Annual Results for year ended 31 December 2009
Africa Opportunity Fund Limited (AOF.L)
Announcement of Annual Results for the year ended 31 December 2009
The Board of AOF is pleased to announce its audited results for the year ended
31 December 2009.
The Company
Africa Opportunity Fund Limited ("AOF" or the "Company") is a Cayman Islands
incorporated closed-end investment company traded on the AIM market of the
London Stock Exchange. Its net asset value on December 31, 2009 was US$31.4
million and its market capitalization was US$24.3 million.
Chairman's Statement
2009 Review
2009 was a good year for both world markets and the Africa Opportunity Fund Ltd
("the Fund" or "AOF"). AOF's audited net asset value rose from $0.52 per share
in January to $0.74 per share on 31 December 2009. Including dividends, the
total NAV return was a gain of 48%.
The shares of AOF had an even better year, appreciating 109% and dramatizing the
impact of a narrowing NAV discount upon returns. It is gratifying to report a
significant recovery in the NAV and share price of AOF.
To provide some basis for comparison, in African markets, South Africa rose
64%, Nigeria fell 38%, Kenya fell 3%, and Egypt rose 35%. In non-African
emerging markets, China rose 80%, Brazil rose 145%, Russia rose 117%, and India
rose 89%. In developed markets, Japan rose 16%, the US rose 23%, and the UK rose
22%.1
A key reward in 2009 was the return provided by AOF's fixed income investments.
At the end of the year 63% of the portfolio was in cash and bonds, which had
contributed approximately 38 of the 48 percentage points of the NAV return. Our
Marine Subsea holding, for example, appreciated over 120% from its year end
valuation of 22% of par while paying a 6% coupon. Our Katanga Resources notes
appreciated 83% from 50% of par while paying a 14% coupon. Two investments
acquired during the year also turned in pleasing results. Our Old Mutual
preferred securities provided a blended return of 100% while also paying a
healthy coupon, and our PA Resources 2nd lien notes appreciated 41% from our
initial purchase price while paying a 10% coupon. In short, AOF enjoyed
significant benefits from holding different asset classes and investing in fixed
income securities.
The equity portfolio added approximately 11 of the 48 percentage points of the
NAV return. Admittedly, this was a muted performance compared to many world
markets. But the companies in which AOF is invested made significant operational
progress during the year, and hold attractive return prospects as we invest the
cash generated by the bond portfolio. A key lesson from 2009, in this regard, is
that Africa has long been a capital starved region of the world, and its leading
companies have franchises that are typically not dependent upon regular access
to financial markets. Sonatel, our largest holding, grew subscribers by 27% in
2009 while maintaining an ebitda margin of nearly 58%. It is valued at 8X
earnings and pays a 10% dividend yield. Similarly, African Bank Investments, a
lender to the emerging middle class in South Africa, experienced no significant
difficulty financing its business. Despite a slowdown in consumer activity, it
grew earnings 19% while earning a 6% return on assets and a 15% return on
equity. These examples serve to dramatize the point that for several companies
in Africa, the gyrations of world financial markets have only a distant impact
on its underlying operating business.
Outlook
Investors throughout the world were reminded in 2008 that investing involves
risk. Use of the term "new normal" is growing commonplace in the financial press
to describe the recognition of this fact. But the sentiment is hardly new. In
the 1973 edition of the Intelligent Investor, Ben Graham made virtually the same
point while commenting upon the impact that the market's 1969-70 decline had
upon the notion that stocks would always advance to new high levels. He writes
"At long last the stock market has 'returned to normal', in the sense
that.investors must again be prepared to experience significant and perhaps
protracted falls as well as rises in the value of their holdings".2
Although nothing is new about the "new normal", a number of concerns today will
give pause to careful investors. Key amongst them in our view are imbalances in
the world's debt position and trade patterns. Africa is accustomed to fiscal
imbalances and currency depreciations, but the world as a whole is not. For our
purposes, we remain focused on identifying goods and services which consumers
demand regardless of political conditions. During the post WWII era there were
many imbalances in European economies, but some of the highest growth rates in
the 20th century were also recorded.
Similarly, Africa today shines as a growing continent. An educated middle class
is emerging in numerous countries which experienced decades of infrastructure
stagnation and underinvestment. African markets offer value that is difficult to
find on other continents. Single digit PE multiples and double digit ROEs are
common. So too are double digit dividend yields. To investors in Africa, fiscal
imbalances and currency depreciations are part of the standard equation. Care
and caution are certainly required, but businesses can still flourish in the
midst of such imbalances. We make no forecast about the general direction of
markets, and never will. But we are both excited about the attractive
opportunities available to us today and optimistic about AOF's prospects.
In closing we would like to thank our shareholders again for their support and
partnership during 2009. We look forward to a successful 2010.
Robert C. Knapp
Chairman
June 2010
1 Reference Indexes are calculated in US dollars using : Nigeria NSE Index,
South Africa Allshare, Nairobi NSE 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 Benjamin Graham, The Intelligent Investor, Revised Edition w/ commentary by
Jason Zweig, (New York: Collins Business, 2006), p. 5.
Manager's Report
The Fund's perennial quest for undervalued securities took it deep into the
terrain of the debt markets in 2009. Its end-of-year holdings gave it financial
exposure to Angola, Botswana, Cote d'Ivoire, the Republic of Congo, the
Democratic Republic of the Congo, Malawi, Namibia, Nigeria, Tanzania, Tunisia,
Senegal, South Africa, Zambia, and Zimbabwe. It had $16.2 million invested in
debt securities, $14.6 million in equity securities, $3.3 million in cash; and
derivative and short sale liabilities equal to $2.8 million. By the end of the
year, the Company's debt portfolio was valued at a 25% discount to its par
value, had a current yield of 11%, and a yield to maturity of 14%. Its equity
portfolio traded on a dividend yield of 7% and the overall portfolio's free cash
yield was 8%.
