| Mon 26 Nov 2001, 0:00 | | Amb Private Equity Partners: Results Announcement |
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AMB PRIVATE EQUITY PARTNERS LIMITED
(Registration number 1998/015329/06)
Share code: APP ISIN: ZAE000026936
(AMB Partners or the company)
RESULTS ANNOUNCEMENT
for the year ended 30 September 2001
HIGHLIGHTS
* Realised IRR of 237% on investment in Sentry Group Limited
* Portfolio value preserved in difficult market and trading conditions
* Benefits from focus on services and telecommunications sectors
* Conservative investment strategy limited exposure to high-risk technology
Investments
* Discount to NAV reduced to 12,7%
* Empowerment investments comprise more than 50% of portfolio
* R145 million cash deployed in four investments
INCOME STATEMENT
Restated
Audited Audited
Year ended Year ended
30 September 30 September
2001 2000
R'000 R'000
Investment income 56 451 56 204
Income from associates 7 527 73
Operating expenses (10 059) (7 327)
Net income from ordinary activities 53 919 48 950
Revaluation adjustment (27 361) 85 955
Unrealised profit on hedging 4 049 -
Realised profit on hedging 9 557 -
Unrealised (loss)/gain on investment revaluation (40 967) 85 955
Provision against loans to associates (6 202) (15 011)
Amortisation of goodwill in associates (2 553) (2 456)
Net income before taxation 17 803 117 438
Taxation (7 658) -
Net income after taxation 10 145 117 438
Preference dividend (2 284) -
Debenture interest paid (31 812) (43 003)
(Deficit)/earnings attributable to
ordinary shareholders (23 951) 74 435
Transfer from/(to) non-distributable reserves 40 907 (75 275)
Retained income/(deficit) for the year 16 956 (840)
Accumulated deficit previously reflected (8 993) (10 158)
Adjustment for change in accounting policy - 2 005
Accumulated deficit brought forward (8 993) (8 153)
Retained income/(accumulated deficit)
- end of the year 7 963 (8 993)
Headline (loss)/earnings per share (cents) (41,1) 143,4
(Loss)/earnings per share (cents) (46,0) 138,8
Debenture interest per linked unit (cents) 61,2 82,5
Number of linked units in issue at
the end of the year 51 912 856 52 152 356
Weighted average number of linked units in
issue during the year 52 079 268 53 615 686
Reconciliation of headline earnings
(Deficit)/earnings attributable to
ordinary shareholders (23 951) 74 435
Add: amortisation of goodwill 2 553 2 456
Headline (deficit)/earnings (21 398) 76 891
BALANCE SHEET
Restated
Audited Audited
as at as at
30 September 30 September
2001 2000
R'000 R'000
Assets
Investments 586 602 515 527
At valuation 567 315 493 687
Goodwill 19 287 21 840
Current assets 297 316 365 226
Accounts receivable 15 666 10 103
Bridging loan - 50 411
Short-term loans 5 255 -
Cash 276 395 304 712
Total assets 883 918 880 753
Liabilities
Loan payable 25 662 -
Current liabilities 25 908 21 670
Debenture interest payable 11 527 20 620
Taxation payable 6 837 -
Other accounts payable 7 544 1 050
Total liabilities 51 570 21 670
Shareholders' funds
Ordinary share capital 5 5
Ordinary share premium 271 624 271 624
Non-distributable reserve - share buy-back 628 1 017
Non-distributable reserve - revaluation 34 368 75 275
Convertible debentures 517 759 520 154
Retained income/(accumulated deficit) 7 963 (8 993)
Linked unitholders' equity 832 347 859 082
Preference share capital 1 1
Total shareholders' funds 832 348 859 083
Total liabilities and shareholders' funds 883 918 880 753
Net asset value per linked unit
(including interest) (R) 16,26 16,87
Net asset value per linked unit
(excluding interest) (R) 16,03 16,47
ABRIDGED CASH FLOW STATEMENT
Restated
Audited Audited
Year ended Year ended
30 September 30 September
2001 2000
R'000 R'000
Cash effects of operating activities (7 518) (14 650)
Cash effects of investing activities (43 016) (122 320)
Cash effects of financing activities 22 217 (25 229)
Decrease in cash and cash equivalents (28 317) (162 199)
Cash and cash equivalents at beginning of the year 304 712 466 911
Cash and cash equivalents at end of the year 276 395 304 712
CONDENSED STATEMENT OF CHANGES
IN ORDINARY SHAREHODERS' FUNDS
Restated
Audited Audited
Year ended Year ended
30 September 30 September
2001 2000
R'000 R'000
Ordinary shareholders' funds
At the beginning of the year 859 083 809 877
Repurchase of debentures (2 395) (26 246)
(Deficit)/attributable earnings for the year (23 951) 74 435
(Decrease)/increase in non-distributable reserve -
linked unit buy-back (389) 1 017
832 348 859 083
The same accounting policies and methods of computation are followed in
these results as were followed in the 2000 annual financial statements,
except for the adoption of an accounting policy relating to the use of the
equity method to value investments where the company holds 20% or more of
the equity share capital of the investee company. Comparative figures have
been restated accordingly.
