(AURR) Aurora Russia

20 December 2011

Aurora Russia Limited ("Aurora Russia" or the "Company")

Results for the six months ended 30 September 2011

·      The Board and the Manager are focused on ensuring optimal exits from the investee companies

·      Continued strong growth in underlying companies

Financial highlights

·      Net asset value per share as at 30 September 2011 of 70.1p per share (Net asset value £78.9m) down from 83.6p per share at 31 March 2011.

·      Cash and cash equivalents as at 30 September 2011 were £1.6m (£4.1m cash within the Group)

Portfolio highlights

OSG

·      Revenues for the 6 months ended 30 September 2011 were £9.16m compared to £6.82m for the same period in 2010.

·      EBITDA up 17% to £1.08m as at 30 September 2011

·      Equity valuation of Aurora Russia's stake in OSG at 30 September 2011 was £30.7m compared to the valuation at 31 March 2011 of £28.8m

Unistream Bank

·      Unistream's share in the Russia-outbound transfer market is estimated at 16.7% as at Q2 2011

·      Revenues for the nine month period ended 30 September 2011 were RUR 1.7bn, up 11.6% YoY

·      PBT for the nine months to 30 September 2011 was RUR71m up from a loss of RUR24.6m for the same period last year.

·      Equity valuation of Aurora Russia's stake in Unistream at 30 September 2011 was £14.9m, compared to the valuation at 31 March 2011 of £18.7m

Superstroy

·      Revenues grew by 31% YoY for the nine months ended 30 September 2011 to RUR6.5bn

·      EBITDA of RUR45m

·      Equity valuation of Aurora Russia's stake in Superstroy at 30 September 2011 was £15.0m, compared to the valuation at 31 March 2011 of £24.5m

Flexinvest and Kreditmart

·      Flexinvest launched a new retail strategy with a credit card as its main loan product financed by retail deposits

·      After a strategic review, the decision was taken to sell Kreditmart for a nominal price to stop its cash burn.

·      As at 30 September 2011, Flexinvest and Kreditmart had £15.5m in net assets down from £17.6m as at 31 March 2011

·      Equity valuation of Aurora Russia's stake in Kreditmart/ Flexinvest Bank at 30 September 2011 was £16.3m, compared to the valuation at 31 March 2011 of £18.5m

Commenting, Geoff Miller, Chairman of Aurora Russia, said:

"While we are now facing challenging times in Europe which are having a knock-on effect on Russia, oil and commodity prices remain robust and the fundamentals in Russia continue to outperform Western economies. We expect to see continued strong growth in the underlying companies in which we are invested and therefore we remain confident that we can deliver value for shareholders from these assets.  The Company's strategy remains focused on ensuring optimal exits from our investee companies on a two year horizon. I would hope that we can make significant progress in this regard during 2012."

Chairman's Statement

Introduction

I am pleased to present the results of Aurora Russia Limited (the "Company" or "Aurora Russia") for the 6 months ended 30 September 2011.

The past six months, since the year end results to 31 March 2011 were announced, have seen a number of changes in both the economic environment and within the Company. We are now facing challenging times in Europe which is having a knock-on effect in Russia. However, oil and commodity prices remain robust and although sentiment has cooled in Russia the fundamentals continue to outperform the economies of the West. The Government of Russia predicts 2012 GDP growth to be 3.7%  with the community of analysts focusing on the Russian market predicting a range of between 2.5% and 4%.

Since taking over as Chairman in August 2011, my focus has been to ensure that the Board reflects the viewpoints of all shareholders, that the corporate governance framework within the Company is appropriate for its size and strategy and that the strategy of the Company is clearly articulated to the market.

The Board has recently completed a visit to all of the portfolio companies, and had presentations from the management of each of the companies, before agreeing the valuations within these accounts. The meetings have reinforced the view of all of us on the Board that these are high quality businesses with strong management, added to which three out of four have leading market positions. The companies have shown good growth in revenues, increasing profitability and each has a clear strategy for future growth. The fact that our investee businesses are in good shape significantly increases our options when seeking exits.