2009 was a year of two themes for the Fund. The first theme, absorbing
considerable time during the first half of the year, was the Fund's tender offer
to its exiting shareholders. We did not commence making significant new
investments for the continuing pool of the Fund until the middle of May, as the
first theme reached its end. The second theme, animating the second half of
2009, was one of reconstruction. The second theme propelled the Fund in the
second half of last year. It was, and remains, to recover the losses endured by
the Fund in 2008 while improving the financial quality of the investments of the
Fund. That theme implied that the Fund's portfolio of new investments had to
combine minimal risk of loss with a material prospect of an internal rate of
return exceeding 20%. 2009 ended with the Fund obtaining a total return of 48%.
Two of the Fund's positions were sold to corporate acquirers during 2009. Addax
Petroleum was acquired by China's Sinopec for CAD $52.8 per share in August,
after having closed 2008 at less than $20. AOF sold its Addax convertible bond
position into the market and tendered its shares to Sinopec, earning an overall
return of nearly 100% on its investment. In addition, AOF sold its holding in
Moto Goldmines to Randgold Resources and Anglogold Ashanti in September for a
gain of 200%. Moto is an emerging gold mining company with its principal asset
in the Congo. Randgold's acquisition took place after an initial bid from Red
Back Mining. AOF was delighted to see a competitive bidding situation emerge so
soon after the collapse of markets in 2008.
The Fund's most lucrative investments of 2009 were made in the arena of fixed
income securities. In increasing the Fund's exposure in that arena, we sought
equity-like returns. In essence, excluding money market investments, in a world
in which even US government debt at the prices prevailing in the last 12 months
has been characterized as "return free risk", we think of a bond, whether
corporate or government, as an independent business unit. 3Â Bonds have the
additional advantage, over equity securities, of having superior asset coverage
because they have a claim on an issuer's assets that ranks ahead of equity. A
bond purchased at a discount to par is often cheaper than the underlying equity
of that issuer because that discounted bond has that issuer's classes of equity
securities serving as a cushion. Consequently, bonds trading below par tend to
appeal to us as an avenue to acquire assets at a discount.
A good example is our investment in Old Mutual subordinated bonds. Old Mutual is
the holding company of the largest private financial services institution in
South Africa. Its subsidiaries also provide financial services in Kenya, Malawi,
Namibia, Swaziland, and Zimbabwe. It is a member of the FTSE 100 and is also
listed on the Johannesburg, Malawi, Namibia, and Zimbabwe stock exchanges. It is
"investment grade" with a Moody's rating of Baa3, a Fitch rating of BBB-, and an
AM Best rating of BBB+. Most of its operating profits since 2007 have been
earned in Africa.
In May 2009, AOF began purchasing the € 5% perpetual callable securities ("Euro
perpetuals") and £ 6.376% perpetual callable securities ("Pound perpetuals" and,
together with the Euro perpetuals referred to as the "Perpetuals") issued by Old
Mutual PLC ("Old Mutual"), each at a price of 31. By the end of July, we had
invested €810,210 and £712,830 in those two instruments. Listed on the London
Stock Exchange, both securities are subordinated unsecured notes of indefinite
duration. They rank ahead of only preference and ordinary shares. Coupon
payments are not cumulative. Old Mutual may elect to defer a coupon payment;
but, it may not declare dividends on its preference and ordinary shares so long
as it is not making coupon payments on the Perpetuals. In sum, the Perpetuals
are the economic equivalent of equity, hence their status as Tier 2 upper
capital for Old Mutual.
In the case of the Fund's holdings, at its average purchase prices, the running
yields for the Euro perpetuals and the Pound perpetuals were, respectively, 14%
and 16%. Those running yields exceed substantially Old Mutual's 2009 average on
equity of -1.46%, its 2008 average return on equity of 4.6% and the returns on
equity of many European insurance companies. The Fund's decision in purchasing
the Perpetuals to generate double digit running yields was the logical
equivalent of a decision to invest in an insurance business earning double digit
after tax returns on equity, a rare opportunity in an industry which generated
single digit returns on equity in 2008 and 2009. Why were the Perpetuals trading
at such steep discounts to par? Because the credit crunch and market crisis of
2008 hit fixed income securities much more severely than equities. To be sure,
that was a temporary irrational pricing discrepancy.
Old Mutual's ordinary shares have appreciated 122% to March 30, 2010, without
the benefit of a dividend, since the Fund's initial purchase of the Perpetuals.
Simultaneously, the Euro perpetuals have appreciated 156% and the Pound
perpetuals have appreciated 149%. Yet, the Fund's initial purchase price of 31%
of par implied that there was a 100% probability of default by Old Mutual with
the holders of Perpetuals recovering only 1/3rd of par. In that eventuality, Old
Mutual's ordinary shares should have been worthless, instead of commanding a
value of £3.73 billion. Yet, even stringent modifications to Old Mutual's
embedded value calculations to provide some sense of its liquidation value
confirmed that the Perpetuals were worth par. Thus, an investment in the
Perpetuals was much safer than Old Mutual's ordinary shares. An additional
benefit of the Perpetuals was that, unlike Old Mutual's ordinary shares, they
were not subject to dilution risk. The market was afraid that Old Mutual would
have to issue shares to strengthen its balance sheet. In our view, that dilution
risk vitiated any possible margin of safety in holding Old Mutual equity in an
uncertain period. In sum, the Perpetuals were valued at 1/3rd of their
liquidation value, constituted a bargain compared to the ordinary shares,
provided a higher double digit return on invested capital than the ordinary
shares, retained some of the upside of those ordinary shares, without a credible
threat of earnings dilution, yet distributed all their earnings in cold hard
cash.
