TIDMAOF
RNS Number : 6440X
Africa Opportunity Fund Limited
30 April 2019
30 April 2019
Africa Opportunity Fund Limited (AOF LN)
Announcement of Annual Results for the Year ended 31 December
2018
The Board of Africa Opportunity Fund Limited ("AOF", the
"Company" or the "Fund") is pleased to announce its audited results
for the year ended 31 December 2018. The Company's full annual
report and financial statements will shortly be sent to
shareholders and will be available to view and download from the
Company's website at: www.africaopportunityfund.com.
The following text and financial information does not constitute
the Company's annual report but has been extracted from the annual
report and financial statements for the year ended 31 December
2018.
The Company
Africa Opportunity Fund Limited is a Cayman Islands incorporated
closed-end investment company traded on the Specialist Fund Segment
("SFS") of the London Stock Exchange ("LSE"). AOF's net asset value
on 31 December 2018 was US$ 50.2 million and its market
capitalisation was US$44.2 million.
The following text and financial information does not constitute
the Company's annual report but has been extracted for the year
ended December 31, 2018.
Proposals
In accordance with the Prospectus dated 28 March 2014 a
continuation vote will be put to shareholders this year, which will
take place at a general meeting at the time of the Company's AGM,
which is currently expected to take place in June 2019. The
continuation vote will be put to shareholders together with a
number of other proposals which will include a tender offer in a
similar structure and format to that conducted in 2009, in which
the assets are divided into a continuing pool and a realisation
pool, together with changes to the management fee structure,
whereby it is proposed that no further asset based management fees
or incentive fees will be charged against the realisation pool, and
instead the Manager will be paid 2% of capital distributed to
shareholders if such distribution takes place prior to 31 December
2019, and reducing thereafter. A circular containing full details
of the proposals is expected to be published in the coming
weeks.
The information contained within this announcement is deemed to
constitute inside information as stipulated under the Market Abuse
Regulations (EU) No. 596/2014. Upon the publication of this
announcement, this inside information is now considered to be in
the public domain.
For further information please contact:
Africa Opportunity Fund Limited
Francis Daniels Tel: +2711 684 1528
Liberum (Corporate Broker)
Gillian Martin
Christopher Britton Tel: +44 20 3100 2000
Chairperson's Statement
2018 Review
2018 was a difficult year for emerging, as well as world,
markets and the Africa Opportunity Fund (the "Fund" or "AOF") also
felt this pressure.
Recovery stalled in Africa as rising commodity prices in the
first half of the year fell in the last quarter of 2018. Prices of
Africa's commodity exports fell as prices of its imports rose,
inflicting deteriorating terms of trade on several economies.
Partially offsetting those negative commodity price trends, annual
export production in some countries, like Nigeria, rose. Some
statistics sketch the broad outline of 2018 commodity price
declines for African exporters: prices of crude oil fell 20%;
cobalt 27%; copper 20%; and robusta coffee 15%. In contrast, prices
of imports such as white maize and yellow maize (crucial imports
for African consumers) rose 15% and 21% respectively. Another
impediment was the US Federal Reserve's four interest rate
increases which encouraged outflows of investor funds -
particularly foreign investor funds - from emerging and frontier
markets. Ineluctably, financial conditions tightened in Africa.
As financial conditions tightened, Africa's capital markets
suffered losses even though the economies of countries like Cote
d'Ivoire, Senegal, Ghana, Kenya and Egypt were forecast to perform
as well or better than expected - a 7.4% GDP growth rate for Cote
d'Ivoire, 7% for Senegal, 6% for Ghana, 6% for Kenya, and 5% for
Egypt - thereby affirming the short term disconnect between stock
markets and national economies. Of course, in the long term, the
performances of stock markets and national economies will tend to
synchronise, although one must be cautious: industries and
economies can perform as hoped in the long run while prescient
investors disappear and die in downdrafts, stock market collapses
and any number of short to medium term risks.
In these testing conditions, the Fund's net asset value per
share fell 27% while its share price declined by 19%. To provide
some basis for comparison, South Africa fell 21%, Nigeria fell 14%,
Kenya fell 13%, and Egypt fell 12%. In non-African emerging
markets, China fell 23%, Brazil fell 2%, Russia fell 1% and India
fell 2%. In developed markets, Japan fell 8%, the US fell 5%,
Europe fell 14%, and the UK fell 14%.
AOF's 2018 strategy was, in the main, a continuation of our 2017
strategy. We added to the Fund's gold equity holdings and
exploration and production company ("E&P") holdings. In a
reversal of 2017 trends, the more liquid companies in the Fund's
portfolio, as measured by average daily trading value,
underperformed in 2018. The Fund continued to reduce its bond
portfolio and closed its Rand denominated equity short positions
but added to its electric utility securities and its insurance
holdings. The crude oil price slide in Q4 also led to realised
losses for the Fund on E&P positions built just before the
commencement of that slide. Those losses reinforced the virtue of
AOF's efforts to find good quality companies with strong and
predictable growth prospects.
Several African governments responded to the contracting
financial conditions by seeking both to strengthen the
effectiveness of state institutions and to increase the quantum of
national revenues under their control - actions that should in the
long term have beneficial implications for the economies of the
African continent even though it may take several years to expunge
the image of Africa as a deeply corrupt continent. For example,
South Africa has taken significant steps to tackle the high level
of corruption that has bedeviled it for many years. Kenya's
Director of Public Prosecutions also initiated prosecutions of
prominent Kenyan officials for breach of trust and other criminal
conduct. Indeed, one of our portfolio companies - Kenya Power -
suffered the dubious distinction of having two former Managing
Directors charged simultaneously with procurement crimes. To date,
those steps and prosecutions have demonstrated that in too many
countries large infrastructure projects, like power plants and
substations, blend malfeasance with inflated costs, late
completion, low performance, and onerous debt burdens.
Other countries like Zambia, Tanzania, and the Democratic
Republic of the Congo raised royalties on foreign mining companies
to increase revenue, regardless of the terms of existing tax
stabilisation agreements with foreign mining companies. In
contrast, a third set of countries, like Ghana and South Africa, is
attempting to collect more taxes from their own residents. At a
minimum, Africans have to fund governmental operating expenditure
from tax revenues.
The recognition by some countries that they themselves should
bear this responsibility is valuable and important progress towards
increasing financing for vital development.
Raising the levels of integrity and competence of African states
is a deliberate and painstaking endeavour. It is one that may
inflict pain on Africa investors as, for example, assets inflated
by corruption are written down, or bank failures caused by
egregious corporate governance lapses tighten liquidity and slow
temporarily the tempo of economic activity. AOF suffered that type
of pain in Ghana in 2018 as the Bank of Ghana restructured the
banking sector by revoking the licenses of several banks, taking
over five insolvent banks, and forcing the re-capitalisation of the
entire industry. Ghana's government had to increase its debt by
$1.2 billion in Q3 to inject fresh capital into those banks,
followed by rising interest rates and a 12% decline of Ghana's
stock market in Q4. Most of the Fund's losses in its Ghanaian
financial holdings occurred in Q4. Zimbabwe was another economy in
which the Fund suffered from its government's attempt to return to
post-election fiscal sobriety. Its central bank and Ministry of
Finance commenced a process in October 2018 to introduce a new
virtual currency - the RTGS Dollar - and to collect more taxes.
Panic ensued, leading to a flight to the safety of actual US
Dollars and a surge in proxies for repatriable US Dollars such as
the Old Mutual Implied Rate. 12% of the Fund's portfolio at the
beginning of 2018 was invested in securities of listed Zimbabwean
commercial property companies. AOF adopted a conservative approach
to reflect the implied penalty of seeking to move funds out of
Zimbabwe and adopted a valuation methodology for its listed
Zimbabwean securities matching that of open-ended mutual funds.
This reduced the value of AOF's holdings by 90% in its books. Our
solace is that the replacement value of the property portfolios of
those lightly levered Zimbabwean companies should be unaffected by
those reductions in valuation. More information on the use of the
Old Mutual implied rate is provided in Note 4.
The Fund's frequently expressed preference for emerging
pan-African multinational companies was endorsed by the
establishment of the African Continental Free Trade Area (ACFTA).
The ACFTA Agreement, signed in Kigali, Rwanda, in March 2018 is a
significant attempt to reduce barriers to intra-African trade. 52
African countries have signed this Agreement, with Nigeria,
Tanzania, and Eritrea as the non-signing laggards. 22 countries
must ratify this treaty to bring it into force. To date, 19
countries, including South Africa and Kenya, have done so. It will
take decades, and considerable physical investment in transport
infrastructure, for the full benefits of this Agreement to be
manifest in the daily lives of Africans. Yet, long before those
benefits are realised, this African continental free trade zone
should prove to be a fecund source of intense intra-African
competition and larger profits for multinational African
companies.
More immediate contributors to African development will come
from the natural gas and oil discoveries to be brought into
production in the next decade. They will generate both substantial
foreign exchange earnings for their host countries and ample,
reliable, and competitively priced domestic energy supplies.
Globally, efficient domestic energy supplies have been a crucial
ingredient in the successful industrialisation of national
economies. Efficient domestic energy supplies should play a similar
catalytic role in African industrialisation in the next two
decades. Some of the biggest global natural gas discoveries are
reaching final investment decision stage in West and East Africa.
The Greater Tortue natural gas field discovered in 2015 in Senegal
and Mauritania by Kosmos Energy, an energy holding of AOF, is
estimated to hold up to 60 trillion cubic feet. Final investment
decision for phase 1 development of this gargantuan field was taken
in December 2018, with first gas expected in H1 2022. This project
will supply both the domestic gas needs of Senegal and Mauritania
and the European natural gas markets. Mozambique's Rovuma basin
projects hold more than 100 trillion cubic feet of natural gas
(approximately 55% of Nigeria's 2017 natural gas reserves).
Anadarko, ENI and Exxon Mobil expect to announce their final
investment decisions by the end of H1 2019, with first production
around 2025. Domestic, regional, and Asian gas needs will be
supplied from this basin. The huge potential impact on Mozambique's
future is embedded in a fact and a forecast: Mozambique's 2017 GDP
was $12.3 billion. The anticipated government taxes alone from the
Rovuma basin, over the life of that basin, is forecast to be $77
billion, implying that the Rovuma basin gives the Mozambican
government a great opportunity to raise the living standards and
skills of its citizenry.
The several developments discussed above - inimical though they
have been for the short-term performance of the Fund - herald a
period in the 2020s in which the industrial capacities of African
companies could be enlarged and deepened to the mutual benefit of
governments, workers, and investors. Long-term oriented pan-African
investors like the Fund can benefit quietly from these positive
changes.
In 2018 AOF appealed against an arbitral award handed down in
favour of Shoprite Holdings Ltd., which award concluded that the
Fund had not obtained good title to a significant number of
Shoprite shares purchased on the Lusaka Stock Exchange between 2009
and 2011. The appeal was dismissed in January 2019. AOF, in the
context of its role as a stock market investor, believes that it is
appropriate to continue to pursue all its options. The appeal
outcome notwithstanding, we remain unbowed in our convictions. We
remain convinced that trades consummated on the Lusaka Stock
Exchange, as with trades on any and all other stock exchanges, and
whether the trades were concluded in the 21st century, or earlier,
transfer good title to those traded securities from the seller to
the buyer. Indeed, a stock exchange's very raison d'etre is to
eliminate counterparty risk for both a buyer and a seller who
execute a trade on a stock exchange. We are unapologetically
mystified, and concerned, by the appeal panel's reversal of even
our Lusaka Stock Exchange purchases of Shoprite shares from third
parties other than Shoprite, whether in big or small lots. We
accept that the decision must take its course, but reiterate our
view that the law is at its finest when law meets justice. Time
will tell whether this decision blends law with justice.
2019 Outlook
AOF begins 2019 with caution. There are increasing signs of
economic weakness in China, Europe, and the United States. Another
year of subdued commodity prices and African currencies is
eminently possible. Yet, the demonstrations in countries like Sudan
and Algeria against incumbent rulers, the relatively peaceful
elections in Nigeria, and the dramatic changes in Ethiopia's polity
and policies show that Africans want a freer and more democratic
continent. There is also increasing recognition that improving the
integrity, competence, and fiscal strength of African states is
essential for rapid African economic development and, by
implication, the multiplication and growth of the African companies
that will be the bedrock of Africa's future economic
development.
These positive developments should take root in the continent
over the next few decades, making Africa progressively more
attractive to investors as its GDP per capita, its youthful
population, and its educational and productivity levels all
continue to rise. We hope that rising GDP rates in Africa will
enlarge the emerging African middle classes, improve government
finances, and open up investment opportunities.
A closed-end investment company, like AOF, benefits from having
long-term liabilities, unlike open-ended funds which have a
short-term monthly or daily redemption liability. The Fund's
closed-end structure allows it the freedom to invest long term in
high quality issuers without focusing on liquidity. To build upon
that advantage, the Fund intends to become a focused investment
company with far fewer investments than it has held in the last few
years. By concentrating on the strongest investments of the current
portfolio and disposing of the rest, AOF hopes to generate higher
returns over time. The Fund will shortly put forward restructuring
proposals to take advantage of this opportunity whilst also
facilitating a realisation mechanism for shareholders who wish to
exit. As part of the restructuring proposals, the Fund will seek to
amend the investment management agreement to reduce costs by
eliminating an asset-based fee and implementing a fixed cost base
agreement. As part of this restructuring, the Fund will conduct a
continuation vote thus fulfilling a promise to shareholders made in
2014 as contained in the Company's prospectus dated 28 March 2014.
Additional details will be released to shareholders in a separate
circular, in due course.
Concluding Thoughts
In closing, we extend our thanks to our shareholders for their
support and look forward to continuing to work with you in the
years to come.
