Q1 2017 Quarterly Business Update

RNS Number : 5401A

Obtala Limited

27 March 2017

 

27 Mar 2017

Obtala Limited

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

(AIM: OBT)

Q1 2017 Quarterly Business Update

Q1 2017 has been an exciting quarter at Obtala. Intense planning is underway for several major projects as the company transitions towards meaningful production, and deployment of our substantial assets. Following the successful US$ 14.25 million fundraising via the issue of preference shares in Argento Limited (Obtala's 75% owned forestry subsidiary) during the final quarter of 2016, which was recently upsized by a further US$ 3 million, as announced on 15 March 2017, management has turned attention towards laying the foundations required for significant and sustainable increases in productivity from both the forestry and agriculture businesses. With financial resources for these projects in place, and following comprehensive consultation and analysis, the next step for the Group is to deliver the infrastructure required to underpin generation of strong positive cashflow.  

Forestry - Mozambique

·     Preparation of management plans for 6  out of our 10 forestry concessions in Northern Mozambique totalling c.120,000 hectares

·     Identification of site for new sawmill in Nampula, Mozambique

·     Architectural design and technical specification for a new sawmill in Nampula, Mozambique

The Mozambique Government prescribed no-cutting season from January - March each year provides time to focus on repair and maintenance of plant and equipment, and to plan for the next campaign. Our team of local mechanics and engineers continue to perform an impressive job of rehabilitating some of our older machines while training junior members of staff.  As equipment returned to service it was put to work immediately on timber that had been harvested and stockpiled during the previous quarter.  1,500 Messassa sleepers were produced and delivered during February. In March, the sawmill in Uape generated an average of 9m³ per day, which had been harvested and stockpiled at the end of 2016.  Delivery of two additional resaws was taken during the final week of March which once operational, will increase productivity within our existing sawmill by c.20%.

Our immediate target is to increase the two concessions which were operational by year end 2016, to five active concessions. Under the leadership of new Forestry COO Ivan Muir, the experienced and skilled managers and crew required to open operations in these new concessions are being identified and recruited and the additional operating equipment and vehicles required placed on order, with delivery expected by end of Q2 2017. We are excited to have Ivan on board.  His passion for forestry and experience of managing campaigns in Mozambique will be key in making the step change required to significantly scale up operations.

The site for our new central sawmill in Nampula has been identified and we expect to finalise arrangements for the land usage during April 2017. Plans have been drawn up for securing the site with a perimeter wall, and for the layout of the sawmill buildings. Planning for power supply, water access and drainage is also underway and we anticipate building to be completed during Q4 2017 with operating equipment timed to arrive simultaneously. Once fully operational, the new sawmill will have production capacity of ~100m³ per day

We have observed a year on year US$ price increase for fully registered and traceable logs in the local market of around 15%, reflecting a scarcity in availability of certain species, most specifically Kiatt. This could be a result of the sharp fall in value of the Mozambique Metical during 2016 making Mozambican timber more attractive to foreign buyers, or simply demand outstripping supply after the strict government-imposed clampdown on illegal logging, or a combination of both. Regardless of the cause, the price trend for our harvestable asset is moving in our favour, and in our view is likely to continue to do so, which reinforces our ambition to become the largest producer of sawn timber in Mozambique.

Agriculture Tanzania

·     Detailed hydrological and soil analysis covering more than 1000 hectares of farmland in Morogoro, Tanzania

·     Architectural design and technical specification for refrigerated pack house facility in Morogoro, Tanzania

Due North of Mozambique, Tanzania receives it's 'big rains' slightly later, typically in March and April, coinciding with the highest temperatures. Our planting season commences around week fourteen, with initial harvest of melon starting 3 months later in June, coinciding with the fruit becoming less available locally in the Middle East.  Having conducted trials of multiple melon varieties during Q4 2016 we have elected to concentrate on growing the Caribbean King variety for the market in Dubai, while continuing to provide smaller quantities of yellow honey dew which are proving more popular in the local African market.