The approach of valuing a bond as an independent business unit also explains the
allure of the PA Resources bonds. We use the 10% 2nd lien 6/20/11 bonds as an
illustration. PA Resources AB ("PA") is a Swedish oil exploration and production
company listed on the Oslo Stock Exchange that is one of the largest oil
producers in Tunisia. Despite its Swedish address, 100% of PA's 78.9 million
barrels of proved and probable reserves are located in Tunisia and the Republic
of Congo. It has a 100% interest in the Didon oil field in Tunisia, a 35%
working interest in the Azurite oil field operated by Murphy Oil Corporation, a
6% working interest in the Aseng field of Equatorial Guinea operated by Noble
Energy Inc., and exploration licenses in the United Kingdom, the North Sea area.
Based on the 2009 BP Energy Report, PA's daily production from the Didon field
accounted for 12% of Tunisia's 2008 daily production. PA's 2nd lien bonds rank
behind the bonds issued by a subsidiary of PA called Didon Tunisia Pty Ltd (we
also own some of the Didon Tunisia bonds). However, we considered them to be
structurally superior to the Didon Tunisia bonds because they mature in 2011
whereas the Didon Tunisia bonds mature in 2012. At the 70% of par we paid for
our initial purchase of the 2nd lien bonds, we earned an annual yield of 14.3%
although PA's return on equity in 2009 was 0.3%. To provide some comparative
perspective, Murphy Oil had a return on common equity of 12% in 2009 and had an
earnings yield (the reciprocal of the P/E ratio) of 5.5%. Another way of viewing
our purchases of PA bonds is to think of the amount we paid for the underlying
reserves. We estimate that, at our initial purchase prices, we paid $3 per
barrel of PA reserves, which was 6% of the $50 per barrel of oil that the market
was then paying for the reserves of Tullow Oil PLC ("Tullow"). Clearly, the 2nd
lien bonds were purchased at a substantial discount to their intrinsic value.
Where AOF can find securities trading at a premium to intrinsic value, we will
similarly seek to generate returns by selling that security short. The short
seller, by borrowing a security and selling it in the market at that premium
valuation, can later repurchase that security at a lower price approximating the
short seller's estimate of intrinsic value for a profit. There are other
benefits from short sales insofar as they are a source of funds and permit an
investor to hedge some risks. The Fund's prime brokerage relationship with
Newedge permitted it to engage in the short sale of ordinary shares of Tullow
last year.
Tullow is one of the most successful oil exploration and production companies of
recent times. It has grown over ten years from a small junior explorer to a
major global player. Management is superb and its success in Ghana is exemplary.
Yet, despite our admiration for Tullow and its management, we concluded that it
was substantially overvalued. It was priced for indefinite exploration and
production success. So, AOF initiated a short position in Tullow shares. In
fact, the proceeds from our short sales funded some of our long positions in the
PA Resources bonds. By the end of 2009, an investor that bought Tullow shares
was paying over $50 per reserve barrel, which contrasts sharply with the $3 per
reserve barrel that the Fund paid for its PA Resources bonds. It is obvious that
enthusiasm for Tullow is driven by the huge exploration upside of its
discoveries in Ghana and Uganda. Thus, an investor was paying $22 per resource
barrel for Tullow while paying $4 per resource barrel for its partner, Anadarko
(note the distinction between "reserve" and "resource", though it makes little
difference to the overall argument). Our short position constituted our 6th
largest holding by the end of the year. As happens with long positions, it takes
a while for the market to either confirm or confute one's judgment. By the end
of 2009, the Fund had lost approximately 20% on its short position. But, the
market revalued Tullow at the beginning of 2010 and AOF reduced its position.
Meanwhile, the Tullow short position allowed the Fund to invest a larger amount
of capital in the oil and gas industry than it would have otherwise. Besides the
PA Resources bonds, 7% of the Fund's portfolio was invested in warrants issued
by the Central Bank of Nigeria, with a guarantee from its Federal Government,
that pay a coupon linked to the crude oil price. The 2009 purchases of those
warrants by the Fund were made for a 30% cash yield. The Fund also has indirect
exposure to oil prices because it has a long position in a natural rubber
plantation, Societe Africaine de Plantations d'Heveas. The price of natural
rubber is tightly correlated to crude oil prices because a substitute for
natural rubber is synthetic rubber, which is a petroleum based product. As a
result, the Tullow position also served as a hedging tool on a wider portfolio
basis.
The Fund's portfolio experienced some losses in its long positions. The bonds of
Diamondcorp PLC declined from 65% of par at the beginning of 2009 to 30% of par
on December 31, 2009. Diamondcorp PLC's sole operating asset, the Lace diamond
mine in South Africa, was put under care and maintenance. The 10% Sphynx
28/01/11 notes, evidencing Ivorian government bonds, fell from 60% of par to
40% of par, as the Cote d'Ivoire government defaulted on its obligations.
