ARC’s portfolio resilient amid challenging macroeconomic environment

17th March 2023 By: Marleny Arnoldi - Creamer Media Contributing Editor Online

JSE-listed African Rainbow Capital (ARC) says its diverse investment portfolio has shown remarkable resilience in what were challenging macroeconomic conditions for all the firms it is invested in, in the six months ended December 31, 2022.

ARC’s intrinsic investment value in the African Rainbow Capital Fund (ARC Fund) increased by 0.2% from R13.24-billion as at June 30, 2022, to R13.27-billion at the end of December 31, indicating stability.

Net asset value (NAV) a share decreased by 1.1% from R10.08 as at June 30, 2022, to R9.97 as at December 31, as a result of the increase in the number of shares in issue.

The intrinsic net asset value (INAV) a share at December 31, 2021, was R10.31.

The increase in shares was driven by a performance hurdle being met in the prior year. The diluted NAV a share remained constant at the end of December, compared with June 2022.

INAV movement in the period comprised R33-million of net fair value gains, disposals of R1.1-billion, acquisitions of just more than R1-billion, a cash balance increase of R382-million, an increase in debt of R421-million and a R72-million decrease in other net liabilities.

Cash in the ARC Fund increased by 57% to more than R1-billion by the end of December, compared with R669-million as at June 30, providing support for more acquisitions.

Debt in the ARC Fund also increased by 43% to just under R1.4-billion.

The company’s effective share in dividend income for the period under review increased by 30% to R79-million, compared with the six months ended December 31, 2021.

The ARC Fund’s investment portfolio includes a combination of investments in pre-break-even to established businesses. The pre-break-even businesses currently comprise 31% of the ARC Fund’s intrinsic portfolio value and include phosphate miner Kropz, transport booking service Linebooker, digital bank TymeBank and staffing solutions company Tyme Global.

ARC, which owns 43% of ARC Investments and which, in turn, owns 99.95% of the ARC Fund, says the six months under review were characterised by strained trading conditions that impacted on the investment portfolio.

“The contracting economy, the continuous implementation of loadshedding, and the ever-increasing pressure on consumers have negatively weighed on business performance in some of our entities, as well as their growth expectations,” the company explains.

ARC continues to action some strategic objectives, including helping various early-stage portfolio companies reach profitability, as well as progress the consolidation of the portfolio.

Four investments were exited in the reporting six months with another investment being disposed of currently.

These include the ARC Fund’s disposal of R486-million worth of shares in diversified miner Afrimat and R68-million worth of shares in investment company Capital Appreciation. ARC Fund also sold investments in technology company Humanstate and payment platform PayProp for R486-million, with another R48-million still receivable.

ARC says the stable portfolio value does not yet reflect all the benefits of the substantial activity that took place in the portfolio during the reporting period. ARC Fund completed disposals of R1.1-billion.  

These disposals are mainly in line with long-term portfolio rationalisation and repositioning initiatives. The internal rate of return (based on disposal profits as well as dividends) for these disposals was 27.5% for Afrimat, 19.7% for Humanstate and PayProp and 12% for Capital Appreciation.

ARC Fund also finalised acquisitions of just over R1-billion as part of its strategy to increase the financial services portfolio, particularly focusing on fintech. These transactions include additional investments in TymeBank, Tyme Global and private equity firm ARCH Emerging Markets, as well as a small mining services acquisition in SMS Holdings.

ARC Fund further acquired a minority holding in Optasia, which is a leading provider of airtime credit services to prepaid mobile subscribers in more than 30 countries with more than 88-million monthly customers.

Moreover, the ARC Fund has reduced its mining exposure to now comprise 11.7% of the total portfolio.

Simultaneously, exposure to future-focused growth areas has increased.

The “other investments” portfolio increased from 11.7% to 14.8%, with agriculture increasing from 3.3% to 3.9% and the financial services’ weighting increasing from 28.3%, to 30.9% in the reviewing period.

The unlisted portion of the fund that is only accessible through ARC Investments, has grown to 88% of the portfolio.

ARC Fund’s key underlying investments generated strong performances. An example of this is telecoms firm rain being on course to achieve earnings of just over R2-billion for the financial year ended February 28.

The fund also continues to support Kropz with operational cash shortfalls, while the ramp-up of its Elandsfontein phosphate mine continues to progress slowly.

ARC Fund in the reporting period invested R490-million in TymeBank and Tyme Global, enabling TymeBank to acquire Retail Capital – a leading fintech funder of small enterprises.

ARC concludes that its diverse investment portfolio through ARC Investments and the ARC Fund has shown remarkable resilience against the persistent challenging macroeconomic environment, which is expected to be the case for the remainder of the year.