Dr. Myma Belo-Osagie
Chairperson
April 2019
Manager's Report
2018 Review
2018 marked the eleventh full year of operation of Africa
Opportunity Fund (the "Fund" or "AOF"). Its ordinary shares had an
annual return of -27%. At year-end, AOF held $47.0 million in
equity securities, $2.3 million in debt securities; and short sale
liabilities equal to $0.8 million. The Fund's underlying
end-of-year holdings were in Botswana, Cote d'Ivoire, Egypt, Ghana,
Kenya, Nigeria, Senegal, South Africa, Tanzania, Uganda, Zambia,
and Zimbabwe.
The Fund turned in a dismal performance in 2018. Its Q4
performance was dominated by sharp price declines in its major
holdings - Enterprise Group, Sonatel, and its investment in Kosmos
Energy. Enterprise Group declined by 26% in Q4 and 44% in 2018;
Sonatel fell by 21% in Q4 and 28% in 2018, and Kosmos fell by 56%
in Q4 and 40% in 2018. One sense of the profound undervaluation of
some of the companies in the Fund's portfolio can be gleaned from
the end-of-year dividend yields. Sonatel was trading on a 9%
dividend yield; Copperbelt traded on an 11% dividend yield, despite
reasonable dividend payout ratios.
Comparative Returns
-----------------------------------------
Index/Security 1 Year 3 Year 5 Year
AOF NAV -27.0% -22.8% -42.7%
Lyxor Africa ETF -19.8% 33.0% -11.7%
DBX MSCI Africa
Top 50 -19.4% 9.9% -17.3%
VanEck Vectors
Africa -19.5% 17.9% -28.6%
Brazil Bovespa -1.8% 107.1% 4.0%
Russia Micex -1.5% 66.6% -3.2%
India Sensex -1.7% 36.6% 62.2%
China CSI 300 -27.8% -18.8% 26.6%
US S&P 500 -4.4% 30.4% 50.3%
The question, to answer after the Fund's 2018 results, is how
does the Fund generate materially stronger results in the future.
The answer, we believe, is to concentrate the Fund's holdings in
our best and most undervalued investments and to sell everything
else. If we have spare cash and those investments remain cheap,
we'll buy more of them. How will we know what to buy? Securities
which can double their price in US Dollars in three years without
losing their status as value investment. The issuers of those
securities will be companies dominant in sectors or industries that
must grow at underlying growth rates faster than an African
economy's gross domestic product for that economy to become an
industrial developed economy. Financial services is one cluster of
those industries; another is infrastructure. By so investing, the
Fund will become akin to a diversified holding company. It will
seek to turn the macro-economic volatility of many an African
economy into a friend of its investment approach, rather than a
foe. We will seek to be supportive shareholders of the companies in
which we invest, trying to assist those companies to raise their
return on capital employed over time.
There were three key drivers behind the Fund's 2018 performance.
First, the baleful impact of rising secondary market domestic bonds
yields, symptomatic of tightening financial conditions, in Ghana
and Zambia, hosts to some of the Fund's largest investments, on the
valuations of those investments. Second, the change in valuation
methodology in Zimbabwe to reflect the emergence of panic about its
new monetary framework in Q4. Third, volatile commodity prices on
the valuation of commodity producers owned by the Fund. The Fund's
holdings in Enterprise Group and Copperbelt Energy declined
substantially in market value as Ghana and Zambia affirmed the
truth of David Hume's 18th century observation-" No man will accept
of low profits where he can have high interest; and no man will
accept of low interest where he can have high profits."
Inflation-adjusted 1 year Cedi-denominated bond yields doubled from
5.2% in December 2017 to 10.5% by the end of December 2018, as
inflation fell by 2.4% while the 1 year nominal bond yield climbed
2.9%.
The 2018 peak of Enterprise's share price occurred
simultaneously with the trough in 12 month nominal bond yield at
the end of February. Subsequently, from August 2018, the Ghana
government and the Bank of Ghana had to issue more than $1 billion
in bonds because Ghana took over, amalgamated and recapitalized
five insolvent banks. Although general Ghanaian monetary conditions
can explain the direction of Enterprise's share price behaviour, it
cannot account for the steepness of the fall in Enterprise's share
price. Peak-to-trough at the end of 2018, Enterprise inflicted 14
cents per share of unrealized losses on the Fund. In the case of
Zambia, Zambia's inflation-adjusted 1 year Kwacha-denominated bond
yields rose 67% from 10.9% in December 2017 to 18.3% at the end of
December 2018. During H2 2018, Zambia's 8.5% 2024 Eurobond fell
from 92% of par to 75% of par to yield approximately 16%. For
comparison, the Eurobond debt of Mozambique, a sovereign issuer in
default, yields less than 14%. Whether from the perspective of
Zambian kwachs or Dollars, the discount rate for valuing Copperbelt
rose sharply in 2018, at the expense of the Fund and other
Copperbelt shareholders. In those environments, the link between
private market valuations and mergers and acquisitions, on the one
hand, and stock market valuations, on the other hand, was
suspended. It will be restored.
Enterprise Group provided the biggest losses to the Fund in
2018, amounting to 8 cents per share. It is a holding company with
majority owned operating subsidiaries in six Ghanaian fields: a 60%
life assurance subsidiary with the largest market share in that
field; a 75% property and casualty insurance subsidiary which has
the largest market share; an 80% pensions administrator subsidiary
which has the largest market share in Ghana's new private pensions
industry; a 70% owned property development subsidiary; a 60%
indirect subsidiary in the funeral services field; and a
majority-owned life assurance subsidiary in Gambia. The two cash
consuming divisions of Enterprise are property and funeral
services. Its highest return on capital employed division is its
pension trustee business. Taking large positions in companies
expected to generate rising profits over long periods is subject to
the risk of intermittent lumpy and large unrealized declines in
share price. Over time, share price growth matches profit growth.
In the words of Warren Buffet:
"Your goal as an investor should simply be to purchase, at a
rational price, a part-interest in an easily-understandable
business whose earnings are virtually certain to be materially
higher five, ten, and twenty years from now. Over time, you will
find only a few companies that meet these standards-so when you see
one that qualifies, you should buy a meaningful amount of stock" -
Berkshire Hathaway 1996 Annual Report, Pg16.
Our preferred investment approach remains to build a long-term
concentrated holding in a sector growing at a faster rate than an
African country's underlying and decent GDP growth rate: life
assurance, property and casualty insurance, and pension
administration - three of Enterprise's fields of operation - fit
the bill. Gross insurance proceeds, for example, grew at a 12%
annual compounded rate, in US Dollars in spite of a 16%
depreciation of the Cedi against the US Dollar, from 2015 until
2017 while Ghana's real gross domestic product grew at an annual
5.8% rate over that two year period. Yet, insurance penetration
(insurance premia as a percentage of Ghana's gross domestic
product) at the end of that period was a minuscule 1%). In the case
of pension assets, total private assets under management of
licensed pension trustees, like Enterprise Trustees, rose at an
annual 147% compounded rate from $26 million in 2012 to $973
million in 2016 in the face of a 56% depreciation of the Cedi
against the US Dollar. Notwithstanding the secular tailwinds
benefiting the Enterprise ship, 2018 was a tough year for
Enterprise.
Enterprise's rights offering circular of March 2018 had
predicted a 20% increase in gross insurance premia to $131 million
in 2018. The actual result was $116 million. Net insurance revenue
was $97 million instead of $108 million forecast in that circular.
By contrast, insurance benefits and claims paid was $48 million, 6%
higher than the forecast $45 million. Ghana's workers, enduring
stagnant real incomes amidst tight monetary conditions, accounted
for both growing surrenders of Enterprise's life insurance
policies, for example, and lower insurance revenue. Net investment
income also fell 25% from $32 million in 2017 to $24 million,
rather than its predicted $37 million for 2018. Losses on the Ghana
Stock Exchange and in commercial property were two reasons behind
the decline in net investment income. Yet, Enterprise's cost of
float also declined sharply, strengthening Enterprise's long-term
value. We estimate that Enterprise's 2018 cost (-14.8 million
Cedis) of float (average float was 503.5 million Cedis) was
approximately 3% versus 8.5% in 2017.
Average Ghana government 3 month bond yield was 17% in 2018
versus 19% in 2017; average Ghanaian inflation was 10% in 2018
versus 12.6% in 2017. Consequently, Enterprise's actual investment
income received in cash rose 13% to $21.6 million Dollars despite a
6% depreciation of the Cedi. Better still, its "other income"
(housing, for example, fees from its pension trustee business and
harbinger of growth prospects in new divisions) was more than
double the forecast set forth in its rights offering circular.
Enterprise's long-term primary appeal is that it receives funds at
a much lower sub-inflation rate than the Ghana government, but
invests those received funds at the positive inflation-adjusted
rates offered by the Ghana government. Most of that income is
shoveled immediately into long-term life fund insurance contract
liabilities and deferred indefinitely as accounting and tax
profits. In sum, with a 15% return on average equity, the
Enterprise 7.4 X P/E ratio and 0.8X P/B ratio signify deep
undervaluation. The Fund is being paid to wait for Enterprise's
deferred income and solid secular prospects to manifest themselves
in future profits.
Copperbelt was the object of an abortive acquisition attempt for
the first 7 months of 2018 at a substantial premium to the
prevailing market price. Once that acquisition attempt expired, the
intense negative downward pressure from sharply rising real
interest rates exerted their pull over the Copperbelt share price.
The Fund lost a major source of gains with the failure of the
Copperbelt takeover offer by CDC Group. It lost 4 cents per share
of potential gain. Copperbelt's 11% end-of-year dividend yield
climbed to 15% at the end of Q1 2019 after a 46% hike in its 2018
dividend without a compromise of its 50% payout ratio. Still, its
overall 2018 financial results were solid. Revenues and profits
after tax rose, 195% and 562%, from $132 million and $7 million in
2007 to $421 million and $56 million in 2018. It has a five year
record of steady Zambian EBITDA growth: $60 million (2014); $80
million (2015); $92 million (2016); $102 million (2017); and $110
million (2018). Free cash flow rose sixfold from $9 million in 2007
to $59 million (fourfold, after adjusting for the additional shares
issued in 2015). Operational results, though, have been muted since
2013, as the copper mines of Zambia and the Democratic Republic of
Congo-Copperbelt's customers-curtailed production plans in response
to lower copper prices, tax policy differences with host
governments, and drought. Annual power sales of 4281 GWh in 2013
exceeded 2018 power sales of 3676 GWh to Copperbelt's mine
customers. Copperbelt's power trading declined 30% to 594 GWh in
2018, as Zambia ceased to import power from Q2 2018 after the
Zambian state-owned electric utility ("ZESCO") lifted the partial
force majeure in place through the drought period; but Copperbelt
continued to export power to Congolese mines.
One unexpected piece of good news was that Copperbelt sold its
internet and broadband interests to its joint venture
partner-Liquid Telecom for $33 million. Those proceeds were
received in 2019 and have been excluded from our commentary about
Copperbelt. Are there reasons other than high real interest rates
behind Copperbelt's double digit dollar denominated dividend yield?
After all, copper production from Zambia and the Democratic
Republic of Congo is expected to increase over the next 5 years.
Consequently, Copperbelt's base case assumes a minimum 20% increase
in electricity sales over that period to ensure continued growth of
electricity volume sales and profits. One possible explanation is
that the market is worried about the new agreement to replace the
current bulk supply agreement between ZESCO and Copperbelt expiring
in 2019. After all, two notorious facts are ZESCO is burdened by
losses and Zambia's mining industry has opposed consistently power
tariff increases. Nevertheless, we don't believe that an
electricity industry can afford to have a loss-making
transmission
network, therefore, we expect Copperbelt to remain profitable.
Its 12.5% return on equity, its net cash status, plus its dollar
stream of revenues and 15% dividend yield, suggest that Copperbelt
should command a significantly higher valuation than its current
4.5X P/E ratio and 0.54X P/B ratio. Copperbelt's valuation is
unjustifiably depressed.
The Fund's Zimbabwean property holdings, in aggregate, lost more
than 80% of their value in its books because of a change in
valuation policy in November. We switched to using the so-called
Old Mutual Implied Rate to value those holdings because Zimbabwe's
currency crisis and panic took a turn for the worse in October. It
is vital to bear in mind that our property holdings (First Mutual
Properties and Mashonaland Holdings) are essentially unencumbered
commercial buildings and land. They are guaranteed to survive the
currency crisis. Replacing their portfolios is unlikely to become
cheaper with the passage of time. The effect of that switch is
manifest in the massive differential between the aggregate property
value of those two companies--about $240 million-and the Old Mutual
Implied Rate valuation of those two companies. The official end of
year aggregate market capitalizations of those two companies was
$140 million. But, applying the Old Mutual Implied Rate to the
official market capitalizations reduced their valuation by 80% to
$27 million. It is undoubtedly true that Zimbabwean commercial
property does not generate a lot of cash these days, especially in
the midst of a currency crisis. Cash, in the form of actual US
Dollars, commands a huge premium in Zimbabwe. Yet, Zimbabwean
commercial property should be worth a great deal more than the
valuation they command under the Old Mutual Implied Rate.
Sonatel's share price performance mirrored that of the BRVM,
which fell 31% in 2018. Its end-of year dividend yield of 10.4%
suggests that the market considers Sonatel's equity to be de facto
bonds, with no prospect of future growth. We continue to think that
Sonatel is walking on the path beaten by a Safaricom and an Econet.
It will take a few years for its net profits and margins to emulate
the results displayed by those companies. In the meantime, though,
a 10% dividend yield does compensate us for our wait.