The remainder of this report comprises commentary on two of AOF's largest equity
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 AOF's largest investment. Its subscribers grew
by 27% in 2009 to 9.2 million. Sonatel has operations in Senegal, Mali, Guinea,
and Guinea-Bissau. It has 100% of Senegal's fixed line market, 90% of Senegal's
internet market, 67% of Senegal's mobile telephony market, 80% of Mali's
telephony market, 25% of Guinea's mobile telephony market, and 25% of the mobile
telephony market in Guinea-Bissau. At 33% for the 2009 financial year, Sonatel's
net margin is the second highest in Africa. In addition, Sonatel has the highest
operating cash flow per telephone subscriber in Africa of $91, the lowest debt
to equity ratio in the telecoms industry of 30%, a debt to total assets ratio of
19%; and a return on average equity of 34%. Yet, as of March 30 2010, with an
enterprise value around $2.7 billion and a market capitalization of $2.9
billion, Sonatel has the second lowest African telephone operator valuation with
a PE ratio of 10X and an enterprise value per subscriber of $295.
African Bank Investment Limited. African Bank Investments Limited ("ABIL") is
the largest consumer finance company in South Africa and Africa. It is the
holding company for African Bank ("African Bank"), a bank, and Ellerines
Brothers, a furniture retailing company. Its subsidiaries grant unsecured loans
to individuals, loans secured by furniture to individuals, and sells furniture.
Its customers are members of the emerging middle class and its average loan size
is 7,000 Rands (or $700). Furniture sales by Ellerines was anaemic, in part
because of the recession in South Africa, but also because ABIL has been
restructuring that business unit. It appears that Ellerines sales are beginning
to recover. African Bank's 1639 branches constitutes the largest financial
branch network in South Africa. Unlike the four major commercial South African
banks, it has no exposure to the mortgage market. Its funding strategy is rare.
It funds itself long term to make loans of shorter duration. As of the end of
September 2009, its ratio of tangible shareholders equity to tangible assets was
23%. African Bank's tier 1 capital adequacy ratio is nearly 20%. That high
capital ratio permits African Bank to incur high non-performing loans and bad
debts in its market. African Bank has strong liquidity ratios, with maturing
liabilities at any one time being half of maturing assets. ABIL's return on
average assets declined from 7.6% in 2008 to 5.8% in 2009 and its return on
average equity declined from 21% to 15%. But, its return on average tangible
equity was 28%. African Bank had a market capitalization on March 30 of 29.4
billion Rands. It traded on a PE ratio of 16.2 and a Price/Book ratio of 2.4 and
a Price/Tangible Book of 4.4.
Once again, we end with a restatement of our investing philosophy. The key
elements of the investment strategy for AOF are:
Material discounts to intrinsic value: AOF invests primarily where and when an
investment can be made at a material discount to the Manager's estimate
intrinsic value.
Company preference: AOF 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: AOF seeks to invest in industries it
finds attractive with little regard to national borders.
National resource discounts: AOF 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: AOF 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: AOF 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. Valuations in some
African industries that rely on credit remain low because of the withdrawal of
credit in the last few years. The markets of some countries have still to
recover, in US Dollar terms, from the 50%+ depreciation of their currencies
against the US Dollar in 2009. We remain interested in industries which have
products in short supply in Africa that rely more on the domestic African
economy than the global economy. We are hunting in those terrains for compelling
equity investments. We shall continue to build a portfolio that delivers both
capital growth and income to the shareholders of AOF.
Francis Daniels
Africa Opportunity Partners
June 2010
3 Our approach to investing in bonds is somewhat famously described by Warren
Buffet in Berkshire Hathaway's 1984 Annual Report. He writes: "As you know, we
buy marketable stock.based upon the criteria we would apply in the purchase of
an entire business. .We extend this business-valuation approach even to bond
purchases such as WPSS (Washington Public Power Supply System). We compare the
$139 million cost of our yearend investment in WPSS to a similar $139 million
investment in an operating business. In the case of WPSS, the "business"
contractually earns $22.7 million after tax (via the interest paid on the
bonds), and those earnings are available to us currently in cash. Only a
relatively few businesses earn the 16.3% after tax on unleveraged capital that
our WPSS investment does and those businesses, when available for purchase, sell
at large premiums to that capital. In the average negotiated business
transaction, unleveraged corporate earnings of $22.7 million after-tax
(equivalent to about $45 million pre-tax) might command a price of $250-$300
million (or sometimes far more). For a business we understand well and strongly
like, we will gladly pay that much. But it is double the price we paid to
realize the same earnings from WPSS bonds."
