RNS Number : 2696E
Aurora Russia Limited
17 December 2009
Aurora Russia Limited ("Aurora Russia" or the "Company")
Results for the 6 months ended 30 September 2009

Investee companies well positioned to grow market share as Russia's economy improves
Successful fundraising of 15 million
Financial highlights
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Net asset value at 30 September 2009 up 2.0% to 81.43 million or 108.6p per share, compared to 79.86 million or 106.5p per share at 31 March 2009
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Cash and cash equivalents as at 30 September 2009 were 3.49 million, compared to 4.12 million as at 31 March 2009
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Consolidated net profit for the period of 1.99 million (1.08 million for 6 months to 30 September 2008)
*
Consolidated earnings per share for the period of 2.65p per share (1.44p per share for 6 months to 30 September 2008)

Operational highlights - Focus on cost efficiency whilst pursuing market share gains.
Fully invested with 64.2million in five companies, three of which are leaders in their field

OSG
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OSG remains the largest records management company in Russia, Ukraine and Kazakhstan
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For the period to 30 September 2009, revenues in Russia grew 33% year-on-year in RUR terms while Poland grew 44% year-on-year in PLN terms
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EBITDA was 1.1m up 21% year-on-year

Unistream Bank
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Continues to build on position as one of the largest money transfer companies in Russia through c.280 of its own money transfer offices
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Revenue for the 9 month period to 30 September 2009 reduced by 5% in RUR terms at 35 million, compared to the prior year period, due to the impact of the financial crisis on the construction industry
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Operating income before fixed expenses during the period increased 9% year-on-year to 15.7 million due to growth in foreign exchange commissions and an increase in the share of own points of sale in the total volume transferred

Superstroy
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Solid performance through focus on operational efficiencies and cost reduction, with all 45 stores expected to be profitable in 2009
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EBITDA improved by 188% year-on-year with the company maintaining its market position which, based on estimated turnover figures, ranks the company as 4th among all chain DIY retailers operating in Russia (up from 7th in 2007)

Kreditmart and Flexinvest
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Due to the financial crisis, Kreditmart has shifted focus on insurance and consumer loans until the mortgage market returns to Russia
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Management achieved a decrease in monthly cash burn of 71% through cost-cutting and reduction of headcount by 53%
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Both Kreditmart and Flexinvest Bank together have net cash of 6.7 million and 20 million in assets as at 30 September 2009

Successful fundraising of 15 million

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On 17 December 2009, the Company announced a Placing of 15 million of newly issued shares
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12.4 million will be used to purchase an additional 43.5% of OSG's shares bringing the shareholding in OSG to 93.6% and to invest new money into OSG to part fund a large warehouse facility
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Balance of proceeds of the Placing to be used to pay costs associated with the Placing and retained by the Company as working capital

Detailed results for the investee companies are contained in the investment management report

Commenting, Dan Koch, Chairman of Aurora Russia, said:
"While the global operating environment over the period has been challenging, the investee companies have taken prudent measures to ensure that they are positioned for growth. Three of the five investments are market leaders and I believe that they are well-positioned for exit either through a strategic sale or IPO.
I am encouraged that the Rouble is gaining strength and that currency stability will likely support growth in consumption. Russia's reserves of over $400 billion remain one of the world's largest and should allow Russia to recover faster than most world economies."

Investment Manager's Report
17 December 2009
Overview
The six months to 30 September 2009 was a challenging time for companies worldwide as a result of the worldwide financial crisis. While our investee companies focused on conserving cash, cutting overhead, and mitigating risk during this period they also pursued opportunities to gain market share. Aurora Investment Advisors (the 'Manager') provided considerable hands-on operational and strategic support to assist them during this period which we believe will result in long-term value for shareholders.
Since the Company's IPO in March 2006, Aurora Russia Limited has invested a total of 64.2 million in five companies. The companies are valued at 30 September 2009 at 77.8 million, representing an increase of 4% since 31 March 2009. Aurora Russia Limited owns 26% of Unistream Bank, 100% of Kreditmart, 100% of Flexinvest Bank, 24.3% of SuperStroy's holding company, and 39.4% of OSG Records Management plus a convertible loan.
Three of our five investments continue to be the market leaders in their sectors. OSG Records Management continues to have a commanding market lead in records management and services in its key markets of Russia, Ukraine, and Kazakhstan. In addition, OSG continues to have a strong position in the Polish and Bulgarian records management sector. Unistream Bank continues to be a leader in the outbound Russian money transfer market. Unistream continues to build its market share by targeting the underserved inter-Russia money transfer segment as well as opening new money transfer corridors. SuperStroy remains the leading DIY retailer in the Urals region of Russia and is one of the largest independent DIY retailers in Russia. Kreditmart has adapted its strategy to address the downturn in the mortgage market by reducing its cost base and by diversifying its product offering. The company has focused on building its distribution of insurance products and consumer loans and remains positioned to benefit from the untapped potential of Russia's mortgage market. Flexinvest Bank moved its headquarters to central Moscow and is working with Kreditmart to build its distribution of mortgages, consumer loans, and deposit products to its customers.