The first statement made by the Company after I was appointed Chairman was a clear, unambiguous commitment to realising value for shareholders from the Company's investments on a two year time horizon. This remains the strategy and the Board and the Company's Manager are focused on ensuring optimal exits from our investee companies. I would hope that we can make significant progress in this regard during 2012.

Results

For the 6 months to 30 September 2011, Aurora Russia recorded a loss of £15.2 million or 13.48p per share, calculated based on the unaudited Company statement of comprehensive income. The net asset value ("NAV") of the Company as at 30 September 2011 was £78.9 million or 70.1p per share. This decline in value, which is detailed further below, derives in largely from adverse stock market and currency movements. Cash and cash equivalents at 30 September 2010 were £1.6 million.

Administration and operating expenses of £12.4 million include Company costs of £1.6 million or 2% of the current NAV. Operating costs of the Company's wholly owned subsidiaries were £10.8 million.

The Annual General Meeting

I would like to take this opportunity to thank our shareholders for their support at the AGM on 28 September 2011 for the re-constituted board and the re-election of all of the Board members including myself.

Composition of the Board

On 1 August this year, the Board said farewell to Dan Koch, the Chairman since 8 September 2008, Alexandr Dumnov who served on the board from 17 June 2010 to 1 August 2011 and Ben Morgan who served on the Board from the listing of the Company in March 2006 to 28 September 2011. The Board welcomes Gilbert Chalk and Tim Slesinger as Directors and looks forward to working with them to bring value to shareholders. I believe that we have a strong Board with a diversity of experience and specialist knowledge that greatly adds to the quality of our debate and, I believe, our decision making.

James Cook also left the board on 17 June 2011 and on 11 November 2011 resigned from the Manager. Michael Hough who has been a minority shareholder in the Manager will now be fully integrated into the Manager and will work with John McRoberts, Andrey Gurin and Mikhail Shorokhov who will continue to manage the portfolio and seek exits for each of the investee companies over the coming months. The Manager has the full support of the Board. The Board believes the Manager is in the best position to bring value to shareholders over the next two years.

I would like to thank all of the members of the Board, past and present, for their considerable contributions to the Company over the period. Despite significant changes to the Board, the focus on delivering shareholder value has remained throughout. Members of the Board have been asked to take on greater levels of responsibility and in some cases to assist in communication with shareholders, which they have done willingly, and our interaction with the market will continue to be as high as we can make it, so as to ensure that the market better understands the workings of the Board.

Investment Review

The Company has sold Kreditmart for a nominal consideration, but has retained an option to acquire 10% of the purchasing entity into which Kreditmart will be integrated and which currently operates an early stage  mortgage and consumer loan brokerage. Athough the company is small it has a good management team. The rationale for entering into this transaction was to stop the cash burn at Kreditmart which continued to undermine the NAV of the Company and consequently value for our shareholders.

The Company has four remaining investments:

• 94.04% of OSG, a regional market leader in records management;

• 24.3% of SuperStroy, one of the leading DIY retailers in Russia

• 26% of Unistream Bank, a leading Russian money transfer company; and

• 100% of Fleixinvest Bank which provides retail banking services;

In all of our investee companies the local management and staff have remained loyal and committed through this period and I would like to thank them for their hard work and dedication.

Portfolio Valuation

A valuation of the investment portfolio was performed at 30 September 2011, resulting in a decrease in value from £90.5 million to £76.9 million. This interim valuation, recommended by the Valuation Committee of the Board was prepared by the Manager and formally adopted by the Board on 19 December 2011. These valuations are prepared for accounting purposes only and comply with International Private Equity and Venture Capital Association ("IPEVCA") guidelines. The resultant valuations of investments included in the Company's financial statements will not necessarily reflect the market value that a third party would be prepared to pay for these businesses.

