By Richard Gill, CFA

Shares in Africa focused agriculture and forestry company Obtala (OBT) have bounced back from recent lows following the release of a positive trading update for the three months to December 2017. Following good momentum continuing in the final quarter the company expects record revenues for the year, with contributions having been made from all three operating divisions – as previously announced Obtala now reports via the Timber Trading, Timber Production and Agriculture Production divisions.

Timber Production

A total of 11,000m³ of logs were harvested and 3,500m³ of sawn timber produced in Q4 2017.

In Gabon, total production in H2 2017 was up by 63% compared to H1. This was despite the rainy season starting three weeks early. The focus remains on doubling harvesting capacity in time for the dry season in order to increase utilisation of the sawmill and new veneer factory which is expected to commence production in Q1 2018.

The market for logs is said to remain strong in Gabon as producers struggle to find sufficient raw material for their veneer and plywood factories. Obtala continues to harvest only a fraction of its available sustainable cut and uses all additional logs harvested to increase production at its sawmill and veneer factory to maximise margins. Production capacity of the veneer factory may be increased in H2 2018, through the potential purchase of an additional dryer and a plywood production line, after the factory meets performance targets.

In Mozambique, Obtala was operational in four concessions in Q4 2017, with a continued focus on increasing harvesting capacity. The construction of the new sawmill is almost complete, remains on budget and is set to be fully operational in Q1 2018 when it will be one of the largest in Sub Saharan Africa. The company is now exploring several opportunities to use its new base of operations as a centre for value added timber processing in Northern Mozambique.

In line with its social impact focus, a reforestation project is underway at Obtala’s concession in Uapé to plant a range of indigenous species, including Chanfuta, Umbila and Pau Ferro. 10,000 tree-seeds will be planted by the end of 2018.

 Mozambique Sawmill construction. Source: Company

Timber Trading

As previously highlighted, the priorities for the timber trading division in Q4 2017 were to secure additional trade finance and lay the groundwork with key suppliers to facilitate profitable growth in 2018. On 2^nd January Obtala announced that an initial $1 million in loan capital has been secured from certain directors and senior management to complement external trade finance. The loan is for a period of ten years and pays interest at 11.5% per annum. Funds can be used for financing receivables, inventory and supplier pre-financing. An external trade finance facility remains on track for first draw down in Q1 2018.

On the operations side, Obtala has been negotiating with suppliers to offtake increased levels of production on the back of strong demand for African hardwood and higher levels of trading capital. The strongest growth in demand for African hardwoods, including Okoume (the primary species produced in Gabon) has been from North America and this trend is expected to continue in 2018. Demand in the Middle East has been flat while sales to Pakistan have been growing on a monthly basis with strong demand for red hardwood species. Obtala has continued to explore JV discussions with strategic partners in Pakistan as it formalises its strategy for WoodBois Asia in H1 2018.

Agriculture Production

At the agriculture operations in Tanzania Q4 saw the further broadening of the product range to include Whitehaven sweet melons, aubergines, sweet peppers, round tomatoes and pumpkin. These added to Caribbean King sweet melons, yellow honeydew sweet melons, watermelon and butternut which were all harvested and sold during the period.

An upgraded refrigerated pack house has recently been completed, with seven, 40-foot, refrigerated containers of sweet melons successfully delivered to Dubai by sea and an eighth due for arrival in mid-January. The pack house is said to be performing as expected, with no cold chain issues experienced throughout the entire season and Obtala now well placed to step up the capacity utilisation of the facility.

The expansion of the market garden has seen thirteen refrigerated trucks of produce delivered and distributed to different markets in Dar es Salaam through the local Mama Jo’s sales team, including to a variety of retail and wholesale outlets. Four refrigerated trucks of produce have also been sent to Nairobi via the firm’s exclusive Kenyan distributor. In line with its long-term plan to expand into mango orchards, Obtala has sold fresh mangos into Dar es Salaam through its local sales team, as well as into Zanzibar via an exclusive agent. Also, a 3.8 tonne aircraft container of fresh mango was delivered to Dubai via airfreight where the fruit was sold via the company’s exclusive wholesaler.

Obtala remains in dialogue with various funding bodies regarding specific projects to scale its agriculture businesses in East Africa, where its goals of increasing food production, job creation, and removing supply chain roadblocks by building infrastructure are aligned with the priorities of national governments.

Palettes of Yellow Honeydew and Caribbean King ready for dispatch to Dubai and Nairobi. Source: Company

Assessment

This was an all-round positive Q4 update from Obtala and although lacking in any direct guidance regarding financial performance this can be excused given its release only a week after the period end. With the steady ramp up of activities across its operations, combined with the transformational acquisition of Woodbois, last year was a pivotal one for the business. However, 2018 is set to be a year of more significant growth as activities are further accelerated and investment made in capital expenditure starts delivering benefits.

We do not believe that the markets are recognising this potential, with Obtala shares currently trading at 14.25p, capitalising the business at just £41.7 million. Demonstrating the value, recent preference share issues placed an up-to-date and market validated price on the whole of forestry subsidiary Argento Limited of $109.36 million (£80.65 million). Obtala’s effective stake in the business of 57%, via its 75% holding in Argento, is therefore valued at £45.97 million at current exchange rates, or 15.67p per share. This is 17% higher than the current market cap and thus effectively values the agriculture operations, Woodbois operations and net cash at less than nothing.

Also, with net assets attributable to owners of the parent of $118.16 million (£87.15 million) as at 30th June, which mainly consist of $227.83 million (£168 million) of biological assets, the current discount to book value is 52%.

We will be revisiting our numbers once further information is released to the markets but for now stick with our DCF based target price of 38.18p and Conviction Buy stance.

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