OSG Records Management

We are delighted with the performance of OSG Records Management during the period despite the worldwide financial crisis. OSG remains the largest records management company in Russia, Ukraine and Kazakhstan. It is the second largest in Poland and is considered a regional market leader. OSG continues to provide cost-effective total records management, document storage, data security, document scanning and confidential data destruction solutions. OSG has a first mover advantage in Central and Eastern Europe which is still underserved. OSG's management estimates that Russia, OSG's largest market, has a vended ratio of under 2%. The market offers enormous growth opportunities and it is expected that the vended portion of the market will increase from approximately US$20 million in 2008 to approximately US$200 million in 2012 reaching the current levels seen in Latin America (vended portion of approximately 20%).
As at 30 September 2009, the company's revenues in Russia have grown 33% year-on-year in RUR terms while Poland grew 44% year-on-year in PLN terms. However, due to exchange rate differences, revenue remained by and large flat in US Dollar (the reporting currency) terms. For the period to 30 September 2009, OSG reported revenues1 of 7.6 million compared to 7.7 million as of the same period in 2008. For the same period EBITDA1 was 1.1 million up 21% year-on-year.
The valuation of our investment (equity and debt) in OSG at 30 September 2009 resulted in a decrease of 0.7 million to 12.9 million compared to the valuation at 31 March 2009 of 13.6 million.
Recognising the high growth prospects of OSG, Aurora Russia Limited has announced that it will invest an additional 12.4 million to purchase the shares of the other non-management shareholders as well as to finance the down payment on a mega-warehouse facility in Moscow. This investment will bring Aurora Russia Limited's shareholding in OSG to 93.6% (on a fully diluted basis and assuming all convertible loans in OSG held by Aurora Russia Limited are converted). The balance of OSG's shares are held in a management option pool of 6.4%, with approximately 2.0% of these held by previous employees who may wish to exercise and sell the shares. If these option shares are purchased by Aurora Russia Limited, the net amount payable to the option holders will be 0.18 million which will increase its shareholding in OSG to 95.6%. However, Aurora Russia Limited expects to increase the management option pool by an additional 3.6% resulting in its fully diluted holding in OSG being approximately 92%.
The additional investment will allow the company to consolidate some of its warehouses in Moscow to provide enhanced operational efficiency, improved EBITDA, and will provide Aurora Russia Limited with full control. It will result in greater transparency to shareholders since the company will now be fully consolidated into the financials of Aurora Russia Limited. We believe that this transaction is in the interests of the company and will improve both the long-term market position of the company as well as greater value over time for Aurora Russia Limited's shareholders.

Unistream Bank

Unistream Bank continues to build on its position as one of the largest money transfer companies in Russia by providing competitive money transfer and foreign exchange products through c.280 of its own money transfer offices throughout Russia. It is regulated by the Central Bank of Russia ("CBR") and has a banking licence to receive and send money transfers, open bank accounts for corporate entities and accept loan payments through its points of sale.
Unistream's primary customers are migrant construction workers who migrate from the former Commonwealth of Independent States (CIS) to work in Russia's growing construction industry. The events of the past year have clearly impacted the construction industry and Unistream has felt this impact as its customers have either lost their jobs in construction or have reduced the amount of money transferred. According to the Central Bank of Russia, outbound transfers for Q2 2009 were down 31% year-on-year in USD terms. Unistream's revenue for the 9 month period to 30 September 2009 was 5% lower in RUR terms at 35 million2 compared to the same period in the prior year, while operating income before fixed expenses during the period increased 9% year-on-year to 15.7 million2 due to growth in foreign exchange commissions and an increase in the share of own points of sale in the total volume transferred.
In 2008, Russia had one of the fastest growth rates for outbound money transfer volumes in the world. Unistream has a commanding lead in the Russian outbound money transfer market and management believes that it can gain market share on the intra-Russia money transfer market as well as expanding in other money transfer corridors.
Russia has committed to invest $1.1 trillion over the next five years to improve its infrastructure. This commitment, along with Russia's declining working-age population, should encourage further growth in migrant labour working in Russia, low unemployment, and robust wage and disposable income growth. All of these factors should benefit the further growth and expansion of Unistream.
Since 2006, Unistream Bank has increased its annual volume of money transfers from approximately US$1.84 billion to approximately US$3.68 billion in 2007 and US$4.91 billion in 2008 (an increase of 33% over 2007). In 2008, Unistream posted revenues2 of 51.0 million up from 29.5 million in 2007.
The valuation of our 26% stake in Unistream Bank at 30 September 2009 resulted in an uplift of 4.7 million to 29.7 million compared to the valuation at 31 March 2009 of 25.0 million.

