Obtala Limited Q2 2017 Quarterly Business Update (4394L)

TIDMOBT

RNS Number : 4394L

Obtala Limited

19 July 2017

19 July 2017

Obtala Limited

("Obtala", the "Group" or the "Company")

(AIM: OBT)

Q2 2017 Quarterly Business Update

-- Completion of $14.6m WoodBois acquisition, incl. c.$15m per annum trading business and 96,851 hectare concession in Gabon with 42,000m3 capacity sawmill

   --     Completed purchase and commenced construction of new sawmill site in Nampula 
   --     6 management plans now approved in Mozambique covering 153,500 hectares 
   --     Melons planted on farms in Tanzania; packhouse renovation complete for 2017 harvest 

-- Acquisition of farmland on which majority of production assets in Tanzania are located, increased profit share on two farms

   --     Obtala named Social Stock Exchange Impact Company of the Year 

A Transformational Quarter

Q2 2017 was a transformational quarter for Obtala. On 30 June 2017, we announced the completion of the $14.6m acquisition through Argento of WoodBois International ApS ('WoodBois'), a deal that more than doubles our potential production capacity of tropical hardwood timber and provides us with a leading global timber trading platform run by principals with decades of trading experience. WoodBois, like our forestry business in Mozambique, is still undergoing a rapid scaling of production. Having commenced this process in Spring 2016, WoodBois' infrastructure and operations team have already been in place for a full year and production and revenue numbers for H1 2017 are extremely encouraging with the outlook for H2 2017 enhanced following the arrival of two new bulldozers in July that will increase production in the forest. WoodBois' timber trading business also showed a strong start to the year despite more capital being allocated to the Gabon forestry operation in the months leading up to our acquisition. We have already increased WoodBois' credit facility by 36% and intend to seek additional trade finance to support higher trading volumes.

We expect the acquisition of WoodBois will have considerable operating and revenue synergies for our forestry business in Mozambique, which has achieved several key milestones in Q2 2017. In May we finalized the purchase of a 10.5-hectare site for our new sawmill in Nampula and have already broken ground on construction with a view to completing the planned 100m3 per day capacity sawmill by the end of 2017. 6 management plans covering 153,500 hectares (41,014 m3 of permitted cut) have now been approved, 2 are currently operational with the remaining 4 expected to ready shortly, thereby allowing us to achieve our immediate goal of being active in 5 concessions. The arrival of new harvesting equipment and the completion of our production team build out is already showing positive results, with logging production showing a marked year on year increase.

In Tanzania, we were delighted to have the opportunity in June to acquire the land on which most of our production assets are located and in doing so also increase our profit share at Magole and Wami Farms (covering 195 hectares and 1,200 hectares, respectively). We have renovated our existing packhouse to support production for the 2017 harvest, planting for which has already commenced. Meanwhile we have continued to refine our larger cold storage packhouse design and begun to evaluate renewable energy options to increase energy efficiency across all our farms as we expand our operations.

Our commitment to sustainability and social impact through our commercial operations remains strong. In June, Obtala was named Social Stock Exchange Impact Company of the Year at the annual Small Cap Awards. This follows our commitment in April to build sustainable and inclusive business in Tanzania through investment activities associated with the Grow Africa partnership(s) in Sub-Saharan Africa.

WoodBois Acquisition

-- Argento has acquired 100% of the share capital of WoodBois, a leading global trader and producer of sawn timber, for $14.6m over 3 tranches including c$4m equity

-- Historic trading revenues (c.$15m) limited by availability of trade finance which Obtala is seeking to address (credit facility already increased by 36%)

-- 96,851-hectare forestry concession in Gabon with potential annual harvest of over 9 million m(3) identified by third party inventory assessor

-- Sawmill capacity of 42,000 m3 identified. Harvesting capacity increased c.2x since H1 2017 with arrival of two new Komatsu bulldozers

   --     Veneer factory completion underway with target of commencing production in 2018 

