Unaudited summarised interim results for the six months ended 31 December 2017

EPE CAPITAL PARTNERS LTD ("ETHOS CAPITAL" OR "THE COMPANY")

19 MAR 2018

EPE CAPITAL PARTNERS LTD (“ETHOS CAPITAL” OR “THE COMPANY”)
INCORPORATED IN THE REPUBLIC OF MAURITIUS
REGISTRATION NUMBER: C138883 C1/GBL
ISIN: MU0522S00005
SHARE CODE: EPE

INTRODUCTION

EPE Capital Partners Ltd (“Ethos Capital” or “the Company”) is an investment holding company, registered and incorporated in Mauritius and listed on the JSE Limited (“JSE”). It invests directly into Funds or Direct Investments, managed by Ethos Private Equity (Pty) Limited (“Ethos”), which give the Company indirect exposure to a diversified portfolio of unlisted private equity-type investments (“Portfolio Companies”). By nature, private equity is a long-term investment, requiring long-term thinking and a patient strategy.

Ethos Capital’s investment objective is to be achieved through the following strategies:

1 | Primary Investments
Commitments to various Ethos Funds during their respective fundraising processes.

2 | Secondary Investments
Acquisitions of existing Limited Partner interests in established Ethos Funds.

3 | Direct Investments
Direct acquisitions of interests in underlying Portfolio Companies alongside Ethos Funds to the extent that the Ethos Funds require co-investors.

4 | Temporary Investments
Temporary Investments in a portfolio of low-risk, liquid debt instruments (including, inter alia, South African government bonds, NCDs and other similar, low-risk, liquid instruments) for cash management purposes, as appropriate.

 

INVESTMENT ADVISOR – AN ALTERNATIVE ADVANTAGE

The investment advisor, Ethos, was founded in 1984, and has an established track record of investing in private equity transactions in South Africa and other sub-Saharan African countries. Ethos targets control buyouts and selected expansion capital investments in companies with strong growth potential.

Ethos employs over 65 members of staff, including 18 partners, which makes it the largest private equity firm in sub-Saharan Africa. An institutionalised approach to investing, world-class governance, extensive origination networks and an experienced investment team provide Ethos with a competitive advantage in the sub-Saharan Africa private equity market.

It manages over R11 billion on behalf of public and corporate retirement funds, sovereign wealth funds, fund-of-funds, development financial institutions and, most recently, Ethos Capital. Investors are based in South Africa, Europe, North and South America and the Middle East and Asia.

Ethos has an unparalleled 33-year record of successful, sustainable investing across economic and political cycles. To date, it has invested in 106 transactions, delivering 96 realised investments at a 36.3% gross Internal Rate of Return (“IRR”) and a 2.7x multiple of cost.

 

FORWARD-LOOKING STATEMENTS

This interim report may contain statements regarding the future expected financial condition and results of the Company, which involve risk and uncertainty. These forward-looking statements have not been reviewed or reported on by the Company’s auditor.

 

PERFORMANCE REVIEW

OVERVIEW

The 2017 year was economically and politically challenging for South Africa. GDP growth remained subdued, consumer confidence was soft, and policy and political uncertainty severely impacted companies’ strategic deployment of capital and investor confidence.

South Africa’s longer-term outlook has, however, improved significantly of late. Political changes – both within the ANC and also at national government with Mr Cyril Ramaphosa taking over as South Africa’s new president in February 2018 – are likely to result in a significant uplift in both consumer and business confidence. The subsequent changes to key government ministerial leadership will hopefully drive the implementation of clear policies in crucial sectors of the economy. Enhanced governance at key state-owned enterprises will also provide for growth in many dependent sectors across the economy. While it will take time for revised government mandates and structural changes to take full effect, we are confident that South Africa’s long-term growth prospects are greatly improved.

Private equity is a long-term investment strategy which requires patient capital and an activist mindset to outperform. Given the difficult economic conditions, growth in the private sector has been constrained, and many of Ethos’s Portfolio Companies have not been immune to the downturn. The underlying attributable EBITDA growth across the various Funds’ portfolios over the past 12 months has been relatively modest. Importantly, the Ethos Fund teams, together with the in-house Value Add capability, have spent significant time and effort to ensure that each Portfolio Company is optimally positioned, both strategically and operationally, to benefit from the turnaround in the economic cycle. With economic prospects likely to improve in the medium term, we believe that the value-accretive strategies implemented at Portfolio Companies should start delivering accelerated growth.

The Board’s medium-term objective remains to fully invest Ethos Capital’s NAV, while managing liquidity and commitment strategies in a disciplined way. In support thereof, Ethos is continuing to review opportunities to develop and grow its product offerings, with the launch of Ethos Healthcare Investments being the most recent initiative. The strategies that Ethos Capital is invested in are detailed alongside:

Ethos Mid Market Fund I

The Ethos Mid Market Fund I (“EMMF I”) had its first close in November 2016, and is expected to have its final close by the end of May 2018, with commitments of over R2 billion.

To date, the Fund has invested in six Portfolio Companies, representing 44% of the total commitments to the Fund. The Fund has a strong pipeline of potential investments in the mid-market space and its broadbased black economic empowerment (“B-BBEE”) credentials are providing a competitive advantage in sourcing such opportunities.

Ethos Fund VI

Ethos Capital completed a secondary transaction of a stake in Ethos Fund VI (“EF VI”) in November 2016. The stake is relatively small (a US$10 million commitment) at 3% of the NAV, but currently provides exposure to nine Portfolio Companies.

Since June 2017, the Fund has successfully exited one investment at a Fund return of 2.7x cost invested. A further two exits are expected to be completed in Q2 2018.

