REG - Aurora Russia Ltd - Annual Financial Report <Origin Href="QuoteRef">AURR.L</Origin> - Part 3
06/09/2014 16:45
- Part 3: For the preceding part double click ID:nRSP5383Mb
Currency of denomination Sterling US Dollars Russian Euro Total
Roubles
£'000 £'000 £'000 £'000 £'000
Total assets 23,133 6,690 32,800 - 62,623
Total liabilities (935) - (496) - (1,431)
Net currency exposure 22,198 6,690 32,304 - 61,192
Foreign Currency Sensitivity
The following table details the Company's sensitivity to a 20% (2013: 20%) strengthening of Sterling against each of the
relevant foreign exchange currencies. 20% (2013: 20%) is the sensitivity rate used when reporting foreign currency risk
internally to management and represents management's assessment of the possible change in foreign exchange rates. This
analysis assumes that all variables, in particular interest rates remain constant. The analysis is performed on the same
basis for the prior period.
Increase / (decrease) in profit /loss:
31 March 31 March
2014 2013
£'000 £'000
Russian Rouble (2,354) (6,461)
US Dollar 11 (1,338)
A 20% (2013: 20%) weakening of the Sterling against each of the relevant foreign exchange currencies at the year end would
have had the equal but opposite effect, on the basis that all other variables remain the same.
21.6 Market risk
Market price risk arises principally from uncertainty concerning future values of financial instruments used in the
Company's operations. It represents the potential loss the Company might suffer through holding interests in unquoted
private companies whose value may fluctuate and which may be difficult to value and/or to realise. The Company seeks to
mitigate such risk by assessing such risks as part of the due diligence process related to all potential investments, and
by establishing a clear exit strategy for all potential investments. There is a rigorous due diligence process before an
investment can be approved which will cover financial, legal and market risks. Following investment the Company/Manager
will always have Board representation, the investee company is required to submit regular management information to an
agreed standard and timeliness and the Manager undertakes regular monitoring. The Board receives and considers the most
recent monitoring report prepared by the Manager at every Board meeting.
Pricing Risk Table
All security investments present a risk of loss of capital, the maximum risk resulting from instruments is determined by
the fair value of the financial instrument. The following represents the Company's market pricing exposure at year end:
At 31 March 2014:
Note Fair Value % of Net
£'000 Assets
Investments at fair value through profit or loss:
- Unlisted Equities 7 & 8 11,768 56.88
At 31 March 2013:
Fair Value % of Net
£'000 Assets
Investments at fair value through profit or loss:
- Unlisted Equities 7 & 8 32,800 53.60
Valuation of financial instruments
The Company measures fair values using the following fair value hierarchy that reflects the significance of the inputs used
in making the measurements:
> Level 1: Quoted market price (unadjusted) in an active market for an identical instrument.
> Level 2: Valuation techniques based on observable inputs, either directly (i.e. as prices) or indirectly (i.e. derived
from prices). This category includes instruments valued using: quoted market prices in active markets for similar
instruments; quoted prices for identical or similar instruments in markets that are considered less than active; or other
valuation techniques where all significant inputs are directly or indirectly observable from market data.
> Level 3: Valuation techniques using significant unobservable inputs. This category includes all instruments where the
valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on
the instrument's valuation. This category includes instruments that are valued based on quoted prices for similar
instruments where significant unobservable adjustments or assumptions are required to reflect differences between the
instruments.
The table below analyses financial instruments, measured at fair value at the end of the reporting period, by the level in
the fair value hierarchy into which the fair value measurement is categorised:
Level 1 Level 2 Level 3 Total
At 31 March 2014: £'000 £'000 £'000 £'000
Investments at fair value through profit or loss:
-Unlisted Equities - 1,968 9,800 11,768
- 1,968 9,800 11,768
At 31 March 2013: Level 1 Level 2 Level 3 Total
£'000 £'000 £'000 £'000
Investments at fair value through profit or loss:
-Unlisted Equities - - 32,800 32,800
- - 32,800 32,800
The following table shows a reconciliation from the beginning balances to the ending balances for fair value measurements
in Level 3 of the fair value hierarchy of the Company:
Level 3
£'000 £'000
2014 2013
Opening balance 32,800 74,600
Disposal of investments (5,817) (29,863)
Total fair value gains or losses in profit or loss (15,215) (11,937)
Transfer to level 2 (1,968) -
Closing balance 9,800 32,800
Although the Company believes that its estimates of fair values are appropriate, the use of different methodologies or
assumptions could lead to different measurements of fair value. Investments classified with level 3 have significant
unobservable inputs, as they trade infrequently. As observable prices are not available for these securities, the Company
has used valuation techniques to derive the fair value. Transfers between levels are deemed to take place at the end of the
year.