"The current valuation of Aurora Russia's shareholdings reflects changes to the prior year end valuation performed for March 2011 as follows:

• the value of 94.04% of OSG's equity has increased by £1.9 million to £30.7 million, an increase of 7%

• the value of the Company's 24.3% shareholding in SuperStroy has decreased by £9.5 million to £15 million, a decrease of 39%.

• the value of the Company's 26% stake in Unistream Bank has decreased by £3.8 million to £14.9 million, a decrease of 20%; and

• the value of Flexinvest Bank and Kreditmart has decreased by £2.2 million to £16.3 million, a decrease of 12%."

It is important to note that over the period there was an approximate 9% favorable movement in the £/RUR exchange rate. In addition the RTS (Russian Trading System, denominated in US Dollars) Index comprising 15 of the largest most liquid stocks dropped 34% and the broader MICEX (which is measured in Roubles) comprising over 230 stocks dropped 25%. Therefore the movement of values may be distorted by currency translation effects and the drop in listed comparable companies both in Russia and abroad and may not be the best reflection of the performance of an underlying asset during the reporting period.

Outlook

In March 2012 the Russian Presidential elections will take place. There is widespread belief that following the victory, albeit with a reduced majority, of Vladimir Putin's United Russia Party in the Duma elections on 4 December 2011, he will almost definitely be elected to lead Russia and the administration will seek to foster stability in Government in Russia. It is to be hoped that the fact that support for United Russia has fallen may encourage the Government to pay more attention to reform issues, which could lay the groundwork for a stronger economy. With entry into the WTO and potentially membership to the OECD to follow, international investment companies and the strategic investor community which so far have been cautious to commit to Russia's growing market may have a change of heart leading to an increase in foreign direct investment not only into Russian listed stocks but also into private businesses such as the Company's portfolio companies.

Notwithstanding a difficult global macro economic backdrop, we expect to see continued strong growth in the underlying companies in which we are invested and therefore we remain confident that we can deliver value for shareholders from these assets.

Geoffrey Miller

Chairman of the Board

Aurora Russia Limited

Date: 19 December 2011

Investment Manager's Report

Overview

As we write this report we are once again in a period of economic uncertainty particularly with respect to the European market. However analysts predict that the Russian economy will grow at 4.1% in 2011 with the official forecast for 2012 at 3.7%. We remain cautiously optimistic about the macroeconomic situation, but do have some concern about the potential effects that the European debt crisis may have on commodity prices, particularly on the oil price.  Nonetheless commodity prices remain robust for the time being and we expect that domestic demand will continue to grow in Russia thereby providing opportunities for our investee companies to continue to increase in value.

Aurora Russia's investments comprise OSG, Superstroy and Unistream all of which have grown well over the period and Flexinvest Bank which has progressed well in implementing its revised retail banking strategy. Aurora Russia exited Kreditmart, its loan brokerage business, in early December.  The company was sold for a nominal sum to a competitor as it continued to lose money and undermine shareholder value. Aurora Russia did however retain a 10% non-dilutable interest in the combined business through a 10 year call option at a nominal strike price.

Despite our remaining portfolio companies performing well over the period, at 30 September 2011 they were valued at £76.9 million, 15% lower than the valuation at 31 March 2011 which was £90.5 million.  The reduced value has been driven primarily by the depreciation in the Rouble verses Pounds Sterling, our reporting currency, of approximately 9% and a significant decline in the value of most of the listed companies that served as proxies in the valuation of our portfolio companies.

Superstroy, Unistream and Flexinvest Bank currently report on a calendar year basis so the updates below for are for the nine months ended September 2011.  OSG however has the same reporting cycle as Aurora Russia and therefore its updates are for the six months ended 30 September 2011.

OSG Records Management

OSG had another record month in September 2011 in terms of revenues, which were £1.6 million, up 26% from the prior year period. The company's contractual storage business showed a solid performance during the first six months of current financial year with storage revenue up 22% while services business grew 43%. At the end of September 2011 the number of boxes in storage reached approximately 3 million, an increase of 31% over September 2010.