The figures reflected for 2001 include the results of AMB Partners'
hedging activities which commenced in the current year and were carried out
through its wholly-owned subsidiary company AMB Mercury Fund Trading (Pty)
Limited.
COMMENTARY
AMB Private Equity Partners Limited (AMB Partners or the company) is
listed in the "Private Equity Funds" sector of the JSE Securities Exchange
South Africa (JSE) and consolidates the private equity activities of African
Merchant Bank Limited (AMB) into one entity. AMB Partners is unique in its
industry, being the only private equity player to actively engage in the
financing of empowerment transactions. AMB Partners uses the comprehensive
resources of the entire AMB group to source and evaluate unlisted
investments and other high-value opportunities.
Private equity market review
During the period under review the private equity industry witnessed a
reduction in levels of activity, largely due to adverse global and local
market conditions, together with volatile equity markets. The period saw a
number of private equity players restructuring their portfolios and was
characterised by a greater level of activity in terms of realisations, as
opposed to new investments. In addition, the downturn in global technology
stocks adversely impacted those players whose portfolios were heavily
weighted in technology investments, particularly those at an early stage of
development. This has led to significant write-downs of portfolio
investments by a number of financial services companies and the cessation of
private equity activities by certain of these companies.
With an increasing focus on quality versus quantity of deals, the more
established and sufficiently capitalised private equity players, such as AMB
Partners, are well-positioned to attract and conclude attractive deals in
the future.
AMB Partners review
Portfolio overview
Two new and two follow-on investments were made in the twelve-month
period ended 30 September 2001. In addition, some movement in the portfolio
took place with the restructuring of one investment and the repayment of
loans in three others.
During August, the unwinding of the special purpose vehicles (spv's)
holding shares in M-Cell Limited (M-Cell) began.
The distribution of the underlying shares in M-Cell to the empowerment
parties and financiers is imminent.
In addition, AMB Partners received the realisation proceeds of R32,92
million from its investment in Sentry Group Limited (Sentry). AMB Partners
realised a profit of R11,42 million on this investment, resulting in an
annualised IRR of 236,6%.
As in the previous reporting period, continued efforts were made to
monitor company performances and promote
value-enhancing strategic initiatives within portfolio companies. The
results of these efforts can be seen in the improved operating performance
of most portfolio companies during the second half of the year.
In accounting for the investments where AMB Partners holds 20% or more of
the equity, the company has complied with SA Statements of Generally
Accepted Accounting Practice (GAAP). Other investments are valued using
valuation principles recommended by the South African Venture Capital and
Private Equity Association (SAVCA). The existing portfolio is valued at
R586,6 million and comprises 24 investments in the following sub-funds:
Number of Percentage
investments Cost Valuation(1)(2) change
R'000 R'000 %
Leveraged equity fund 8 210 461 229 405 9,0
Empowerment equity fund 3 92 333 79 190 (14,2)
Structured equity fund 5 224 356 249 063 11,0
Emerging equity fund 8 41 700 28 944 (30,6)
24 568 850 586 602 3,1
Notes:
1. Accounted for using GAAP with all investments in which AMB Partners has
an equity stake greater than 20% being equity accounted
2. Directors' valuation using valuation principles recommended by SAVCA
Leveraged equity fund
Portfolio investments in the leveraged equity fund improved performance
under difficult trading conditions. Trading results at Sweet-Orr & Lybro
(Pty) Limited (Sweet-Orr), Bowline Fulfilment (Pty) Limited (Bowline), PFK
Electronics (Pty) Limited (PFK) and Highland Print Holdings (Pty) Limited
(Highland) showed continued improvement, which is attributable to both
management's dedication and the increased involvement of AMB Partners in
strategic initiatives at these companies.