AFRICA OPPORTUNITY FUND LIMITED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2009
+------------------------------------------------+----+----------++------------+
| |Note| 2009 || 2008 |
+------------------------------------------------+----+----------++------------+
| | | USD || USD |
+------------------------------------------------+----+----------++------------+
|Income | | || |
+------------------------------------------------+----+----------++------------+
|Interest revenue | 6 |1,520,674 ||6,150,183 |
+------------------------------------------------+----+----------++------------+
|Dividend revenue | |1,407,439 ||1,606,923 |
+------------------------------------------------+----+----------++------------+
|Net gain on financial assets and liabilities at |7(c)|6,852,439 ||- |
|fair value through profit or loss | | || |
+------------------------------------------------+----+----------++------------+
|Other income | 12 |1,517,681 ||139,595 |
+------------------------------------------------+----+----------++------------+
|Realised exchange gain | |25,771 ||- |
+------------------------------------------------+----+----------++------------+
+------------------------------------------------+----+----------++------------+
| | |11,324,004||7,896,701 |
+------------------------------------------------+----+----------++------------+
+------------------------------------------------+----+----------++------------+
|Expenses | | || |
+------------------------------------------------+----+----------++------------+
|Management fee | 5 |540,759 ||2,010,654 |
+------------------------------------------------+----+----------++------------+
|Custodian, secretarial and administration fees | |181,206 ||549,410 |
+------------------------------------------------+----+----------++------------+
|Brokerage fees and commissions | |181,477 ||485,588 |
+------------------------------------------------+----+----------++------------+
|Audit fees | |56,670 ||52,500 |
+------------------------------------------------+----+----------++------------+
|Directors' fees | |82,144 ||120,000 |
+------------------------------------------------+----+----------++------------+
|Other operating expenses | |81,136 ||129,362 |
+------------------------------------------------+----+----------++------------+
|Net loss on financial assets at fair value |7(c)|- ||53,856,788 |
|through profit or loss | | || |
+------------------------------------------------+----+----------++------------+
|Realised exchange loss | |- ||679,503 |
+------------------------------------------------+----+----------++------------+
+------------------------------------------------+----+----------++------------+
| | |1,123,392 ||57,883,805 |
+------------------------------------------------+----+----------++------------+
+------------------------------------------------+----+----------++------------+
|Profit/(loss) for the year | |10,200,612||(49,987,104)|
+------------------------------------------------+----+----------++------------+
+------------------------------------------------+----+----------++------------+
|Other comprehensive income | |- ||- |
+------------------------------------------------+----+----------++------------+
+------------------------------------------------+----+----------++------------+
|Total comprehensive income | |10,200,612||(49,987,104)|
+------------------------------------------------+----+----------++------------+
+------------------------------------------------+----+----------++------------+
|Attributable to: | | || |
+------------------------------------------------+----+----------++------------+
|Equity holders of the Company | |10,021,265||(49,658,231)|
+------------------------------------------------+----+----------++------------+
|Non-controlling interest | |179,347 ||(328,873) |
+------------------------------------------------+----+----------++------------+
+------------------------------------------------+----+----------++------------+
+------------------------------------------------+----+----------++------------+
| | |10,200,612||(49,987,104)|
+------------------------------------------------+----+----------++------------+
+------------------------------------------------+----+----------++------------+
|Basic earning/(loss) per share attributable to | | || |
|the equity holders of the Fund during the year | 13 |0.2351 ||(0.4056) |
+------------------------------------------------+----+----------++------------+
+------------------------------------------------+----+----------++------------+
AFRICA OPPORTUNITY FUND LIMITED
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2009
+----------------------------------------------+-----+-----------++------------+
| |Notes| 2009 || 2008 |
+----------------------------------------------+-----+-----------++------------+
| | | USD || USD |
+----------------------------------------------+-----+-----------++------------+
|ASSETS | | || |
+----------------------------------------------+-----+-----------++------------+
+----------------------------------------------+-----+-----------++------------+
|Cash and cash equivalents | 9 | 3,673,348||2,671,415 |
+----------------------------------------------+-----+-----------++------------+
|Other receivables | 8 | 719,065||1,294,247 |
+----------------------------------------------+-----+-----------++------------+
|Financial assets at fair value through profit |7(a) | 30,792,960||57,140,459 |
|or loss | | || |
+----------------------------------------------+-----+-----------++------------+
+----------------------------------------------+-----+-----------++------------+
|Total assets | | 35,185,373||61,106,121 |
+----------------------------------------------+-----+-----------++------------+
+----------------------------------------------+-----+-----------++------------+
|Liabilities | | || |
+----------------------------------------------+-----+-----------++------------+
|Other payables | 11 | 835,861||1,616,607 |
+----------------------------------------------+-----+-----------++------------+
|Financial liabilities at fair value through |7(b) | 2,771,400||- |
|profit or loss | | || |
+----------------------------------------------+-----+-----------++------------+
+----------------------------------------------+-----+-----------++------------+
|Total liabilities | | 3,607,261||1,616,607 |
+----------------------------------------------+-----+-----------++------------+
+----------------------------------------------+-----+-----------++------------+
|EQUITY | | || |
+----------------------------------------------+-----+-----------++------------+
+----------------------------------------------+-----+-----------++------------+
|Equity attributable to equity holders of the | | || |
|parent | | || |
+----------------------------------------------+-----+-----------++------------+
|Share capital | 10 | 426,303||1,155,100 |
+----------------------------------------------+-----+-----------++------------+
|Share premium | | 39,319,756||107,741,068 |
+----------------------------------------------+-----+-----------++------------+
|Retained losses | |(8,366,966)||(49,824,259)|
+----------------------------------------------+-----+-----------++------------+
|Equity attributable to equity holders of the | | 31,379,093||59,071,909 |
|parent | | || |
+----------------------------------------------+-----+-----------++------------+
|Non-controlling interest | | 199,019||417,605 |
+----------------------------------------------+-----+-----------++------------+
| | | || |
|Total equity | | 31,578,112||59,489,514 |
+----------------------------------------------+-----+-----------++------------+
+----------------------------------------------+-----+-----------++------------+