Acquisition Background

On June 30 2017, we announced the completion of the acquisition of WoodBois International ApS. WoodBois was founded in 2004 as a global trader of sawn timber primarily sourced from hundreds of suppliers across Africa with whom WoodBois' principals had developed a relationship during their careers in sales and procurement with DLH Group. WoodBois' relationship with Obtala originated from a wood order they placed with our forestry division in Mozambique. Over time it became apparent that an acquisition would be advantageous for both companies. We recognized that WoodBois' trading business, though profitable and historically achieving revenues of c.$15m, had the potential to scale considerably if provided with additional trade finance. After European banks pulled back from commodity trade finance in 2008, we believe a gap has been left in the market which WoodBois can fill. Obtala's ability to raise capital (as evidenced by our c.$25m capital raising since 2016), our understanding of operating in Africa, and the financial expertise of our Board made us the perfect partner for WoodBois. In 2013 WoodBois began investing in its own production in Gabon, which began to scale significantly in 2016, allowing us to acquire a trading business that is now vertically integrated and moving up the value chain with the completion of a veneer factory due at the end of 2017.

Due Diligence Findings

We were delighted with the results of our due diligence process, as they revealed that WoodBois' management had been conservative in their assumptions about the business, creating a strong foundation of trust between the two management teams. This is important as WoodBois' principals, Jacob Hansen and Zahid Abbas, have agreed to continue working for Obtala for the next 5 years, while Hadi Ghossein, a Gabonese citizen who manages operations in Gabon, has committed for a minimum of 3 years. A significant portion of the transaction proceeds ($5m) is linked to Jacob and Zahid's employment, while an additional c$4m of Obtala equity was included in the total transaction consideration.

Concessions in Gabon

The most pleasantly surprising due diligence finding came from our third-party forest inventory report, which found that of WoodBois' 96,851 hectares, 82,703 hectares are dense forest, giving rise to a potential annual cut of over 9 million m3. This figure is based on conservative assumptions (for instance, that only 3,000 hectares of each 5,000 hectare area WoodBois may operate in each year is accessible, productive land), however we expect that the actual amount of timber harvested each year will be drastically lower than this due to our commitment to sustainable harvesting practices. It is clear the volume of wood in the forest can easily support the sawmill and veneer factory at current (or multiples of) production capacity, eliminating any concerns of a bottleneck in raw material supply. The inventory report also confirmed the presence of over 20 commercial species of timber in WoodBois' concessions (the sawmill is currently processing just 5 of these - Okoume, Okan, Ovangkol, Padauk and Azobe), many of which are rare or high value hardwoods.

Gabon Operations

Our due diligence team, along with an independent forestry consultant, found that with the installation of a new sawing line already purchased, WoodBois' sawmill has a potential production capacity of 42,000 m3 (vs. 24,000 m3 estimated pre-due diligence). Average production costs were found to be in line with management's estimate. Harvesting capacity in the forest was estimated at over 70,000 m3 per annum, with the potential to increase significantly with the purchase of new equipment. WoodBois' harvesting operations benefit greatly from the density of their forest and its proximity to their sawmill (the greatest distance from their sawmill to a concession area is c.70km, significantly saving on transportation costs). WoodBois' veneer factory is located less than 5km from their sawmill.

Trading Operations

WoodBois' trading business is headquartered in Copenhagen, where it conducts the sale of wood primarily sourced in Africa to a diverse network of buyers. The Obtala team visited WoodBois' African trading operation in Abidjan, Ivory Coast, where wood is sourced from regional suppliers, then stored (and typically kiln dried) before shipment. Obtala intends to significantly upscale this business, which has seen its available capital reduced as WoodBois invested in production assets in Gabon, and we have already increased WoodBois' credit facility by 36%, enabling the company to procure a greater volume of wood from African suppliers (and at higher margin via 'pre-financing' production) in H2 2017.