Ethos Fund VII

Fund raising for Ethos Fund VII (“EF VII”) was launched in August 2017, with a target size of R8 billion to R10 billion. Ethos Capital has made a first close commitment to this Fund of R1.25 billion with an intended final commitment of up to R2.3 billion; this will provide investors with exposure to large buyout Portfolio Companies based in South Africa and other select sub-Saharan countries. The first close for this Fund is likely to occur in Q2 2018.

Ethos Mezzanine Partners Fund 3

Ethos Mezzanine Partners Fund 3 (“EMP 3”) is likely to have its first close in March/April 2018, with strong demand from international investors, especially development finance institutions.

The pipeline of opportunities for this Fund is strong, with particular application of the mezzanine product to growth opportunities in sub-Saharan Africa. The Fund has signed two term sheets for transactions which are likely to close in Q2 2018. Aligned with this strategy, Ethos recently opened a satellite office in Nairobi, Kenya, and believes this footprint will further enhance deal origination and investment management into the future. The Fund operates in a relatively uncontested niche, which has resulted in strong demand both from potential investors and also companies looking to access growth capital.

Ethos Capital has made a first close commitment of R250 million to this Fund with an intended final commitment of R320 million.

Ethos Healthcare Investments

Ethos Healthcare Investments (“EHI”) is a platform that has been established to invest in hospitals and other healthcare-related industries in South Africa and in other sub-Saharan African countries. The two key principals in this Fund are Michael Flemming and Jonathan Lowick, who were instrumental in establishing, operating and growing Life Healthcare, one of South Africa’s largest hospital groups. The pipeline of opportunities remains strong, and the first investment has been signed and is subject to regulatory approval. Ethos Capital has made a commitment of R250 million to EHI.

Direct Investments

During the period, a Direct Investment of R100 million was made in Kevro Holdings (Pty) Ltd (“Kevro”), alongside EMMF I. In addition, a further Direct Investment of R171 million was made in Primedia Holdings (Pty) Ltd (“Primedia”), alongside EF VI. The Company continues to assess a number of interesting additional co-investment opportunities alongside the various Ethos Funds.

OUTLOOK

The pipeline of opportunities across all of the Funds remains very strong. While there is improvement in the macroeconomic environment, it is important that the Funds continue to invest selectively in assets that have a robust and defensible business case.

Across the various Funds, Ethos is in exclusive discussions on seven investments. Two have been signed and are subject only to regulatory approval. A further two investments are well progressed and have signed term sheets. While there can be no guarantee that all of these transactions will close, Ethos remains confident that it will be able to close on the majority of these investments.

The amount of capital required by Ethos Capital into these transactions, should the Funds be successful in closing all of them, would be approximately R400 million.

NAV

During the six months ended 31 December 2017, the NAV increased to R1.9 billion, equivalent to R10.76 per share.

At 31 December 2017, Ethos Capital’s unlisted invested capital (including guarantees) was 39% of the NAV, with the balance largely invested in Temporary Investments.

An analysis of the movements in the NAV and NAVPS is detailed below:

NAV
R’000
NAVPS
Cents
At 30 June 20171 867 07910.37
Net return on Temporary Investments52 4270.29
Return on investment portfolio28 5110.16
Share buybacks(17 344)0.03
Expenses and tax(10 457)(0.06)
Fees paid to Ethos(6 207)(0.03)
At 31 December 20171 914 00910.76

 

The net return on Temporary Investments during the period was R52.4 million, representing a net annualised return of 7.6%. The net return on the unlisted investment portfolio was R28.5 million, implying a cumulative IRR of the investment portfolio of 12.2%.

Operating expenses and tax for the Company totalled R10.5 million, constituting 0.5% of NAV, of which R4.2 million relates to transaction-related fees in respect of completed and aborted transactions.

The fees payable to Ethos include advisory fees on Primary and Direct Investments, charged at 1.5% per year on the average invested capital over the period, and management fees on Temporary Investments, charged at 0.25% per year less any fees payable to Ashburton Fund Managers Proprietary Limited (“Ashburton”) for managing the portfolio of Temporary Investments. Further details on expenses are provided in note 9 of the Notes to the Interim Financial Statements.

SHARE PRICE ANALYSIS

Ethos Capital’s share price as at 31 December 2017 was R8.70, which represented a 19.1% discount to the NAVPS at 31 December 2017.

As noted previously, the Ethos Capital Board is committed to a policy of enhancing long-term shareholder value. The Company has continued to repurchase shares to enhance shareholder value and the shares acquired by the Company are held in treasury. During the six months to 31 December 2017, the Company repurchased an additional 2 034 038 shares representing 1.1% of the unencumbered issued A Ordinary Share capital.

Since the period-end, the Company has continued to repurchase shares and the Board will continue to monitor the Company’s share price performance and the discount to NAV.

COMMITMENTS

Ethos Capital’s Investment Strategy is to make investment commitments into Funds managed by Ethos, through a combination of Primary, Direct and Secondary Investments, or making commitments to Direct Investments. As at 31 December 2017, Ethos Capital had liquid resources of R1.2 billion to meet any outstanding commitments. In addition, the Company has agreed a four-year revolving credit facility with Rand Merchant Bank (“RMB”) that, once activated, will provide access to c. R0.6 billion of additional resources for the Company.

As at 31 December 2017, the Company’s closed and approved – subject to legal Fund closings – commitments to Ethos Funds were as follows:

TypeVintageOriginal
R’000
Undrawn
R’000
Closed
EMMF IPrimary2016900 000532 085
PrimediaDirect2017171 1058 199
EF VISecondary2011123 05017 670
EMMF ID*Direct2017100 000
1 294 155557 954
Approved
EF VII1 250 0001 250 000
EMP 3320 000320 000
EHI250 000250 000
3 114 1552 377 954

* Investment in Kevro via the Ethos Mid Market Fund I Direct Partnership (“EMMF ID”).

