopian public and private sector, in a country with over 100 million people. Only 20% of Ethiopia’s pharmaceuticals are manufactured in Ethiopia, with the balance being imported. Although the Ethiopian government has a stated policy of preferring local manufacturers over importers, public sector sales were withheld by the company due to pricing disputes with the government. Private sector sales have increased, but not sufficiently to place the business on a growth path. Although Addis Pharma is highly profitable, its value was marked down in the past quarter due to the lack of turnover growth as the prior higher valuation was based on the assumption of growth
The new factory expansion in Adigrat is expected to be completed early in 2019, creating significant additional manufacturing capacity. The focus of the management remains firmly on making sure it has foreign currency to import essential raw materials, and growing its private market sales, including cross border expansion to neighbouring countries.
A trade sale at an attractive price to a foreign pharmaceutical manufacturer is the most likely exit in three to four years once growth has resumed, and the new manufacturing capacity in Adigrat has been commissioned and its capacity utilised.
9. AFRICAN ALPHA FCMG GROUP (“African Alpha”)
The company offers Fast Moving Consumable Good (“FMCG”) exposure to the high growth Ethiopian economy (8% plus economic growth p.a.) through an investment in a number of businesses including Bluebird Holdings (www.bluebirdholding.com/). We backed a strong private equity team on the ground against FMCG competition which is generally undercapitalised and fragmented, in addition to a lack of committed international FMCG competitors. The strategy is to aggressively grow revenue and profits by extracting economies of scale through combining management resources in procurement, marketing, administration and sales across the various businesses, before selling the business as a unit to an international FMCG business wishing to enter Ethiopia. African Alpha is currently reflecting an annualised IRR of 7.9%.
The Edible Oil and Soap businesses have enjoyed revenue growth of 147% and 49% respectively over the last year. The growth in profitability of the Edible Oil and Soap businesses have been impressive, increasing by 300% and 116%, respectively over the same period. The Dairy, Water, Pasta and Flour businesses have not yet made a significant contribution, either because of intensive operational restructuring and de-bottlenecking of plants, or through delaying operational changes whilst minority buy-out negotiations have been under way. We expect the underperforming business units to start contributing meaningfully in the forthcoming year.
10. NEW LOOK RETAIL GROUP LIMITED (“New Look”)
New Look is a leading fast-fashion brand, with 593 retail stores in the UK and over 297 across Europe, China and Asia. It dominates the fashion trade in the female 18 to 35 age group in the UK. New Look is owned 100% by Brait, who took New Look private in 2015 at which time it raised and listed three tranches of Loan Notes totalling GBP 1.3bn on the Frankfurt Stock Exchange.
APEO bought tranches of New Look Loan Notes with bullet capital payments in 2022 and 2023 respectively, at a discount on the assumption that the group will remain solvent. New Look’s June 2018 results have shown green shoots after management changes and a change in strategy had been implemented, but some risk remains as absolute debt levels are high. APEO plans to hold the notes to maturity which will earn us an annualised IRR of above 25%, of which a portion is earned in cash through six monthly interest payments.
11. BETPAWA GROUP HOLDINGS LIMITED (“betPawa”)
Established in late 2013, betPawa is a UK registered holding company with licensed African online (smart phone) sports betting subsidiaries. betPawa was established by a Danish entrepreneur who applied or acquired betting licenses in-country over the past five years, and the software was acquired via an acquisition it made in Estonia. Currently it is operational in Kenya, Uganda, Nigeria, Ghana and Zambia. We invested in order to get exposure to a fast-growing consumer business in Africa with a strong technology platform and limited physical footprint, managed by a dynamic management team. The recently launched operations in Nigeria and Ghana are showing great promise. Overall growth in group revenue over the prior year is running at 150%.
betPawa is currently reflecting an annualised IRR of 95.5% in APEO portfolio, and it is outperforming comparable listed operations.