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Obtala Ltd: THE INVESTMENT CASE

Obtala looking to apply a veneer of success

"Don't get fixated on hurdles in Mozambique," is the message; it's a decreasing part of the business. Far more important is securing the trade finance that would enable the company to scale-up
Timber operations
INVESTMENT OVERVIEW: OBT The Big Picture
The company is on a path of rapid expansion in Africa

Things are going well for forestry management and agriculture group Obtala Limited (LON:OBT) in Gabon, making up for disappointments in Mozambique.

Speaking to Proactive Investors in the wake of the group’s second-quarter update, chairman Miles Pelham said: “Operationally it was a good quarter and a good half for us”.

WATCH: Obtala Ltd 'progressing well' with record sawn timber production

Output from its Gabon sawmill was 3,800 cubic metres, with June’s average 30% higher than the first three months of the year, representing a record quarter for the sawmill.

Elsewhere in Gabon, the company has invested a lot of time and money in its new veneer factory. Veneer should be the group’s highest margin product so it is unfortunate that the start of production has been delayed by a few last minute tweaks.

Pelham said the factory is “on budget but behind schedule because we were making some changes that would mean we can scale up efficiently and effectively”.

All being well, the factory should be online in the next month.

The scaling-up imperative

The need to achieve scale was emphasised several times by Pelham in his conversation with Proactive Investors’ Andrew Scott.

He is convinced that once the company achieves trade finance, the company will be in a position to scale-up and then it will start to see some serious returns on capital-employed.

“Trade finance is going to be very significant for the future profitability of Obtala,” Pelham said.

“It has been a struggle thus far. We’ve faced significant headwinds,” he added.

The company’s financing efforts have not been helped by the new Basel III directive on capital adequacy levels for banks. The stricter regulations have effectively shut off “that traditional banking avenue that historically we have leveraged”.

Nevertheless, the company has thought outside of the box to raise funds in the past and even now is “tracking down specialist lenders”.

READ: Obtala tops up coffers with additional fund raise

Pelham sees no reason to be pessimistic about its quest for trade finance, citing the board’s experience of financial markets and the group’s track record of meeting payment deadlines in Africa.

“We do feel we can attract capital,” Pelham said, and when the company does, it will be able to put its foot more firmly on the accelerator.

Not that the company has been stuck in neutral since Pelham became chairman of the company some two years ago.

“The business is unrecognisable from the one I inherited,” Pelham maintains.

“If my mandate was to turn the business around, then I guess I am pretty happy. I’m obviously not happy with the recent share price performance … but if you just look at the underlying metrics of the business that we own now, we’ve got revenues that are 14-times the level of 2016 when I took over; tangible assets of US$27mln versus US£3mln when I took over; we’ve obviously raised significant funds to fund expansion and made fantastic progress operationally,” he declared.

The focus has long since switched away from Mozambique

One area where the company has not made the sort of progress it hoped for is Mozambique, where new timber export rules have put the future of the group’s forestry operations in doubt.

“The government has banned the export of our two most common species unless they are processed but are yet to define what ‘processed’ means,” Pelham explained.

It’s frustrating but not a company-shaker; Mozambique was budgeted to be just 4% of Obtala’s sales this year.

“The reality is that we had already started allocating the vast majority of our capital to other parts of our business even before the policy change, simply on a return-on-capital basis,” Pelham said.

So, the ruling by the Ministry of Land, Environment and Rural Development in Mozambique has had a negative impact on Obtala but it is not especially damaging to the group, leaving Pelham optimistic about the group’s future prospects.

“It is taking much longer than we hoped but our foundations and momentum are strong enough we can be pretty confident in achieving our goals,” he concluded.

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"Don't get fixated on hurdles in Mozambique," is the message; it's a decreasing part of the business. Far more important is securing the trade finance that would enable the company to scale-up

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