INVESTMENT PORTFOLIO

At 31 December 2017, the investment portfolio and invested capital consisted of the following:

Cost
R’000
Valuation
R’000
% of NAV
Investments
EMMF I362 265403 95721.1
Primedia160 275160 2758.4
EMMF ID*100 000100 0005.2
EF VI65 40265 4583.4
Total investments687 942729 69038.1
Unfunded guarantees
EF VI**20 0641.1
Total invested capital688 088749 75439.2

* Investment in Kevro via the Ethos Mid Market Fund I Direct Partnership (“EMMF ID”).
** Guarantees provided by the Fund to raise financing that was used to invest in Portfolio Companies.

During the period, the investments in two Portfolio Companies (Kevro and Primedia) were completed as well as the EMMF I investment into MTN Zakhele Futhi (the BEE shareholder of the MTN Group). This increased Ethos Capital’s underlying exposure to 11 Portfolio Companies across a number of sectors which provide a diversified portfolio exposure.

Post-December, EMMF I completed the acquisition of Echotel Proprietary Limited (“Echo”), of which Ethos Capital’s contribution was R34.0 million. Echo is a South African corporate Internet Service Provider and primarily services domestic high-end SME and enterprise clients.

The above increased Ethos Capital’s invested capital to 41% of NAV and its underlying exposure to 12 Portfolio Companies.

REALISATIONS

During October 2017, Ethos Capital received R11.9 million as its share of the sale of Kevro by EF VI which generated a Fund return of 2.7x cost invested. A further two exits are expected to be completed in Q2 2018.

UNDERLYING PORTFOLIO COMPANIES

The Ethos Funds – making up Ethos Capital’s investment portfolio – invest in a diversified pool of unquoted investments (Portfolio Companies) and provide the Company with indirect exposure to the Funds’ underlying investments. At 31 December 2017, the investments (excluding guarantees) constituting 38.1% of total NAV, consisted of the following 11 companies and other surplus cash and current assets at the Fund level:

NameFundBusiness descriptionYear*% of NAV
KevroEMMF I/ EMMF IDCorporate clothing and promotional201711.3
PrimediaEF VI/DirectMedia20178.9
AutozoneEF VI/EMMF IRetailer and wholesaler of automotive parts20145.5
MTN Zakhele FuthiEMMF ITelecommunications20173.7
TwinsaverEF VI/EMMF IIndustrials (FMCG)20153.5
Eazi AccessEF VI/EMMF IIndustrial support services20163.2
Eaton TowersEF VIShared telecoms towers20150.6
Waco InternationalEF VIIndustrial support services20120.6
The Beverage CompanyEF VICarbonated drinks20170.3
RTTEF VILogistics20140.2
NeopakEF VIPaper and packaging20150.2
OtherEF VI/EMMF ICash and current assets0.1
38.1

* Initial acquisition date by Ethos Fund

PORTFOLIO COMPANY PERFORMANCE

Ethos Capital’s investment portfolio at 31 December 2017 provides exposure to 11 Portfolio Companies that, in aggregate (excluding the results of the MTN Group), have sales of over R24 billion and EBITDA of more than R4 billion. The companies span a number of sectors providing diversified portfolio exposure.

The economic environment in South Africa and sub- Saharan Africa has remained subdued in the past 12 months, with some prevalent macroeconomic headwinds. However, the Portfolio Companies’ performance held up relatively well and the Funds benefited from sectoral diversity in the portfolio and some of the initiatives undertaken to optimise operations. The growth in the aggregate sales of the Portfolio Companies (excluding the results of the MTN Group) over the last 12 months (“LTM”) to 31 December 2017 was 6.1% while the portfolio grew its LTM aggregate EBITDA by 4.6%.

PORTFOLIO COMPANY VALUATION ANALYSIS

The NAV of each Fund is derived from the valuations of the underlying Portfolio Companies, which are prepared in accordance with International Private Equity and Venture Capital Guidelines (“IPEV Guidelines”). Valuations are performed quarterly, audited semi-annually and approved by each Fund’s Advisory Board. The IPEV Guidelines set out best practice where private equity investments are reported on at fair value

As at 31 December 2017, the Ethos Capital portfolio of investments was valued at an average EV/EBITDA multiple of 6.9x. The IPEV Guidelines require the Manager to ascribe a series of adjustments to the Portfolio Company valuation multiples to reflect their unlisted nature and company-specific factors. As at 31 December 2017, the average EV/EBITDA multiple represents an average discount of 41% compared to the equivalent multiple of the Portfolio Companies’ peer groups.

The value-weighted average Net Debt/EBITDA of the portfolio was 2.0x.

UNAUDITED SUMMARISED STATEMENT OF FINANCIAL POSITION

AT 31 DECEMBER 2017

Unaudited
Notes31 Dec 2017
R’000
31 Dec 2016
R’000
30 June 2017
R’000
ASSETS
Non-current assets
Unlisted investments at fair value4729 690340 175307 939
Total non-current assets729 690340 175307 939
Current assets
Other assets and receivables21 62124 15626 758
Money market investments at fair value51 141 2361 421 3831 529 281
Cash and cash equivalents25 78210 75610 044
Total current assets1 188 6391 456 2951 566 083
TOTAL ASSETS1 918 3291 796 4701 874 022
EQUITY AND LIABILITIES
Capital and reserves
Issued capital61 747 6681 765 3591 765 012
Retained earnings166 34128 871102 067
Total equity1 914 0091 794 2301 867 079
Current liabilities
Other liabilities and payables3 6578893 775
Current tax liabilities6631 3513 168
Total current liabilities4 3202 2406 943
TOTAL EQUITY AND LIABILITIES1 918 3291 796 4701 874 022
NET ASSET VALUE1 914 0091 794 2301 867 079
Net asset value per share (Rand)11.210.769.9710.37
Attributable shares in issue at end of period/year (’000)11.1177 926180 000179 960


