7 May 2014 16:22
Terra Partners Asset Management Limited
Portomaso Tower Suite 8/5A
St. Julian's Malta STJ4011
Telephone +356-2371-7000
Regulated by Malta Financial Services Authority, Reg. No. C56353
May 7, 2014
Investment Manager's Update to Shareholders regarding
First Quarter 2014 Activities of Terra Capital plc. ("TCA")
The opinions expressed in this update represent the views of the Investment Manager (Terra Partners Asset Management or "Terra") at the time of its preparation. All reasonable precautions have been taken to ensure the accuracy of the information utilized and relied upon in preparing this update and which are provided herein, and Terra believes this information to be reliable; however no representation or warranty as to the accuracy of the information contained in this report is made or is to be implied. The information reported herein does not represent all of the information Terra had available, or which it relied upon, when making its initial and continuing investment decisions and therefore this update will necessarily be incomplete and/or condensed. Terra reserves the right to amend this report and its opinions at any time. Please note that investments in Emerging and Frontier markets usually suffer from liquidity problems, and are often affected by governmental interference in the free market, local politics and vagaries in commodity prices; therefore, their prices can be very volatile. This means that it can be difficult to acquire and subsequently sell the shares noted in this, and prior, updates. This report is for information purposes only, and is not intended as an offer or solicitation with respect to the purchase or sale of any security or investment vehicle. All offers or solicitations are on the public market of the AIM Section of the London Stock Exchange and occur solely by reference to the information contained in the document titled "Tender Offer to Purchase Ordinary Shares at the Tender Price and Restructuring and Amendment to the Directors' Incentive Plan and Change of name to Terra Capital PLC and Notice of Extraordinary General Meeting" (the "Circular") accessible on the Fund's website www.terracapitalplc.com in the "Investor Center" tab under the Documents and Announcements section of the file "AIM Rule 26". This website contains important information which may supplement, modify or differ from the information contained herein and no prospective investment decision should be considered before careful reading of the documentation found on the Fund's website. All current and prospective investors should be aware that PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
Terra Capital plc. (the "Fund") 1st Quarter Return & Portfolio
The Fund's NAV rose to 0.9663 as of March 31, 2014 from 0.9563 as of December 31, 2013 (and 98.6 as of April 30). A dividend of $0.0335 was distributed during the quarter, resulting in a net total return of 4.55% for the quarter, and bringing the 12-month return to 13.41%. The Fund's equity exposure increased to 70.01% at quarter end from 61.53% at the end of the 4th quarter.
SUMMARY OF EXPOSURE
Europe
Europe remained the largest regional exposure representing 22.55% of the Fund's total exposure, down slightly from the previous report mainly due to the sale of Ciments Francais following the buyout offer from its majority shareholder Italcementi. Other minor changes in the Fund's European holdings included an increase in Greece's Eurobank Properties due to a rights offering, an increase in Macedonia's KMB, and a continued trimming of the U-Blox position as it continued to rise.
Asia
The allocation to Asia increased sharply to 21.36% at quarter end from 16.80% at the end of 2013 due mainly to an increase in Bangladesh's Brac Bank through a rights offering, adding to China's Qingling Motors (Hong Kong-listed), and the initiation of several new positions in Korea.
Middle East
The allocation to the Middle East rose to 14% from 10.21% on increases to Lebanon's Blom Bank and Bahrain's SEEF Properties. Additional positions were also initiated in Qatar and Bahrain.
Africa
Africa's allocation rose to just over 6.84 % as the Fund added to Onatel in Burkina Faso and Kenya's Housing Finance, while the Fund's holding in Kenya's Equity Bank was reduced by 46%. Additionally, two new positions in Tunisia were initiated.
Americas
The Americas allocation reached 5.26% as the Fund continued to add to National Commercial Bank of Jamaica and Scotia Group Jamaica.
PURCHASES
The Fund continued to deploy additional capital into 11 current positions and initiated investments in 6 new positions (please refer to accompanying table on following page). As 5 of the 6 new positions are still being actively traded by the Fund, the investment case for only the one company in which trading is complete will be presented below.
Bahrain Commercial Facilities
Bahrain Commercial (BCFC) operates in 4 segments of the Bahraini economy: consumer finance, auto dealerships (National Motor Company), real estate (Tas'Heelat Real Estate Services Company), and insurance (Tas'Heelat Insurance Services Company). The Consumer Finance segment provides loans, mortgages, and credit card facilities; the automotive segment engages in the sale of motor vehicles and maintenance; the real estate segment involves the buying and selling of land and properties, evaluation services, and renting properties; and, the insurance segment is engaged in motor, home, life and travel insurance.
Investment Rationale: BCFC is currently trading at 8.6x earnings and 1.2x book. The company has a very conservative balance sheet with only 1.5x equity of leverage and NPLs of only 2.6%. Despite the low leverage levels, the company still generates an ROE over 14% and managed 6% earnings growth in 2013. The stock yields almost 6% at March 31's closing price and its loan book is well collateralized as it is largely focused on the automotive sector. Our expectations are that this is a very low volatility stock that is well-positioned to capitalize on the post-Arab Spring growth returning to Bahrain. This should allow it to deliver a mid-teens total return while at the same time materially diversifying the Fund's overall portfolio.