The losses occasioned by the companies discussed in this
report-Enterprise, Copperbelt, Sonatel, and Zimbabwean property
companies-are unrealized. We believe that they will be reversed
because the current valuations of those companies are unreasonably
cheap. However, the Fund did realize some losses. We reduced our
positions in Naspers and Kosmos Energy, signifying a reappraisal of
the ideal weighting of those companies in the Fund's portfolio,
crystallizing losses to reach our smaller holdings in those
companies. Kosmos Energy is an independent deepwater oil and gas
explorer and producer to which the Fund has had exposure for a few
years. Its specialty is exploration around the Atlantic Margin. At
the time of our initial investment, Kosmos' sole source of
production was the Jubilee field in Ghana. Today, it produces oil
from Ghana, Equatorial Guinea, and the Gulf of Mexico, averaging
81,000 low-cost barrels of oil per day. It paid its maiden dividend
in Q1 2019. We were attracted by its business model. The basic
business model of Kosmos has four interlocking and unorthodox
parts: (a) explore for natural hydrocarbons in countries which
combine geological indicators of those hydrocarbons, a long history
of failure to find commercial discoveries, and a decent potential
to discover huge hydrocarbon fields; (b) negotiate extremely
favorable tax regimes in its target countries to reward Kosmos if
exploration is successful, with future explorers having to accept
less favorable tax regimes after Kosmos has lowered the geological
risks of those target countries; (c) design a plan to commence
commercial production of discovered hydrocarbons in a much shorter
period than industry norms; and (d) maintain a sober balance sheet,
founded on low-cost oil and hedges to ensure cash flow even in
depressed industry conditions. Kosmos has revealed a capacity to
make astute acquisitions in the last two years, evidenced by the
deals through which it entered Equatorial Guinea and the Gulf of
Mexico. In both cases, Kosmos has been able to use proprietary
insight and geological interpretative expertise to raise capacity
utilization of the production infrastructure it acquired. It must
be noted, though, that the last two years has seen Kosmos drill a
string of dry wells, replacing the tide of success in which it made
gargantuan natural gas discoveries in Senegal and Mauritania.
Kosmos' valuation has declined to reflect the market's
disappointment and the Q4 drop in the price of crude oil. In the
wake of the final investment decision taken with BP to build the
annual 10 million tonne first phase of its Senegal/Mauritania
natural gas field, we consider its common stock to be attractively
valued.
There were a few pockets of profit in the Fund's portfolio. Its
investments in the equity securities of Anglogold Ashanti and
Zimplats generated, respectively, returns of 23% and 5%. Zimplats
declared only its second dividend since inception, according it a
10% dividend yield in the middle of Zimbabwe's currency panic.
Anglogold's share price rose 75% from its mid-August trough in
response to the 10% rise in the gold price. More telling, though,
was the commencement of the construction of its new mechanized mine
at Obuasi in Ghana. The new mine will have an all-in sustaining
cost per ounce around $850 per ounce. When Obuasi's production
occurs at the end of 2019, Anglogold would have swapped higher cost
South African mines for lower cost West African gold. It has
announced disposal plans for a few other mines, again with the goal
of improving its free cash generation capacity. Finally, Sanlam
proposed to buy out other shareholders of Continental Reinsurance,
at a premium to the stock exchange price. Although the Continental
takeover, plus its usual handsome dividends, delivered a 45% return
for the Fund in 2018, we were disappointed by this investment. The
Fund made a slight loss over the life of this investment, despite
the annual receipt of high dividends. Continental's regular high
dividend yield (10%+) seemed to serve to make it a value trap
because the Nigerian Stock Exchange valued it consistently below
its book value.
The Fund's financial liabilities - primarily short positions and
hedges - generated losses of $ 1.3 million in 2018. The three other
loss-incurring years for financial liabilities were 2009, 2012, and
2016. Over its life, the Fund has generated a cumulative gain of
$3.6 million from its financial liabilities.
Our review of 2018 would be incomplete without an update about
the Shoprite. We lost our appeal and shall keep our investors
updated about future developments.
We end with a statement of our investing philosophy. The key
elements of the investment strategy for the Fund are:
Material discounts to intrinsic value: The Fund invests
primarily where and when an investment can be made at a material
discount to the Manager's estimated intrinsic value.
Company preference: The Fund 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: The Fund seeks to
invest in industries it finds attractive with little regard to
national borders.
National resource discounts: The Fund 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: The Fund 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: The Fund 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,
exemplified by the Fund's own portfolio of undervalued companies.
We remain interested in industries which have products in short
supply in Africa that rely more on domestic African demand than
global growth. We are hunting in those terrains for compelling
equity investments. We expect the outcome of our hunt to be a
portfolio that delivers both capital growth and income into the
future.
Francis Daniels
Africa Opportunity Partners
April 2019
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEARED 31 DECEMBER 2018
Notes 2018 2017
--------------------- --------------------
USD USD
Income
Net gains on investment in subsidiaries
at fair value
through profit or loss 6(a) - 14,070,922
- 14,070,922
--------------------- --------------------
Expenses
Net losses on investment in subsidiaries
at fair value
through profit or loss 6(a) 17,398,818 -
Management fee 1,184,038 1,123,456
Custodian fees, brokerage fees and
commissions 39,237 39,400
Other operating expenses 30,222 46,411
Directors' fees 188,761 180,805
Audit and professional fees 168,715 97,551
19,009,791 1,487,623
--------------------- --------------------
Total comprehensive (loss)/income
for the year (19,009,791) 12,583,299
===================== ====================
Earnings per share attributable to
equity holders (0.254) (0.04)
STATEMENT OF FINANCIAL POSITION
AS AT 31 DECEMBER 2018
Notes 2018 2017
-------------------------- ---------------------------
USD USD
ASSETS
Cash and cash equivalents 8 4,376 91,767
Investment in subsidiaries 6(a) 50,385,898 69,306,978
Prepaid assets 7 4,949 -
Total assets 50,395,223 69,398,745
-------------------------- ---------------------------
EQUITY AND LIABILITIES
LIABILITIES
Trade and other payables 10 156,941 150,672
Total liabilities 156,941 150,672
-------------------------- ---------------------------
Net assets attributable to
shareholders 50,238,282 69,248,073
========================== ===========================
Ordinary share capital 748,496 748,496
Share premium 37,921,452 37,921,452
Retained earnings 11,568,334 30,578,125
Total equity 9(b) 50,238,282 69,248,073
========================== ===========================
Net assets value per share:
- Ordinary shares 9(b) 0.671 0.925
STATEMENT OF CHANGES IN EQUITY
FOR THE YEARED 31 DECEMBER 2018
Share Share Retained
Capital Premium Earnings Total
------------------------ -------------------------- --------------------- ------------------------
USD USD USD USD
At 1 January - - - -
2017
At 22 August
2017 -
transfer from
Statement of
changes
in net assets 748,496 37,921,452 32,786,725 71,456,673
OPERATIONS:
Total
comprehensive
loss for the
year - - (2,208,600) (2,208,600)
------------------------ -------------------------- --------------------- ------------------------
At 31 December
2017 748,496 37,921,452 30,578,125 69,248,073
======================== ========================== ===================== ========================
Share Share Retained
Capital Premium Earnings Total
------------------------ -------------------------- --------------------- ------------------------
USD USD USD USD
At 1 January 2018 748,496 37,921,452 30,578,125 69,248,073
OPERATIONS:
Total
comprehensive
loss for the
year - - (19,009,791) (19,009,791)
------------------------ -------------------------- --------------------- ------------------------
At 31 December
2018 748,496 37,921,452 11,568,334 50,238,282
======================== ========================== ===================== ========================
STATEMENT OF CHANGES IN NET ASSETS
FOR THE YEARED 31 DECEMBER 2018
Net assets
Number of Ordinary Class C Attributable
to
units Shares Shares shareholders
------------------------------- --------------------------- --------------------------- ----------------------------
USD USD USD USD
At 1 January
2017 71,830,327 33,719,116 22,945,658 56,664,774
OPERATIONS:
Increase in
net assets
attributable
to
shareholders
from
operations - 11,419,202 3,372,697 14,791,899
Conversion of
Class
C Shares
into Ordinary
Shares 3,019,279 26,318,355 (26,318,355) -
At 22 August
2017 -
transfer to
Statement of
changes
in equity (74,849,606) (71,456,673) - (71,456,673)
------------------------------- --------------------------- --------------------------- ----------------------------
At 31 December - - - -
2017
=============================== =========================== =========================== ============================
STATEMENT OF CASH FLOWS
FOR THE YEARED 31 DECEMBER 2018
2018 2017
------------------- -------------------
USD USD
Operating activities
Total comprehensive (loss)/income for
the year (19,009,791) 12,583,299
Adjustment for non-cash items:
Unrealised loss/(gain) on investment in
subsidiaries at
fair value through profit or loss 6(a) 17,398,818 (14,070,922)
------------------- -------------------
Cash used in operating activities (1,610,973) (1,487,623)
------------------- -------------------
Net changes in operating assets and liabilities
Distribution received 6(a) 1,522,262 -
(Increase)/decrease in prepaid assets (4,949) 23,545
Increase in trade and other payables 6,269 1,543,241
------------------- -------------------
Net cash generated from operating activities 1,523,582 1,566,786
------------------- -------------------
Net (decrease)/increase in cash and cash
equivalents (87,391) 79,163
Cash and cash equivalents at start of
the year 91,767 12,604
------------------- -------------------
Cash and cash equivalents at end of year 4,376 91,767
=================== ===================
Note: In 2017, the distribution received amounting to USD
3,048,160 was classified under the movement in trade and other
payables in the statement of cash flows. During the year 2018, the
presentation has changed and the movement is now shown separately
under 'Distribution received'. The 2017 comparatives have been
amended to conform with the current year's presentation.
NOTES TO THE FINANCIAL STATEMENTS
GENERAL INFORMATION
Africa Opportunity Fund Limited (the "Company") was launched
with an Alternative Market Listing "AIM" in July 2007 and moved to
the Specialist Funds Segment "SFS" in April 2014.
Africa Opportunity Fund Limited 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 may therefore invest in
securities issued by companies domiciled outside Africa which
conduct significant business activities within Africa. The Company
has 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 Amended and Restated Investment Management
Agreement dated 12 February 2014.
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. ("the Master Fund") as an
exempted limited partnership in the Cayman Islands. All investments
made by the Company are made through the limited partnership. The
limited partners of the limited partnership are the Company and AOF
CarryCo Limited. The general partner of the limited partnership is
Africa Opportunity Fund (GP) Limited. Africa Opportunity Fund
Limited includes 100% of Africa Opportunity Fund (GP) Limited.
The financial statements for the Company for the year ended 31
December 2018 were authorised for issue in accordance with a
resolution of the Board of Directors on 30 April 2019.
Presentation currency
The financial statements are presented in United States dollars
("USD"). All figures are presented to the nearest dollar.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The principal accounting policies applied in the preparation of
these financial statements are set out below. These policies have
been consistently applied from the prior year to the current year
for items which are considered material in relation to the
financial statements.
Statement of compliance
The financial statements are prepared in accordance with
International Financial Reporting Standards (IFRS) as issued by the
International Accounting Standards Board (IASB).
Basis of preparation
In the prior and current year, the Company satisfied the
criteria of an investment entity under IFRS 10: Consolidated
Financial Statements. As such, the Company no longer consolidates
the entities it controls. Instead, its interest in the subsidiaries
has been classified as fair value through profit or loss, and
measured at fair value. This consolidation exemption has been
applied prospectively and more details of this assessment are
provided in Note 4 "significant accounting judgements, estimates
and assumptions."
The preparation of financial statements in conformity with IFRS
requires the use of certain critical accounting estimates. It also
requires the Board of Directors to exercise its judgement in the
process of applying the Company's accounting policies. The areas
involving a higher degree of judgement or complexity, or areas
where assumptions and estimates are significant to the financial
statements are disclosed in Note 4.
The Company presents its statement of financial position in
order of liquidity. An analysis regarding recovery within 12 months
(current) and more than 12 months after the reporting date
(non-current) is presented in Note 14.
Certain prior year amounts have been reclassified for
consistency with the current year presentation. These
reclassifications had no effect on the reported results.
Foreign currency translation
(i) Functional and presentation currency
The Company's financial statements are presented in USD which is
the functional currency, being the currency of the primary economic
environment in which both the Company operates. The Company
determines its own functional currency and items included in the
financial statements of each entity are measured using that
functional currency. The functional currency of the Company is USD.
The Company chooses USD as the presentation currency.
(ii) Transactions and balances
Transactions in foreign currencies are initially recorded at the
functional currency rate prevailing at the date of transaction.
Monetary assets and liabilities denominated in foreign currencies
are retranslated at the functional currency spot rate of the
exchange ruling at the reporting date. All differences are taken to
profit or loss. Non-monetary items that are measured in terms of
historical cost in a foreign currency are translated using the
exchange rates as at the dates of the initial transactions.
Non-monetary items measured at fair value in a foreign currency are
translated using the exchange rates at the date when the fair value
is determined.
Financial instruments
A financial instrument is any contract that gives rise to a
financial asset of one entity and a financial liability or equity
instrument of another entity.
(a) Classification
The Company classifies its financial assets and liabilities in
accordance with IFRS 9 into the following categories:
(i) Financial assets and liabilities at fair value through
profit or loss
The category of the financial assets and liabilities at fair
value through the profit or loss is subdivided into:
Financial assets and liabilities held for trading
Financial assets are classified as held for trading if they are
acquired for the purpose of selling and repurchasing in the near
term. This category includes equity securities, investments in
managed funds and debts instruments. These assets are acquired
principally for the purpose of generating a profit from short term
fluctuation in price. All derivatives and liabilities from the
short sales of financial instruments are classified as held for
trading at the Africa Opportunity Fund LP (the "Master Fund")
level.
Financial assets at fair value through profit or loss upon
initial recognition
These include equity securities and debt instruments that are
not held for trading at the Master Fund level. These financial
assets are classified at FVTPL on the basis that they are part of a
group of financial assets which are managed and have their
performance evaluated on a fair value basis, in accordance with
risk management and investment strategies of the Company, as set
out in each of their offering documents. The financial information
about the financial assets is provided internally on that basis to
the Investment Manager and to the Board of Directors. For the
Company, financial assets classified at fair value through profit
or loss upon initial recognition include investment in
subsidiaries.
Under IAS 39, the investment in subsidiaries were designated at
FVTPL.