Level 3 investments have been valued in accordance with the methodologies in Note 21.8. The value of the investments and
the fair value movements are disclosed in note 8.
Unrealised loss on fair value movements from revaluation of level 3 investments still held at year end and recognised in
the Statement of Comprehensive Income amounted to £12.6 million (2013: unrealised loss of £12.97 million).
Superstroy was valued using 100% EBITDA multiple with 25% liquidity discount. Unistream was valued using 75% EBITDA
multiple and 25% revenue multiple basis and 30% liquidity discount and KFL was valued based on an agreed sales price.
The average of the EBITDA multiple range observed when valuing Superstroy was 7.8x. For Unistream the Revenue multiple
observed was 2.0x and for EBITDA was 7.4x.
Price sensitivity
The sensitivity analysis below has been determined based on the exposure to equity price risks as at the reporting date.
At the reporting date, if the valuations had been 20% higher while all other variables were held constant net profit would
increase by £2,353,600 (2013: £6,560,000) for the Company. This sensitivity rate was determined by the Directors as
reasonable taking market conditions into account.
If the Revenue multiple weighting was increased by 10% the value of Superstroy would become £2.6 million and Unistream's
value would become £9.1 million.
21.7 Interest rate risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in market interest rates.
The Company is exposed to interest rate risk as a result of the cash and bank balances that are invested at floating
interest rates. The Company monitors its interest rate exposure regularly and allocates its cash resources to an
appropriate mix of floating and fixed rate instruments of varying maturities.
The following table details the Company's exposure to interest rate risk as at period end by the earlier of contractual
maturities or re-pricing:
At 31 March 2014: No Less than 1 months 1 to 2 2 to 5 Greater Total
contractual 1 month to 1 year years than 5
terms of years years
repayment
£'000 £'000 £'000 £'000 £'000 £'000 £'000
Assets
Non-interest bearing 11,768 - 3 - - - 11,771
Floating interest rate instruments 4,726 - - - - - 4,726
Fixed interest rate instruments - 4,410 - - - - 4,410
Total 16,494 4,410 3 - - - 20,907
Liabilities
Non-interest bearing - - (219) - - (219)
Total - - (219) - - - (219)
Net Exposure 16,494 4,410 (216) - - - 20,688
At 31 March 2013: No Less than 1 months 1 to 2 2 to 5 Greater Total
contractual 1 month to 1 year years than 5
terms of years years
repayment
£'000 £'000 £'000 £'000 £'000 £'000
Assets
Non-interest bearing 32,800 - 5,584 1,105 - - 39,489
Floating interest rate instruments 277 - - - - - 277
Fixed interest rate instruments - 22,857 - - - 22,857
Total 33,077 22,857 5,584 1,105 - - 62,623
Liabilities
Non-interest bearing - (456) (364) (611) - (1,431)
Total - (456) (364) (611) - - (1,431)
Net Exposure 33,077 22,401 5,220 494 - - 61,192
* The Company's fixed interest rate instruments represents cash accounts placed on deposit. The Company does not account
for any fixed rate financial assets and liabilities at fair value through profit or loss. Therefore a change in interest
rates at the reporting date would not affect profit or loss.
Sensitivity analysis
The sensitivity analysis below has been determined based on the Company's exposure to interest rates for interest bearing
assets and liabilities at the reporting date and the stipulated change taking place at the beginning of the financial year
and held constant throughout the reporting period in the case of instruments that have floating rates.
If interest rates had been 50 basis points higher and all other variables were held constant, the Company's net profit and
equity for the year ended 31 March 2014 would have increased by £23,634 (2013: £1,387).
If interest rates had been 50 basis points lower it would have had the equal but opposite effect, on the basis that all
other variables remain the same.
21.8 Fair value measurement
Methodologies and assumptions used in valuing investments and investments in subsidiaries:
1) Market Approach:
The market approach uses industry specific benchmarks as its basis and indicates the market value of the shares of the
company based on a comparison of the subject company to other comparable companies in similar lines of business that are
publicly traded or which are part of a public or private transaction.
The market comparable method indicates the market value of the ordinary shares of a business by comparing it to publicly
traded companies in similar lines of business. The conditions and prospects of companies in similar lines of business
depend on common factors such as overall demand for their products and services. An analysis of the market multiples of
companies engaged in similar businesses yields insight into investor perceptions and, therefore, the value of the subject
company.