The continued improvement in the performance of Sweet-Orr during the
current year is encouraging, and the level of the order book for the new
year bodes well for the future. In addition, the successful completion of
the management and shareholder restructuring has had a positive impact on
the company and will provide Sweet-Orr with new strategic direction in the
forthcoming year.
Bowline has emerged as a leader in specialist fulfillment services to the
IT, communications and music industries. The company continues to grow at a
rapid rate, and successfully launched a music distribution business in the
last year.
PFK's performance for the current year has been satisfactory. The
company has undertaken a refocusing exercise which should position the
business well for the new year. Its strength in the domestic market, and
its positioning in the export market, should bode well for the company in
the forthcoming year.
Highland has performed well under difficult trading conditions in the
print/packaging sector. The company has recently undergone a restructuring
exercise and is in the process of upgrading its print capacity. The
introduction of new management last year had a positive impact, and the
company continues to strengthen its position in the market.
Federal Protection Services (Pty) Ltd (Federal) has continued to perform
admirably, experiencing particularly strong cash flow. Growth prospects for
the company look exciting, and Federal expects to leverage off its strong
positioning in the hospitality market.
The results of Waco International Limited (Waco) reflected the difficult
economic environment in the United Kingdom and Australia. Depressed market
conditions in certain sectors of the Australian market (notably the
construction sector), as well as reduced government spending, had an adverse
effect on the Australian operations of Waco and, consequently, on Waco's
group results in the first quarter of its financial year (Waco has a June
financial year end). Waco's South African and American operations performed
well under the circumstances. It was encouraging to note that further
progress was made in the sale of non-core assets and the introduction of an
empowerment partner into Waco's South African operations. Waco remains on
track with its debt repayment schedule and, at the time of writing, a
significant portion of the original acquisition debt had been repaid.
Operating results for Stuttafords Stores (Pty) Limited (Stuttafords) for
the first quarter of the new financial year further corroborate the quality
of the investment and the management team. Although turnover was in line
with budget, earnings were significantly higher than budgeted. With the norm
in the retail sector being that approximately 50% of earnings are generated
in the last calendar-year quarter, much depends on festive season trading,
but the first quarter start is encouraging. Stuttafords has committed to
opening several new stores in the current financial year.
The prospects of realising investments in the leveraged equity portfolio
continue to improve, with some notable interest being expressed in certain
companies. Strategic initiatives and restructurings continue to be the key
focus for this portfolio, with the ultimate aim being to increase the
critical mass of the companies and position them for growth.
Empowerment equity fund
The valuation of this fund showed a 19% reduction for the year, mainly
due to a decrease in the value of the investments in Siphumelele Investments
Limited (Siphumelele) and Kensani Consortium (Pty) Limited (Kensani). This
decrease was mainly attributable to a decline in the value of the listed
components of both Siphumelele's and Kensani's portfolios, and a revised
valuation of Kensani's investment in the Louis Trichardt prison.
The investment in Siphumelele reflected a decline over the period, which
was predominantly attributable to the decline in the M-Cell share price, but
partially offset by the increased valuation of Irvin & Johnson (Pty)
Limited. In line with its strategy of focusing on the outsourced services
sector, Siphumelele has embarked on a planned programme of exiting non-core
investments. The founder, Sam Montsi, has now taken up an executive role at
the company, and he will play an important part in Siphumelele's future
focus in the services industry.
The investment in Nozala Investments (Pty) Limited (Nozala) showed a
decline over the period. The once-off impact of the change in accounting
policy with respect to the investment in Tsebo Outsourcing Services Group
(Pty) Limited (Tsebo) (formerly Fedics) in the last quarter had a major
impact on the value of this investment.