Potential Risks: The Bahraini economy is still subject to shocks from political unrest resulting from the sectarian tension between the minority Sunni Arabs who rule the country and the majority Shia who are largely ethnic Persians. Over 60% of the company's profits come from the sale of, or lending on,vehicles so any significant decline in automotive sales in the Kingdom would directly impact the company's growth, loan book quality and profitability.
Sales
Terra liquidated 1 position and sold a portion of 3 others. The liquidated position was Ciments Francais which had reached the proposed buyout price offered by its majority shareholder. The Fund trimmed its holdings in U-Blox (23% sold) on continued gains in the stock and elevating valuations. The Fund reduced its position in Kenya's Equity Bank (46% sold) on concerns that margin pressure will continue in the Kenyan banking sector and that regional expansion is projected to assume ever increasing importance in the bank's expansion strategy, despite clear execution missteps in past efforts. Finally, the Fund sold off a small portion of its holdings in Brac Bank (1.4% sold) following the rights offering.
SIGNIFICANT EVENTS IN CURRENT POSITIONS
Ciments Francais: The company's majority shareholder, Italcementi, offered to buy out the remaining minority shareholders at a price of 78 euros, resulting in a 42% price appreciation on the quarter. The Fund liquidated its shares near 78 euros a share rather than wait for the takeover to be completed due to concerns about the amount of time it could take for a final payout.
Kernel: Although Kernel Trades on the Warsaw Stock Exchange, its operations are in Ukraine (though not Crimea) and Russia, and its share price was duly impacted by the events in March. Additionally, the company's 2013 earnings failed to improve as we projected, or even register a positive result, further depressing the share price.
Eurobank Properties: Eurobank executed the previously announced rights offering that effectively delivered control of the company to Canada's Fairfax Holdings.
Onatel: The company announced 2013 earnings that were 67% higher than 2012's, and a proposed dividend that would equate to a 14.9% dividend yield as of March 31's closing price.
CURRENT PORTFOLIO AS OF MARCH 31, 2014
Region | Country | Security | Shares | Market value | % of Fund | Change in Share Holding | Price Return local ccy | Total Return local ccy |
Europe | Hungary | Any Security Printing Co.Plc (AlamiNyomda) | 553,679 | 2,007,288 | 3.04% | No Change | 37.82% | 37.82% |
Greece | Eurobank Properties | 109,590 | 1,373,838 | 2.08% | Increase | 12.62% | 12.62% | |
Serbia | Galenika-Fitofarmacija DP | 41,372 | 1,332,215 | 2.02% | No Change | -8.81% | -8.81% | |
Germany | Vib Vermoegen O.N | 74,979 | 1,316,961 | 1.99% | No Change | 9.35% | 9.35% | |
Switzerland | U-Blox AG | 9,114 | 1,250,780 | 1.89% | Decrease | 26.26% | 26.26% | |
Montenegro | Crnogorski Telekom a.d. | 222,624 | 1,213,958 | 1.84% | No Change | -5.76% | 2.81% | |
Portugal | Portucell | 259,423 | 1,180,430 | 1.79% | No Change | 13.51% | 13.51% | |
Macedonia | Komercijalna Banka AD Skopje | 28,845 | 1,096,204 | 1.66% | Increase | -5.03% | -5.03% | |
Croatia | Hrvatski Telekom DD | 36,228 | 1,076,061 | 1.63% | No Change | -6.80% | -6.80% | |
France | Ste de la Tour Eiffel | 13,450 | 922,916 | 1.40% | No Change | 2.55% | 2.55% | |
Russia | JSC ACRON S GDR | 308,792 | 910,936 | 1.38% | No Change | -6.65% | -6.65% | |
Estonia | Silvano Fashion Group AS | 267,000 | 783,455 | 1.19% | No Change | -20.22% | -20.22% | |
Ukraine | Kernel Holding SA | 45,558 | 440,838 | 0.67% | No Change | -23.14% | -23.14% | |
France | Ciments Francais | 0 | 0 | 0.00% | Liquidated | 40.84% | 40.84% | |
14,905,880 | 22.55% | |||||||