UNAUDITED SUMMARISED STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED 31 DECEMBER 2017

Unaudited
NotesSix months ended
31 Dec 2017 R’000
Six months ended
31 Dec 2016 R’000
Year ended
30 Jun 2017 R’000
Income
Investment income760 12150 627123 901
Net fair value gains/(losses)821 850(8 971)2 683
Total income81 97141 656126 584
Expenses
Management and administration fees9.1(7 240)(1 693)(4 820)
Legal and consultancy fees9.2(4 641)(5 938)(8 917)
Other operating expenses9.3(4 361)(3 803)(7 612)
Total expenses(16 242)(11 434)(21 349)
Profit before tax65 72930 222105 235
Income tax expense(1 455)(1 351)(3 168)
Profit for the period/year64 27428 871102 067
Other comprehensive income for the period/year
TOTAL COMPREHENSIVE INCOME FOR THE PERIOD/ YEAR64 27428 871102 067
Earnings per share
Basic and diluted earnings per share (Rand)11.10.360.160.57

The above relate to continuing operations as no operations were acquired or discontinued during the year.

UNAUDITED SUMMARISED STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS ENDED 31 DECEMBER 2017

Unaudited
Six months ended 31 Dec 2017
NotesShare capital
R’000
Retained earnings
R’000
Total equity
R’000
Balance at 1 July 20171 765 012102 0671 867 079
Buy-back of ordinary shares6(17 344)(17 344)
Income for the period11.164 27464 274
Balance at 31 December 20171 747 668166 3411 914 009

 

Unaudited
Six months ended 31 Dec 2016
Share capital
R’000
Retained earnings
R’000
Total equity
R’000
Issue of ordinary shares61 800 0751 800 075
Share issue costs6(34 716)(34 716)
Income for the period11.128 87128 871
Balance at 31 December 20161 765 35928 8711 794 230

 

Year ended 30 Jun 2017
Share capital
R’000
Retained earnings
R’000
Total equity
R’000
Issue of ordinary shares61 800 0751 800 075
Share issue costs6(34 716)(34 716)
Buy-back of ordinary shares6(347)(347)
Income for the year11.1102 067102 067
Balance at 30 June 20171 765 012102 0671 867 079

No comparative financial information as at 1 July 2016 has been presented as no Statement of Changes in Equity was presented in the 30 June 2016 financial statements.

UNAUDITED SUMMARISED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 31 DECEMBER 2017

Unaudited
Net cash (used in)/generated by operating activities before investment activities(21 843)6 067(16 769)
Net cash generated by/(used in) investing activities55 019(1 755 168)(1 732 697)
Cash generated by/(used in) operating and investing activities33 176(1 749 101)(1 749 466)
Net cash (used in)/generated by financing activities(17 344)1 765 3591 765 012
Net increase in cash and cash equivalents15 83216 25815 546
Cash and cash equivalents at the beginning of the period/year10 044
Effects of exchange rate changes on the balance of cash held in foreign currencies(94)(5 502)(5 502)
Total cash and cash equivalents at the end of the period/year25 78210 75610 044

 

UNAUDITED SUMMARISED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED 31 DECEMBER 2017

 

1 GENERAL INFORMATION

EPE Capital Partners Ltd (“Ethos Capital”, or “the Company”) was registered and incorporated in Mauritius as a private company on 26 May 2016 under the Mauritius Companies Act, Act No. 15 of 2001, and was converted to a public company on 15 July 2016. The Company is licensed as a Category One Global Business Licence company by the Financial Services Commission of Mauritius and is designed to offer shareholders long-term capital appreciation by investing into Funds or Direct Investments that provide the Company exposure to a diversified portfolio of unlisted private equity-type investments.

 

2 APPLICATION OF NEW AND REVISED INTERNATIONAL FINANCIAL REPORTING STANDARDS (“IFRS”)

The following new and revised standards and interpretations are relevant to the Company and have been adopted in these Summarised Interim Financial Statements. Their adoption has not had any significant impact on the amounts reported in these Summarised Interim Financial Statements but may have affected the accounting and disclosure of transactions and arrangements. These standards are effective for companies with financial year-ends beginning on or after the effective date as noted for each standard.

 

StandardDescription/name of standardEffective date
IAS 7Statement of Cash Flows1 January 2017
IFRS 2Share-Based Payments1 January 2017
IFRS 17Insurance Contracts1 January 2017
IAS 12Income Taxes1 January 2017
IFRS 12Disclosure of Interest in Other Entities1 January 2017

 

The Directors anticipate that these amendments will be applied in the Summarised Interim and Annual Financial Statements for the annual periods beginning on or after the respective dates as indicated above. The Directors have not yet assessed the potential impact of the adoption of these amendments.

 

StandardDescription/name of standardEffective date
IFRS 15Revenue from Contracts with Customers1 January 2018
IFRS 9Financial Instruments1 January 2018
IFRIC 22Foreign Currency Transactions and Advance Consideration1 January 2018
IFRS 16Leases1 January 2018

 

The Directors anticipate that these amendments will be applied in the Summarised Interim and Annual Financial Statements for the annual periods beginning on or after the respective dates as indicated above. The Directors have not yet assessed the potential impact of the adoption of these amendments.

 

3 SIGNIFICANT ACCOUNTING POLICIES

3.1 Basis of preparation

These Summarised Interim Financial Statements have been prepared in accordance with: IFRS as issued by the International Accounting Standards Board; the SAICA Financial Reporting Guides, as issued by the Accounting Practices Committee; the Financial Reporting Pronouncements, as issued by the Financial Reporting Standards Council; as a minimum, the information required by IAS 34; the Listings Requirements of the JSE; and the requirements of the Mauritius Companies Act, Act No. 15 of 2001, in so far as applicable to Category One Global Business Licence companies.