|Total equity and liabilities | | 35,185,373||61,106,121 |
+----------------------------------------------+-----+-----------++------------+
AFRICA OPPORTUNITY FUND LIMITED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2009
ATTRIBUTABLE TO EQUITY HOLDERS OF THE PARENT
+---------------+---------++------------++------------++------------++---------------++------------+
+---------------+---------++------------++------------++------------++---------------++------------+
| | Issued || Share || Retained || ||Non-controlling|| Total |
+---------------+---------++------------++------------++------------++---------------++------------+
| | capital || premium || losses || Total || interest || equity |
+---------------+---------++------------++------------++------------++---------------++------------+
| | USD || USD || USD || USD || USD || USD |
+---------------+---------++------------++------------++------------++---------------++------------+
+---------------+---------++------------++------------++------------++---------------++------------+
|At 1 January| || || || || || |
|2008 |1,250,000|| 119,489,981|| (166,028)|| 120,573,953|| 746,478|| 121,320,431|
+---------------+---------++------------++------------++------------++---------------++------------+
+---------------+---------++------------++------------++------------++---------------++------------+
|Share buy back | (94,900)|| (6,262,650)|| -|| (6,357,550)|| -|| (6,357,550)|
+---------------+---------++------------++------------++------------++---------------++------------+
+---------------+---------++------------++------------++------------++---------------++------------+
|Total | || || || || || |
|comprehensive | || || || || || |
|income for the| || || || || || |
|year | -|| -||(49,658,231)||(49,658,231)|| (328,873)||(49,987,104)|
+---------------+---------++------------++------------++------------++---------------++------------+
+---------------+---------++------------++------------++------------++---------------++------------+
|Dividend | -|| (5,486,263)|| -|| (5,486,263)|| -|| (5,486,263)|
+---------------+---------++------------++------------++------------++---------------++------------+
+---------------+---------++------------++------------++------------++---------------++------------+
|At 31 December| || || || || || |
|2008 |1,155,100|| 107,741,068||(49,824,259)|| 59,071,909|| 417,605|| 59,489,514|
+---------------+---------++------------++------------++------------++---------------++------------+
+---------------+---------++------------++------------++------------++---------------++------------+
|Share buy back| || || || || || |
|(Tender offer) |(728,797)||(67,977,957)|| 31,436,028||(37,270,726)|| -||(37,270,726)|
+---------------+---------++------------++------------++------------++---------------++------------+
+---------------+---------++------------++------------++------------++---------------++------------+
|Total | || || || || || |
|comprehensive | || || || || || |
|income for the| || || || || || |
|year | -|| -|| 10,021,265|| 10,021,265|| 179,347|| 10,200,612|
+---------------+---------++------------++------------++------------++---------------++------------+
+---------------+---------++------------++------------++------------++---------------++------------+
|Non-controlling| || || || || || |
|interest buy| || || || || || |
|back | -|| -|| -|| -|| (397,933)|| (397,933)|
+---------------+---------++------------++------------++------------++---------------++------------+
+---------------+---------++------------++------------++------------++---------------++------------+
|Dividend | -|| (443,355)|| -|| (443,355)|| -|| (443,355)|
+---------------+---------++------------++------------++------------++---------------++------------+
+---------------+---------++------------++------------++------------++---------------++------------+
|At 31 December| || || || || || |
|2009 | 426,303|| 39,319,756|| (8,366,966)|| 31,379,093|| 199,019|| 31,578,112|
+---------------+---------++------------++------------++------------++---------------++------------+
AFRICA OPPORTUNITY FUND LIMITED
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED 31 DECEMBER 200
+---------------------------------------------+-----+------------++------------+
| |Notes| 2009 || 2008 |
+---------------------------------------------+-----+------------++------------+
| | | USD || USD |
+---------------------------------------------+-----+------------++------------+
|Cash flows from operating activities | | || |
+---------------------------------------------+-----+------------++------------+
|Profit for the year | |10,200,612 ||(49,987,104)|
+---------------------------------------------+-----+------------++------------+
+---------------------------------------------+-----+------------++------------+
|Adjustment to reconcile profit/(loss) for the| | || |
|financial year to net cash from operating | | || |
|activities: | | || |
+---------------------------------------------+-----+------------++------------+
|Interest income | |(1,520,674) ||(6,150,183) |
+---------------------------------------------+-----+------------++------------+
|(Gains)/ losses on financial assets and | | || |
|liabilities at fair value through profit or | |(6,852,439) ||53,856,788 |
|loss | | || |
+---------------------------------------------+-----+------------++------------+
|Dividend income | |(1,407,439) ||(1,606,923) |
+---------------------------------------------+-----+------------++------------+
|Gain on disposal of held-to-maturity | |- ||(139,595) |
|investment | | || |
+---------------------------------------------+-----+------------++------------+
|Tender offer pool adjustment | |(3,485,296) ||- |
+---------------------------------------------+-----+------------++------------+
|Operating loss before working capital changes| |(3,065,236) ||(4,027,017) |
+---------------------------------------------+-----+------------++------------+
+---------------------------------------------+-----+------------++------------+
+---------------------------------------------+-----+------------++------------+
|Decrease in other receivables | |83,612 ||1,258,942 |
+---------------------------------------------+-----+------------++------------+
|Increase in other payables | |413,679 ||83,445 |
+---------------------------------------------+-----+------------++------------+
|Net cash used in operating activities | |(2,567,945) ||(2,684,630) |
+---------------------------------------------+-----+------------++------------+
+---------------------------------------------+-----+------------++------------+
|Interest received | |2,016,423 ||6,185,937 |
+---------------------------------------------+-----+------------++------------+
|Proceeds on financial liabilities at fair | |2,183,758 ||- |
|value through profit or loss | | || |
+---------------------------------------------+-----+------------++------------+
|Purchase of financial assets at fair value |7(a) |(14,581,367)||(76,022,331)|
|through profit or loss | | || |
+---------------------------------------------+-----+------------++------------+
|Disposal of financial assets at fair value |7(a) |14,317,360 ||17,657,136 |
|through profit or loss | | || |
+---------------------------------------------+-----+------------++------------+
|Disposal of held-to-maturity investment | |- ||4,639,595 |
+---------------------------------------------+-----+------------++------------+
|Dividend received | |1,403,110 ||1,606,923 |
+---------------------------------------------+-----+------------++------------+
|Net cash from / (used in) investing | |5,339,284 ||(45,932,740)|
|activities | | || |
+---------------------------------------------+-----+------------++------------+
+---------------------------------------------+-----+------------++------------+
