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City broker thinks Obtala shares are worth double their current market value

"Even after prudently modelling Obtala’s business opportunity with the application of punitive discount rates to reflect all the risks, fair value still appears to be significantly higher than the current share price"

Beaufort’s Barry Gibbs thinks 37.5p is a fair price for Obtala shares

Beaufort Securities has kicked off its coverage of Obtala Ltd (LON:OBT), the agricultural and forestry company, with a ‘speculative buy’ recommendation, claiming that the shares are worth double their current market value.

An Obtala share will set you back 17.9p apiece or so, but Beaufort’s Barry Gibbs thinks 37.5p is a more accurate price.

In his initiation note, Gibbs says that Obtala’s recent US$14.6mln acquisition of WoodBois, its first major purchase since raising US$27mln at the end of 2016, has eased the one major concern investors might have had.

“The reality is that plugging the one-real near-term concern – that of access to a global forestry product distribution channel – through the acquisition of WoodBois International at just 1x revenues, reinforces the view Obtala’s board has a comprehensive understanding of the challenges its group faces.”

Timber prices to head ‘sharply higher’?

Woodbois also gives Obtala access to about 83,000 hectares of dense forest in Gabon for the next 20 years which is also key given the increased regulation surrounding tree felling.

“The timing [of the acquisition] appears perfect, given that it has neatly positioned Obtala to become a key beneficiary of significant long-term demand growth for timber at a time when stricter global enforcement of illegal logging can be expected to push medium-term product pricing sharply upward, potentially even creating a short-term ‘super-cycle’ or pricing bubble,” wrote Gibbs.

Speaking of long-term demand, the analyst has delved into the latest research reports from the World Bank which suggest demand for timber will quadruple by 2050.

He also estimates that about 50% of timber supply over the past decade has come from illegal logging which is the target of a renewed campaign from authorities.

Even a “relatively small squeeze” on these operations would have a “significant” impact on the likes of Obtala through higher prices, he adds.

Big industry

Gibbs also points out the sheer size of the timber market that Obtala is looking to attack.

Although he likens the industry to “a cottage industry” due to its highly fragmented and localised nature, the analyst refers to it as a “giant global industry”.

He’s not wrong either: it is estimated that the worldwide timber industry contributes around US$600bn to the international economy, which isn’t far off 1% of global GDP.

Gibbs’ research suggests that the strong operational base Obtala has made for itself will translate into the finances in a couple of years.

He estimates that revenues will grow to US$70mln in 2019 which should yield an operating profit in excess of US$34mln. The analyst also expects Obtala to be profitable on an operating level next year.

Shares were 1.7% higher on Monday morning to 17.92p.

Quick facts: Woodbois Limited

Price: 2.2 GBX

Market: LSE
Market Cap: £31.48 m

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