The accounting policies applied in the preparation of these Summarised Interim Financial Statements are, where applicable to the prior financial year, consistent in all material respects with those used in the prior financial year and with IFRS.

 

NOTES TO THE SUMMARISED INTERIM FINANCIAL STATEMENTS (CONTINUED)

FOR THE SIX MONTHS ENDED 31 DECEMBER 2017

 

3 SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

3.1 Basis of preparation

The Summarised Interim Financial Statements have been prepared on the historical cost basis except for financial instruments and investments which are measured at fair value.

The Directors believe the Company has adequate resources to settle its obligations as and when they become due, therefore these Summarised Interim Financial Statements have been prepared on the going concern basis.

These Summarised Interim Financial Statements were compiled under the supervision of the Chief Financial Officer, Mr Jean-Pierre van Onselen, CA(SA), and were approved by the Board on 13 March 2018.

 

3.2 Segmental reporting

Since the Company has only one business segment, and all its investments are managed as one segment investing in private equity-type investments, segmental reporting is not applicable.

 

4 UNLISTED INVESTMENTS AT FAIR VALUE

The Company obtains exposure to and has indirect interests in a diversified pool of unquoted investments (“Portfolio Companies”) by investing into Fund Limited Partnerships (“Funds”), managed by Ethos Private Equity (Pty) Limited (“Ethos”), that typically have a 10-year life cycle. The Company becomes a Limited Partner of the Fund and the investments are made through commitments into the Funds. Alternatively, the Company can also make direct commitments to invest into Portfolio Companies alongside the Funds.

In November 2016, the Company made a R550 million commitment to the Ethos Mid Market Fund I Partnership (“EMMF I”), which was increased to R900 million in July 2017. The Company also acquired a US$10 million (R123 million) commitment in Ethos Fund VI (Jersey) LP (“EF VI”) in November 2016, through a secondary transaction. During the current period, a commitment of R100 million was made to the Ethos Mid Market Fund I Direct Partnership (“EMMF I Direct”), to facilitate the Company’s first Direct Investment, which was followed by a R171 million commitment to invest directly in Primedia Holdings (Pty) Ltd.

 

31 Dec 2017
R’000
31 Dec 2016
R’000
30 Jun 2017
R’000
Investments held at fair value through profit and loss:
Unlisted investment in EMMF I403 957292 142247 412
Unlisted investment in EF VI64 45848 03360 527
Unlisted investment in EMMF I Direct100 000
Unlisted investment in Primedia Holdings (Pty) Ltd160 275
729 690340 175307 939
Consisting of:
Cost687 942344 272288 505
Unrealised capital appreciation/(depreciation) at end of period/year27 340(4 294)7 515
Accrued income14 40819711 919
729 690340 175307 939

NOTES TO THE SUMMARISED INTERIM FINANCIAL STATEMENTS (CONTINUED)

FOR THE SIX MONTHS ENDED 31 DECEMBER 2017

 

4 UNLISTED INVESTMENTS AT FAIR VALUE (CONTINUED)

At 31 December 2017, the underlying investments of the above Funds (Portfolio Companies), constituting 38.1% of the Company’s net asset value (“NAV”), consisted of the following 11 unlisted companies and other surplus cash and current assets held at the Fund level:

 

NameFund/typeBusiness description/sector% of NAV 31 Dec 2017
KevroEMMF I/ EMMF IDCorporate clothing and promotional11.3
PrimediaEF VI/DirectMedia8.9
AutozoneEF VI/EMMF IRetailer and wholesaler of automotive parts5.5
MTN Zakhele FuthiEMMF ITelecommunications3.7
TwinsaverEF VI/EMMF IIndustrials (FMCG)3.5
Eazi AccessEF VI/EMMF IIndustrial support services3.2
Eaton TowersEF VIShared telecoms towers0.6
Waco InternationalEF VIIndustrial support services0.6
The Beverage CompanyEF VICarbonated drinks0.3
RTTEF VILogistics0.2
NeopakEF VIPaper and packaging0.2
OtherEF VI/EMMF ICash and current assets0.1
38.1

 

Cost
R’000
Capital appreciation/
(depreciation)
R’000
Accrued
income
R’000
Total
R’000
Reconciliation of movements:
Balance at 1 July 2017288 5057 51511 919307 939
Acquisitions408 396408 396
Realisations(8 959)(1 360)(801)(11 120)
Revaluation increase at end of period21 1853 29024 475
Balance at 31 December 2017687 94227 34014 408729 690
Balance at 1 July 2016
Acquisitions349 160349 160
Realisations(4 888)(4 888)
Revaluation (decrease)/increase at end of period(4 294)197(4 097)
Balance at 31 December 2016344 272(4 294)197340 175
Balance at 1 July 2016
Acquisitions293 393293 393
Realisations(4 888)(4 888)
Revaluation increase at end of year7 51511 91919 434
Balance at 30 June 2017288 5057 51511 919307 939


NOTES TO THE SUMMARISED INTERIM FINANCIAL STATEMENTS (CONTINUED)

FOR THE SIX MONTHS ENDED 31 DECEMBER 2017

5 MONEY MARKET INVESTMENTS AT FAIR VALUE

31 Dec 2017
R’000
31 Dec 2016
R’000
30 Jun 2017
R’000
Investments held at fair value through profit and loss:
Floating rate notes502 001552 433637 091
Negotiable certificates of deposit567 475383 368577 473
Treasury bills69 241426 858179 185
Cash and call accounts2 51958 724135 532
1 141 2361 421 3831 529 281
Consisting of:
Cost1 140 6841 420 8511 528 622
Unrealised appreciation at end of period/year552532659
1 141 2361 421 3831 529 281

 

The money market investments, or Temporary Investments, are managed by Ashburton Fund Managers Proprietary Limited (“Ashburton”) under a discretionary investment management agreement dated 28 July 2016. These investments are currently invested in money market instruments that consist of a combination of floating rate notes, negotiable certificates of deposit (“NCD”) and treasury bills.