Structured equity fund
The effective face-value reduction in the net value of this fund is
primarily due to the decline of the share prices of Dimension Data Holdings
plc (Didata) and M-Cell. However, not reflected in the valuation of the
investments in the spv's with exposures to Didata and M-Cell are the hedging
profits (realised and unrealised) of approximately R14 million.
The Didata share price was affected by an "earnings guidance
announcement" earlier in the year, which the market interpreted as a profit
warning. Market concerns regarding the Didata business model and the
continued derating of IT stocks, both locally and internationally, have had
additional negative impact on the share price. Throughout most of this year,
AMB Partners has been actively hedging its Didata exposure. Currently, two-
thirds of AMB Partners' direct exposure to Didata is hedged at an average
price of approximately R21,00. Didata was valued at R11,74 per share at year
end and has subsequently increased to R13,50 as at 21 November 2001.
During the final quarter, the M-Cell share price came under continued
pressure, following market reaction to the initial draft of the proposed new
telecommunications policy, the global telecommunications share price
deflation and uncertainty regarding the roll-out of the Nigerian licence.
Following the unwinding of the M-Cell spv's, AMB Partners will have a
direct exposure to M-Cell shares. M-Cell was valued at R13,72 per share at
year end and has subsequently increased to R17,90 per share as at 21
November 2001.
As noted in the interim results, AMB Partners invested approximately
R120 million in Ucingo Investments (Pty) Limited (Ucingo), an spv
established to facilitate the acquisition of a stake in Telkom SA Limited
(Telkom) by an empowerment consortium.
Following the recent finalisation of new telecommunications legislation
and statements from the Minister of Finance, it is anticipated that the
Telkom listing will most likely take place during the latter part of the
2002 calendar year. In valuing AMB Partners' exposure to Telkom, cognisance
was given to enterprise value/earnings before interest, tax, depreciation
and amortisation (EV/EBITDA) multiples of other emerging market integrated
telecommunications operators, which resulted in an upward valuation of the
investment.
Emerging equity fund
In the period under review, the valuation of this fund was revised
upwards, primarily due to an upward revision of the value of Meyer Zall
Laboratory Holdings (Pty) Limited (Meyer Zall). During the final quarter,
Meyer Zall received a capital injection from a private investor, which will
be utilised to conduct clinical tests of its products, which are at an
advanced stage.
There is likely to be an additional funding call from DXS/Digihealth in
the next quarter to facilitate the roll-out of the company's product in the
United Kingdom and United States.
Due to the size of these investments, they continue to absorb a
disproportionate amount of management time. Consequently, AMB Partners, with
the support of the incumbent management teams, continue to pursue
opportunities to exit certain of the portfolio investments.
Linked unit price performance
AMB Partners recorded a decrease of 2,7% in NAV per linked unit
(excluding interest) to R16,03 at year end from the prior year's value of
R16,47. The linked unit price traded in a band between R8,00 and R14,00
during the 12 months ended 30 September 2001. However, in the past six
months, the linked units have traded in a narrower range between R11,00 and
R14,00 per linked unit. The discount to NAV at the financial year end of
12,7% is considerably less than the 45% discount to NAV at which the linked
units traded as at 30 September 2000, and is in line with undertakings given
to linked unitholders.
The majority of companies in the "Private Equity Funds" sector of the JSE
are trading at well below their NAV, largely due to liquidity issues and the
long lead times between investing and appreciation in the underlying assets.
Linked unit repurchase
Linked unitholders approved the continued implementation of a linked unit
repurchase at the linked unitholders' annual general meeting on 14 February
2001. Due to the discount at which AMB Partners trades to its underlying
NAV, AMB Partners will continue to acquire linked units in the market at a
discount. During the 12 months ended 30 September 2001, AMB Partners
acquired 239 500 linked units in the market at a total consideration of R2,8
million, which equates to an average cost of R11,69 per linked unit.
In line with JSE regulations, the company has applied for, and the JSE
has granted, permission for the delisting of 1 213 000 linked units in the
issued capital of AMB Partners with effect from the close of business on
Monday, 12 November 2001. This constitutes the total linked units that have
been repurchased as part of the ongoing repurchase programme since the last
press announcement in March 2000.