Investment in subsidiaries
In accordance with the exception under IFRS 10 Consolidated
Financial Statements, the Company does not consolidate subsidiaries
in the financial statements. Investments in subsidiaries are
accounted for as financial instruments at fair value through profit
or loss.
(i) Financial assets and liabilities at fair value through
profit or loss (Continued)
Derivatives - Options
Derivatives are classified as held for trading (and hence
measured at fair value through profit or loss), unless they are
designated as effective hedging instruments (however the Company
does not apply any hedge accounting). The Master Fund's derivatives
relate to option contracts.
Options are contractual agreements that convey the right, but
not the obligation, for the purchaser either to buy or sell a
specific amount of a financial instrument at a fixed price, either
at a fixed future date or at any time within a specified
period.
The Master Fund purchases and sells put and call options through
regulated exchanges and OTC markets. Options purchased by the
Master Fund provide the Master Fund with the opportunity to
purchase (call options) or sell (put options) the underlying asset
at an agreed-upon value either on or before the expiration of the
option. The Master Fund is exposed to credit risk on purchased
options only to the extent of their carrying amount, which is their
fair value.
Options written by the Master Fund provide the purchaser the
opportunity to purchase from or sell to the Master Fund the
underlying asset at an agreed-upon value either on or before the
expiration of the option.
Options are generally settled on a net basis.
Contracts for difference
Contracts for difference are derivatives that obligate either
the buyer or the seller to pay to the other the difference between
the asset's current price and its price at the time of the
contract's usage. Unrealized gains or losses are recorded at the
end of each time period that passes without the CFDs being used.
Once the CFDs are used, the difference between the opening position
and the closing position is recorded as either revenue or a loss
depending on whether the business was the buyer or the seller.
Derivatives relating to options and contracts for difference are
recorded at the level of the Master Fund. The financial statements
of the Company does not reflect the derivatives as they form part
of the net asset value (NAV.) of the Master Fund which is fair
valued.
(ii) Financial assets at amortised cost
The Company measures financial assets at amortised cost if both
of the following conditions are met:
-- The financial asset is held within a business model with the
objective to hold financial assets in order to collect contractual
cash flows
-- The contractual terms of the financial asset give rise on
specified dates to cash flows that are solely payments of principal
and interest on the principal amount outstanding
Financial assets at amortised cost are subsequently measured
using the effective interest (EIR) method and are subject to
impairment. Gains and losses are recognised in profit or loss when
the asset is derecognised, modified or impaired. The Company's
financial assets at amortised cost comprise 'trade and other
receivables' and 'cash and cash equivalents' in the statement of
financial position.
Previously under IAS 39, the Company classified these financial
assets as loans and receivables.
(iii) Other financial liabilities
This category includes all financial liabilities, other than
those classified as fair value through profit or loss. The Company
includes in this category amounts relating to trade and other
payables and dividend payable.
(a) Recognition
The Company recognises a financial asset or a financial
liability when, and only when, it becomes a party to the
contractual provisions of the instrument.
Purchases or sales of financial assets that require delivery of
assets within the time frame generally established by regulation or
convention in the market place are recognised directly on the trade
date, i.e., the date that the Master Fund commits to purchase or
sell the asset.
(b) Initial measurement
Financial assets and liabilities at fair value through profit or
loss are recorded in the statement of financial position at fair
value. All transaction costs for such instruments are recognised
directly in profit or loss.
Derivatives embedded in other financial instruments are treated
as separate derivatives and recorded at fair value if their
economic characteristics and risks are not closely related to those
of the host contract, and the host contract is not itself
classified as held for trading or designated at fair value though
profit or loss. Embedded derivatives separated from the host are
carried at fair value.
Financial assets at amortised cost and financial liabilities
(other than those classified as held for trading) are measured
initially at their fair value plus any directly attributable
incremental costs of acquisition or issue.
(c) Subsequent measurement
The Company measures financial instruments which are classified
at fair value through profit or loss at fair value. Subsequent
changes in the fair value of those financial instruments are
recorded in 'Net gain or loss on financial assets and liabilities
at fair value through profit or loss. Interest earned elements of
such instruments are recorded separately in 'Interest revenue'.
Dividend expenses related to short positions are recognised in
'Dividends on securities sold not yet purchased'. Dividend
income/distributions received on investments at FVTPL is recorded
in "Net gain or loss on financial assets at fair value through
profit or loss".
Financial assets at amortised costs are subsequently measured
using the effective interest method and are subject to impairment.
Gains and losses are recognised in profit or loss when the asset is
derecognised, modified or impaired. Under IAS 39, loans and
receivables were carried at amortised cost using the effective
interest method less any allowance for impairment. Gains and losses
were recognised in profit or loss when the loans and receivables
were derecognised or impaired.
Financial liabilities, other than those classified as at fair
value through profit or loss, are measured at amortised cost using
the effective interest method. Gains and losses are recognised in
profit or loss when the liabilities are derecognised, as well as
through the amortisation process.
The effective interest method is a method of calculating the
amortised cost of a financial asset or a financial liability and of
allocating the interest income or interest expense over the
relevant period. The effective interest rate is the rate that
exactly discounts estimated future cash payments or receipts
through the expected life of the financial instrument or, when
appropriate, a shorter period to the net carrying amount of the
financial asset or financial liability. When calculating the
effective interest rate, the Company estimates cash flows
considering all contractual terms of the financial instruments, but
does not consider future credit losses. The calculation includes
all fees paid or received between parties to the contract that are
an integral part of the effective interest rate, transaction costs
and all other premiums or discounts.
(e) Derecognition
A financial asset (or, where applicable, a part of a financial
asset or part of a group of similar financial assets) is
derecognised where:
-- The rights to receive cash flows from the asset have expired; or
-- The Company has transferred its rights to receive cash flows
from the asset or has assumed an obligation to pay the received
cash flows in full without material delay to a third party under a
'pass-through' arrangement; and
Either (a) the Company has transferred substantially all the
risks and rewards of the asset, or (b) the Company has neither
transferred nor retained substantially all the risks and rewards of
the asset, but has transferred control of the asset. When the
Company has transferred its rights to receive cash flows from an
asset (or has entered into a pass-through arrangement), and has
neither transferred nor retained substantially all the risks and
rewards of the asset nor transferred control of the asset, the
asset is recognised to the extent of the Company's continuing
involvement in the asset.
The Company derecognises a financial liability when the
obligation under the liability is discharged, cancelled or expires.
When an existing financial liability is replaced by another from
the same lender on substantially different terms, or the terms of
an existing liability are substantially modified, such an exchange
or modification is treated as the derecognition of the original
liability and the recognition of a new liability. The difference in
the respective carrying amounts is recognised in profit or
loss.
Determination of fair value
The Company measures it investments in subsidiaries at fair
value through profit or loss, and the Master Fund measures its
investments in financial instruments, such as equities, debentures
and other interest-bearing investments and derivatives, at fair
value at each reporting date.
Fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between
market participants at the measurement date. The fair value
measured is based on the presumption that the transaction to sell
the asset or transfer the liability takes place either in the
principal market for the asset or liability or, in the absence of a
principal market, in the most advantageous market for the asset or
liability. The principal or the most advantageous market must be
accessible to the Company. The fair value for financial instruments
traded in active markets at the reporting date is based on their
quoted price without any deduction for transaction costs.
For all other financial instruments not traded in an active
market, the fair value is determined by using appropriate valuation
techniques. Valuation techniques include: using recent arm's length
market transactions; reference to the current market value of
another instrument that is substantially the same; discounted cash
flow analysis and option pricing models making as much use of
available and supportable market data as possible. An analysis of
fair values of financial instruments and further details as to how
they are measured is provided in Note 6.
The Company uses the following hierarchy for determining and
disclosing the fair value of the financial instruments by valuation
technique:
-- Level 1: quoted (unadjusted) market prices in active markets
for identical assets and liabilities.
-- Level 2: valuation techniques for which the lowest level
input that is significant to the fair value measurement is directly
or indirectly observable.
-- Level 3: valuation techniques for which the lowest level
input that is significant to the fair value measurement is
unobservable.
Impairment of financial assets
As from the financial year 2018, the Company recognises an
allowance for expected credit losses (ECLs) for all debt
instruments not held at fair value through profit or loss. ECLs are
based on the difference between the contractual cash flows due in
accordance with the contract and all the cash flows that the
Company expects to receive, discounted at an approximation of the
original effective interest rate. The expected cash flows will
include cash flows from the sale of collateral held or other credit
enhancements that are integral to the contractual terms.
ECLs are recognised in two stages. For credit exposures for
which there has not been a significant increase in credit risk
since initial recognition, ECLs are provided for credit losses that
result from default events that are possible within the next
12-months (a 12-month ECL). For those credit exposures for which
there has been a significant increase in credit risk since initial
recognition, a loss allowance is required for credit losses
expected over the remaining life of the exposure, irrespective of
the timing of the default (a lifetime ECL).
For trade receivables, the Company applies a simplified approach
in calculating ECLs. Therefore, the Company does not track changes
in credit risk, but instead recognises a loss allowance based on
lifetime ECLs at each reporting date. At the reporting date, the
majority of the Company's debt instruments were held at fair value
through profit or loss with the exception of trade and other
receivables and cash and cash equivalents which are de minimis. As
a result, no ECL has been recognised as any amount would have been
insignificant. Previously under IAS 39, the Company assessed for
impairment when there was an objective evidence of impairment as a
result of one or more events that have occurred after the initial
recognition of an asset (an "incurred" loss event) and that loss
has an impact on the estimated future cash flows of the financial
asset or group of financial assets that can be reliably
estimated.
Interest revenue on impaired financial assets is recognised
using the rate of interest used to discount the future cash flows
for the purpose of measuring the impairment loss.
Offsetting financial instruments
Financial assets and financial liabilities are offset and the
net amount reported in the statement of financial position if, and
only if, there is a currently legally enforceable right to offset
the recognised amounts and there is an intention to settle on a net
basis, or to realise the asset and settle the liability
simultaneously.
Net gain or loss on financial assets and liabilities at fair
value through profit or loss
This item includes changes in the fair value of financial assets
and liabilities held for trading or designated upon initial
recognition as 'at fair value through profit or loss' and excludes
interest and expenses. At the Master Fund Level, the fair value
gains and losses exclude interest and dividend income.
Unrealised gains and losses comprise changes in the fair value
of financial instruments for the year and from reversal of prior
year's unrealised gains and losses for financial instruments which
were realised in the reporting period.
Realised gains and losses on disposals of financial instruments
classified as 'at fair value through profit or loss' are calculated
using the Average Cost (AVCO) method. They represent the difference
between an instrument's initial carrying amount and disposal
amount, or cash payments or receipts made on derivative contracts
(excluding payments or receipts on collateral margin accounts for
such instruments).
Due to and due from brokers
Amounts due to brokers are payables for securities purchased (in
a regular way transaction) that have been contracted for but not
yet delivered on the reporting date at the Master Fund level. Refer
to the accounting policy for financial liabilities, other than
those classified at fair value through profit or loss for
recognition and measurement.
Amounts due from brokers include margin accounts and receivables
for securities sold (in a regular way transaction) that have been
contracted for but not yet delivered on the reporting date. Refer
to accounting policy for financial assets at amortised cost for
recognition and measurement.
Shares that impose on the Company, an obligation to deliver to
shareholders a pro-rata share of the net asset of the Company on
liquidation classified as financial liabilities
The shares are classified as equity if those shares have all the
following features:
(a) It entitles the holder to a pro rata share of the Company's
net assets in the event of the Company's liquidation.
The Company's net assets are those assets that remain after
deducting all other claims on its assets. A pro rata share is
determined by:
(i) dividing the net assets of the Company on liquidation into units of equal amount; and
(ii) multiplying that amount by the number of the shares held by the shareholder.
(b) The shares are in the class of instruments that is
subordinate to all other classes of instruments. To be in such a
class the instrument:
(i) has no priority over other claims to the assets of the Company on liquidation, and
(ii) does not need to be converted into another instrument
before it is in the class of instruments that is subordinate to all
other classes of instruments.
(c) All shares in the class of instruments that is subordinate
to all other classes of instruments must have an identical
contractual obligation for the issuing Company to deliver a pro
rata share of its net assets on liquidation.
In addition to the above, the Company must have no other
financial instrument or contract that has:
(a) total cash flows based substantially on the profit or loss,
the change in the recognised net assets or the change in the fair
value of the recognised and unrecognised net assets of the Company
(excluding any effects of such instrument or contract) and
(b) the effect of substantially restricting or fixing the residual return to the shareholders.
The shares that meet the requirements to be classified as a
financial liability have been designated as at fair value through
profit or loss on initial recognition.
During the previous year, the Ordinary Shares and Class C Shares
were merged into one single class of share and classified as
equity.
Distributions to shareholders whose shares are classified as
financial liabilities.
Distributions to shareholders are recognised in the statement of
comprehensive income as finance costs.
Interest revenue and expense
Interest revenue and expense are recognised in profit or loss
for all interest-bearing financial instruments using the effective
interest method.
Dividend revenue and expense
Dividend revenue is recognised when the Company's right to
receive the payment is established. Dividend revenue is presented
gross of any non-recoverable withholding taxes, which are disclosed
separately in profit or loss. Dividend expense relating to equity
securities sold short is recognised when the shareholders' right to
receive the payment is established.
Cash and cash equivalents
Cash and cash equivalents comprise cash at bank. Cash
equivalents are short term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject
to an insignificant risk of change in value.
3. CHANGES IN ACCOUNTING POLICIES AND DISCLOSURES
The Company applied for the first time certain standards and
amendments, which are effective for annual periods beginning on or
after 1 January 2018. The Company has not early adopted any other
standard, interpretation or amendment that has been issued but is
not yet effective.
The nature and the effect of these changes for accounting
standards and interpretations relevant to the Company's operations
are disclosed below. Although these new standards and amendments
applied for the first time in 2018, they did not have a material
impact on the financial statements of the Company.