In the market approach, recent sales, listings of comparable assets and such other factors as the Board deems relevant are
gathered and analysed. After identifying and selecting the comparable publicly traded companies, their business and
financial profiles are analysed for relative similarity. Price or EV multiples of the publicly traded companies are
calculated and then adjusted for factors such as relative size, growth, profitability, risk, and return on investment. The
adjusted multiples are then applied to the relevant element of the subject company's business.
All valuations of unquoted investments and investments in subsidiaries (collectively referred to as the "portfolio") were
performed using weighted combination of revenue and/or EBITDA multiples (except for KFL where an agreed sales price was
used). 17% (2013: 32%), by value at year-end, of the portfolio was valued using an agreed sales price with the remaining
83% (2013: 68%) of the portfolio being valued using an enterprise value/EBITDA multiple approach and/or enterprise
value/revenue multiple.
The key assumptions in the valuations were as follows:
- Liquidity adjustment: 25% to 30% (31 March 2013: 20% to 30%)
2) Income Approach:
The income approach methodology is used as a cross-check for the Market Approach and indicates the market value of a
business enterprise based on the present value of the cash flows that the business can be expected to generate in the
future. Such cash flows are discounted at a discount rate that reflects the time value of money and the risks associated
with the cash flows.
The reconciliation between beginning and ending balances of Level 3 investments is disclosed in Note 21.6. There was a
transfer to level 2 from level 3 during the year. The investment was moved from level 3 to level 2 as the sales price could
be used to value the investment. The investment was sold after year end, refer to note 25.
22. Segmental information
The Board of Directors of the Company decides on the strategic resource allocations of the Company. The operating segments
of the Company are the business activities that earn revenue or incur expenses, whose operating results are regularly
reviewed by the Board of Directors of the Company, and for which discrete financial information is available. The Board of
Directors considers the Company to be made up of one segment, which is reflective of the business activities of the Company
and the information used for internal decision-making which includes the monthly reporting to management of investment
holdings on a fair value basis:
- Aurora Russia
The Investment Manager's Report provides more information on the Company's business and the operations of each investment.
The Company derives its revenues from its investments primarily through fair value gains or losses.
The Company regards the holders of its ordinary shares as its customers, as it relies on their funding for continuing
operations and meeting its objectives. The Company's shareholding structure is not exposed to a significant shareholder
concentration.
The Company is engaged in investment in small and mid-sized companies in Russia and in one principal geographical area,
being Russia..
23. Related party transactions
The Company had three direct subsidiaries, KFL, Flexinvest and Flex Bank during the year and one subsidiary at the year end
(see note 7 and 8). Details of the investments in Unistream Bank and Grindelia Holdings are presented in note 8.
Michael Hough, who is a director of AIAL, holds 100,000 (2013: 100,000) of the shares in Aurora Russia as at 31 March
2014.
AIAL holds 1,224,072 (2013: 2,576,534) of the shares in Aurora Russia as at 31 March 2014.
The management fees paid to AIAL were £744,743 (2013: £1,103,705); at year end there was no prepayment of management fees.
There were no amounts payable at year end (2013: £Nil).
Per the Amended and Restated Management Agreement, the management fee and performance fee payable to AIAL were as follows:
(a) Management fee of an amount equal to i) for all Valuation Dates up to and including 31 March 2011, 1% of the net asset
value of the Company; and ii) for all Valuation Dates after 31 March 2011, 0.75% of net asset value of the Company;
(b) Performance fee is calculated as follows:
- 2.5% of the value of any disposals realised by the Company would be payable to the Manager, calculated on the value of
assets of the Company realised up to £45 million, i.e. £0.40 per share (the "2.5% Tranche");
- 7.5% of the value of any disposals realised by the Company would be payable to the Manager, calculated on the value of
assets of the Company realised between £45 million and £99 million, i.e. £0.40 per share to £0.88 per share (NAV) (the
"7.5% Tranche"); and
- 20% of the value of any disposals realised by the Company would be payable to the Manager, calculated on the value of
assets of the Company realised over £99 million, i.e. over £0.88 per share (the "20% Tranche").
Performance fees to decline by 20% per annum from 1 January 2012 in respect of the 2.5% Tranche, and by 20% per annum from
1 January 2013 in respect of each of the 7.5% Tranche and the 20% Tranche.
The performance fees paid by the Company to AIAL during the year was £27,735 (2013: £470,758); at year end £40,960 (2013:
£107,520) was outstanding. The performance fees became payable on the sale of Flexinvest, calculated at 1.28% on the cash
consideration of £3.2 million. At year end £40,960 was still payable.
If the remaining investments were sold at their fair values as at 31 March 2014, £150,630 (£11,767,500 at 1.28%) would be
payable to AIAL by way of performance fees.
24. Contingencies and capital commitments
The Company had no contingencies and capital commitments outstanding at the reporting date other than disclosed in note
23.