Having extensively studied crop choices, our medium-term plan to drive revenues is to develop large scale, high value orchards. With appropriate irrigation and silvicultural practice, orchards deliver high yields as they approach maturity after 6-7 years. ROI, especially on a risk-adjusted basis is amongst the highest offered in the sector with EBIT typically above 50%. The obvious trade-off is cost of capital and negative cash-flow in the initial years. The board is strongly of the view that developing orchards now will provide significant returns to shareholders over time. In order to offset this cash outlay we will implement a 'hybrid' agricultural model with cash crops, or 'annuals' which will provide the positive cash-flow required to fund the expansion of orchards.

We expect to plant 80 hectares of high value annuals in 2017, predominantly melon but including butternut and onion, in addition to 30 hectares of feed maize for the purpose of rotation. A 'market garden' of 14 hectares will test multiple varieties of crops such as tomato to assess suitability to soil and climate, as well as the appetite from the rapidly growing domestic market in Dar Es Salaam ahead of scaling up in 2018. An initial 50 hectares of orchards containing mango and pomegranate will also be planted this summer, while we conduct feasibility studies to assess the viability of Avocado, Cashew, Cocoa and Banana plantations.

The key factor inhibiting growth beyond this expansion in 2017 is lack of availability of cold storage and pack house facilities. Indeed, our existing facilities will be operating at maximum capacity at harvest time from June to November this year. The specification for the new pack house has been agreed and building is scheduled to be completed in time for the 2018 harvest. The results of soil analyses and hydrological surveys conducted during Q1 2017 have confirmed that the farms on which we currently have long-term leases can support a minimum of 900 hectares of orchards. Management is cognisant of the necessary balance between capex required to clear, irrigate and plant the maximum number of hectares on one hand, and retaining a strong cash position on the other. The hybrid model of using profits from annuals to invest in and develop long-term orchards is designed to address this requirement. We will also look to expand operation within a defined radius of our new pack house where we see the opportunity to expand through partnerships with landowners, who can demonstrate suitable soil and access to water.

Finance and M&A strategy

Since announcing the successful capital raise in December 2016 we have received a steady stream of potential investment opportunities from third parties looking to sell assets or partner with us in East Africa. Those outside our areas of core competence and interest, agriculture and forestry, have been immediately rejected. Conversely, opportunities with potential synergies or falling within our strategic criteria have been, and in some cases continue to be reviewed in detail for strategic, commercial and cultural fit.

We are also analysing additional parts of the value chain that Obtala may want to pursue greenfield or via M&A if the opportunity arises. Adhering to a strategy of identifying "first to scale" opportunities within the value chain of both businesses is where we believe we can build a sustainable competitive advantage and maximize return on capital.

While our focus is on growing our businesses from the ground up, should high quality potential acquisitions materialise we are fully prepared to commit significant management time to gathering insight and performing detailed due diligence whilst remaining cognisant of our regulatory obligations. Once our competence within existing business lines is demonstrated through recurring positive cashflows, we will actively seek opportunities that will allow us to build scale. We will actively seek investors who share our view of the outsized potential of investing in Africa to co-fund expansion plans. Shareholders can rest assured that any future M&A will not be entered into lightly, and target companies will need to demonstrate both strong positive cash-flow and significant growth potential or asset value to be of interest to the Board.

2016 and early 2017 has seen an intensive period of investor relations and with 85% of Argento Pref investors coming from Asia the Company is investigating whether a dual-listing may be appropriate in order to increase liquidity and give Asian investors an easier platform with which to invest, whilst remaining cognisant of our regulatory obligations.  Active discussions are occurring but any such listing is not expected before the conclusion of 2017.

Board changes and key hires

Before introducing new members of the team, the Company would like to take this opportunity to acknowledge the retirement from the board of Simon Rollason MD, and Jean Du Lac NED, as announced on 16 March 2017. We are grateful to both Simon and Jean for the insight and advice that they have always been willing to share with the Board and thank them from everyone at Obtala for their years of commitment and service to the company.

On 23 March 2017 we announced the appointment of Jessica Camus to the Board as an additional Non-executive director.  Jessica is a multilingual expert on impact strategy and brings extensive experience facilitating public-private partnerships. Jessica co-founded Ignis Advisory, a social impact consultancy focused on emerging and frontier markets. As an Associate Director at the World Economic Forum, she led various programmes on entrepreneurship ecosystems, innovation and gender in international organizations.