The accounting policies adopted are consistent with those of the
previous financial year except for the following new and amendments
to IFRS as from 1 January 2018:
Effective for accounting period beginning on or after
Standards and Amendments:
IFRS 9 Financial Instruments 1 January 2018
IFRS 15 Revenue from Contracts with Customers 1 January 2018
IFRS 2 Classification and Measurement of Share-based Payment
Transactions
(Amendments to IFRS 2) 1 January 2018
IAS 40 Transfers of Investment Property (Amendments to IAS
40)
1 January 2018
IFRIC Interpretation 22 Foreign Currency Transactions and
Advance Consideration
1 January 2018
IFRS 1 First-time Adoption of International Financial Reporting
Standards - Deletion of
Short-term exemptions for first-time adopters
1 January 2018
IAS 28 Investments in Associates and Joint Ventures -
Clarification that measuring investees
At fair value through profit or loss is an investment - by -
investment choice
1 January 2018
Applying IFRS 9 Financial instruments with IFRS 4 Insurance
contracts - Amendments to
IFRS 4 1 January 2018
Clarification to IFRS 15 'Revenue from contracts with
customers'
1 January 2018
Where the adoption of the standards or amendments or
improvements is deemed to have an impact on the financial
statements or performance of the Company, their impact is described
below.
IFRS 15-Revenue from Contracts with Customers
The adoption of IFRS 15 did not have a significant impact on the
Company. At the Master Fund's level, income comprises mainly
interest revenue and dividend income which are scoped out of IFRS
15.
For IFRS 9 impact, refer to transition disclosures in Note
3.2.
3.1 ACCOUNTING STANDARDS AND INTERPRETATIONS ISSUED BUT NOT YET EFFECTIVE
The following standards, amendments to existing standards and
interpretations were in issue but not yet effective. The Company
would adopt these standards, if applicable, when they become
effective. No early adoption of these standards and interpretations
is intended by the Board of directors.
Effective for accounting period beginning on or after
New or revised standards and interpretation:
IFRS 16 Leases 1 January 2019
IFRS 17 Insurance Contracts 1 January 2022
IFRIC Interpretation 23 Uncertainty over Income Tax
Treatments
1 January 2019
Amendments:
Amendments to IFRS 10 and IAS 28: Sale or Contribution of assets
between an investor and Effective date deferred
its associate or joint venture indefinitely
Long-term Interests in Associates and Joint Ventures (Amendments
to IAS 28)
1 January 2019
Amendments to IFRS 9 Prepayment features with negative
compensation
1 January 2019
Amendments to IAS 28: Long-term interests in associates and
joint ventures
1 January 2019
Annual improvements 2015-2017 cycle
1 January 2019
Amendments to IAS 19: Plan amendment, curtailment or
settlement
1 January 2019
3.2 TRANSITION DISCLOSURES
The following table set out the impact of the adoption of IFRS 9
on the statement of financial position, retained earnings including
the effects of Expected Credit Loss, if any.
In USD IAS 39 Measurement Remeasurement IFRS 9 measurement
(ECL)
Financial assets Category Amount Amount Category
----------- ----------- -------------- ----------- ----------
Listed equity and debt securities
(at Master Fund Level) FVTPL 45,839,794 - 45,839,794 FVTPL
----------- ----------- -------------- ----------- ----------
Unlisted equity and debt
securities (at Master Fund
level) FVTPL 3,438,529 - 3,438,529 FVTPL
----------- ----------- -------------- ----------- ----------
Cash and cash equivalent Amortised Amortised
(at Company level) cost 4,376 - 4,376 cost
----------- ----------- -------------- ----------- ----------
There are no ECL on the Company's financial assets following the
adoption of IFRS 9, and therefore, no impact on retained earnings.
Listed and unlisted equity securities are still classified at
FVTPL, although previously under IAS 39 they were designated at
FVTPL while under IFRS 9, they are mandatorily classified at FVTPL.
Financial assets at amortised cost includes only cash and cash
equivalent which is a small amount. The ECL will be insignificant
if not nil.
4. SIGNIFICANT ACCOUNTING JUDGEMENTS, ESTIMATES AND ASSUMPTIONS
The preparation of the Company's financial statements requires
management to make judgements, estimates and assumptions that
affect the reported amounts recognised in the financial statements
and disclosure of contingent liabilities. However, uncertainty
about these assumptions and estimates could result in outcomes that
could require a material adjustment to the carrying amount of the
asset or liability affected in future periods.
Judgements
In the process of applying the Company's accounting policies,
management has made the following judgements, which have the most
significant effect on the amounts recognised in the financial
statements:
Going concern
The Company does not have a fixed life but, as stated in the
Company's admission document published in 2007, the Directors
consider it desirable that Shareholders should have the opportunity
to review the future of the Company at appropriate intervals.
Accordingly, Shareholders passed an ordinary resolution at an
extraordinary general meeting of the Company on 28 February 2014
that the Company continue in existence.
In June or July 2019, the Directors will convene another general
meeting where an ordinary resolution will be proposed that the
Company will continue in existence. If the resolution is not
passed, the Directors will be required to formulate proposals to be
put to Shareholders to reorganise, reconstruct or wind up the
Company. If the resolution is passed, the Company will continue its
operations and a similar resolution will be put to Shareholders
every five years thereafter.
At the same time as the continuation vote in 2019, the Company
will provide Shareholders with, (without first requiring a
Shareholder vote to implement this policy), an opportunity to
realise all or part of their shareholding in the Company for a net
realised pro rata share of the Company's investment portfolio.
The above conditions give rise to a material uncertainty about
the entity's ability to continue as a going concern as it is
dependent on the voting of the shareholders in 2019. In the event
that the Shareholders does not pass the resolution, the Company may
not be able to continue realising its assets and settle its
liabilities in the normal course of business. However, management
is of the belief that the likelihood of the continuation of the
Company is more probable than not, and that any required
liquidation would result in a realisation of investments over a
period of time, as possible, to maximize investor returns. It is
therefore unlikely that the Company would not continue in existence
beyond 2019, regardless of the outcome of the Shareholder vote.
The financial statements are prepared on the basis of accounting
policies applicable to a going concern. This basis presumes that
that the company will continue as proposed by the shareholders'
resolution, and that the realisation of assets and settlement of
liabilities will occur in the ordinary course of business.
Determination of functional currency
The determination of the functional currency of the Company is
critical since recording of transactions and exchange differences
arising thereon are dependent on the functional currency selected.
As described in Note 2, the directors have considered those factors
therein and have determined that the functional currency of the
Company is the United States Dollar.
Assessment for an investment entity
An investment entity is an entity that:
(a) Obtains funds from one or more investors for the purpose of
providing those investor(s) with investment management
services;
(b) Commits to its investor(s) that its business purpose is to
invest funds solely for returns from capital appreciation,
investment income, or both; and
(c) Measures and evaluates the performance of substantially all
of its investments on a fair value basis.
An investment entity must demonstrate that fair value is the
primary measurement attribute used. The fair value information must
be used internally by key management personnel and must be provided
to the entity's investors. In order to meet this requirement, an
investment entity would:
-- Elect to account for investment property using the fair value
model in IAS 40 Investment Property
-- Elect the exemption from applying the equity method in IAS 28
for investments in associates and joint ventures, and
-- Measure financial assets at fair value in accordance with IFRS 9.
In addition, an investment entity should consider whether it has
the following typical characteristics:
-- It has more than one investment, to diversify the risk portfolio and maximise returns;
-- It has multiple investors, who pool their funds to maximise investment opportunities;
-- It has investors that are not related parties of the entity; and
-- It has ownership interests in the form of equity or similar interests.
As from the previous year, the Board concluded that the Company
meets the definition of an investment entity as all investments
have been measured on a fair value basis. IFRS 10 allows the
application of this change to be made prospectively in the period
in which the definition is met. IFRS 10 Consolidated Financial
Statements provides 'investment entities' an exemption from the
consolidation of particular subsidiaries and instead require that
an investment entity measures the investment in each eligible
subsidiary at fair value through profit or loss in accordance with
IFRS 9 Financial Instruments.
The key assumptions concerning the future and other key sources
of estimation uncertainty at the reporting date, that have a
significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial year,
are discussed below. The Company based its assumptions and
estimates on parameters available when the financial statements
were prepared. However, existing circumstances and assumptions
about future developments may change due to market changes or
circumstances arising beyond the control of the Company. Such
changes are reflected in the assumptions when they occur. When the
fair value of financial assets and financial liabilities recorded
in the statement of financial position cannot be derived from
active markets, their fair value is determined using a variety of
valuation techniques that include the use of mathematical
models.
Fair value of financial instruments
The inputs to these models are taken from observable markets
where possible, but where this is not feasible, estimation is
required in establishing fair values. The estimates include
considerations of liquidity and model inputs such as credit risk
(both own and counterparty's), correlation and volatility. Changes
in assumptions about these factors could affect the reported fair
value of financial instruments in the statement of financial
position and the level where the instruments are disclosed in the
fair value hierarchy. The models are calibrated regularly and
tested for validity using prices from any observable current market
transactions in the same instrument (without modification or
repackaging) or based on any available observable market data. An
analysis of fair values of financial instruments and further
details as to how they are measured is provided in Note 6.
IFRS 13 requires disclosures relating to fair value measurements
using a three-level fair value hierarchy. The level within which
the fair value measurement is categorised in its entirety is
determined on the basis of the lowest level input that is
significant to the fair value measurement in its entirety as
provided in Note 6. Assessing the significance of a particular
input requires judgement, considering factors specific to the asset
or liability. To assess the significance of a particular input to
the entire measurement, the Company performs sensitivity analysis
or stress testing techniques.
Valuation of investments listed on the Zimbabwe Stock
Exchange
The Fund has applied discounts to its investments listed on the
Zimbabwe Stock Exchange since November 30, 2018. In applying those
discounts, it has taken note of rising economic uncertainties, and
signs of sovereign stress, in Zimbabwe, especially since October
2018, manifest, for example, in lengthening queues for the foreign
exchange remittances, and a heightened volatility in share prices.
It selected a transparent discount factor to the market values of
its listed Zimbabwean holdings, otherwise known as the Old Mutual
Implied Rate. That rate is the ratio of 1 ordinary share of Old
Mutual listed on the Zimbabwe Stock Exchange to the US Dollar price
of 1 ordinary share of Old Mutual listed on the London Stock
Exchange on the same day. To provide an illustrative example, the
Old Mutual share price on the Zimbabwe Stock Exchange on December
31, 2018 was $7.89, the corresponding Old Mutual share price in
Dollars on the London Stock Exchange was $1.46, and the quoted
share price of First Mutual Properties was $0.0702. The share price
of First Mutual Properties recorded in the financial statements of
the Fund was $0.01296=$0.0702*($1.46/$7.89). This ratio was
selected because it represented a legal, market-determined,
exchange rate available to persons seeking to move funds in and out
of Zimbabwe via the movement of Old Mutual shares between share
registers in Zimbabwe and the United Kingdom or South Africa.
5. AGREEMENTS
Investment Management Agreement
Following the Admission of Ordinary Shares and C Shares to the
Specialist Fund Market (SFM) of the London Stock Exchange on 17
April 2014, the Company entered into an Amended and Restated
Investment Management Agreement with Africa Opportunity Partners
(the "Investment Manager"), an investment management company
incorporated in the Cayman Islands, to manage the operations of the
Company subject to the overall supervision of the Company's board
as specified in the SFS Admission document of the Company. Under
the Amended and Restated Investment Management Agreement, the
Investment Manager receives, a management fee equal to the
aggregate of: (i) two per cent of the Net Asset Value per annum up
to US$50 million; and (ii) one per cent of the Net Asset Value per
annum in excess of US$50 million, payable in US$ quarterly in
advance.
In addition, the principals (directors) of the Investment
Manager are beneficially interested in CarryCo, which under the
terms of the Amended and Restated Limited Partnership Agreement, is
entitled to share an aggregate annual carried interest (the
"Performance Allocation") from the Limited Partnership equivalent
to 20 per cent of the excess of the Net Asset Value (as at 31
December in each year) over the sum of (i) the annual management
fee for that year end (ii) a non-compounding annual hurdle amount
equal to the Net Asset Value as at 31 December in the previous
year, as increased by 5 per cent. The Performance Allocation is
subject to a "high watermark" requirement. Subsequent to the merger
of the ordinary shares and the C shares, the high watermark is
calculated as the aggregate of the Net Asset Value of the
pre-merger ordinary share high watermark plus the proceeds of the C
class share placing before expenses. The Performance Allocation
accrues monthly and is calculated as at 31 December in each year
and is allocated following the publication of the NAV for such
date. The management fee for the financial year under review
amounts to USD 1,184,038 (2017: USD 1,123,456) and the performance
fees for the financial year under review was nil (2017: nil).
Administrative Agreement
SS&C Technologies is the Administrator for the Company.
Administrative fees are expensed at the Master Fund level and have
been included in the NAV of the subsidiary.
Custodian Agreement
A Custodian Agreement has been entered into by the Master Fund
and Standard Chartered Bank (Mauritius) Ltd, whereby Standard
Chartered Bank (Mauritius) Ltd would provide custodian services to
the Master Fund and would be entitled to a custody fee of between
18 and 25 basis points per annum of the value of the assets held by
the custodian and a tariff of between 10 and 45 basis points per
annum of the value of assets held by the custodian. The custodian
fees are expensed at the Master Fund level and have been included
in the NAV of the subsidiary.
Prime Brokerage Agreement
Under the Prime Brokerage Agreement, the Master Fund appointed
Credit Suisse Securities (USA) LLC as its prime broker for the
purpose of carrying out the Master Fund's instructions with respect
to the purchase, sale and settlement of securities. Custodian fees
are expensed at the Master Fund level and have been included in the
NAV of the subsidiary.
