Africa Opportunity Fund’s net asset value per share of US$0.898 as at 30 June 2016 increased by 2.7% from the 31 December 2015 net asset value per share of US$0.875. In the same period, the share price rose 7% from $0.647 to $0.692. Its C share net asset value per share of US$0.819 decreased by 0.2% from the 31 December 2015 net asset value per share of US$0.821. South Africa rose 10%, Egypt fell 11%, Kenya fell 1%, and Nigeria fell 23%. Three Africa-focused exchange traded funds – the Lyxor ETF Pan Africa (PAF FP) listed on the Euronext Paris, Market Vectors Africa Index (AFK US) listed on the NYSE, and the DBX MSCI Africa Top 50 (XMAF LN) listed on the LSE – rose, respectively, 33%, 12%, and 6%.
Within the portfolio, bonds and the securities of commodity producers rallied, offset by losses on the short side. Specifically, the bond portfolio contributed 4.1%; the equity securities of commodity producers also contributed 4.1%, while the shorts lost 2.9%.
Africa Opportunity Fund purchased almost $2 million face value of Tullow bonds in April, at a price of 74. The running yield and yield to maturity of those bonds were 8.4% and 12.5%. With a debt/total assets ratio of 44%, a debt/equity ratio of 170%, and large development commitments, Tullow’s balance sheet is debt laden. But, measured against Tullow’s 320 million crude oil barrels in reserve, the Fund was paying $16/barrel of low-cost oil and little for resources in Equatorial Guinea, Gabon, Kenya, and Uganda. Significantly, the fund was not increasing its Cedi exposure. To date, those bonds have generated 10% in returns. Tullow will increase its Ghana revenues in Q3 as the Tweneboa, Enyenra, and Ntomme offshore fields enter production.
The fund’s Ghanaian Cedi-denominated investments in Enterprise Group and Standard Chartered Bank had a weak H1. Standard Chartered Bank’s ordinary shares lost 11% while Enterprise’s shares declined by 0.2%, both in US Dollars. Furthermore, the Cedi remains vulnerable to a sharp depreciation, as the Ghana government exceeds its expenditure targets in this year of elections. However, the H1 results of both Enterprise and Standard Chartered were decent. Enterprise’s H1 2016 profits attributable to shareholders rose by 53% when compared to 2015. A warning is warranted insofar as Enterprise’s life business has slowed down its growth rate. In the case of Standard Chartered Bank, credit impairment charges declined, year-on-year, in each of the first two quarters of 2016 leading to a 98% rise in H1 2016 profits to $38.6 million.
Iamgold’s 6.75% 2020 bonds generated a 47% return, in the first half. The company is a high cost ($1,100 per oz) producer of gold but they say it has a string balance sheet. They also have a holding Copperbelt Energy where they say Its investment in Abuja Electricity Distribution Company is proving to be a gargantuan millstone of losses. Copperbelt Energy’s US Dollar denominated share price rose 20% in H1. Despite its Nigerian woes and Nigeria-induced losses, it declared a dividend in respect of 2015. It trades on a historical dividend yield of 13%. That dividend represented a 40% payout ratio of its profitable and cash generating US Dollar denominated Zambian operations. Crucially, those Zambian operations do not guarantee the Nigerian debts of the consolidated Copperbelt group. Copperbelt just completed the construction of the 220kV double circuit transmission line between Zambia and the Democratic Republic of Congo, increasing the capacity of Zambia-Congo interconnection from 260 MW to 500 MW, which will enhance its trading capacity. Copperbelt expects to sell about 15% less power to its Zambian customers in 2016 and expects also to incur losses in Nigeria. Nevertheless, we anticipate that its Zambian profits and dividend levels will match its 2015 levels.
Within the C share portfolio they have exposure to 33 issuers. Its largest losses came from Continental Reinsurance, Mashonaland Holdings, and its short book. Continental and Mashonaland Holdings constituted 7% and 5% of the NAV of the C shares. The C shares had 9% of its net asset value in gold mining equities, 6% in gold mining debt, 2% in oil and gas equities, and 9% in oil and gas debt. Although gold companies like Anglogold and Iamgold contributed positively to the C share portfolio, those gains were overwhelmed by the losses incurred in some of the large holdings of the C shares.
AOF / AOFC : Africa Opportunity Fund invests in Tullow bonds