AFRICA OPPORTUNITY FUND February 2016 LSE: AOF Summary Africa - - PowerPoint PPT Presentation

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AFRICA OPPORTUNITY FUND

LSE: AOF

February 2016

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LSE: AOF

Africa Opportunity Fund

• Absolute return - oriented strategy solely focused on Africa
• Listed closed-end fund that invests across asset classes and continent| Value driven

Africa Opportunity Partners Track Record

• 585% cumulative return investing in Africa since 2003, with three down years
• Strong alignment with investors – managers have aggregate personal investment of $8 mm in AOF

The African Investment Opportunity

• Rising GDP with high real interest rates
• Rising working population, middle class and disposable income
• Rising productivity and efficiencies
• Inadequate infrastructure and insufficient intra-African trade
• Weakening currencies, declining exports, and rising budget deficits

Summary

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Contents

I. Summary II. Africa Opportunity Fund i. Investment Strategy and Universe ii. Track Record iii. Portfolio and Case Studies III. Appendix I: The African Investment Opportunity IV. Appendix II: AOF Reference Data i. Team ii. C Share iii. Monthly returns iv. References

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Absolute return-oriented strategy solely focused on Africa AOF’s closed-end structure gives manager flexibility to invest across asset classes and across the continent 1) Targets deep-value investments with a preference for companies generating high ROAs with low leverage and high earnings yields 2) Exploits structural mispricing of securities caused by cross-border market inefficiencies 3) Invests long and short allowing for both hedging and alpha generation 4) Seeks returns of 15% per annum* Strong alignment with fund investors – managers have aggregate personal investment of $8 mm in AOF

* Investors should note that the target return of 15% net per annum is a target only and not a profits forecast. The existence of such a target should not be considered as an assurance or guarantee that it can or will be met.

Investment Strategy

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African Universe

Overview

• Access to Africa via Equity and Fixed Income
• 25 Exchanges represent a 33% increase over 10 years
• Privatization, globalization and foremost the

development of the African middle class has driven the increase in Africa focused public companies

• More than ever African listed companies reflect the

domestic economy vs. the export economy

• African capital markets, though still in their relative

infancy, have experienced material growth and development over the last 10 years, i.e. short sales,

• ptions, and CDS

Source: AOP and Bloomberg

Africa-Related securities Number Size $ mm Equities 1 185 936 888 EuroBonds 40 42 556 Corp Bonds 609 36 625

• Sov. Bonds

1 017 189 794 Total 2 851 1 205 862

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Manager Track Record*

Generated 585% cumulative net return investing in Africa since 2003

Investment Team Track Record

Source: AOP and Bloomberg

* See Slide 26 for Investment Team Details

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Manager Track Record*

Outperformed all indices over the past 12 years

Source: AOP and Bloomberg

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AOF Portfolio Breakdown

Source: AOF 30 June 2015 Report

Sector Asset Class Geography

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AOF A Shares - Top Ten Positions

Source: AOF 30 September 2015 Report

Largest Holdings Description % of NAV Sonatel Fast growing mobile phone provider in Senegal and neighbouring countries 19.9% Enterprise Group Ltd Property and life insurance company in Ghana 19.6% IAM Gold - 6.75% 10/01/20 Medium sized gold producer with operations in West Africa 5.9% Tizir - 9% 09/28/2017 First priority debt issued by Tizir, an Eramet lead JV developing the Grande Cote Mineral Sands Project in Senegal with the Tyssedal Titanium smelter in Norway providing collateral 4.5% Tanzanzia Breweries Tanzania's largest beer producer and distributor of wines and spirits 4.4% Letshego Microfinance lender with operations in Botswana, Mozambique, Namibia, Swaziland, Tanzania, Uganda and Zambia 4.4% Standard Chartered Bank Ghana Leading retail and corporate banking provider in Ghana 3.7% Shoprite Large South African food retailer operating over 1,700 stores in 16 countries across Africa, while serving over 14 million shoppers annually (Size shown net of short position in SA vs. long position in Zambia) 3.4% Pallinghurst Holding company with projects in natural resources, iron ore, manganese and precious stones 3.2% Triton Class A Preferred 8% Underwater timber harvesting operation with license over Volta Lake in Ghana 2.7% TOTAL 71.7%

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AOF C Shares - Top Ten Positions