Brokerage Agreement
Under the Broker Agreement revised during 2016, the Master Fund
appointed Liberum, a company incorporated in England to act as
Broker to the Company. The broker fee is payable in advance at six
month intervals. The broker fees are expensed at the Master Fund
level and have been included in the NAV of the subsidiary.
6. FINANCIAL ASSETS AND LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
6(a). Investment in subsidiaries at fair value
The Company has established Africa Opportunity Fund L.P., an
exempted limited partnership in the Cayman Islands to ensure that
the investments made and returns generated on the realisation of
the investments made and returns generated on the realisation of
the investments are both effected in the most tax efficient manner.
All investments made by the Company are made through the limited
partner which acts as the master fund. At 31 December 2018, the
limited partners of the limited partnership are the Company
(99.45%) and AOF CarryCo Limited (0.55%). The general partner of
the limited partnership is Africa Opportunity Fund (GP) Limited.
Africa Opportunity Fund Limited holds 100% of Africa Opportunity
Fund (GP) Limited.
2018 2017
------------------- -------------------
USD USD
Investment in Africa Opportunity Fund
L.P. 50,383,677 69,303,993
Investment in Africa Opportunity Fund
(GP) Limited 2,221 2,985
------------------- -------------------
Total investment in subsidiaries at fair
value 50,385,898 69,306,978
=================== ===================
Fair value at 01 January 69,306,978 58,284,216
Net disposal of investment in subsidiaries (1,522,262) (3,048,160)
Net loss on investment in subsidiaries
at fair value (17,398,818) 14,070,922
------------------- -------------------
Fair value at 31 December 50,385,898 69,306,978
=================== ===================
*This was previously disclosed as "Net disposal of investments
in subsidiaries" but has been disclosed as "Distribution income" in
the current year as it relates to the distribution of cash to the
Company in order to enable the Company to pay expenses.
6(b). Fair value hierarchy
The Company uses the following hierarchy for determining and
disclosing the fair value of the financial instruments by valuation
technique:
Level 1: quoted (unadjusted) market prices in active markets for
identical assets and liabilities.
Level 2: valuation techniques for which the lowest level input
that is significant to the fair value measurement is directly or
indirectly observable.
Level 3: valuation techniques for which the lowest level input
that is significant to the fair value measurement is
unobservable.
Note: The assets and liabilities of the Master Fund have been
presented but do not represent the assets and liabilities of the
Company as the Master Fund has not been consolidated.
Investment in subsidiaries at fair value through profit or
loss:
31 December
2018 Level 1 Level 2 Level
3
----------------- ------------------ -------------------- -------------
COMPANY USD USD USD USD
Investment in subsidiaries 50,385,898 - 50,385,898 -
================= ================== ==================== =============
MASTER FUND
Financial assets at fair value through profit
or loss
Equities 46,877,826 42,900,686 3,975,890 1,250
Debt securities 2,282,673 2,107,673 - 175,000
Equity options 117,825 117,825 - -
----------------- ------------------ -------------------- -------------
49,278,324 45,126,184 3,975,890 176,250
================= ================== ==================== =============
Financial liabilities at fair value through
profit or loss
Written put options 797,188 797,188 - -
----------------- ------------------ -------------------- -------------
797,188 797,188 - -
================= ================== ==================== =============
31 December
2017 Level 1 Level 2 Level
3
----------------- ------------------ -------------------- -------------
COMPANY USD USD USD USD
Investment in subsidiaries 69,306,978 - 69,306,978 -
================= ================== ==================== =============
MASTER FUND
Financial assets at fair value through profit
or loss
Equities 64,304,803 62,117,000 1,686,553 501,250
Debt securities 4,858,416 4,508,416 - 350,000
----------------- ------------------ -------------------- -------------
69,163,219 66,625,416 1,686,553 851,250
================= ================== ==================== =============
Financial liabilities at fair value through
profit or loss
Shortsellings 2,609,523 2,609,523 - -
Written put options 101,625 101,625 - -
Contract for Difference 363,669 - 363,669 -
----------------- ------------------ -------------------- -------------
3,074,817 2,711,148 363,669 -
================= ================== ==================== =============
The valuation technique of the investment in subsidiaries at
Company level is as follow:
The Company's investment manager considers the valuation
techniques and inputs used in valuing these funds as part of its
due diligence, to ensure they are reasonable and appropriate and
therefore the NAV of these funds may be used as an input into
measuring their fair value. In measuring this fair value, the NAV
of the funds is adjusted, as necessary, to reflect restrictions on
redemptions, future commitments, and other specific factors of the
fund and fund manager. In measuring fair value, consideration is
also paid to any transactions in the shares of the fund. Given that
there has been no such adjustments made to the NAV of the
underlying subsidiaries and given the simple structure of the
subsidiaries investing over 95% in quoted funds, the Company
classifies these investment in subsidiaries as Level 2.
The valuation techniques of the investments at master fund level
are as follows:
Equity and debt securities
These pertain to equity and debt instruments which are quoted
for which there is a market price. As a result, they are classified
within level 1 of the hierarchy
Contract for difference (CFD)
The prices for CFD are calculated based on average prices from
various quotes received from brokers.
Written put options
These are traded on an active market and have a quoted market
price. They have therefore been classified in level 1 of the
hierarchy.
Unlisted debt and equity investments
Triton Resources Inc. concluded a binding agreement in 2016 to
sell its African underwater logging harvesting assets and its Volta
Lake concession in Ghana. To date, the purchaser has not completed
obligatory payments and as such ownership of the harvesting assets
has not changed. These assets were to be operational in 2018 and
Triton will be the lessor of these assets until outstanding
payments are made. Negotiations concluded in 2017 for the delivery
of logs to a biomass power plant in French Guiana from 2020,
subject to completion of the permitting process. Negotiations for
the harvesting of underwater logs in Surinam, ongoing in 2017, were
completed in early 2018. Negotiations with a lead investor who
executed a letter of intent for the sale of Triton itself were
suspended as the investor failed to raise the necessary funds. A
new Letter of Intent with a new potential buyer of Triton was
executed in December 2018.
The Investment Manager, based on its own sensitivity analysis,
and in conjunction with its analysis of the operational challenges
and opportunities for Triton, adjusted the valuation of the
preference shares at the end of 2017. Delays in selling the South
American concessions during 2018 have diluted AOF's position and
the Investment Manager wrote down the value of the preferred shares
effective 30 June 2018. The Investment Manager, in consideration of
ongoing delays has written the position down on the outstanding
promissory notes by a further 50% effective 31 December 2018.
Consistent with the prior year's treatment, the Investment Manager
has determined the promissory note investments to be classified as
Level 3 assets for valuation purposes.
African Leadership University ("ALU") is a network of tertiary
institutions, currently with operations in both Mauritius and
Rwanda. The Investment Manager continues to value ALU on the basis
of the post-money valuation of ALU's Series B financing round as of
May 2018. The valuation has been determined using observable prices
based from the last round of obtaining external financing through
the issue of ALU's series B preference shares. This valuation, in
addition to analysis of the Investment Manager, continues to be the
best estimate of ALU fair value, as confirmed by the terms of its
2018 financing round accepted in the capital markets.
2018 2017
-------------- -------------------
USD USD
Investment in Triton 176,250 851,250
============== ===================
Financial assets at fair value through profit 2018 2017
or loss
-------------- -------------------
USD USD
Investment in Triton:
At 1 January 851,250 1,201,250
Total loss in profit or loss (675,000) (350,000)
-------------- -------------------
At 31 December 176,250 851,250
============== ===================
Total loss included in the profit or loss
of Africa Opportunity Fund L.P.
for asset held at the end of the reporting
period (675,000) (350,000)
============== ===================
2018 2017
-------------- -------------------
USD USD
Investment in ALU 2,361,193 1,686,553
============== ===================
Financial assets at fair value through profit 2018 2017
or loss
-------------- -------------------
USD USD
Investment in ALU:
At 1 January 1,686,553 1,686,553
Total loss in profit or loss 674,640 -
-------------- -------------------
At 31 December 2,361,193 1,686,553
============== ===================
Total gain included in the profit or loss
of Africa Opportunity Fund L.P.
for asset held at the end of the reporting 674,640 -
period
============== ===================
Investment in Shoprite Holdings (SHP ZL)
On 22 August 2017, as a condition precedent to the merger of the
C shares and the ordinary shares, the 637,528 ordinary shares of
Shoprite Holdings (SHP ZL "Shoprite") affected by the terms of the
Shoprite arbitral award, plus estimates of associated legal costs,
were excluded from the assets of Africa Opportunity Fund, and
securities called Contingent Value Rights ("CVR"s) were issued to
the ordinary shareholders of record. As such, the outcome of the
Shoprite arbitration is separate and independent of the net asset
value of the ordinary shares of Africa Opportunity Fund.
Consequently, the current ordinary shareholders were not considered
to be affected by the outcome of the Shoprite arbitration and any
appeals. The contingent value rights holders will be responsible
for the losses or benefits associated with the Shoprite arbitration
appeal which occurred in 2019. The full terms and conditions
attaching to the CVRs are contained in the instrument by which they
are constituted that can be inspected at the Fund's website.
In January 2019 the Fund was informed of the appeal award by the
arbitration panel. Africa Opportunity Fund was deemed to not have
right to the disputed shares and the panel identified an additional
41,617 shares, and corresponding dividends that were deemed not
properly titled to AOF. This adjustment was made in these financial
statements. The Directors of AOF are considering its options with
respect to the Shoprite shares.
6(c). Statement of Comprehensive Income of the Master Fund for the year ended 31 December 2018
The net loss on financial assets at fair value through profit or
loss amounting to USD 17,398,818 (2017: net gain USD 14,070,922) is
due to the loss arising at the Master Fund level and can be
analysed as follows:
2018 2017
--------------------------- ----------------
USD USD
Income
Interest revenue 463,318 748,899
Dividend revenue 2,479,546 2,321,955
Other income 25,006 41,300
Net gains on financial assets and liabilities
at fair value
through profit or loss - 14,353,955
Net foreign exchange gain 484,892 -
--------------------------- ----------------
3,452,762 17,466,109
--------------------------- ----------------
Expenses
Net losses on financial assets and liabilities at fair value
through profit or loss 20,142,153 -
Net foreign exchange loss - 1,358,525
Custodian fees, Brokerage fees and commission 389,415 694,150
Dividend expense on securities sold
not yet purchased 98,281 57,811
Other operating expenses 11,777 70,376
Audit and professional fees 101,970 903,723
--------------------------- ----------------
20,743,596 3,084,585
--------------------------- ----------------
Operating loss before tax (17,290,834) 14,381,524
Less withholding tax (205,488) (218,327)
--------------------------- ----------------
Total Comprehensive (loss)/income for
the year (17,496,322) 14,163,197
=========================== ================
Attributable to:
AOF Limited (direct interests) (17,398,054) 14,070,201
AOF Limited ( indirect interests through AOF (GP) Ltd)
(17,398,818) 14,070,922
AOF CarryCo Limited (minority interests) (97,504) 92,275
(17,496,322) 14,163,197
=========================== ================
(i) Net gains on financial assets and liabilities at fair value
through profit or loss held by Africa Opportunity Fund L.P.
2018 2017
------------------------------- -------------
USD USD
Net (losses)/gains on fair value of financial assets at fair
value through profit or loss (19,926,489) 12,741,809
Net (losses)/gains on fair value of financial liabilities at
fair value through profit or loss (215,664) 1,612,146
-------------
Net (losses)/gains (20,142,153) 14,353,955
=============================== =============
(ii) Financial asset and liabilities at fair value through
profit or loss held by Africa Opportunity Fund L.P.
2018 2017
----------------------- --------------
USD USD
Held for trading assets:
At 1 January 69,163,219 60,722,399
Additions 8,439,260 16,954,002
Disposal (8,397,666) (21,254,991)
Net (losses)/gains on financial assets at fair value through
profit or loss (19,926,489) 12,741,809
--------------
At 31 December (at fair value) 49,278,324 69,163,219
======================= ==============
Analysed as follows:
- Listed equity securities 44,633,208 62,103,817
- Listed debt securities 2,107,673 4,508,416
- Unlisted equity securities 2,362,443 2,200,986
- Unlisted debt securities 175,000 350,000
----------------------- --------------
49,278,324 69,163,219
======================= ==============
Other receivables, cash at bank and other payables are not
included above.
(iii) Net changes on fair value of financial assets at fair value through profit or loss
2018 2017
--------------------- --------------
USD USD
Realised 604,993 (1,209,423)
Unrealised (20,531,482) 13,951,232
--------------------- --------------
Total (losses)/gains (19,926,489) 12,741,809
===================== ==============
(iv) Financial liabilities at fair value through profit or loss
held by Africa Opportunity Fund L.P.
2018 2017
------------------------ --------------
USD USD
Held for trading financial liabilities
Contract for difference - 363,669
Written put options 797,188 101,625
Listed equity securities sold
short - 2,609,523
------------------------ --------------
Financial liabilities at fair value through profit
or loss 797,188 3,074,817
==============
(v) Net changes on fair value of financial liabilities at fair value through profit or loss
2018 2017
-------------------- --------------
USD USD
Realised 241,003 3,151,910
Unrealised (456,667) (1,539,764)
-------------------- --------------
(215,664) 1,612,146
==================== ==============
7. OTHER RECEIVABLES
2018 2017
-------------------------- -----------------------
USD USD
Prepayments 4,949 -
-------------------------- -----------------------
4,949 -
========================== =======================
8. CASH AND CASH EQUIVALENTS
2018 2017
---------------------- ----------------------
USD USD
Other bank accounts 4,376 91,767
====================== ======================
9(a). ORDINARY SHARE CAPITAL
Company
2018 2018 2017 2017
--------------- ------------ --------------- ------------
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
=============== ============ =============== ============
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 below the Net Asset Value, the directors
will consult with the Investment Manager as to whether it is
appropriate to instigate a repurchase of the ordinary shares.