The share of services revenue of total revenues for the period increased from 50% to 55% compared to the same period last year.  Acceleration in the growth of services revenue generally occurs when clients feel more optimistic about the future.  OSG continues to maintain double digit growth rates through the conversion of so-called "unvended" opportunities into "vended" by promoting the outsourcing of document and archive management.  

For the six months to 30 September 2011, OSG reported revenues of £9.18 million compared to £6.82 million for the same period in 2010. EBITDA was £1.08 million up 17% year-on-year ("YoY") for the same period. The growth in profitability has however been impacted by a decrease in the average storage capacity utilization as OSG expanded capacity in its flagship Moscow facility in Q4 2010 for an additional 0.5 million boxes. In Russia and Poland, OSG has been able to finance the purchase of warehouse racking and vehicles through finance leases and bank loans. At 30 September 2011, the outstanding balance on its lease financing and bank loans was £4.2 million.

The valuation of the investment in OSG at 30 September 2011 resulted in an uplift of £1.9 million to £30.7 million compared to the valuation at 31 March 2011 of £28.8 million. Its valuation proxy was one of the few companies that ended the six month period to 30 September with a similar share price as at the 31 March 2011 but most of the increase in value came from growth in the business partly offset by an increase in net debt of £1.3 million. OSG's reporting currency is in Pounds Sterling, as it has businesses in a number of countries, and therefore the drop in the value of the Rouble verses Pounds Sterling did not have a direct effect on the valuation.

Unistream Bank

According to the Central Bank of Russia, the money transfer market continued to recover with outbound transfers in the six months period to 30 June 2011 up by 43.5% YoY in US Dollar terms. Russia's inbound transfers grew 33.9% in the same time period.

Based on these figures management estimates that Unistream's share of the Russia-outbound remittances market has declined from 18.7% in Q4 2010 to 16.7% in Q2 2011. Unistream's share in the Russia inbound remittances also declined from 14.3% in Q4 2010 to 10.4% in Q2 2011.  The primary reason for this drop in market share has been that Unistream is focusing on its profitability, rather than pricing to maintain its market share in what has become a very competitive market place.  We believe that because the company is profitable and has its own network of approximately 200 outlets it is in a strong position versus its competitors.  We are pleased to report that total volumes are up 16% YoY for the company for the nine months to 30 September, but more importantly volumes through its own locations are up 26% over the same period beating plan by 9%.  In our view this is a key dynamic as the company is able now to offer its customers better service due to its control over its own locations.

Unistream continued to distribute its loyalty cards and by the end of September 0.9 million customers were issued with loyalty cards (this reached 1.1 million by the end of November). The main benefit to a customer is through reduced transaction time and sms-notification services that inform the customer first when a transfer is sent and again when it is picked up by the receiver.

The company is now putting in place human resources to focus on leveraging its own network and loyalty card data to earn additional non-money transfer revenues.  We believe that in the next six months we will see some traction in this area.

Unistream continues signing up new bank agents. As of September 2011, seven of its agents had more than RUR80 million monthly outbound transfer volumes each versus just three a year ago.

Unistream's remittance volume for the nine month period to 30 September 2011 was RUR97.7 billion compared to RUR84 billion for the same period in 2010 with revenue of RUR1.7 billion up 11.6% YoY. At the same time, due to a focus on profit, its profit before tax for the nine months to 30 September 2011 was RUR71 million up from a loss of RUR 24.6 million for the same period last year.

The valuation of the 26% stake in Unistream Bank at 30 September 2011 resulted in a write down of £3.8 million to £14.9 million compared to the valuation at 31 March 2011 of £18.7 million.  9% of this change was due to the depreciation of the currency and 15% due to its valuation proxy experiencing a reduction in its trading multiples. Approximately 4% was recovered through Unistream's growth.