Source: AOF 30 September 2015 Report

Largest Holdings Description % of NAV Continental Reinsurance Ltd Nigerian listed reinsurer operating in 35 African countries, offering marine & aviation, bond, auto, engineering, general accident and life reinsurance services 9.0% Kenya Power & Lighting Ltd Distributes and sells electricity to over 2.6 million Kenyan consumers 7.9% Stanbic Bank Uganda Ltd Leading retail and corporate banking provider in Uganda 7.3% Enterprise Group Ltd Property and life insurance company in Ghana 6.8% Mashonaland Holdings Property investment and development company in Zimbabwe 6.4% African Bank Investment Ltd 5% 08/28/18 South African bank and financial services provider focused on microlending and the underserviced areas of the South African population 6.1% Dangote Cement Plc Fully integrated Nigerian cement producer with operations in 14 other African countries 5.6% Letshego Holdings Ltd Microfinance lender with operations in Botswana, Mozambique, Namibia, Swaziland, Tanzania, Uganda and Zambia 5.2% Tizir Ltd 9% 09/28/2017 First priority debt issued by Tizir, an Eramet lead JV developing the Grande Cote Mineral Sands Project in Senegal with the Tyssedal Titanium smelter in Norway providing collateral 4.5% IAM Gold - 6.75% 10/01/20 Medium sized gold producer with operations in West Africa 3.8% TOTAL 62.4%

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Sonatel – Case Study

Public Equity – Value & Income

• Dominant telecom company in West Africa with EBITDA
• f $820 mm for the 12 months ending June 2015
• EBITDA margin is 53%, Net Margin is 24%, ROA is 20%,

and ROE is 41%

• Current market capitalization is $4.0 bn, P/E is 11.7x,

dividend yield is 6.0%

• Strong balance sheet with net cash
• Total subscribers reached 28 million in June 2015, an 8%

increase since December 2014

• 42% France Telecom ownership, high dividend payout

ratio

• ARPU is currently $5 vs Verizon’s $71 - data growth

should increase ARPU

• Free cash flows have averaged 35% of revenues over the

last 3 years versus Verizon’s 13% over the same period

• Company with high real returns on assets

Source: Bloomberg and Sonatel FY2014 - Valuation Data as of Jan 2016

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Tanzania Breweries – Case Study

Public Equity – Value & Growth

• Tanzania Breweries is a Tanzania based brewer, with an

estimated market share of 75%

• Consumption is 10 liters/capita versus 12 liters/capita for

the African universe*

• EBIT and Net income margins have averaged 29% and 19%
• ver the past 8 years and ROE and ROA have averaged 46%

and 28%

• PE is 21x versus the peer universe of 32x and dividend yield

is 2.0% versus a peer average of 2.8%

• Market capitalization is $2 billion with little debt

Source: Bloomberg, Tanzania Breweries reports *Source :BMI Research March 2015

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Massmart Holdings – Case Study

Public Equity – Short Position

• Massmart distributes and retails general merchandise, food,

and liquors in Southern Africa - South Africa makes up 92%

• f revenues
• Walmart acquired 51% of Massmart in June 2011
• Weaker economic growth and strong competition in South

Africa continue to pressure Massmart’s profitability

• EBIT margin has declined from 6.1% in 2009 to 2.6% in 2015

whilst ROE decreased from 42% to 20%

• During same period total debt to equity has climbed from

6% to 68%

• PE multiple has fallen to 20x from an all-time high of 37x in

2012

• Market capitalization is $1.2 billion; Enterprise value is $1.7

billion; Current PE is 20x; Current EV/CFO 13x; and Dividend yield is 4.6%

Source: Bloomberg Feb 2016, Massmart Holdings reports

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Diamond Corp – Case Study

Public Equity – Emerging growth

• DiamondCorp is an emerging diamond producer

established in 2005 to acquire 74% of the Lace Diamond Mine in South Africa

• The Lace Mine was active from 1901 to 1931, and

mothballed by DeBeers for over 60 years

• Estimated to have 13mm carats of diamonds in M&I

resources and 1.5 million in reserves

• Currently producing 4k tons/month and targeting 30k

tons/month by July 2016

• Management forecast 50%+ operating margins at full

production

• Current mkt cap is $50 million and EV is $69 million -

~65% of debt is ZAR denominated

Source: Bloomberg, Diacmondcorp reports

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Contents

I. Summary II. Africa Opportunity Fund i. Investment Strategy and Universe ii. Track Record iii. Portfolio and Case Studies III. Appendix I: The African Investment Opportunity IV. Appendix II: AOF Reference Data i. Team ii. C Share iii. Monthly returns iv. References

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The African Investment Opportunity

• Resilient GDP with high real interest rates
• Rising working population, middle class and disposable income
• Rising productivity and efficiencies
• Inadequate infrastructure and insufficient intra-African trade
• Weakening currencies, declining exports and rising budget deficits