9(b). NET ASSETS ATTRIBUTABLE TO SHAREHOLDERS
Ordinary
Shares
----------------------
USD
At 1 January 2018 69,248,073
Changes during the period:
Total comprehensive loss for
the year (19,009,791)
----------------------
At 31 December 2018 50,238,282
======================
Net asset value per share at 31 December
2018 0.671
======================
Ordinary Class C
Shares Shares Total
---------------------- ----------------------- -----------------------
USD USD USD
At 1 January 2017 33,719,116 22,945,658 56,664,774
Changes during the period:
Gain for the period from 1
January 2017 11,419,202 3,372,697 14,791,899
through 22 August 2017
Conversion of Class C Shares
into
Ordinary Shares on 22 August
2017 26,318,355 (26,318,355) -
Loss for the period from 23
August 2017
through 31 December 2017 (2,208,600) - (2,208,600)
---------------------- ----------------------- -----------------------
At 31 December 2017 69,248,073 - 69,248,073
====================== ======================= =======================
Net asset value per share at 0.925 -
31 December 2017
====================== =======================
Ordinary and C share Merger, Issuance of Contingent Value
Rights
In 2014, AOF closed a Placing of 29.2 million C shares of
US$0.10 each, at a placing price of US$1.00 per C share, raising a
total of $29.2 million before the expenses of the Issue. The
placing was closed on 11 April 2014 with the shares commencing
trading on 17 April 2014. AOF's Ordinary Shares and the C Shares
from the April placing were admitted to trading on the LSE's
Specialist Fund Segment ("SFS") effective 17 April 2014.
The C Shares were a transient class of shares: the assets
representing the net proceeds of any issue of C Shares were
maintained, managed and accounted for as a separate pool of capital
of the Company until those C Shares converted into Ordinary Shares.
In this regard, although Conversion was anticipated to occur no
later than six months after Admission, the Directors considered it
in the best interests of all Shareholders (being at that time
Ordinary Shareholders and C Shareholders) to extend the Conversion
Date beyond the six month period until the Shoprite case would be
resolved.
The directors had the discretion to defer the conversion
indefinitely. Hence, there was two classes of shares (the Ordinary
and the C Class shares) that could be realised in a forced
liquidation by the shareholders, and then the requirements of IAS
32.16C and 16D would need to be applied to both classes. Due to the
fact that there are two separate pools of assets and liabilities
attributable to the C Class and Ordinary shareholders respectively,
the requirements of IAS 32.16C(a) would not be met. Therefore both
the classes were classified as financial liabilities as from April
17, 2014 upon issuance of a Class C shares.
The Shoprite arbitral award was issued in 2016 and on 23 August
2017, upon the consent of the Board of Directors, the Fund merged
the C share class and the ordinary shares as contemplated in the
April 2014 issuance of the C share class. The C Class shares were
converted into ordinary shares. Each holder of C Shares received
such number of Ordinary Shares as equals the number of C Shares
held by them multiplied by the Net Asset Value per C Share and
divided by the Net Asset Value per Ordinary Share (subject to a
discount of 5 per cent). Based on a conversion ratio of 1.1034,
29,200,000 C Shares were delisted and cancelled and 32,219,279
Ordinary Shares were admitted to trading on the Specialist Fund
Segment of the London Stock Exchange. The new ordinary shares rank
pari passu with the Fund's ordinary shares prior to the conversion.
Subsequent to the merger, the total number of ordinary shares is
74,849,606.
To effectuate this merger, Contingent Value Rights certificates
were issued to the ordinary shareholders of record on 21 August
2017. From the Shoprite arbitral award issued in 2016 and resulted
in AOF not being considered legal owner of the specific Shoprite
Holdings, the Shoprite investment was written off. Refer to note 6
(b) for information on appeal award obtained in January 2019.
Subsequent to the merger, one class of ordinary shares exists
for all investors and all financial and return information
presented reflects the existing ordinary share class. Upon
conversion of the C Class shares into Ordinary shares, the
remaining shares in AOF are classified as equity. Information
regarding the merger was distributed and released to the market
prior to, and upon execution of, the merger. This information and
information relative to the CVRs can be found on the Fund's
website.
10. TRADE AND OTHER PAYABLES
2018 2017
------------------ --------------------
USD USD
Due to Africa Opportunity Fund
L.P. 41,768 32,263
Directors Fees
Payable 43,750 43,750
Other Payables 71,423 74,659
------------------ --------------------
156,941 150,672
================== ====================
Other payables and accrued expenses are non-interest bearing and
have an average term of six months.
11. EARNING PER SHARE
The earnings per share (EPS) is calculated by dividing the
decrease in net assets attributable to shareholders by number of
ordinary shares. The EPS for 2018 and 2017 represent both the basic
and diluted EPS.
2018
------------------------------
Ordinary
shares
------------------------------
Total Comprehensive (loss)/income USD (19,009,791)
==============================
Number of shares in issue 74,849,606
==============================
Change in net assets attributable
to shareholders
per share USD (0.254)
Period from 1 January 2017
to 22 August 2017
--------------------------------------------------------------------------------
Ordinary shares C shares
-------------------------------------- ----------------------------------------
Increase in net assets
attributable
to shareholders USD 11,419,202 3,372,697
====================================== ========================================
Weighted average
number of ordinary
shares for basic EPS
before conversion of Class C
shares 27,213,332 18,640,000
Change in net assets
attributable
to shareholders per
share USD 0.420 0.181
====================================== ========================================
Period from 23 August 2017
to 31 December 2017
--------------------------------------------------------------------------------
Ordinary shares C shares
-------------------------------------- ----------------------------------------
Loss for the period USD (2,208,600) -
====================================== ========================================
Weighted average number of 42,630,327 -
ordinary
shares for basic EPS
Effect of dilution 11,651,904 -
following
conversion of Class C
shares
Weighted average number of 54,282,231 -
ordinary
shares adjusted for
the effect of dilution
Loss attributable to USD (0.041) -
shareholders
per share
====================================== ========================================
12. RELATED PARTY DISCLOSURES
The Directors consider Africa Opportunity Fund Limited (the
"Company") as the ultimate holding company of Africa Opportunity
Fund (GP) Limited and Africa Opportunity Fund L.P.
% equity % equity
Country interest interest
of
Name incorporation 2018 2017
------------------------------ ---------------- --------- ---------
Africa Opportunity Fund (GP)
Limited Cayman Islands 100 100
Africa Opportunity Fund L.P. Cayman Islands 99.45 99.09
During the year ended 31 December 2018, the Company transacted
with related entities. The nature, volume and type of transactions
with the entities are as follows:
Type of Nature of Volume Balance
at
Name of related relationship transaction USD 31 Dec
parties 2018
-------------------- --------------- ---------------- --------------------- ------------------
USD
Africa Opportunity Investment Management fee 1,184,038 -
Partners Limited Manager expense
Africa Opportunity
Fund LP Subsidiary Payable - 41,768
SS&C Technologies Administrator Administration 114,919 -
fees
Type of Nature of Volume Balance
at
Name of related relationship transaction USD 31 Dec
parties 2017
-------------------- --------------- ---------------- --------------------- ------------------
USD
Africa Opportunity Investment Management fee 1,123,456 -
Partners Limited Manager expense
Africa Opportunity
Fund LP Subsidiary Payable - 32,263
SS&C Technologies Administrator Administration 129,248 -
fees
Key Management Personnel (Directors' fee)
Except for Robert Knapp who has waived his fees, each director
has been paid a fee of USD 35,000 per annum plus reimbursement for
out-of pocket expenses during both 2018 and 2017.
Robert Knapp, who is a director of the Company, also forms part
of the executive team of the Investment Manager. Details of the
agreement with the Investment Manager are disclosed in Note 5. He
has 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 (refer to Note 5 - 'Investment
management agreement' for further detail of the performance fee
paid to the director).
Details of investments in the Company by the Directors are set
out below:
No of shares Direct interest
held held %
2018 14,284,315 19.08
2017 14,284,315 19.08
13. TAXATION
Under the current laws of Cayman Islands, there is no income,
estate, transfer sales or other Cayman Islands taxes payable by the
Company. As a result, no provision for income taxes has been made
in the financial statements.
Dividend revenue is presented gross of any non-recoverable
withholding taxes, which are disclosed separately in the statement
of comprehensive income. Withholding taxes are not separately
disclosed in statement of cash flows as they are deducted at the
source of the income.
A reconciliation between tax expense and the product of
accounting profit multiplied by the applicable tax rate is as
follows:
2018 2017
------------------------- ------------------------
USD USD
Total comprehensive (loss)/income (19,009,791) 12,583,299
------------------------- ------------------------
Income tax expense calculated at - -
0%
------------------------- ------------------------
Withholding tax suffered outside - -
Mauritius
------------------------- ------------------------
Income tax expense recognized in - -
profit or loss
========================= ========================
* Withholding taxes are borne at the master fund level and
amounted to USD 205,488 (2017: USD 218,327). These have been
included in the NAV of the subsidiary.
14. FINANCIAL RISK MANAGEMENT OBJECTIVES AND POLICIES
Introduction
The Company's objective in managing risk is the creation and
protection of shareholder value. Risk is inherent in the Company's
activities. It is managed through a process of ongoing
identification, measurement and monitoring, subject to risks limits
and other controls. The process of risk management is critical to
the Company's continuing profitability. The Company is exposed to
market risk (which includes currency risk, interest rate risk and
price risk), credit risk and liquidity risk arising from the
financial instruments it holds.
Risk management structure
The Investment Manager is responsible for identifying and
controlling risks. The Board of Directors supervises the Investment
Manager and is ultimately responsible for the overall risk
management approach of the Company.
Fair value
The carrying amount of financial assets and liabilities at fair
value through profit or loss are measured at fair value at the
reporting date. The carrying amount of trade and other receivables,
cash and cash equivalents trade and other payables approximates
their fair value due to their short-term nature.
Market risk
Market risk is the risk that the fair value or future cash flows
of a financial instrument will fluctuate because of changes in
market prices and includes interest rate risk, foreign currency
risk and equity price risk.
Short selling involves borrowing securities and selling them to
a broker-dealer. The Master Fund has an obligation to replace the
borrowed securities at a later date. Short selling allows the
Master Fund to profit from a decline in market price to the extent
that such decline exceeds the transaction costs and the costs of
borrowing the securities, while the gain is limited to the price at
which the Fund sold the security short. Possible losses from short
sales may be unlimited as the Master Fund has an obligation to
repurchase the security in the market at prevailing prices at the
date of acquisition.
With written options, the Master Fund bears the market risk of
an unfavourable change in the price of the security underlying the
option. Exercise of an option written by the Master Fund could
result in the Master Fund selling or buying a security at a price
significantly different from its fair value.
A contract for difference creates, as its name suggests, a
contract between two parties speculating on the movement of an
asset price. The term 'CFD' which stands for 'contract for
difference' consists of an agreement (contract) to exchange the
difference in value of a particular currency, commodity share or
index between the time at which a contract is opened and the time
at which it is closed. The contract payout will amount to the
difference in the price of the asset between the time the contract
is opened and the time it is closed. If the asset rises in price,
the buyer receives cash from the seller, and vice versa. The Master
Fund bears the risk of an unfavourable change on the fair value of
the CFD. The risk arises mainly from changes in the equity and
foreign exchange rates of the underlying security.
The Master Fund's financial assets are susceptible to market
risk arising from uncertainties about future prices of the
instruments. Since all securities investments present a risk of
loss of capital, the Investment Manager moderates this risk through
a careful selection of securities and other financial instruments.
The Master Fund's overall market positions are monitored on a daily
basis by the Investment Manager.
The directors have based themselves on past and current
performance of the investments and future economic conditions in
determining the best estimate of the effect of a reasonable change
in equity prices, currency rate and interest rate.
Equity price risk
Equity price risk is the risk that the fair value of equities
decreases as a result of changes in the levels of the equity
indices and the values of individual stocks. The trading equity
risk arises from the Master Fund's investment portfolio.
The equity price risk exposure arises from the Master Fund's
investments in equity securities, from equity securities sold short
and from equity-linked derivatives (the written options). The
Master Fund manages this risk by investing in a variety of stock
exchanges and by generally limiting exposure to a single industry
sector to 15% of NAV.
Management's best estimate of the effect on the profit or loss
for a year due to a reasonably possible change in equity indices,
with all other variables held constant is indicated in the table
below. There is no effect on 'other comprehensive income' as the
Company has no assets classified as 'available-for-sale' or
designated hedging instruments.
In practice, the actual trading results may differ from the
sensitivity analysis below and the difference could be material. An
equivalent decrease in each of the indices shown below would have
resulted in an equivalent, but opposite impact.