H1 2017 and Outlook

In the first half of 2017 WoodBois recorded total revenue of EUR7.97m ($9.15m). Trading revenues were EUR5.78m ($6.63m) from 11,594 m3 of timber traded. Gabon production (sawmill) revenues were EUR2.19m ($2.51m) from 5,986 m3 of timber sold. It is expected that with the arrival of two new Komatsu bulldozers in July and the addition of three new horizontal saws to the sawmill in June harvest and production volume for the second half of the year will show an improvement on H1 2017. We have observed an increase in demand for Okoume from China, the Caribbean Islands, and Mexico, creating a favorable price outlook for the remainder of 2017.

The process of completing the veneer factory has now commenced with the target of commencing production in 2018. The factory structure is already complete and the main equipment (peeler and dryers) purchased and already on site. The total cost of completion is estimated to be $400,000, consisting of engineering works, machinery installation, and other smaller equipment purchases. Other potential investments under consideration include kilns (WoodBois currently kiln dries wood at a third-party site and could realize significant savings and improve logistics with the installation of its own kilns powered by wood waste).

The most significant factor in the performance of the trading business in H2 2017 will be access to additional capital. We have already increased WoodBois' existing credit facility by 36%, and intend to work on substantially increasing this. We have begun to identify and screen a small number of administrative hires in Gabon, the Ivory Coast, and Denmark to prepare the trading (and production) operation for higher anticipated volumes in 2018. WoodBois is still exploring joint venture options with its strategic partners in Pakistan, where it intends to base its Asian trading operation (WoodBois Asia), though no announcement is imminent. Pakistan is viewed as a high growth market and WoodBois has already secured a contract to provide railway sleepers for the construction of a major railway linking China to Pakistan's Gwadar Port, set to become the largest port in Asia.

Forestry - Mozambique

-- Completed purchase of 10.5-hecatare site for new sawmill in Nampula with option to buy additional 4.5 hectares

-- Site clearance 60% complete, boundary wall work commenced, sawmill layout projected to produce 100 m(3) of processed timber per day

-- 2017 cutting season underway with marked improvement in productivity following arrival of new equipment and impact of new processes and procedures

   --     6 management plans approved covering 153,500 hectares (41,014 m3 of permitted cut) 

After the Mozambique Government prescribed no-cutting season ended, new licenses were issued in June, as they were in 2016, while the government worked on new policies and procedures to prevent illegal logging. Although this delayed the commencement of the cutting season, the impact on our forestry business in 2017 is not expected to be significant. As stated on numerous occasions, Obtala welcomes any new regulations aimed at curbing the illegal export of logs (unprocessed timber) from Mozambique, as well as any other actions that support or favor producers of sawn (value added) timber. The six management plans we reported to be working on in our Q1 2017 update have now been approved, covering 153,500 hectares (41,014 m3 of permitted cut). We are currently operating in 2 concessions and expect to have an additional 4 operational shortly. Our immediate target remains to be active in 5 concessions.

A significant amount of new harvesting and sawmill equipment was delivered in Q2 2017, including 3 bell loggers and 1 bell TLB, with 5 new tractors due to arrive shortly. With the new equipment installed in the forest production has already begun to show an improvement. We are currently harvesting an average of 250 logs per day (vs. 90-180 per day at peak production in 2016), and this is expected to increase with the arrival of more equipment, the opening of new concessions, and the introduction of volume-based incentives. With more equipment in the field and activity increasing we have made important hires in the forestry division: a new Head of Logistics (with previous manager taking up a new role as Head of Procurement) and a Maintenance Manager. While we wait for our new sawmill in Nampula to be completed, production is continuing at Uape, where we have hired an experienced sawmill manager, Henning Visser, who will oversee production at Uape and the development of the new sawmill in Nampula.

Agriculture - Tanzania

   --     Completed renovation of existing packhouse to support 2017 harvest 
   --     Acquisition in June of Magole Farms where majority of production assets are located 
   --     Increased profit share at Magole Farms and Wami Farms 
   --     Crop and land development underway; first cash crops (melons) planted 

Crops and Land Development

The second quarter is typically a quiet time for production for the agricultural industry in Tanzania. The rains come to an end during the quarter and land preparation begins for the next season. We have spent this time increasing our land available for cultivation through land preparation and the expansion of our irrigation infrastructure.

