The portfolio has shown modest growth in the past quarter of 1.4% after costs, having made a decision to exit its investment in New Look at a loss, and with Novare’s African retail property portfolio being marked down substantially following a thorough valuation review. This was balanced out by continued strong growth in revenue and profits at betPawa and African Alpha. 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. Around sixty five percent of the investment commitment towards the fund had been drawn down by 31 December 2018. We expect that the remainder of the undrawn commitments will be called for within the next year to complete building projects.
APEO’s stake in Novare was valued down (based on the valuations of two independent valuators) due to continued pressure on collecting contracted rent, largely as a result of weak consumer spending following currency devaluations in Nigeria, Mozambique and Zambia in 2016. Although there are signs across the portfolio of a recovery, we only expect the investment to be significantly revalued upwards once rental flows 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 0.24 CAD on 31 March 2019.
Setup of the mine is due to be completed early in May 2019, in line with operational and budget forecasts. We participated in a small funding round at an attractive price to provide working capital to the mine early in April 2019. Global tin demand is still favourable and the tin price looks set to be subject to upward pressure in the short to mid-term. 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 experience slow (but profitable) growth 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 Consumer Goods (“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 and we expect to see strong turnover and profit growth from it in 2019. The Water division, Aquasafe successfully installed its new Sidel packaging line in 2018 and is expected to make an earnings contribution in 2019. Etete, the group’s Dairy business, is still undergoing restructuring which will be completed during 2019.
Seen as a whole, 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 Dairy divisions.
10. NEW LOOK RETAIL GROUP LIMITED (“New Look”)
New Look experienced much worse trading conditions over December 2018 and into 2019 than previously anticipated, resulting in a major corporate restructuring. Given the ongoing uncertainty of New Look’s financial position, and the fact that it now has no single dominant leading shareholder (Brait has been significantly diluted in the restructuring), APEO decided to exit both New Look bond positions in the last quarter.
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, 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 60% in APEO’s portfolio, and it is outperforming comparable listed operations. betPawa generated exceptional returns in January to March 2019 after a disappointing December 2018 trading month, following which we decided to value betPawa down in December 2018. The business is continuing its expansion into more African markets and is now one of the leading sports betting platforms in sub-Saharan Africa. We expect the business to keep growing at a strong rate as its propriety software continues to be an advantage in the African market.
12. 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 217 pence on 31 March 2018 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.