|Cash flows from financing activities | | || |
+---------------------------------------------+-----+------------++------------+
|Acquisition of non-controlling interest | |(397,933) || |
+---------------------------------------------+-----+------------++------------+
|Redemption of shares | |- ||(6,357,550) |
+---------------------------------------------+-----+------------++------------+
|Dividend paid |17 |(1,637,780) ||(4,181,000) |
+---------------------------------------------+-----+------------++------------+
|Net cash flow used in financing activities | |(2,035,713) ||(10,538,550)|
+---------------------------------------------+-----+------------++------------+
+---------------------------------------------+-----+------------++------------+
|Net increase/(decrease) in cash and cash | |1,001,932 ||(59,155,920)|
|equivalents | | || |
+---------------------------------------------+-----+------------++------------+
+---------------------------------------------+-----+------------++------------+
|Cash and cash equivalent at the start of the | |2,671,416 ||61,827,336 |
|year | | || |
+---------------------------------------------+-----+------------++------------+
+---------------------------------------------+-----+------------++------------+
+---------------------------------------------+-----+------------++------------+
|Cash and cash equivalent at the end of the | |3,673,348 ||2,671,416 |
|year | | || |
+---------------------------------------------+-----+------------++------------+
AFRICA OPPORTUNITY FUND LIMITED
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEAR ENDED 31 DECEMBER 200
1. GENERAL INFORMATION
Africa Opportunity Fund Limited (the "Company") was launched and admitted to
trading on the AIM market of the London Stock Exchange in July 2007.
The Company 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 therefore may invest in securities issued by companies domiciled
outside Africa which conduct significant business activities within Africa. The
Company will have 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 Investment Management Agreement
dated 18 July 2007.
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
will be made through the limited partnership. The limited partners of the
limited partnership are the Company and AOF CarryCo Limited. Millennium Special
Opportunities Holdings Ltd, a limited partner during 2009, had their
non-controlling interest purchased by the Company effective 31 December 2009.
The general partner of the limited partnership is Africa Opportunity Fund (GP)
Limited.
Copies of the annual report are being posted to shareholders and copies will be
available from the company's registered office and also from the Company's
website
http://www.africaopportunityfund.com
<
http://www.africaopportunityfund.com/>.
2. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS
+--------------------------------------------------++------------++------------+
| || 2009 || 2008 |
+--------------------------------------------------++------------++------------+
| || USD || USD |
+--------------------------------------------------++------------++------------+
|Designated at fair value through profit or loss: || || |
+--------------------------------------------------++------------++------------+
|At 1 January ||57,140,459 ||52,632,051 |
+--------------------------------------------------++------------++------------+
+--------------------------------------------------++------------++------------+
|Additions ||14,581,367 ||76,022,332 |
+--------------------------------------------------++------------++------------+
|Disposals ||(14,317,360)||(17,657,136)|
+--------------------------------------------------++------------++------------+
+--------------------------------------------------++------------++------------+
|Net gain/ (loss) on financial assets at fair value||7,173,924 ||(53,856,788)|
|through profit or loss || || |
+--------------------------------------------------++------------++------------+
|Transfer to tender offer pool ||(33,785,430)||- |
+--------------------------------------------------++------------++------------+
|At 31 December (at fair value) ||30,792,960 ||57,140,459 |
+--------------------------------------------------++------------++------------+
+-------------------------------++------------++------------+
| || 2009 || 2008 |
+-------------------------------++------------++------------+
| || USD || USD |
+-------------------------------++------------++------------+
| Analysed as follows: || || |
+-------------------------------++------------++------------+
| - Listed equity securities(4) || 14,333,949 || 31,698,660 |
+-------------------------------++------------++------------+
| - Listed debt securities || 15,673,728 || 22,167,517 |
+-------------------------------++------------++------------+
| - Unlisted equity securities || 225,224 || - |
+-------------------------------++------------++------------+
| - Unlisted debt securities || 560,059 || 3,274,282 |
+-------------------------------++------------++------------+
+-------------------------------++------------++------------+
| || 30,792,960 || 57,140,459 |
+-------------------------------++------------++------------+
FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
+----------------------------------------++-----------++------+
| || 2009 || 2008 |
+----------------------------------------++-----------++------+
| || USD || USD |
+----------------------------------------++-----------++------+
+----------------------------------------++-----------++------+
| - Written call option || 2,716,650 || - |
+----------------------------------------++-----------++------+
| - Written put option || 54,750 || - |
+----------------------------------------++-----------++------+
+----------------------------------------++-----------++------+
| Financial liabilities held for trading || 2,771,400 || - |
+----------------------------------------++-----------++------+
3. SHARE CAPITAL
+------------------------++-------------++----------++-------------++----------+
| || 2009||2009 ||2008 ||2008 |
+------------------------++-------------++----------++-------------++----------+
| ||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|
+------------------------++-------------++----------++-------------++----------+
+------------------------++-------------++----------++-------------++----------+
+------------------------++-------------++----------++-------------++----------+
+-----------------------------++------------++---------++-----------++---------+
| || 2009||2009 ||2008 ||2008 |
+-----------------------------++------------++---------++-----------++---------+
| ||Number ||USD ||Number ||USD |
+-----------------------------++------------++---------++-----------++---------+
|Share capital || || || || |
+-----------------------------++------------++---------++-----------++---------+
|Opening balance ||115,510,000 ||1,155,100||125,000,000||1,250,000|
+-----------------------------++------------++---------++-----------++---------+
|Share buy back - (Tender || || || || |
|Offer) ||(72,879,673)||(728,797)||- ||- |
+-----------------------------++------------++---------++-----------++---------+
|Share buy back ||- || ||(9,490,000)||(94,900) |
+-----------------------------++------------++---------++-----------++---------+
+-----------------------------++------------++---------++-----------++---------+
| ||42,630,327 ||426,303 ||115,510,000||1,155,100|
+-----------------------------++------------++---------++-----------++---------+
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 to a discount to the
Net Asset Value, the directors will consult with the Investment Manger as to
whether it is appropriate to instigate a repurchase of the ordinary shares.