At 31 December 2017, the following range of interest rates was applicable to the respective categories of money market instruments, from which the accrued income at 31 December 2017 was derived:

 

31 Dec 2017
Low %High %
Floating rate notes7.85008.0750
NCD7.10008.2750
Treasury bills7.65387.6538

 

6 ISSUED CAPITAL

 

31 Dec 2017 Number31 Dec 2016 Number30 Jun 2017 Number
Issued:
A Ordinary Shares issued at R10.00 per share180 000 000180 000 000180 000 000
A Ordinary Shares issued at R0.01 per share7 500 0007 500 0007 500 000
B Ordinary Shares issued at R0.01 per share10 00010 00010 000
Total issued at time of listing187 510 000187 510 000187 510 000
A Ordinary Shares purchased(2 074 140)(40 102)
Total issued share capital185 435 860187 510 000187 469 898

 

NOTES TO THE SUMMARISED INTERIM FINANCIAL STATEMENTS (CONTINUED)

FOR THE SIX MONTHS ENDED 31 DECEMBER 2017

6 ISSUED CAPITAL (CONTINUED)

31 Dec 2017
R’000
31 Dec 2016
R’000
30 Jun 2017
R’000
Issued:
A Ordinary Shares issued at R10.00 per share1 800 0001 800 0001 800 000
A Ordinary Shares issued at R0.01 per share757575
B Ordinary Shares issued at R0.01 per share
Less: Share issue costs(34 716)(34 716)(34 716)
Total issued at time of listing1 765 3591 765 3591 765 359
A Ordinary Shares purchased(17 691)(347)
Total issued share capital1 747 6681 765 3591 765 012

During the period, the Company purchased 2 034 038 of its A Ordinary Shares at an average price of R8.53 per share. These shares are currently held in treasury.

 

7 INVESTMENT INCOME

Six months ended
31 Dec 2017
R’000
Six months ended
31 Dec 2016
R’000
Year ended
30 Jun 2017
R’000
Interest from unlisted investments6 3595015 854
Dividends from unlisted investments1017611 314
Interest from money market investments47 98833 65680 251
Interest from bank and call deposits3821 3301 486
54 83035 79798 905
Amortisation of net discount5 29114 83024 996;
5 29114 83024 996
60 12150 627123 901

 

8 NET FAIR VALUE GAINS/(LOSSES)

Six months
ended
31 Dec 2017
R’000
Six months
ended
31 Dec 2016
R’000
Year ended
30 Jun 2017
R’000
Unrealised:
Net gains/(losses) arising on changes in the fair value of unlisted investments19 825(4 294)7 515
Net (losses)/gains arising on changes in the fair value of money market instruments(107)532659
Net foreign exchange losses on conversion of cash and cash equivalents(94)(282)
19 624(3 762)7 892
Realised:
Gains on realisation of unlisted investments2 226
Gains on realisation of money market instruments1111
Net foreign exchange losses on conversion of cash and cash equivalents(5 220)(5 220)
2 226(5 209)(5 209)
Net fair value gains/(losses)21 850(8 971)2 683

 

NOTES TO THE SUMMARISED INTERIM FINANCIAL STATEMENTS (CONTINUED)

FOR THE SIX MONTHS ENDED 31 DECEMBER 2017

 

9 PROFIT BEFORE TAX

Profit before tax has been arrived at after charging:

Six months
ended
31 Dec 2017
R’000
Six months
ended
31 Dec 2016
R’000
Year ended
30 Jun 2017
R’000
9.1 Management and administration fees
Management fees – Ethos2 5131 286
Advisory fees – Ethos*2 821
Administration fee – Ethos8737361 482
Administration fee – Ashburton1 0339572 052
7 2401 6934 820
* Payable from 1 July 2017.
9.2 Legal and consultancy fees
Legal and consultancy fees734 4095 154
Fund formation fees2551 4311 809
Fund formation fees2551 4311 809
Expenses relating to the acquisition of investments4 313981 954
4 6415 9388 917
9.3 Other operating expenses
Company secretarial, accounting and other administration fees7588001 517
Directors’ emoluments1 9601 5263 353
Auditors’ remuneration419473852
Insurance costs321191431
Sponsor and listing-related fees377112408
Other expenses5267011 051
4 3613 8037 612

 

10 CAPITAL COMMITMENTS AND CONTINGENT LIABILITIES

OriginalOutstanding
31 Dec 2017
R’000
31 Dec 2017
R’000
31 Dec 2016
R’000
30 Jun 2017
R’000
Capital commitments:
Unlisted investment in EMMF I900 000532 085255 442319 205
Unlisted investment in EF VI123 05017 67081 81555 874
Unlisted investment in EMMF I Direct100 000
Unlisted investment in Primedia Holdings (Pty) Ltd171 1058 199
1 294 155557 954337 257375 079
Contingent liabilities:
Rand Merchant Bank (“RMB”)105 000118 143106 369113 424
105 000118 143106 369113 424
Total commitments and contingent liabilities1 399 155676 097443 626488 503

Refer to note 4 for further details on the capital commitments.


FOR THE SIX MONTHS ENDED 31 DECEMBER 2017

10 CAPITAL COMMITMENTS AND CONTINGENT LIABILITIES (CONTINUED)

The Company has provided a guarantee against a R105 million five-year non-recourse loan facility (plus any outstanding interest thereon) issued by RMB to Black Hawk Private Equity Proprietary Limited (“Black Hawk”), expiring on 29 July 2021. The proceeds of the facility, signed on 28 July 2016, were used by Black Hawk to subscribe to R105 million of A Ordinary Shares on behalf of the two non-executive Directors, who are members of the Company’s Investment Committee. The above amount represents the current outstanding balance on the facility, including any accrued interest charges to 31 December 2017. Interest currently accrues at a rate that is based on JIBAR plus a 1% margin, and the interest is intended to be rolled-up and settled with the capital amount outstanding upon the maturity of the loan or an earlier repayment event.