Source: IMF World Economic Outlook Jan 2016

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Favorable Demographics

• Middle Class Expansion
• Consumption
• Urbanization

Source: McKinsey Global Institute – Lions on the move (2010)

Large and rising working population =

100 200 300 400 500 600 700 800 900 1000 1100 1200 Millions

Working-age Population

Africa India China SE Asia

• L. America

Europe

• N. America

Japan

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10m 16m 29m 18m 27m 41m 29m 41m 56m 47m 63m 71m 55m 47m 44m 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 2000 2008 2020F

Rise of the African Consumer

Destitute (< $2k) Basic consumer needs ($2k-$5k) Emerging consumers ($5k-$10k) Consuming middle class ($10k-$20k) Affluent middle class (>$20k)

Demographic Dividend

84m 126m

Source: UN Web data base, McKinsey Global Institute – Lions on the move (2010)

Only region in the world with decreasing Dependency Ratio over next 100 years

0% 20% 40% 60% 80% 100%

Europe US World Asia Latam Africa

Demographic Dividend

0-15 15-64 > 64

57m

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Rising Productivity

Increasing Productivity, leading to lower costs and higher returns on equity for African companies

• Sonatel (West African Telecom) has seen subscribers per employee rise 71x in 16 years
• Okomu (West African Palm Oil) has seen production per employee rise 10x in 22 years

Productivity Examples

Sources: Sonatel AR 1998 &2014; Okomu Oil AR 1992 & 2014

Sonatel 1998 2014

• No. of Employees

1 675 3 804

• No. of Subscribers

161 656 26 346 949 Subscriber per Employee 97 6 926 Okomu 1992 2014

• No. of Employees

692 563 Rubber & Palm Oil Tonnage 4 535 40 061

• No. of Tonnes per Employee

7 71

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Growth with High Real Interest Rates

Capital is scarce in Africa, so investors are rewarded with high returns: As rates come down, asset prices will rise

*90 day rate – CPI

Source: Bloomberg and Central Bank webpages Feb 2016

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• The Zambia Kwacha depreciated 42% against the US Dollar in 2015
• The Ghanaian Cedi has lost a cumulative 52% against the US Dollar since 2012
• Short term adjustment is painful - but longer term devaluations are the medicine

Africa’s Disappearing Currencies

Source: Bloomberg Feb 2016

Country Delta 2013 Delta 2014 Delta 2015 Delta YTD 2016 Zambia

• 6%
• 13%
• 42%
• 2%

Uganda 17%

• 9%
• 18%
• 3%

Tanzania

• 1%
• 8%
• 19%
• 2%

Ghana

• 20%
• 26%
• 14%
• 6%

South Africa

• 19%
• 9%
• 25%
• 2%

Kenya 0%

• 5%
• 11%

0% Mauritius 2%

• 6%
• 11%

0% Cote D'Ivoire 4%

• 6%
• 12%

4% Egypt

• 8%
• 3%
• 9%

0% Nigeria

• 3%
• 12%
• 8%

0%

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Domestic credit still roughly only a third of BRIC levels

• In 2012 Africa’s average domestic credit was just 34% of GDP vs. 95% for BRICS and 148% for OECD

Scarce Credit leads to High Returns in the Financial Sector

• Growth rates of Africa financial sector likely to exceed GDP

African Commercial Banks operating in structurally profitable environment

• Lending risk premia versus local risk free treasury bill rates exceeds 8% in many African countries

In Africa, Standard Chartered Bank’s net interest margin exceeds 4%, higher than any other region

Profitable African Financial Sector

Source: Standard Chartered HY 2015

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Stability of USD Earnings Despite FX Volatility

Long assets that preserve their real value + short liabilities that depreciate in real terms = Positive US PnL and book value growth

• Despite the Ghanaian Cedi depreciating by 49% since 2012 Enterprise Group’s USD EPS has risen 13% and

Standard Chartered Ghana’s USD EPS has declined 39%

• Enterprise’ share price has risen 132% and Standard Chartered Ghana’s share price has declined 29% over the

same period

• A result of having their Liabilities in a deprecating currency and their assets in Gov. bonds with high real rate

Dec 12 Sept 15 Delta Cedi US FX Rate 1.91 3.75

• 49%

Enterprise Group USD EPS 0.08 0.09 13% Standard Chartered Ghana USD EPS 0.63 0.39

• 39%

Enterprise Group USD Share Price 0.25 0.58 132% Standard Chartered Ghana USD Share Price 6.04 4.32

• 29%

Source: Bloomberg, Standard Chartered Ghana and Enterprise Group

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AOF’s Bank & Consumer Finance Portfolio