Jessica brings Obtala a fresh perspective and is a welcome addition to the Board. Her focus will include the integration of IRIS, the global standard for measuring social impact into our corporate reporting processes. She will seek to form partnerships with DFIs, NGOs and other social impact investors who have mandates to allocate significant levels of funding via grants, loans and equity stakes to projects in Africa. Alleviating poverty in East Africa forms part of Obtala's mission statement, and we believe that our pursuit of 'industrial value- add' aligns with that objective. Where 'first-mover to scale' advantages exist, and governments are keen to promote activity within specific value chains, such as agriculture and food processing in Tanzania, social impact is not only a charitable activity, it is smart business. Jessica's extensive experience in this field clearly increases our chances of success on both fronts and we're encouraged by the fact that she clearly shares our conviction on this important point. I am both proud and delighted to welcome her to the Board.

Moving forward, our plans are ambitious, and to achieve them we will need a skilled, dedicated and enthusiastic management team to execute our strategy. A lengthy and thorough process to identify key roles and high quality personnel to fill them has been underway since Q4 2016. I am delighted to announce that the following staff have been recruited at operational level to fulfil these critical functions and I have no doubt that this injection of talent and experience will have a positive impact on future results.

Ivan Muir - Forestry COO

-      Start date March 2017

-      >25 years of experience in all spheres of Forestry production and management

-      South African national, highly qualified FSC auditor

-      Has worked in 27 African countries including 4yrs harvesting forestry concessions in Northern Mozambique

-      Deliverables - Plan and execute production, manage supply chain from concessions via sawmill to port

-      Based in Mozambique

Ben Salter - Head of Health, Safety, Security and Environment (HSSE)

-      Start date April 2017

-      Ex-Royal Marines Commando

-      Performed HSSE role for major Oil conglomerates in Asia

-      Deliverables - secure supply lines, introduce processes and procedures, define roles and responsibilities, compliance with local regulations.

Based in Mozambique

Martin Collins - Head of New Business

-      Start date March 2017

-      Ex-CEO of Tullet Futures Asia and ex-CEO of Natsource Europe. Runs private family office

-      Originated and structured many of the world's first Emission Reduction Transactions based on UNFCCC rules, traveling extensively in Asia and Africa to source suitable projects

-      Deliverables - Vet and advise on M&A and value chain opportunities in existing businesses

-      Likely to be named as Investor representative Director on the Argento Board

-      Based in London

Carnel Geddes - Group Accountant

-      Start date May 2017

-      Chartered Accountant and Certified Fraud Examiner, dually qualified in UK and SA

-      Ex - Director BDO London and Partner BDO Cape Town

-      Deliverables - Enhanced speed, quality and analysis of financial reporting, rollout of Sage project, tax efficiency, structuring and best practice

-      Based in South Africa

Ulrica Marshall - Public Relations advisor

-      Ulrica Marshall is a qualified Member of the Association of UK Corporate Treasurers (MCT), and holds a Master's degree in International Journalism.

-      After 8 years in investment banking, culminating as Senior Associate Director, Debt Capital Markets, at Deutsche Bank, she changed career to freelance writing, marketing and public relations for international corporations and publications including the Financial Times.

The Company is pleased to announce that new corporate presentations and brochures are now available to download on our website.  It is anticipated that third party research will be available on Obtala in the imminent future and will also be available on our website.

Obtala Limited will be presenting at the UK Investor Show which is being held at the Queen Elizabeth II Conference Centre in Westminster on Sat 1^st April 2017.  You can find us at stand 96-97.  The Chairman, CEO, Head of Forestry and Head of Agriculture will all be present amongst others.

Obtala Limited Miles Pelham - Chairman Paul Dolan - CEO www.obtala.com	[phone]
ZAI Corporate Finance Limited (Nomad)                 Peter Trevelyan-Clark / John Treacy	[phone]
Brandon Hill Capital (Broker)      Jonathan Evans	[phone]

This announcement contains inside information for the purposes of Article 7 of EU Regulation 596/2014. 

 

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