The rains this year were about 10 weeks later than usual, so we have pushed the planting season back to week 23. Our first harvest is expected at the beginning of September. The first hectares of our headline crops for the year, Caribbean Kings and White Honeydews, are now in the fields with more being planted each week. We have a total of 40 hectares of melons planned for the second half of this year. This produce is destined for Dubai, Kenya, and local markets.

We have also begun production of our Market Garden which focusses on producing smaller amounts of a wide variety of produce. This diversified product base allows us to service local and regional supermarket demand across their entire spectrum of needs. The Market Garden will begin harvesting in September, as well. We expect 60 hectares in total from mid-September to early next year.

Our research into the most viable orchard options has continued. We plan to plant three varieties of mangoes before year end beginning with 50 hectares and scaling this up significantly over the coming years. These varieties produce fruit at different times of the year, allowing us to stretch our season over a longer period. We are also continuing to conduct feasibility studies to analyze additional products for both orchards and cash crops that would be viable for production on our land.

Packhouse Upgrade

As we have mentioned in previous trading updates, one of the key inhibiting factors for large-scale production is the availability of cold storage and packing facilities. We are delighted that the renovation to our packhouse is complete. We have improved both the capacity and the cold room technology. This upgrade will allow us to handle significantly more produce in a much more precise and controlled manner. We have also begun the design and specification for our new world-class packing facility. This is a large-scale project that will bring international standards of cold tech and packing to Tanzania. The aim of this facility will be to service our farms once they are in full production. We expect development to coincide with the needs of our increased production and orchard development.

Magole Land Acquisition and Wami Farm Profit Share

Two other highlights during Q2 2017 have been the agreement to purchase Magole Farms and the improvement of our profit share on Wami Farms. Magole Farms is 195 hectares of our current land and is also the land on which our packing and dried fruit production facilities are built. It will also be the site of our new packhouse development. Wami Farms represents the largest part of our farm land at over 1,200 hectares. During the second quarter, we came to an agreement with our local partner to improve Montara's profit share from 70% to 90%.

Finance and M&A Strategy

We have continued to receive a steady stream of potential investment opportunities both directly and indirectly from third parties and businesses looking to sell assets or form strategic partnerships with us in Africa. Management is currently focused on the integration of WoodBois, and we are not actively pursuing additional M&A opportunities. Investments will be focused on increasing production and value chain enhancement of our current businesses. Our financing strategy for WoodBois will focus on scaling the trading business with the provision of more trade finance.

Our analysis of the additional parts of the value chain has focused on monetizing wood waste at our sawmill in Nampula (with similar implications for WoodBois' sawmill in Gabon) and we are investigating opportunities to work with local governments and international funding bodies that may be interested in benefiting from our energy projects. We are also continuing to explore adding a veneer production line to our new sawmill in Mozambique.

As we stressed in our Q1 2017 update, although management is focused on the existing businesses (now including WoodBois), should high quality potential acquisitions materialize we are fully prepared to commit significant management time to gathering insight and performing detailed due diligence whilst remaining cognizant of our regulatory obligations. Target companies must demonstrate strong positive cash-flow and significant earnings growth potential or asset value to be of interest to the Board.

We continue to actively seek investors who share our view of the outsized potential of investing in Africa to co-fund expansion plans. The Company is continuing to investigate whether a dual-listing may be appropriate to increase liquidity and give Asian investors an easier platform with which to invest. Any such listing is not expected before the conclusion of 2017.

Board Changes and Key Hires

The Company would like to take this opportunity to acknowledge the retirement from the board of Frank Scolaro NED and Philippe Cohen as Finance Director, as announced on 3 July 2017. The Board would like to thank Frank and Philippe for their contribution to Obtala over the years and we wish them all the best with their future endeavors.

CFO duties have been assumed by Paul Dolan and Group Accountant Carnel Geddes, while suitable candidates continue to be vetted. As a Chartered Accountant and Certified Fraud Examiner dually qualified in the UK (ex-Director of BDO London) and South Africa (ex-Partner BDO Cape Town), Carnel is sufficiently qualified to handle CFO duties, as well as the integration of WoodBois, having worked with the onsite due diligence team.