33% of Africa Opportunity Fund is invested in the Financial Sector as of September 2015 Strong operators, delivering high returns on equity and assets with low leverage

Source: Bloomberg as of Feb 2016, Annual Reports and AOP

Company % of AOF Gearing P/B ROA ROE Enterprise Group Ltd 14.6% 2.2 1.6 15% 27% Continental Reinsurance 5.0% 2.0 0.7 3% 6% Average - Insurance 2.1 1.1 9% 17% Letshego Holdings 4.7% 1.6 1.3 12% 18% Standard Chartered Ghana 3.4% 5.5 2.8 5% 27% Stanbic Bank Uganda 2.8% 8.2 3.4 4% 31% Average - Lenders 5.1 2.5 7% 25%

*Tangible Assets AOF includes assets of C Shares Table does not include African Bank bonds which are undergoing a restructuring

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Contents

I. Summary II. Africa Opportunity Fund i. Investment Strategy and Universe ii. Track Record iii. Portfolio and Case Studies III. Appendix I: The African Investment Opportunity IV. Appendix II: AOF Reference Data i. Team ii. C Share iii. Monthly returns iv. References

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Managers

Francis Daniels

• 2007: Launched Africa Opportunity Fund
• 1998 – 2014: Johannesburg. Specialist in insurance,

consumer finance, and natural resources:

• 1998 – 2006: Managed personal portfolio

focused on Africa generating 56% annualized return

• 2003 – 2007: Advised Robert Knapp on Africa

investments: Invested $50 mm in 10

• pportunities over 5 years, 2 year average

holding period, generating $128 mm in net profit for investors

• Francis Daniels holds a 5% position in AOF

Robert Knapp

• 2007: Launched Africa Opportunity Fund
• 1997 – 2014: New York/Boston. Specialist in closed

end fund arbitrage, distressed and special situations including emerging markets, natural resources: 1) 1997 – 2009: Generated cumulative returns of 653% for Millennium Partners vs. S&P cumulative returns of 63.4%. 2) 2010 – 2013: Generated cumulative returns of 82% for Ironsides Partners vs. S&P’s 80%

• Central theme: buying assets below intrinsic value
• Robert Knapp holds a 20% position in AOF

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Shingayi Mutasa

• Director of Masawara PLC, a Zimbabwe-focused investment

company admitted to AIM Market, and CEO of its investment adviser

• Masawara has insurance, insurance brokerage, hotels, real

estate, and fertilizer operations

• Holds a BA degree in Economics from the University of London

Peter Mombaur

• Co-Managing Director Tana Africa
• Tana Africa is an Africa focused Investment Company with an
• pen-ended investment horizon backed by the Oppenheimer

family and Temasek

• Holds BA degrees in Mechanical Engineering from RWTH

Aachen, and in Economics from the University of Bayreuth. Law degree from Fern Universitat in Hagen Robert Knapp

• See Slide 26

Myma Belo-Osagie (Chair nominee)

• Practicing attorney and former Managing Partner at Udo,

Udoma & Belo-Osagie law firm in Lagos, Nigeria

• Member of New York, Ghana, and Nigeria Bars along with

American Bar Association

• Holds LL.B degree from University of Ghana and LL.M and SJD

from Harvard Law School Vikram Mansharamani

• Lecturer at Yale University and experienced global equity

investor

• Author of Boombustology: Spotting Financial Bubbles Before

They Burst

• Holds PhD and MS from MIT and a BA from Yale University

Chris Agar

• Laxey Partners Limited since 2007
• 25 years experience in closed end funds

Board of Directors

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C Share

When: Size: Listing: C Shares: Conversion:

April 2014 $29.2million (29,200,000 C shares) Admission of new C shares and existing ordinary shares to trading on the London Stock Exchange’s Specialist Fund Market (with admission to trading on AIM cancelled and listing

• n SFM as well)

C Shares are advantageous to existing shareholders and new investors as assets are treated as separate pool so existing shareholders not exposed to portfolio of un-invested cash. The Board, in its discretion pursuant to terms of the C Shares, has decided to wait until a satisfactory outcome has been achieved in the Shoprite matter before proceeding with conversion