4. EARNINGS/(LOSS) PER SHARE
Basis loss per share is calculated by dividing the loss attributable to equity
holders of the Group by the weighted average number of ordinary shares in issue
during the period excluding ordinary shares purchased by the Group and held as
treasury shares.
The Group's diluted loss per share is the same as basic loss per share, since
the Group has not issued any instrument with dilutive potential.
+-------------------------------------------+--------++----------++------------+
| | || 2009 || 2008 |
+-------------------------------------------+--------++----------++------------+
+-------------------------------------------+--------++----------++------------+
|Gain/(loss) attributable to equity holders | || || |
|of the Group |USD ||10,021,265||(49,658,231)|
+-------------------------------------------+--------++----------++------------+
+-------------------------------------------+--------++----------++------------+
+-------------------------------------------+--------++----------++------------+
|Weighted average number of ordinary shares | || || |
|in issue | ||42,630,037|| 122,431,041|
+-------------------------------------------+--------++----------++------------+
+-------------------------------------------+--------++----------++------------+
|Basic earnings/(loss) per share |US cents|| 23.51|| (40.56)|
+-------------------------------------------+--------++----------++------------+
5. RELATED PARTY DISCLOSURES
The financial statements include the financial statements of Africa Opportunity
Fund Limited and the subsidiaries in the following table:
Country of % equity interest % equity interest
Name incorporation 2009 2008
Africa Opportunity Fund
(GP) Limited Cayman Islands 100 100
Africa Opportunity Fund
L.P. Cayman Islands 98.84 98.37
During the period ended 31 December 2009, the Company transacted with related
entities. The nature, volume and type of transactions with the entities are as
follows:
2009 Balance at
Type of Nature of Volume 31 Dec 2009
Name of related relationship transaction USD USD
parties
Africa Opportunity Investment Manager Management fee 540,749 -
Partners Limited expense
During the period ended 31 December 2008, the Company transacted with related
entities. The nature, volume and type of transactions with the entities are as
follows:
2008 Balance at
Type of Nature of Volume 31 Dec 2008
Name of related relationship transaction USD USD
parties
Africa Opportunity Investment Manager Management fee 2,010,654 2,010,654
Partners Limited expense
Key Management Personnel (Directors' fee)
Except for Francis Daniels and Robert Knapp who have waived their fees, each
director has been paid a fee of USD 30,000 per annum plus reimbursement for
out-of pocket expenses.
Francis Daniels and Robert Knapp who are directors/shareholders of the Company
are also shareholders of the Investment Manager and form part of the executive
team of the Investment Manager. Details of the agreement with the Investment
Manager are disclosed in Note 5. They have 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. The total carried interest is 20%.
6. SHARES BUY BACK - TENDER OFFER
In the wake of the financial crisis in 2008, the Company had been notified by
some of its largest Shareholders that difficult market conditions required that
they realise investments, including their investments in the Company.
Furthermore, the size of some of the shareholdings concerned and the current
discount to Net Asset Value per Ordinary Share at which the Ordinary Shares
trade meant that the market mechanism didnot provide an attractive option in
terms of realising an investment for those Shareholders.
Accordingly, after discussions with the major Shareholders, the Company and the
Investment Manager determined to implement a Tender Offer to allow Shareholders
an opportunity to realise their investment in the Company.
The Company announced a Tender Offer in early February 2009 which was closed on
the 26th of February 2009. Shareholders were given the option to submit 100% of
their holdings for redemption. 37% of holders chose to remain invested.
The mechanics of the redemption was as follows:
The price that will be paid to Shareholders who decide to tender Ordinary Shares
will be linked to the net amount actually realised from a pro rata share of the
Company's investment portfolio. This sum may be different from the Company's
announced Net Asset Value per Ordinary Share.
The Company's assets and liabilities is divided into a Tender Offer Pool or
Liquidating Pool for exiting shareholders and a Continuing Pool for continuing
shareholders on, 27 February 2009, the calculation date.
Following the calculation date, exiting shareholders ceased to have any rights
as shareholders and became unsecured creditors until the payment of the Tender
Consideration has been completed.
The assets and liabilities which have been sent to the Liquidating Pool have
been derecognised as they meet the criteria set out in IAS 39 for derecognition.
For those investors that tendered their shares to the Company, as of 31st
December the NAV per share of the liquidating pool is estimated to be
approximately US$0.07.
For further information please contact:
Africa Opportunity Fund Limited
Francis Daniels Tel: +2711 684 1528
Grant Thornton Corporate Finance (Nominated Adviser)
Philip Secrett Tel: +44 207 383 5100
[HUG#1422689]
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