Due diligence yields pleasant surprises as Obtala completes Woodbois acquisition

2017-07-03 12:04:00
Obtalafound on numerous occasions that the WoodBois team had been very conservative in its estimates and projections.
Obtala intends to scale-up WoodBois's African trading operation in Abidjan on the Ivory Coast

Obtala Limited (LON:OBT), the agricultural and forestry company, has completed its acquisition of WoodBois International after doing its due diligence.

The final consideration was US$14.6mln, which is a little less than the purchase price originally announced.

WATCH: Obtala's Miles Pelham on 'very welcome surprises' to come from Woodbois acquisition

Obtala said “a more than satisfactory due diligence process” on the Woodbois (WBI) acquisition confirmed a potential annual harvest of more than 9mln cubic metres (m³) and a sawmill capacity of 42,000m³ once already purchased equipment is installed; the sawmill's capacity was originally estimated at 24,000m³.

Since Obtala announced the acquisition of WoodBois on 24 May 2017, WoodBois has received approval for a forest management plan for a 20-year concession covering a net area of 96,851 hectares near Mouila, Gabon, 82,703 hectares of which is dense forest.

Each year, WoodBois may apply to harvest an area of 5,000 hectares, and each 5,000 hectare area may remain open for harvesting for up to three years with no more than three areas in any concession opened for harvesting at any one time, Obtala revealed.

Obtala commissioned a third-party inventory assessment to determine the potential annual cut of first- and second-grade quality timber available to WoodBois in each 5,000 hectare area, based on the timber inventory and government requirements. More than 25 commercial species were identified in the forest; however, the inventory assessment focused only on the five primary species WoodBois is currently harvesting.

An annual potential first- and second-grade cut of 8,201,091m³ of Okoume, 527,691m³ of Okan, 153,662m³ of Azobe, 926,940m³ and 186,925m³ of Ovengkol was found. This assumes about 3,000 hectares of each 5,000 hectare area is readily accessible productive land, which Obtala said is a conservative assumption.

WoodBois's current harvesting capacity was assessed by Obtala's commercial due diligence team and an independent forestry consultant, and concluded that an annual harvest of 71,280m³ could be readily achieved with existing equipment.

READ Obtala swoops for US$14.8mln timber trader

Given the extent of the timber resources available in the concession there is scope to invest in increasing harvesting capacity many times over, though the amount Obtala is likely to end up harvesting will be drastically less than its allowance because of its commitment to sustainable harvesting practices.

Obtala intends to invest US$400,000 to complete the construction of Woodbois’s veneer factor in Mouila to address production bottlenecks and enable output to be pushed up to 18,000m³ of veneer. The veneer factory is expected to be completed by the end of 2017.

"Our due diligence team verified substantially all the assumptions upon which our valuation was based, finding on numerous occasions that the WoodBois team had been very conservative. A great deal of trust has consequentially developed between the Obtala and WoodBois management teams, which gives me great confidence in our ability to execute on the business plan," said Obtala's chairman, Miles Pelham.

“Obtala management’s financial expertise and proven access to capital markets combined with WBI’s global distribution makes for a formidable timber trading group,” said Paul Dolan, chief executive officer of Obtala.

Finance director retires

In a separate announcement, Obtala announced Philippe Cohen has retired as finance director, as has non-executive director and company founder, Frank Scolaro.

Until a new chief finance officer is appointed Cohen’s duties will be assumed by Paul Dolan, the chief executive officer, and Carnel Geddes, the group’s accountant.

One of Scolaro’s last acts as a director was to invest in preference shares of Obtala subsidiary Argento.

Scolara paid US$150,000 for 429 Argento shares. Chairman Miles Pelham bought 4,286 shares for US$1.5mln; Paul Dolan purchased 715 shares at a cost of US$250,000 while Warren Deats, Obtala’s chief operating officer, paid US$250,000 for 715 Argento shares.

Late last Friday, the company issued its results for 2016, which showed that total assets at the end of the year had risen to US$181.1mln from US$179.7mln the year before.

Cash and cash equivalents had risen to US$3.4mln from US$1.0mln at the end of 2015, after the company raised fresh capital during the year.

In what was a year of transition, with the group narrowing its focus to two key industries – timber and agriculture – turnover eased to US$630,000 from US$868,000 the year before.

The company made a loss before tax from continuing operations of US$5.25mln, which represented a substantial improvement on the preceding year’s loss of US$14.78mln, and was ahead of the forecast by VSA Capital of a loss of US$5.9mln.

“2016 was a transformative year for OBT,” says VSA

To support its new strategy, Obtala raised funds on a number of occasion, raising more than US$25mln in 2016 and the first half of this year.

“We view this as an extremely significant achievement, considering the financing difficulties that many other companies operating in similar sectors and countries have experienced,” VSA said.

“OBT continues to advance its new strategy, with key staff now in place across its businesses. Deploying the recently raised funds into its existing operations, as well as through acquisitions, such as the US$14.6mln WoodBois International acquisition, should help the new management team quickly build OBT into an African agriculture and forestry business with the required scale to successfully operate on the continent,” the broker added, as it reiterated its ‘buy’ recommendation and 36p price target.

Shares in Obtala currently trade 17.375p, down 0.25p on the day.

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