Asia | Australia | Ardent Leisure Group | 807,977 | 1,872,992 | 2.83% | No Change | 24.38% | 24.38% |
Bangladesh | Square Pharma | 486,752 | 1,674,778 | 2.53% | No Change | 40.38% | 40.38% | |
Georgia | Bank of Georgia Holdings Plc | 38,300 | 1,591,922 | 2.41% | No Change | 4.09% | 4.09% | |
Vietnam | Imexpharm Pharmaceutical JSC. | 534,772 | 1,584,190 | 2.40% | No Change | 67.56% | 67.56% | |
Korea | Hyundai Motor Co. Ltd. - PFD | 9,760 | 1,246,699 | 1.89% | No Change | 8.80% | 10.40% | |
Bangladesh | Brac Bank Ltd | 3,842,039 | 1,203,113 | 1.82% | Increase | -8.73% | -6.75% | |
Korea | Daelim Industrial Co. Ltd.-PFD | 33,290 | 1,052,135 | 1.59% | No Change | 10.33% | 10.33% | |
China | Qingling Motors | 3,428,000 | 1,043,013 | 1.58% | Increase | 1.72% | 1.72% | |
Korea | Kumho Petro Chemical Co - PFD | 28,940 | 910,576 | 1.38% | No Change | -3.60% | 0.86% | |
Vietnam | Hung Vuong Corporation | 721,500 | 895,976 | 1.36% | No Change | 6.94% | 6.94% | |
Korea | Lotte Chilsung Beverage Co | 250 | 350,333 | 0.53% | New | -0.72% | -0.72% | |
Vietnam | Hau Giang Pharmaceutical JSC. | 41,890 | 275,984 | 0.42% | No Change | 21.93% | 21.93% | |
Korea | Shinyoung Securities LTD | 6,670 | 250,900 | 0.38% | New | -1.87% | -1.87% | |
Bangladesh | Heidelberg Cement Ltd | 30,850 | 167,727 | 0.25% | Increase | 10.82% | 10.82% | |
14,120,338 | 21.36% | |||||||
Middle East | Qatar | Al Khaliji Bank | 273,078 | 1,642,405 | 2.48% | No Change | 9.55% | 9.55% |
Oman | Oman Cement | 720,950 | 1,498,253 | 2.27% | No Change | -1.96% | 2.33% | |
Qatar | Masraf Al Rayan | 135,000 | 1,471,885 | 2.23% | No Change | 26.84% | 31.63% | |
Lebanon | Blom Bank GDS ord B shs | 128,423 | 1,181,492 | 1.79% | Increase | 6.36% | 6.36% | |
Oman | Oman Refreshment | 175,000 | 1,136,496 | 1.72% | No Change | -3.85% | 0.00% | |
Qatar | Gulf Warehousing Company | 66,000 | 752,214 | 1.14% | New | -0.69% | -0.69% | |
Lebanon | Solidere - GDRs | 56,485 | 731,481 | 1.11% | No Change | 18.81% | 18.81% | |
Bahrain | SEEF Properties b.s.c. | 968,897 | 470,313 | 0.71% | Increase | 14.38% | 20.63% | |
Bahrain | Bahrain Commercial Facilities Company | 200,000 | 368,700 | 0.56% | New | 1.31% | 7.14% | |
9,253,240 | 14.00% | |||||||
Africa | Kenya | Housing Finance Kenya | 4,309,900 | 1,720,967 | 2.60% | Increase | 9.52% | 9.52% |
Burkina Faso | Onatel BF | 111,815 | 1,615,668 | 2.44% | Increase | 12.79% | 12.79% | |
Kenya | Equity Bank Ltd | 2,011,000 | 738,996 | 1.12% | Decrease | 3.25% | 8.13% | |
Tunis | Tunisie Leasing | 24,110 | 327,228 | 0.50% | New | -1.47% | -1.47% | |
Tunis | Automobile reseau tunisien et services | 24,362 | 120,124 | 0.18% | New | 0.39% | 0.39% | |
4,522,982 | 6.84% | |||||||
Americas | Argentina | IRSA Inversiones y represent. SA GDR RCTP | 145,630 | 1,540,765 | 2.33% | No Change | -12.63% | -12.63% |
Jamaica | Scotia Group Jamaica | 5,429,031 | 1,051,232 | 1.59% | Increase | 5.05% | 7.05% | |
Jamaica | National Commercial Bank Jamaica | 5,431,719 | 883,552 | 1.34% | Increase | -1.94% | -0.17% | |
3,475,550 | 5.26% | |||||||
Total Equity Holdings | 46,277,990 | 70.01% | ||||||
Cash | 19,762,508 | 29.90% | ||||||
Hedging | 65,200 | 0.10% | ||||||
XDE Put June 2014 @ 1.37 | 400 | 56,000 | Increase | -47.17% | ||||
XDE Put June 2014 @ 1.38 | 50 | 9,200 | No Change | -40.65% | ||||
Total Fund | 66,105,698 | |||||||
Respectfully Submitted by: Terra Partners Asset Management Limited
Portomaso Tower Suite 8/5A,
St. Julian's Malta STJ4011
Regulated by Malta Financial Services Authority, Reg No. C56353
Contact: Galileo Fund Services Limited (Administrator)
Ian Dungate or David Parnell
+44 1624 692600
Panmure Gordon (Nominated adviser and corporate broker)
Paul Fincham or Jonathan Becher
+44 20 7886 2500
Terra Capital plc. Howard Golden or Filip Montfort +356-2371-7000