Equity
Effect on
Company Change in Equity
NAV price 2018
---------- ---------------------
USD
Investment in subsidiaries at fair value
through profit or loss 10% 5,038,590
-10% (5,038,590)
Effect on
net
assets
attributable
to
Master Fund Change in shareholders
NAV price 2018
---------- ---------------------
USD
Financial assets at fair value through
profit or loss 10% 4,927,832
-10% (4,927,832)
Financial liabilities at fair value
through profit or loss 10% (79,719)
-10% 79,719
Effect on
Company Change in Equity
NAV price 2017
---------- -----------------------
USD
Investment in subsidiaries at fair value
through profit or loss 10% 6,930,698
-10% (6,930,698)
Effect on
net
assets
attributable
to
Master Fund Change in shareholders
NAV price 2017
---------- -----------------------
USD
Financial assets at fair value through
profit or loss 10% 6,916,322
-10% (6,916,322)
Financial liabilities at fair value
through profit or loss 10% (307,482)
-10% 307,482
Currency risk
The Master Fund's investments are denominated in various
currencies as shown in the currency profile below. Consequently,
the Company is exposed to the risk that the exchange rate of the
United States Dollar (USD) relative to these various currencies may
change in a manner which has a material effect on the reported
values of its assets denominated in those currencies. To manage its
risks, the Master Fund may enter into currency arrangements to
hedge currency risk if such arrangements are desirable and
practicable. The following table shows the offsetting of financial
assets:
Company Gross amounts
of recognised Net amount
of
Gross financial financial
assets
amounts liabilities presented
of set off in
recognised in the statement the statement
financial of financial of financial Financial Cash
assets position position instruments collateral Net amount
------------------ ---------------------------- --------------------------- ------------------ --------------- -------------------
USD USD USD USD USD USD
Cash and cash
equivalents 4,376 - 4,376 - - 4,376
------------------ ---------------------------- --------------------------- ------------------ --------------- -------------------
Total 4,376 - 4,376 - - 4,376
================== ============================ =========================== ================== =============== ===================
As at 31
December
2017
Company Gross amounts
of recognised Net amount
of
Gross financial financial
assets
amounts liabilities presented
of set off in
recognised in the statement the statement
financial of financial of financial Financial Cash
assets position position instruments collateral Net amount
------------------ ---------------------------- --------------------------- ------------------ --------------- -------------------
USD USD USD USD USD USD
Cash and cash
equivalents 91,767 - 91,767 - - 91,767
------------------ ---------------------------- --------------------------- ------------------ --------------- -------------------
Total 91,767 - 91,767 - - 91,767
================== ============================ =========================== ================== =============== ===================
Cash and cash equivalents are offset as the Company has current
bank balances and bank overdraft with the same counterparty which
the Company has the current legally enforceable right to set off
the recognised amounts and the intention to settle on a net basis
or realise the asset and settle the liability simultaneously.
The currency profile of the Company's financial assets and
liabilities is summarised as follows:
2018 2018 2017 2017
Financial Financial Financial Financial
assets liabilities assets liabilities
----------------- ----------------- ----------------- -----------------
USD USD USD USD
United States
Dollar 50,390,274 156,941 69,398,745 150,672
----------------- ----------------- ----------------- -----------------
50,390,274 156,941 69,398,745 150,672
================= ================= ================= =================
Prepayments are typically excluded as these are not financial
assets; prepayments as at 31 December 2018 and 2017 amounted to USD
4,949 and US Nil, respectively.
The sensitivity analysis shows how the value of a financial
instrument will fluctuate due to changes in foreign exchange rates
against the US Dollar, the functional currency of the Company.
Currency risk at master fund level
The following table details the master fund's sensitivity to a
possible change in the USD against other currencies. The percentage
applied as sensitivity represents management's assessment of a
reasonably possible change in foreign currency denominated monetary
items by adjusting the translation at the year-end for the change
in currency rates at the Master Fund level. A positive number below
indicates an increase in profit where the USD weakens against the
other currencies. In practice, actual results may differ from
estimates and the difference can be material. The effect of a
change in USD against other currencies at the master fund level as
per the table below will have the same impact at the company level
and will form part of the NAV of the subsidiary.
Effect on net assets attributable
to
Currency shareholders in (USD)
----------------------------------------------------
Master Fund
Change: 30% -30%
Botswana Pula (560,094) 560,094
Ghana Cedi (3,033,754) 3,033,754
Kenyan Shilling (288,836) 288,836
Nigerian Naira (231,756) 231,756
Tanzanian Shilling (393,918) 393,918
Uganda Shilling (636,163) 636,163
South African
Rand (1,263,302) 1,263,302
Zambian Kwacha (1,589,462) 1,589,462
Change: 10% -10%
CFA Franc (588,982) (588,982)
Egyptian Pound (218,071) (218,071)
Change: 5% -5%
Australian Dollar (31,554) 31,554
Great British
Pound (65,593) 65,593
Effect on net assets attributable
to
Currency shareholders in (USD)
----------------------------------------------------
Master Fund
Change: 30% -30%
Botswana Pula (559,401) 559,401
Ghana Cedi (4,517,593) 4,517,593
Kenyan Shilling (565,601) 565,601
Nigerian Naira (990,619) 990,619
Tanzanian Shilling (443,206) 443,206
Uganda Shilling (553,572) 553,572
South African
Rand (90,801) 90,801
Zambian Kwacha (1,921,239) 1,921,239
Change: 10% -10%
CFA Franc (915,616) 915,616
Egyptian Pound (195,969) 195,969
Change: 5% -5%
Australian Dollar (36,647) 36,647
Euro (54,743) 54,743
Great British
Pound (29,744) 29,744
Interest rate risk
Interest rate risk arises from the possibility that changes in
interest rates will affect future cash flows or the fair values of
financial instruments. The fair values of the Company's debt
securities fluctuate in response to changes in market interest
rates. Increases and decreases in prevailing interest rates
generally translate into decreases and increases in fair values of
those instruments.
The investments in debt securities have fixed interest rate and
the income and operating cash flows are not exposed to interest
rate risk. The change in fair value of investments based on a
change in market interest rate (a 50 basis points change) is not
significant and has not been disclosed.
Credit risk
Financial assets that potentially expose the Company to credit
risk consist principally of investments in debt securities, cash
balances and interest receivable. The extent of the Company's
exposure to credit risk in respect of these financial assets
approximates their carrying values as recorded in the Company's
statement of financial position.
The Company takes on exposure to credit risk, which is the risk
that a counterparty will be unable to pay amounts in full when due.
The Company's main credit risk concentration is its debt securities
which are classified as financial assets at fair value through
profit or loss.
With respect to credit risk arising from financial assets which
comprise of financial assets at fair value through profit or loss,
other receivables and cash and cash equivalents, the Company's
exposure to credit risk arises from the default of the
counterparty, with a maximum exposure equal to the carrying amount
of these financial assets.
The carrying amount of financial assets represents the maximum
credit exposure. The maximum exposure to credit risk at the
reporting date was:
2018 2018 2017 2017
Company Master Company Master
Fund Fund
------------------------------ ------------------------ ------------------------------ -----------
Carrying Carrying Carrying Carrying
amount amount amount amount
Notes USD USD USD USD
Financial
assets
at fair
value
through
profit
or loss 6(c)(ii) - 49,278,324 - 69,163,219
Other
receivables 7 4,949 258,814 - 410,858
Cash and cash
equivalents 8 4,376 2,611,947 91,767 3,887,184
The cash and cash equivalent assets of the Company are
maintained with Standard Chartered Bank (Mauritius) Ltd. Standard
Chartered Bank has an A1- issuer rating from Moody's long term
rating agency, a P-1 short term rating from Moody's rating agency,
an AA- issuer rating from Standard and Poor's rating agency, and an
A-1+ short term rating from Standard and Poor's rating agency. All
other issuers of debt instruments owned by the Company are unrated.
The issuers of the unrated debt instruments owned by the Company
are reputable companies which do not envisage obtaining ratings,
and have the ability to repay any debt or redeem any security as it
falls due or when required.
Concentration risk
At 31 December 2018 the Master Fund held investments in Africa
which involves certain considerations and risks not typically
associated with investments in other developed countries. Future
economic and political developments in Africa could affect the
operations of the investee companies.
Analysed by geographical distribution of underlying assets:
Master Fund Master Fund
2018 2017
USD USD
Bond & Notes
Ghana 175,000 2,443,324
South Africa 2,107,673 2,415,092
Total 2,282,673 4,858,416
Master Fund Master Fund
2018 2017
USD USD
Equity Securities
Ghana 11,411,113 14,498,175
Zambia 4,737,440 5,069,063
Senegal 4,749,214 7,080,891
South Africa 8,202,715 7,058,010
Zimbabwe 3,547,331 9,211,968
Botswana 1,866,979 1,864,669
Nigeria 1,333,287 4,637,130
Tanzania 1,313,059 1,477,354
Egypt 2,180,706 1,368,674
Cote D'Ivoire 1,140,610 2,075,273
Kenya 962,788 1,885,335
Uganda 2,120,543 4,495,212
Other 3,429,866 3,583,049
Total 46,995,651 64,304,803
Shortsellings
Ghana (797,188) (37,500)
South Africa - (3,037,317)
(797,188) (3,074,817)
Total 48,481,136 66,088,402
Note: In the previous year, the geographical distribution was
presented net of short-sellings. This year, it is presented gross
and the comparatives have been amended to conform with the current
year's presentation.
Analysed by industry of underlying assets:
Master Fund Master Fund
2018 2017
USD USD
Bond & Notes
Consumer Finance 901,086 245,556
Oil Exploration & Production - 2,093,325
Telecommunications 984,705 1,074,684
Plantations 175,000 350,000
Consumer Product & Services 221,882 1,094,851
Total 2,282,673 4,858,416
Master Fund Master Fund
2018 2017
USD USD
Equity Securities and Shortsellings
Consumer Finance 2,066,158 6,561,595
Mining Industry 6,642,371 5,501,622
Oil Exploration & Production 500,161 1,550,755
Telecommunications 6,137,760 7,080,891
Plantations 1,036,973 2,433,775
Beverages 1,313,059 1,477,354
Consumer Products & Services 104,887 (239,254)
Financial Services 12,534,559 13,899,773
Materials 772,520 944,686
Media 1,370,868 2,647,584
Real Estate 1,612,200 8,276,156
Transport 1,301,556 -
Utilities 6,260,996 8,026,639
Other 4,544,395 3,068,410
Total 46,198,463 61,229,986
Liquidity risk
Liquidity risk is the risk that the Company will not be able to
meet its financial obligations as they fall due. The Company's
approach to managing liquidity is to ensure, as far as possible,
that it will always have sufficient liquidity to meet its
liabilities when due, under both normal and stressed conditions,
without incurring unacceptable losses or risking damage to the
Company's reputation.
The Company manages liquidity risk by maintaining adequate
reserves, by continuously monitoring forecast and actual cash
flows. The table below illustrates the maturity profile of the
Company's financial liabilities based on undiscounted payments.
Year 2018 Due Due Due
Due Between Between greater
3 1
Due on within and 12 and 5 than
3 5
demand Months Months years years Total
USD USD USD USD USD USD
Financial
liabilities
Other
payables - 156,941 - - - 156,941
Total
liabilities - 156,941 - - - 156,941
Year 2017 Due Due Due
Due Between Between greater
3 1
Due on within and 12 and 5 than
3 5
demand Months Months years years Total
USD USD USD USD USD USD
Financial
liabilities
Other
payables - 150,672 - - - 150,672
Total
liabilities - 150,672 - - - 150,672
Capital management
Total capital is considered to be the total equity as shown in
the statement of financial position.
The Company is a closed end fund and repurchase of shares in
issue can be done with the consent of the Board of Directors. The
Company is not subject to externally imposed capital
requirements.
The objectives for managing capital are:
-- To invest the capital in investment meeting the description,
risk exposure and expected return indicated in the Admission
document.
-- To achieve consistent capital growth and income through
investment in value, arbitrage and special situations opportunities
derived from the African continent.
-- To maintain sufficient size to make the operation of the Company cost effective.
The primary objective of the Company's capital management is to
ensure that it maintains a strong credit rating and healthy capital
ratios in order to support its business and maximise shareholder
value.
15. ANALYSIS OF NAV OF MASTER FUND ATTRIBUTABLE TO ORDINARY SHARES
31.12.2018
USD
ASSETS
Cash and cash equivalents 2,611,947
Trade and other receivables 217,046
Receivable from AOF Ltd 41,768
Financial assets at fair value through
profit or loss 49,278,324
Total assets 52,149,085
EQUITY AND LIABILITIES
Liabilities
Trade and other payables 682,554
Financial liabilities at fair value
through profit or loss 797,188
Total liabilities 1,479,742
Net assets attributable to shareholders 50,669,343
16. SEGMENT INFORMATION
For management purposes, the Çompany is organised in one main
operating segment, which invests in equity securities, debt
instruments and relative derivatives. All of the Company's
activities are interrelated, and each activity is dependent on the
others. Accordingly, all significant operating decisions are based
upon analysis of the Company as one segment. The financial results
from this segment are equivalent to the financial statements of the
Company as a whole.
For geographical segmentation, please refer to Note 14.
17. PERSONNEL
The Company did not employ any personnel during the year (2017:
the same).
18. COMMITMENTS AND CONTINGENCIES
There are no commitments or contingencies at the reporting
date.
19. EVENTS AFTER REPORTING DATE
Except as stated above, there are no other events after the
reporting date which require amendments to and/or disclosure in
these financial statements.
SHARE PRICE
Prices of Africa Opportunity Fund Limited are published daily in
the Daily Official List of the London Stock Exchange. The shares
trade under Reuters symbol "AOF.L" and Bloomberg symbol "AOF
LN".
MANAGER
Africa Opportunity Partners Limited.
COMPANY INFORMATION
Africa Opportunity Fund Limited is a Cayman Islands incorporated
closed-end investment company admitted to trading on the SFS
operated by the London Stock Exchange.
CAPITAL STRUCTURE
The Company has an authorized share capital of 1,000,000,000
ordinary shares of US$0.01 each of which 74,849,606 are issued and
fully paid.
LIFE OF THE COMPANY
The Company does not have a fixed life, but the directors
consider it desirable that its shareholders should have the
opportunity to review the future of the Company at appropriate
intervals. In 2014 the shareholders voted for the continuation of
the Company for an additional five years. The Directors will
convene a general meeting in 2019 where a resolution will be
proposed that the Company will continue in existence. If the
resolution is not passed, the Directors will be required to
formulate proposals to be put to shareholders to reorganise,
reconstruct or wind up the Company. If the resolution is passed,
the Company will continue its operations and a similar resolution
will be put to shareholders every five years thereafter.
At the same time as the continuation vote in 2019, the Company
will provide Shareholders with, without first requiring a
Shareholder vote to implement this policy, an opportunity to
realise all or part of their shareholding in the Company for a net
realized pro rata share of the Company's investment portfolio.
REGISTERED NUMBER
Registered in the Cayman Islands number MC-188243.
Website
www.africaopportunityfund.com
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR LLFSRSVIIVIA
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April 30, 2019 12:57 ET (16:57 GMT)
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