Kreditmart

Kreditmart commenced operations in March 2007 and distributes a wide range of financial services products through its seven locations in Moscow, St. Petersburg, Tyumen, Yekaterinburg, Kazan, and Rostov-on-Don as well as the internet.
Kreditmart, a wholly owned subsidiary of Aurora Russia Limited, distributes mortgages, equity release loans, insurance, auto loans, pension funds, mutual funds, and other consumer finance products.
While the global financial crisis has impacted Russia, Kreditmart has continued to operate while shifting its focus on insurance and consumer loans until the mortgage market returns. Management decreased monthly cash burn by 71% through aggressive cost-cutting measures and a reduction of headcount by 53%.
Kreditmart broker revenue fell 38% compared to the same period in 2008 to 0.2 million. However, month-on-month revenues have begun to rebound with 26% growth in September. In light of the current market, the valuation of Kreditmart (including Flexinvest- see below) at 30 September 2009 resulted in a write down of 2.6 million to 20.4 million compared to the valuation at 31 March 2009 of 23.0 million.
Since mortgage penetration in Russia remains at less than 3% of GDP and total consumer debt at c.10% of GDP, Russia represents one of the most attractive growth markets in Europe for financial services. Through its established distribution system, Kreditmart is well-positioned to capitalize on this growth.

Flexinvest Bank

Flexinvest Bank ("Flexinvest") was acquired in May 2008 through Flexinvest Limited, a wholly owned subsidiary for a consideration of 5.1 million (RUR 237 million). Additional funds of 1.2 million (RUR 57 million) were invested into the bank by Flexinvest to cover post-acquisition infrastructure costs and fund ongoing operations.
As of 30 September 2009, both Kreditmart and Flexinvest had 20 million in assets. Flexinvest Bank distributes short-term Rouble consumer loans as well as offering a range of deposit and banking products including deposit boxes, currency exchange and money transfer.
Despite recent concerns about the increase in non-performing loans, Russia continues to be an attractive market for retail banking in a medium to long term and recently saw banks like HSBC start its retail operations in Russia.
The Manager remains confident that Flexinvest Bank will have opportunities to grow its assets and will continue benefiting from the already established distribution platform of Kreditmart.
Kreditmart and Flexinvest Bank together reported net cash of 6.7 million as at 30 September 2009.

SuperStroy

Superstroy showed solid performance during the period by focusing on the improvement of operational efficiencies and cost reduction. All 45 stores are expected to be profitable in 2009. RosBusinessConsulting estimates that the overall DIY market in Russia will be down by 25-36% in USD terms in 2009.
For the 9 months ended 30 September 2009, the company's revenues have declined 11% year-on-year in local currency terms to 91.5 million2 with most of the decline due to its wholesale operations while retail sales were down by only 3%. In 2008, it posted revenues of approximately 142.4 million2 up on 2007 revenues of 95.6 million2.
While the company temporarily put its expansion plans on hold during the crisis, it improved EBITDA by 188% year-on-year to 2.2 million2 and increased margins while maintaining its market position.
Based on estimated turnover figures, Superstroy ranks fourth among all chain DIY retailers operating in Russia up from being seventh in 2007.
Superstroy is the only company in Aurora Russia Limited's portfolio that has any debt of any substance. It has a credit line with Sberbank of RUR 800 million (16.5 million) and ZAO Uralprivat bank of RUR 60 million (1.2 million). At 30 September 2009, the outstanding balance on the two facilities was RUR c.0.49 billion (approximately 10.2 million). The interest rate (before fees) is charged at between 16.0% and 16.5% per annum however Sberbank recently approved a reduction in the rate to 14.25% per annum.
Given a general rebound in the valuation multiples of public retailers and DIY retailers, in particular, the valuation of SuperStroy as at 30 September 2009 resulted in an uplift of 1.6 million for our 24.3% stake to 14.8 million compared to the valuation at 31 March 2009 of 13.2 million.

Conclusion

Despite the challenges of the global financial crisis, the value of the portfolio grew by 4% during the period. The Manager remains positive about the growth prospects for the services sectors in Russia. While the Russian economy has historically been dependent on the price of commodities, the economy is becoming more diversified. The services sector should benefit from the continued diversification away from commodities and grow at a faster rate. We remain very positive about all of Aurora Russia Limited's investments and we believe that all five are positioned to benefit from the growth of the services sector and to gain market share.
The Russian market continues to provide opportunities for growth for well-managed companies. Due to the low penetration and vast market potential in the sectors we invest in, our portfolio companies are positioned to grow further over the coming period. We will continue to identify and target the niches where our companies can gain a competitive advantage while securing our current market position for continued growth.