Flexinvest Bank

For the nine months to September 2011 Flexinvest Bank had been implementing its new retail strategy with a credit card as its main loan product financed by retail deposits. At the end of September the bank issued and tested its first cards and began sales and marketing of its card and deposits. Potential customers can apply for a credit card with a maximum limit of RUR200,000 either through the internet or through the call centre. The instant credit decision is based on the scoring model's output and a credit history check. Approved applicants need to come to the branch once to pick up their credit cards and sign the required documents.

During the months of October and November, the bank received 191 and 369 credit card applications respectively. Out of this number it approved 61 applications which correspond to an approval rate of approximately 11%. During the same period the bank issued 48 credit cards for a total of RUR8.4 million of approved overdraft limit. The average percentage rate charged varies for purchases paid with a card versus cash withdrawals and is now at 21.9% for the former and 39.9% for the latter.  The deposit-taking marketing effort brought deposits of RUR17.3 million. Flexinvest Bank pays from as low as 7% for 90-day deposits up to 10% for 1-year deposits.       

The bank has recently enhanced functionalities of its web site www.flexbank.ru allowing customers submit on-line applications and launched a new trade mark  "FLEX BANK" making its brand easier to remember and recognize.

Flexinvest's interest and fee income decreased 6% compared to the prior year period and reached £0.7 million for the nine months ended 30th September 2011. The share of interest income from its existing mortgage portfolio has decreased while fee income has grown by 38% for the same period last year. 

As of 30 September 2011, Flexinvest and Kreditmart (which we value together) had £15.5 million in net assets down from £17.6 million as of 31 March 2011. The valuation of Flexinvest and Kreditmart at 30 September 2011 resulted in a write down of £2.2 million to £16.3 million compared to the valuation at 31 March 2011 of £18.5 million. We attribute £1.1 million of this change to the depreciation of the Rouble against Pounds Sterling, £0.7 million to the cash burn in Kreditmart and Flexinvest Bank, and £0.4 million net change due to an increase in provisioning including £0.2 million provision for the exit costs related to the sale of Kreditmart.

SuperStroy

Superstroy is the largest DIY retailer in the Urals Region of Russia.

The DIY market in Russia in 2010 was estimated by Ros Business Consulting ("RBC") to be approximately US$13.9 billion up approximately 18% YoY. Same source estimates show that the market will grow 16 to 17% in 2011 in US Dollar terms. The top 10 chains have increased their market share from approximately 32.5% in 2009 to 34.1% in 2010. RBC analysts expect further consolidation in the sector in 2011 with the share of top 10 players reaching 36% by year-end. Based on turnover figures estimated by RBC, Superstroy ranks #6 among all DIY retailers operating in Russia, or #2  as far as Russian DIY retailers are concerned. The top 5 DIY retailers are Leroy Merlin, OBI, Castorama, Kesko and one Russian chain, Maxidom.

Superstroy's expansion in 2011 consisted of opening one hypermarket, which was the largest it ever opened, and one supermarket resulting in increase in its trade space by 25.5%. In addition to opening these two new stores it completely renovated three of its existing stores where it also managed to enlarge the trade space of the stores by 88% adding 3.9% to total trade space. Superstroy also moved one store to a new location increasing the trade space of that store by 57%. The company closed one small store with trade space of 0.9% of the total current trade space where a rent increase made it unprofitable. As of September 2011 Superstroy's total trade space was approximately 111,000 sqm, up 28.4% as of 2010 year-end.

For the nine months ended 30 September 2011, Superstroy's revenues have increased 31% YoY in local currency terms to RUR6.46 billion with wholesale revenues generating growth of 50% while retail sales were up 25%. Like-for-like growth September YTD reached 16%.  Opening its largest hypermarket depressed the company's gross margin in 2011, resulting in EBITDA of RUR45 million or 61% lower as compared to the same period of 2010. However, adjusting for new store preopening and renovation costs, adjusted EBITDA for the period was RUR122 million.