Changes to accounting policies
In line with SA Statements of GAAP, AMB Partners now equity accounts all
investments in which it has an equity stake of greater than 20%. This has
had no effect on operational performance. Comparative figures have been
restated, resulting in a revised NAV of R16,47 per linked unit as at 30
September 2000 (previously R16,38 per linked unit). The effect of the
adoption of the equity accounting method on the current year is a decline in
NAV of 10 cents per linked unit.
Results
Results for the year, while showing a slight decline in NAV, demonstrate
AMB Partners' ability to identify attractive sectoral themes and, in
addition, its ability to implement appropriate hedging and restructuring
strategies to preserve value in the portfolio.
The balance sheet as at 30 September 2001 reflects a total investment
value of R586,6 million and cash resources available for future transactions
of R276,4 million. The income statement for the 12 months ended 30 September
2001 reflects investment income of R56,5 million, which is largely interest
earned on uninvested capital and income from investments. The expenses for
the current year showed an increase of 37% largely due to increased
management fees (in view of the greater market capitalisation of AMB
Partners) and costs incurred in attempting to restructure AMB Partners.
Debenture interest of R31,8 million has been declared payable to unitholders
during the 12-month period to 30 September 2001. The unrealised loss on
revaluation of investments represents a decrease in the valuation of the
underlying portfolio, largely due to the performance of M-Cell and Didata.
The change in accounting policy to the equity accounting method also
impacted the carrying value of investments.
As noted, AMB Partners has adopted a conservative approach in valuing its
unlisted investments, due to the difficult macroeconomic conditions facing
companies in South Africa and the higher risks associated with small and
medium capitalisation companies. The headline loss of 41,1 cents per linked
unit reflects the policy of repaying net interest earned (after operating
costs) on uninvested capital to shareholders, as well as the decline in the
underlying investment portfolio.
Dividend declaration
At inception, AMB Capital Management (Pty) Limited (AMB Capital), a
wholly-owned subsidiary of AMB Holdings Limited, subscribed for preference
shares issued by AMB Partners. Following the successful realisation of the
Sentry investment, a preference dividend of R2,28 million has been declared
and will be payable to AMB Capital.
No ordinary dividend will be declared by AMB Partners. Due to the long-
term nature of private equity investing, it is not anticipated that an
ordinary dividend will be paid until the underlying portfolio is more
mature.
Prospects
In addition to the M-Cell unwinding, AMB Partners is at an advanced
stage in realising certain of its portfolio investments. Realisations should
be concluded in the first quarter of the new year, and are expected to
generate acceptable returns.
AMB Partners will continue to adopt a cautious approach to investing in
the current market, despite perceived low valuation and interest rate
levels, and will continue to concentrate on high-value opportunities in
private equity and select empowerment transactions, targeting larger
companies which can clearly demonstrate a business model that will weather
subdued economic conditions. AMB Partners believes this approach should
generate positive returns to linked unitholders over the medium to long
term. AMB Partners remains well-positioned to capitalise on investment
opportunities that will arise from renewed economic activity in the new
financial year and assist empowerment groups to participate in opportunities
in both the public and private sectors.
Cautionary announcement
Since its listing in May 1999, AMB Partners has been hampered by the lack
of liquidity of its linked units, inflexibility relating to future capital
raising and the discount at which linked units trade to underlying NAV.
This has necessitated a review of AMB Partners' current structure and at the
time of writing, the board of AMB Partners was examining various
restructuring initiatives.
Shareholders in AMB Partners are therefore urged to exercise caution in
their dealings in AMB Partners' linked units until a further announcement is
made in this regard.
On behalf of the board
ROB DOW ANDREW SPRAGUE ZENZO LUSENGO
Chairman Joint Managing Directors
Registered address:
8th Floor, The Forum, corner Maude and Fifth Streets, Sandton, South Africa
PO Box 786833, Sandton, 2146, South Africa
Telephone: +27 11 303-2900
Website: www.ambpartners.co.za
Transfer secretaries:
Mercantile Registrars Limited, 5th Floor, 11 Diagonal Street, Johannesburg,
2001
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www.ambpartners.co.za