Aurora Investment Advisors Limited

December 2009

1 Translated at September 30 2009 spot rate of 0.63 GBP/USD
2 Translated at September 30 2009 spot rate of 47.7 RUR/GBP
Independent Review Report to Aurora Russia Limited

We have been engaged by the Company to review the unaudited condensed set of financial statements in the half yearly financial report for the six months ended 30 September 2009 which comprise the unaudited condensed consolidated statement of comprehensive income, the unaudited condensed company statement of comprehensive income, the unaudited condensed consolidated statement of financial position, the unaudited condensed company statement of financial position, the unaudited condensed consolidated statement of changes in equity, the unaudited condensed consolidated statement of cash flows and related explanatory notes. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the unaudited condensed set of financial statements.
This report is made solely to the Company, in accordance with the terms of our engagement letter dated 30 September 2009. Our work has been undertaken so that we might state to the Company those matters we are required to state to them in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company, for our review work, for this report, or for the conclusions we have reached.

Directors' responsibilities

The half yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half yearly financial report in accordance with the AIM Rules of the London Stock Exchange.
As disclosed in note 2, the annual financial statements of the Company are prepared in accordance with International Financial Reporting Standards ("IFRS"). The unaudited condensed set of financial statements included in this half yearly financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting".

Our responsibility

Our responsibility is to express to the Company a conclusion on the unaudited condensed set of financial statements in the half yearly financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standards on Review Engagements (UK and Ireland) ISRE 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the unaudited condensed set of financial statements in the half yearly financial report for the six months ended 30 September 2009 is not prepared, in all material respects, in accordance with International Accounting Standard 34.

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Financial highlights:

Net asset value per share at 31 March 2010 of 88.0p per share (Net asset value 99.0m)

Cash and cash equivalents as at 31 March 2010 were 5.70 million

Net profit for the period of 4.8 million

Earnings per share for the period of 5.78p per share

Operational highlights:

73.9 million invested in five companies, three of which are leaders in their field

Successful fundraising of 15 million and acquisition of additional 45.5% of OSG

Intention to return up to 105 million over time to shareholders from proceeds of sale of Company's investments

OSG

OSG remains the largest records management company in Russia, Ukraine and Kazakhstan

Increased stake in OSG to 95.5% following the Placing in January

OSG continued its expansion in Russia and as of Q1 2010 operated in 20 cities (up from 13 in 2009)

For the year ending 31 December 2009, revenues in Russia grew 30% year-on-year in RUR terms while Poland grew 27% year-on-year in PLN terms

EBITDA up 26% to 1.7 million for year ended 31 December 2009

Unistream Bank

Unistream had c.21% of the outbound money transfer market according to Q1 2010 statistics published by the CBR

Rationalized proprietary distribution network by shutting down 88 under-performing cash desks at the end of 2009

Despite closures, the volume in Unistream's cash desks held up well and grew 4% year-on-year in Q1 2010

Revenue for the year ending 31 December 2009 was 51.9 million which was down from 55.1 million compared to the prior year period, due to the impact of the economic environment on the construction industry

EBITDA was 1.3m down 55% year-on-year

Superstroy

Focus in 2009 on conserving cash and reducing net debt

The company's revenues declined by 14% to 132.4 million impacted by fall in DIY market in Russia with most of the decline due to its wholesale operations while retail sales were down by only 8%

Reduction in net debt to 7.7 million from 14.2 million and increase in EBITDA from a negative -1.1 million to a positive 3.5 million for the year ending 31 December 2009

Kreditmart and Flexinvest

Kreditmart impacted by significant contraction in mortgage market

Shift in focus to insurance and consumer loans

Both Kreditmart and Flexinvest Bank together have net cash of 5.5 million and 20.5 million in assets as at 31 March 2010

Principal assets as at 31 March 2010 include a mortgage book net of provision of approximately 8.3 million, yielding 11.7% p.a.

Commenting, Dan Koch, Chairman of Aurora Russia, said:

"Three out of five of our companies are considered to be leaders in their respective markets and we are satisfied that each of them has done what was necessary to maintain this position through the crisis and set a platform to achieve their growth aspirations as and when the Russian market recovers. Economists and analysts have varying views on the strength of the Russian revival but all seem to believe that the country has come through the worst and is now in a good position to grow again over the foreseeable future and to continue to develop as a market economy with an improving international reputation."

It gets a mention in Investors Chronicle today -Aurora Russia has perked up nicely - but this fund is hugely undervalued at 32p against a net assett value of 88p a share