Allan Gray’s Africa ex-SA Equity Fund has generated negative returns for the last quarter, however the asset manager believes that the fund’s largest holdings Econet Wireless, Umeme and Zimplats offer attractive buying opportunities.

The $243m Allan Gray Africa ex-SA Equity Fund posted -9.7% YTD and 9.3% since inception in January 2012.

Andrew Lapping, Allan Gray fund manager, said the Fund generated negative returns for the quarter, mainly due to negative returns from Zimbabwe’s dominant mobile operator Econet Wireless, as well as two smaller positions, Zimbabwean platinum miner Zimplats and Ugandan energy distributor Umeme.

“We believe these companies are excellent businesses and the lower share prices present attractive buying opportunities,” he said.

Econet Wireless Zimbabwe is Zimbabwe's largest provider of telecommunications services, providing solutions in mobile and fixed wireless telephony, public payphones, internet access and payment solutions.

The company reported disappointing results for the year ended February 2015.

Lapping said the main disappointment was voice revenue, which was 22% lower in the second half than the same period in the previous year.

“Two factors led to the weaker revenue: a 5% excise duty on service revenue was introduced in September 2014 and a legislated tariff cut of 35% on January 1, 2015. Thanks to the weak economy there is very little price elasticity and revenues fell in line with tariffs. Voice revenue will fall further in FY2016 as the tariff cut rolls through the base,” he said.

Econet’s earnings before interest, taxes, depreciation and amortisation (EBITDA) margin was also lower because of the lower voice revenue and rapidly growing Ecocash mobile money business – up 62% year on year – which is lower margin.

“Management at Econet is well aware of the issues, has a keen focus on costs and is looking to drive the ancillary revenue growth. The share is down 42% over the past year and 20% since the results,” he said.
“In our view, the bad news is discounted and the share is attractively priced despite the current tough economic conditions,” he said.

Zimbabwean platinum miner Zimplats, a subsidiary of Impala Platinum, is down 30% over the past year and 13% over the past month.

Lapping said that the Zimplats business is structurally advantaged compared to South African platinum producers, as the platinum-bearing reef the company mines is shallow and wide relative to the South African reefs, enabling lower-cost, mechanised mining: “The reef is also rich in nickel and copper by-products, which augment revenue.”

“These factors make Zimplats a low-cost platinum producer. As a result, while the majority of the South African producers are making cash losses, Zimplats is generating cash. Because of cash constraints, the South African industry is not investing sufficiently to maintain production. In time, Zimplats should benefit as metal prices recover because of the declining South African production,” he said.

When asked about Umeme, an energy distribution network company in Uganda, Lapping said that its distribution tariff is calculated using the company’s dollar asset base so the value of the company should be calculated in dollars.

“However, the Ugandan shilling share price is unchanged in 2015 despite a 19% weakening of the shilling. This presents a clear opportunity,” he said.