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References

• Case for Africa: 2012-2014 data see http://www.imf.org/external/pubs/ft/weo/2016/01/pdf/text.pdf 2011 data see

http://www.imf.org/external/pubs/ft/weo/2012/02/pdf/text.pdf

• Favorable Demographics: McKinsey & Company June 2010 Lions on the move (page 19):

http://www.mckinsey.com/insights/africa/lions_on_the_move

• Demographic Dividend: http://data.un.org/Data.aspx?q=dependency+ratio&d=PopDiv&f=variableID%3a42 & McKinsey & Company June 2010 Lions
• n the move.
• Rising Productivity: Sonatel Annual reports 1998 and 2014; Okomu annual reports 1993 and 2014
• Growth with High Real Interest Rates: Bloomberg and Central Bank webpages
• Profitable African Financial Sector: H1 2015 Standard Chartered Interim Report
• AOF’s Bank & Consumer Finance Portfolio: AOP, Bloomberg and Annual Reports for respective investments
• Manager Track Record: AOP and Bloomberg
• AOF Portfolio Breakdown: Sept 2015 Quarterly Report
• AOF Top Ten Positions: Sept 2015 Quarterly Report
• Case Studies: AOP, Bloomberg and Annual and Half Yearly Reports for respective investments

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Disclaimer

For the purposes of this presentation you have been classified as a professional investor. Nothing in this presentation should be construed as investment advice and is not suitable for a retail audience. This presentation is for information purposes only. It is not a prospectus, advertisement and does not constitute or form part of any offer or invitation to sell or transfer, or to underwrite, subscribe for or acquire, any ordinary shares, C shares or other securities in the capital of Africa Opportunity Fund Limited (the "Company"), and does not constitute or form any part of any solicitation of any such offer or invitation, nor shall it or any part of it or the fact of its distribution form the basis of or be relied upon in connection with any contract therefore. This presentation is based upon information and reflects prevailing conditions at February 2015 and the Company's views as at that date, all of which are subject to change without notice. This presentation contains forward-looking statements which involve risks and uncertainties. These statements are made

• n the basis of current knowledge and assumptions and will not be updated. Actual future results, performance or events may differ materially from those

described in these statements. No obligation is assumed to update any forward-looking statements. Nothing in this presentation is, or should be relied upon as a guarantee, promise or forecast and no representation or warranty is given as to the accuracy, achievement or reasonableness of any future projection, forecast, target or other statement. The value of investments and the income therefrom can go down as well as up. Past performance is not a reliable guide to future results. This presentation does not constitute any form of financial opinion or recommendation on the part of the Company or Africa Opportunity Partners Ltd ("AOP") or any of their respective affiliates or advisers and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities in any

• jurisdiction. Neither the Company's ordinary shares nor its C Shares have been registered under the U.S. Securities Act of 1933, as amended (the "U.S.

Securities Act") or with any securities regulatory authority of any state or other jurisdiction of the United States. The Company is not registered under the U.S. Investment Company Act of 1940, as amended (the "U.S. Investment Company Act"). This presentation is confidential and is being supplied to you solely for your information and may not be reproduced, re-distributed or passed, directly or indirectly, to any other person or published in whole or in part for any purpose. Neither the Company nor AOP nor any of their respective affiliates is under any obligation to update or keep current the information contained in this presentation and any opinions expressed in this presentation are subject to change without notice. This presentation contains information from third party sources. This presentation contains only summary information and no representation

• r warranty, express or implied, is made or given by or on behalf of, and no responsibility or liability is accepted by the Company or AOP, or any of their

respective officers, agents or advisors as to the accuracy, sufficiency or completeness of any of the information or opinions, or for any errors, omissions or misstatements, negligent or otherwise, contained in or excluded from this presentation (except to the extent that such liability arises out of fraud or fraudulent misrepresentation).

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Disclaimer, continued

Any views contained herein are based on financial, economic, market and other conditions prevailing as of the date of this presentation. The information contained in this presentation does not purport to cover all matters that may be relevant for the purposes of considering whether or not to make any prospective investment and is not intended to provide, and should not be relied upon, for accounting, legal or tax advice. This presentation contains certain forward-looking statements. In some cases forward looking statements can be identified by the use of terms such as "believes", "estimates", "anticipates", "projects", "expects", "intends", "may", "will", "seeks" or "should" or variations thereof, or by discussions of strategy, plans, objectives, goals, future events or intentions. By their nature, forward-looking statements involve risk and uncertainty because they relate to future events and circumstances. Actual outcomes and results may differ materially from any outcomes or results expressed or implied by such forward-thinking

• statements. Historical performance is not necessarily indicative of future performance which could vary substantially. Case studies are provided to show

process and methodology employed by AOP, but are not intended to be approved (for the purposes of section 21 of the Financial Services and Markets Act 2000 (“FSMA”).

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Contact Information

Francis Daniels Anibok Investment Research Ltd 1 Melrose Arch, Suite 3 Melrose Boulevard Johannesburg 2196 South Africa +27-11-684-1528 fdaniels@anibok.com