11 EARNINGS AND NET ASSET VALUE PER SHARE

As detailed in note 6, the Company issued 187 500 000 A Ordinary Shares, 7 500 000 of which were issued to the EPE Allocation Trust and are currently notionally encumbered. Until these shares are released from their encumbrance (through the notional performance participation), the Company has an irrevocable right and option to acquire the notionally encumbered A Ordinary Shares at a repurchase price of R0.01 per share, being each share’s fair value, and then to apply for the delisting of such shares acquired. The holders of these shares are therefore restricted from selling the shares to any party other than the Company and obtaining or sharing in any economic benefit derived from the shares, until they are released from their encumbrance.

Given the restrictions the encumbered shares place on the holder and the probability of the shares being delisted unless certain contingent conditions are met, they are excluded from the calculations to determine the earnings, headline earnings and net asset value per share (“NAVPS”) respectively. The calculations below therefore reflect the earnings, headline earnings and NAV attributable to the unrestricted A Ordinary shareholders.

11.1 Earnings and headline earnings per share

Six months
ended
31 Dec 2017
R’000
Six months
ended
31 Dec 2016
R’000
Year ended
30 Jun 2017
R’000
Total comprehensive profit attributable to ordinary shareholders64 27428 871102 067
Reconciliation of basic earnings to headline earnings:
Total comprehensive profit attributable to ordinary shareholders64 27428 871102 067
Items attributable to headline earnings
Headline earnings for the period/year64 27428 871102 067
’000’000’000
Attributable shares:
Number of shares in issue during the period/year187 500187 500187 500
Less: Treasury shares(2 074)(40)
Less: Notionally encumbered shares(7 500)(7 500)(7 500)
Number of attributable shares in issue at the end of the period/year177 926180 000179 960
Wighted average number of ordinary shares for the purpose of earnings per share178 631180 000180 000
Basic and diluted earnings per share (Rand)0.360.160.57
Basic and diluted headline earnings per share (Rand)0.360.160.57

 

NOTES TO THE SUMMARISED INTERIM FINANCIAL STATEMENTS (CONTINUED)

FOR THE SIX MONTHS ENDED 31 DECEMBER 2017

11 EARNINGS AND NET ASSET VALUE PER SHARE (CONTINUED)

11.2 Net asset value per share

31 Dec 2017
R’000
31 Dec 2016
R’000
30 Jun 2017
R’000
Net assets1 914 0091 794 2301 867 079
Net asset value per share (Rand)10.769.9710.37

 

12 FINANCIAL RISK FACTORS AND INSTRUMENTS

12.1 Overview

The Board of Directors has overall responsibility for the establishment and oversight of the Company’s risk management framework. The Company’s risk management policies are established to identify and analyse the risks faced by the Company, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies and systems are reviewed regularly to reflect changes in market conditions and the products offered.

Through the Company’s activities, it is exposed to a variety of risks that could result in changes to the NAV or its performance.

The main risks the Company is exposed to which could result in changes to the NAV or its performance are: capital risk; valuation risk; market risk (comprising currency risk, interest rate risk and equity price risk); credit risk; and liquidity risk.

These risks are detailed in note 23 of the Notes to the Annual Financial Statements as at 30 June 2017.

12.2 Fair value classification of investments

Financial assets and liabilities carried at fair value need to be classified within the appropriate level of hierarchy on which their fair values are based. The information below sets out the different levels, as well as the classification of the Company’s assets and liabilities where appropriate.

Investments trading in active markets and deriving their fair value from quoted market prices of identical assets are classified within level 1. These prices provide the most reliable fair value classification and the Company does not need to adjust the quoted prices to measure the fair value of investments. The quoted market price used for investments held by the Company is the current bid price.

Investments trading in markets not considered to be active and deriving their fair value from observable inputs other than quoted prices included within level 1 are classified within level 2. These inputs need to be directly or indirectly observable for the investment and can include: quoted market prices for similar assets in active or non-active markets; observable inputs other than quoted prices; and inputs derived or corroborated by observable market date. The Company’s money market investments will typically be classified within level 2.

Level 3 classification applies to investments where observable inputs are not available for the asset to determine its fair value. Unobservable inputs are used to measure fair value where relevant observable inputs are not available. The unlisted investments in Fund Limited Partnerships are within this level.

 

NOTES TO THE SUMMARISED INTERIM FINANCIAL STATEMENTS (CONTINUED)

FOR THE SIX MONTHS ENDED 31 DECEMBER 2017

12 FINANCIAL RISK FACTORS AND INSTRUMENTS (CONTINUED)

12.2 Fair value classification of investments (continued)

The financial assets and liabilities measured at fair value in the Statement of Financial Position can be summarised as follows within the fair value hierarchy:

Level 1
R’000
Level 2
R’000
Level 3
R’000
Total
R’000
Assets:
Unlisted investments729 690729 690
Money market investments1 141 2361 141 236
Accrued income on money market investments19 03519 035
1 160 271729 6901 889 961

During the period, there were no transfers of assets from level 1 to level 2 or 3, level 2 to level 1 or 3 or level 3 to level 1 or 2.

The following table presents the movement in level 3 assets during the period by class of financial instrument:

Unlisted
investments
31 Dec 2017
R’000
Non-current assets:
Opening balance307 939
Acquisitions408 396
Realisations and equalisations at carrying value of acquisitions(11 120)
Net gains included in the Statement of Comprehensive Income24 475
729 690

 

The Board of Directors has approved the valuation method for level 3 investments as set out in the accounting policies. The valuation techniques used and the inputs available to determine the fair value of each investment, are detailed in note 4 of the Notes to the Annual Financial Statements as at 30 June 2017. The inputs available to the Investment Advisor to determine the valuation of the underlying Portfolio Companies, from which the NAV of the Funds is derived, are mainly the maintainable earnings of the relevant companies and valuation multiples that are derived from the public markets.