With the acquisition of WoodBois, Warren Deats and Paul Dolan joined the WoodBois International ApS board. A new holding company, WoodBois Gabon SA has been formed through which the combined group will conduct forestry operations, with Hadi Ghossein as CEO and Paul Dolan, Jacob Hansen, and Zahid Abbas serving as Directors.

On 5 July 2017, we announced that the following key hires from our Q1 2017 update have each been issued share options with an 18p exercise price as part of our management incentive plan: Carnel Geddes (Group Accountant), Martin Collins (Head of New Business), Jessica Camus (NED), Ben Salter (Global Head of HSSE), and Ulrica Marshall (Public Relations Advisors).

In addition to those mentioned above, the following staff have been recruited at operational level to fulfil critical functions:

Henning Visser - Sawmill Manager

   --    South African national, over 30 years of experience managing sawmill operations 

-- Joins Obtala having held role as sawmill manager for a large forestry operation in Uganda. Has worked in numerous sawmills across Africa, including his own operation for 5 years

-- B.Tech. Forestry, Nelson Mandela Metropolitan University, Diploma in Forestry, Saaveld College for Forestry

Bradwell Masendeke - Head of Logistics

   --    Mozambique national (fluent in Portuguese and English) 

-- Joins Obtala having served as an operations manager for a trucking operation in Nampula, Mozambique responsible for all key KPIs and associated operating procedures

-- Formerly in automotive sales for Nissan, Mozambique, freight forwarding manager for a logistics company in Maputo, and a warehouse and logistics manager in Nacala, Mozambique, where we expect to export our timber

-- Will work closely with Claus Wellov, who transitions from Logistics Manager to Head of Procurement

Johann Keyter - Head of Maintenance

   --    South African national 

-- Trained mechanic and management level maintenance leader, with experience setting up maintenance systems and training local staff

-- Extensive experience as country level maintenance manager for mining, military, agriculture, and logistics operations in the Central African Republic, South Africa, Liberia, Zambia, Mali, as well as other countries in the Middle East, Asia and Africa

Third Party Research and Appointment of Joint Broker

VSA initiated coverage on Obtala on 29 March 2017 with a buy recommendation and 28p price target. On 24 May 2017 VSA reiterated the buy recommendation with a new price target of 36p following the first announcement of the WoodBois acquisition. Align Research initiated coverage on Obtala on 10 May 2017 with a conviction buy recommendation and 30.52p price target, subsequently maintained following the initial WoodBois announcement on 24 May 2017, but noting the potential for WoodBois to add another 13.4p per share. Hardman & Co. initiated coverage on Obtala on 5 June 2017 with a 30p price target. All our third-party research reports are now available on our website and we expect regular updates and notes to be issued moving forward.

On 19 May 2017, Beaufort Securities was appointed a joint corporate broker (alongside Brandon Hill Capital) to assist in marketing Obtala to investors and raising the company profile.

Obtala will be exhibiting at the UK stand of the 53rd edition of the International Trade Fair and Exhibition (FACIM) in Maputo 28 August - 3 September, along with the British Council, British High Commission, DFID, and other leading UK companies in Mozambique.

 
Obtala Limited 
 Miles Pelham - Chairman 
 Paul Dolan - CEO 
 www.obtala.com                               [phone] 
ZAI Corporate Finance Limited (Nomad) 
 John Treacy / Ray Zimmerman                  [phone] 
Brandon Hill Capital (Joint Broker) 
 Jonathan Evans                               [phone] 
 Beaufort Securities Limited (Joint Broker) 
 Gavin Burnell / Jon Belliss                   [phone] 
 

This announcement contains information which was previously inside information for the purposes of Article 7 of the Market Abuse Regulation EU Regulation 596/2014.

This information is provided by RNS

The company news service from the London Stock Exchange

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July 19, 2017 02:00 ET (06:00 GMT)