25. Events after the reporting date
Sale of KFL
On 28 April 2014 the Company announced that it has agreed to sell KFL for a total consideration of RUR100 million
(approximately £1.7 million) plus US$450,000 (approximately £267,500). The Board have agreed to the sale at a discount in
the light of the current Russian market for banking assets and the difficult nature of the portfolio, which is the rump of
the Flexinvest mortgage book and which could only otherwise be disposed of on a protracted piecemeal basis, which would be
lengthy and uncertain.
Tender offer
On 1 May 2014 the Company announced a tender offer to Shareholders for up to 29,651,549 Shares, being approximately 39.9
per cent. of the current issued share capital of the Company, at a price of 27.5454p per Share (the "Repurchase Price").
The Repurchase Price has been calculated by reference to the Unaudited Net Asset Value of 27.8464p per Share as at 31 March
2014 and after deducting 0.3010p per Share of costs of the Tender Offer (such costs representing approximately 1.1 per
cent. of the Unaudited Net Asset Value per Share). The full amount of shares under the tender offer was repurchased at
27.5454 pence per Share by the Company and subsequently cancelled.
Following the implementation of the Tender Offer and the cancellation, the Company has 44,611,131 shares in issue (being
74,262,617 shares in issue less 29,651,486 shares being repurchased under the Tender Offer and subsequently cancelled).
Termination of Investment Advisor
On 30 April 2014 the Management agreement between the Manager, Aurora Russia Investment Advisors Limited, and the Company
was terminated by mutual agreement. Under the termination agreement £40,960 is payable to the Manager in respect of the
sale of Flexinvest as a performance fee as well as £15,000 per calender month for the service to be provided for the two
months to 30 June 2014. Mr Nicholas Henderson-Stewart was appointed as advisor to the Company on 19 June 2014 to assist in
managing, monitoring and realising the Company's residual investments. This will include representing the Company on
Investee company boards if so requested by Aurora Russia Board, assistance with certain administrative functions and the
provision of financial information, including management accounts, and other relevant information on the Investee
companies.
Fees payable to the Advisor comprise a modest annual fee. In addition the Advisor will obtain a commission of 2 per cent of
any payment made by the Company to its shareholders (whether by way of dividends, capital return, share buy backs or
otherwise) during the term of the agreement.
Change in directors interests
The Company announced that as a result of the tender offer for Shares on 30 May 2014, the Company's directors' beneficial
shareholdings in the Company have changed as follows:-
Gilbert Chalk: from 33,005 ordinary shares to 19,827 ordinary shares.
Tim Slesinger: from 9,446,850 ordinary shares to 5,674,913 ordinary shares.
Peregrine Moncreiffe: from 635,209 ordinary shares to 381,583 ordinary shares.
There are no further events after reporting date that require disclosure.
Directors and Advisors
Directors Independent Auditor
Gilbert Chalk - Chairman - appointed 25 February KPMG Channel Islands Limited
2013 20 New street
Geoffrey Miller - resigned 12 April 2013 St Peter Port
Tim Slesinger - appointed 22 August 2011 Guernsey GY1 4AN
Grant Cameron - resigned 1 May 2013
John Whittle - resigned 12 April 2013
Jonathan Bridel - appointed 12 April 2013
Peregrine Moncreiffe - appointed 12 April 2013 CREST Service Provider and UK Transfer Agent
Lyndon Trott - appointed 1 May 2013 Capita Registrars
The Registry
Manager 34 Beckenham Road
Aurora Investment Advisors Limited Beckenham
(terminated 30 June 2014) Kent BR3 4TU
Sarnia House
Le Truchot
St Peter Port Nominated Adviser and Broker
Guernsey GY1 4NA Numis Securities Limited
The London Stock Exchange Building
Advisor 10 Paternoster Square
Mr Nicholas Henderson-Stewart London
(appointed 19 June 2014) EC4M 7LT
10 Avenue Maurice
1050 Brussels Russian Solicitors to the Company
Belgium White & Case LLC
4 Romanov Pereulok
Administrator and Secretary 125009 Moscow
Kleinwort Benson (Channel Islands) Russia
Fund Services Limited
Dorey Court
Admiral Park UK Solicitors to the Company
St Peter Port SNR Denton UK LLP
Guernsey GY1 2HT One Fleet Place
London EC4M 7WS
Registrar
Capita IRG (CI) Limited
2nd Floor
No 1 Le Truchot
St Peter Port
Guernsey GY1 4AE
Guernsey Advocates to the Company
Carey Olsen
Carey House
Les Banques
St Peter Port
Guernsey GY1 4BZ
This information is provided by RNS
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