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 +44 (0)20 7099 1940
ZAI Corporate Finance Limited (Nomad)
John Treacy / Ray Zimmerman +44 (0)20 7060 2220
Brandon Hill Capital (Joint Broker)
Jonathan Evans +44 (0)20 3463 5000
Beaufort Securities Limited (Joint Broker)
Gavin Burnell / Jon Belliss +44 (0)20 7382 8300
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
END
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