The portfolio has shown growth in the past quarter of 4.7% after costs, with a strong performance from betPawa. We invested an additional USD 250k into Blue Bird and USD168k into Alphamin during the quarter under review, with no investment realizations. A 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. Seventy one percent of the investment commitment towards the fund had been drawn down by 30 June 2019. We expect that the remainder of the undrawn commitments will be called for within the next year to complete building projects.
Novare’s next independent property valuation round is currently underway. Although pressure on rentals have not abated, we are seeing consumer spending starting to pick up in Nigeria, and the situation in Mozambique is expected to improve in the next year as very significant Mozambique foreign direct investment projects become visible.
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 0.24 CAD on 30 June 2019.
Setup of the mine was completed early in May 2019, in line with operational and budget forecasts. The mine is currently cash flow positive with the grade of ore mined in line with expectation. The concentration plant is still not running at nameplate capacity, but improvements are being made on a weekly basis. Global tin demand has softened in recent months, but remain within the boundaries of the original mine feasibility study. We expect strong share price performance once the mine proves its ability to generate income.
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.
The business continued to trade profitably but growth has stagnated over the last quarter. A shareholder restructuring is still under negotiation which, once completed will enable the business to reach its true growth potential.
A trade sale at an attractive price to a foreign pharmaceutical manufacturer remains 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 FMCG 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. 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.
Both the Oil and Soap businesses (wholly owned) continued their very strong growth in revenue and profits on the back of adding additional manufacturing capacity. The Pasta division’s restructuring has been completed. We expect to see continued strong growth from this investment powered by high growth in Oil and Soap, and turnarounds at the Pasta, Water and Diary divisions.
10. 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, Tanzania 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 and profits over the prior year is running at above 200%.
betPawa is currently reflecting an annualised IRR of 64% in APEO’s portfolio, and it is outperforming comparable listed operations. betPawa generated exceptional returns in April to June 2019.
45% of betPawa’s business is generated in Kenya. The Kenyan Gambling Board unexpectedly failed to renew any of the 30 sports betting licences issued in Kenya in July 2019, and the matter is currently subject to various court processes. We expect the matter to be resolved shortly, but given the uncertainty we decided to make a significant provision in betPawa’s valuation at 30 June 2019. Subject to a satisfactory resolution of the Kenyan licensing matter, we expect betPawa to keep growing at a strong rate as its propriety software continues to be an advantage in the sub- Sahara African mobile betting market.
11. HASTINGS GROUP PLC (“HASTINGS”)
Hastings Group is a motor and household insurer established in 1997, with its largest shareholder being the Outsurance group from South Africa. Hastings is a market leader in the UK, and they have various brands under the Hastings Group umbrella. The company has a strong focus on capitalizing on the current trend seen with UK insurance consumers to make use of ‘aggregator’ sites used to compare quotes from different providers. The company has a strong focus on constantly improving and implementing state-of-the-art technology and leverages these systems to not only improve its ability to evaluate risks, customer offering, but also to keep overheads at a minimum.
Hastings is a publicly listed company listed on the London Stock Exchange. The share was trading at 196 pence on 30 June 2019 after our initial investment was made on 197 pence in November 2018. We believe our acquisition price is in deep value territory, with the business well placed to increase earnings as the UK insurance market keeps showing a client preference for quote aggregator platforms.
Operationally growth has slowed down a bit in a difficult motor insurance market, but Hastings continues to win market share at very good underwriting margins. Brexit is not expected to have a major impact.