At 30 September 2011, the net debt of the company was RUR786 million (approximately £15.8 million).

Although Superstroy is having its best year to date growing its monthly sales by 34% YoY from March to September it has been severely affected by a large reduction in the valuations of similar businesses, used as valuation proxies; these have caused a decline of approximately 30% in the value of Superstroy.  Adding the effects of the 9% decrease in the value of the Rouble verses Pounds Sterling resulted in the business being valued 39% lower than at 31 March 2011.

The valuation of Superstroy as at 30 September 2011 resulted in a write down of £9.5 million for Aurora Russia's 24.3% stake to £15.0 million compared to the valuation at 31 March 2011 of £24.5 million.

Kreditmart

In early December we sold Kreditmart to a competitor in the market for a nominal value in order to stop its cash burn. The buyer will combine Kreditmart with its existing mortgage and consumer loan brokerage that it set up in June 2010.   The buyer will benefit from the existing partner relationships and a known brand while Aurora Russia will retain a 10% non-dilutable option in the combined business valid for 10 years with a nominal strike price.

The valuation of Aurora Russia's portfolio included a provision of £0.2 million relating to the exit of Kreditmart as indicated above.

Conclusion

The Manager is committed to exit the Company's investments and is working hard to identify the optimal avenues through which to achieve this. We have been discussing Aurora Russia's investments with strategic investors as well as with stock market participants with a view to potentially listing OSG, Superstroy and Unistream. There has been some encouraging feedback in both areas.

Regarding Flexinvest Bank, we have been making good progress with its revised strategy and will report to the market on its status regularly.

Aurora Investment Advisors Limited

December 2011

Independent Review Report to Aurora Russia Limited

We have been engaged by the Company to review the unaudited condensed set of consolidated financial statements in the half year financial report for the six months ended 30 September 2011 which comprise the unaudited condensed half year consolidated statement of comprehensive income, the unaudited condensed half year company statement of comprehensive income, the unaudited condensed half year consolidated statement of financial position, the unaudited condensed half year company statement of financial position, the unaudited condensed half year consolidated statement of changes in equity, the unaudited condensed half year consolidated statement of cash flows and related explanatory notes. We have read the other information contained in the half year financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the unaudited condensed set of consolidated financial statements.

This report is made solely to the Company, in accordance with the terms of our engagement letter dated 25 October 2011. 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 year financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half year 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 consolidated financial statements included in this half year 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 consolidated financial statements in the half year 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 consolidated financial statements in the half year financial report for the six months ended 30 September 2011 is not prepared, in all material respects, in accordance with International Accounting Standard 34.

KPMG Channel Islands Limited

PO Box 20

20 New Street

St Peter Port

Guernsey

GY1 4AN

Date: 19 December 2011

Unaudited Condensed Half Year Consolidated Statement of Comprehensive Income

For the 6 month period 1 April 2011 to 30 September 2011

All items in the above statement derive from continuing operations.

The accompanying notes on pages 17 to 28 form an integral part of these consolidated financial statements.

Unaudited Condensed Half Year Company Statement of Comprehensive Income

For the 6 month period 1 April 2011 to 30 September 2011

All items in the above statement derive from continuing operations.

The accompanying notes on pages 17 to 28 form an integral part of these consolidated financial statements.

Unaudited Condensed Half Year Consolidated Statement of Financial Position

As at 30 September 2011

The accounts on pages 11 to 28 were approved by the Board of Directors on 19 December 2011 and signed on its behalf by:

Date: 19 December 2011

The accompanying notes on pages 17 to 28 form an integral part of these consolidated financial statements.

Unaudited Condensed Half Year Company Statement of Financial Position

As at 30 September 2011

The accounts on pages 11 to 28 were approved by the Board of Directors on 19 December 2011 and signed on its behalf by:

Date: 19 December 2011

The accompanying notes on pages 17 to 28 form an integral part of these consolidated financial statements.