Forestry and agriculture group Obtala has been in decline over the past 12 months following a major shake-up of its business that has involved several major acquisitions and a large placing. With a recent spate of share purchases by chairman Miles Pelham prompting a reversal of this trend, could the company be worth a punt at 7.6p as it continues to look at ways to maximise revenues across its business?
Obtala is an Africa-focused timber trading and agriculture company focused on sustainable operations in Africa. Its forestry division is made up of three 75pc-owned subsidiaries that operate 312,465 hectares in Mozambique and 98,851 hectares in Gabon. Meanwhile, it runs 1,930 hectares in Tanzania as part of its agriculture division.
The last 14 months have marked a period of major change for Obtala, starting with the acquisition of Woodbois, a global trader and producer of sawn timber, in July last year for $14.6m. In January this year, Obtala announced that its directors would loan Woodbois an initial $1m at an 11.5% annual interest rate to help fund its expansion alongside an external trading capital facility. Obtala then announced a £4.5m placing, with around $4m (c.£3m) of this being used to boost Woodbois expansion through initiatives such as doubling its harvesting capacity and constructing a veneer factory in Gabon. The rest was used to acquire a timber supplier operating in the Ivory Coast called NSMS.
The fruits of Obtala’s labour appear to have begun to pay off, with its interim results for the six months to 30 June 2018 demonstrating a considerable amount of progress. For example, it revealed revenues of $6.6m, a 44x increase on the $149k it made in H1 2017 and reported a gross profit of $347,000, up from a loss of $804,000 in H1 2017. Within its forestry division, the firm said a faster flow of raw material and improved logistics at its sawmill in Gabon saw monthly production of sawn timber in June move 30pc above its Q1 2018 average. This led the division to set a new quarterly record of 3800m3 of sawn wood produced.
What’s more, looking forward, Obtala said it sees ‘substantial opportunities’ to grow its trading division as further funding materialises via its internal trading fund, which rose to $1.7m during the period.
Unfortunately, not everything about the results was positive. Obtala said its legacy businesses in East Africa were mostly responsible for an operating loss of $4.8m in H1 2018. It added that this continues to be a drag on earnings and management time. Furthermore, the company said it generated minimal revenues from its farms in Tanzania as well as Mozambique. On the latter, it said this was primarily due to inconsistent signals from the authorities, which include a ban on export the of sawn timber of some internationally popular species, unless in the form of ‘finished products’.
Encouragingly, the firm said it plans to undertake a strategic review of its businesses in both areas and aims to implement the recommendation by year-end of by Q1 2019 at the latest.
Obtala’s acquisition-and-placing-heavy news agenda has proved to be a considerable drag on shares, with the business falling from 17.6p to 7.6p over the last year. The firm has a complicated model, and its focus on a sensitive sector where government intervention is rife will not be for everyone. However, regardless of your opinion, it has been encouraging to see chairman Miles Pelham significantly increase his skin in the game recently. This week alone, he has bought around £400,000 worth of shares, bringing his total stake to 5.2%.
At this price, which still gives Obtala a £25.4m market cap, you have to weigh up whether the early promise demonstrated in Gabon can be replicated across its operations in Tanzania and Mozambique over time. The fact that the firm seems to have a clear idea of where its weaknesses lie and have put in plans to address these issues imminently is undoubtedly encouraging.