The main inputs available to the Investment Advisor to determine the valuation on a case-by-case basis for each of the underlying Portfolio Companies, from which the NAV of the Funds is derived, are: maintainable earnings, trading multiples and capital structures. Earnings, for instance EBITDA, can be based on budgeted EBITDA, most recent or historic reported EBITDA, last-12-months EBITDA or EBITDA adjusted to a normalised earnings level.

Trading multiples are determined by identifying comparable public companies based on, for instance, their industry, size, growth stage, revenue generation, and strategy. Once a public company’s trading multiple is calculated, the Investment Advisor can then adjust the multiple for considerations such as illiquidity, capital structure and other differences between the public company and the Portfolio Company, based on company–specific facts and differences. The Investment Advisor can also, in addition to the original transaction multiples, consider recent private transactions in similar securities as the Portfolio Company or third-party transactions, and adjust the trading multiples as deemed appropriate.

 

NOTES TO THE SUMMARISED INTERIM FINANCIAL STATEMENTS (CONTINUED)

FOR THE SIX MONTHS ENDED 31 DECEMBER 2017

12 FINANCIAL RISK FACTORS AND INSTRUMENTS (CONTINUED)

12.2 Fair value classification of investments (continued)

The capital structure of each Portfolio Company determines the ranking or distribution waterfall of how the fair value is allocated, firstly, to each type of security, and secondly, to each holder of such securities, for example, taking into consideration preferred rights or incentive schemes upon an exit scenario, possible earn-out payments, etc. Other subjective inputs to use might be based on the Investment Advisor’s assessment of the quality of earnings, third-party external debt, comparability differences and probability of default.

All these numerical and subjective inputs are recorded and maintained, for each Portfolio Company, in a valuation model designed and updated by the Investment Advisor. The Board of Directors has no direct access or input to these valuation models or the subjective assessments that were considered in deriving the fair value and are not reasonably available to the Board. All these inputs and considerations are largely interdependent and subjective, and the models are highly complex for an outside party to manage. Therefore, it is not reasonable, and potentially misleading, for the Board to determine and present to the shareholders of the Company a sensitivity analysis of the potential impact of changes to one or more of the underlying inputs to fair value.

12.3 Interest rate risk

Interest rate risk is the risk that the value of a financial instrument will fluctuate based on changes in market interest rates. The Company has exposure to interest rate risk through its Temporary Investments (money market investments) that are largely invested in fixed rate instruments and floating rate notes with a relatively short re-pricing period. The fair value of the money market instruments is largely dependent on the market interest rates and could fluctuate with changes in the latter.

The performance, maturity profile and sensitivity analysis of Temporary Investments are reviewed regularly and Ashburton aims to match the liquidity profile with the Company’s liquidity requirements to optimise the returns. The Temporary Investments are managed by Ashburton under an investment management agreement that sets certain permitted securities and limits within which they have to manage the portfolio to provide a balance of risk and returns that the Board is comfortable with.

The table below demonstrates the sensitivity in the fair value of the Temporary Investments held at 31 December 2017 based on assumed changes to the market interest rates (measured in basis points (“bps”) at different intervals and taking into account the maturity dates of the securities.

 

Fair value
adjustment
31 Dec 2017
R’000
Change in market interest rates assumed:
-75 bps1 959
-50 bps1 306
-25 bps653
+25 bps(653)
+50 bps(1 306)
+75 bps(1 959)

 

13 EVENTS AFTER THE REPORTING PERIOD

There have been no material events after the reporting date that would require disclosure or adjustment to the Summarised Interim Financial Statements for the six months ended 31 December 2017

CORPORATE INFORMATION

EPE Capital Partners Ltd (“Ethos Capital” or “the Company”) is an investment holding company, registered and incorporated in Mauritius and listed on the JSE Limited (“JSE”). It invests directly into Funds or Direct Investments, managed by Ethos Private Equity (Pty) Limited (“Ethos”), which give the Company indirect exposure to a diversified portfolio of unlisted private equity-type investments (“Portfolio Companies”). By nature, private equity is a long-term investment, requiring long-term thinking and a patient strategy.

Directors
Yvonne Stillhart (Chairperson)
Derek Prout-Jones
Kevin Allagapen
Michael Pfaff
Yuvraj Juwaheer


Senior Advisors
Jean-Pierre van Onselen (CFO)
Peter Hayward-Butt (CEO)

Investment Advisor
Ethos Private Equity (Pty) Limited
35 Fricker Road
Illovo
Johannesburg, 2196

Company Secretary and Registered Office
Ocorian (Mauritius) Limited
4th floor,
Standard Chartered Tower
19 Bank Street
Cybercity
Ebene
Mauritius

Auditors
Deloitte & Touche
Level 7, Standard Chartered Tower
19 Bank Street
Cybercity
Ebene
Mauritius

Deloitte & Touche
20 Woodlands Drive
Woodmead
Sandton
Johannesburg, 2196

Listing
JSE Limited
Abbreviated name: ETHOSCAP
JSE code: EPE
Sector: Financials – Speciality Finance

Transfer Secretary
Computershare Investor Services (Pty) Ltd
Rosebank Towers
15 Biermann Avenue
Rosebank, 2196

Sponsor
Rand Merchant Bank
1 Merchant Place
Cnr Fredman Drive and Rivonia Road
Sandton
Johannesburg, 2196

Johannesburg

DATE:

19-03-2018

SPONSOR:

RAND MERCHANT BANK (A division of FirstRand Bank Limited)