Quarterly Update - Clarification

RNS Number : 7421T

Obtala Limited

05 July 2018

 

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF ARTICLE 7 OF THE MARKET ABUSE REGULATION (EU) 596/2014.

5 July 2018

Obtala Limited

("Obtala", the "Group" or the "Company")

(AIM: OBT)

Quarterly Update - Clarification

Obtala, the African focused agricultural and forestry company, is pleased to provide a quarterly update on operations for the quarter ended 30 June 2018 (Q2 of the Group's 2018 financial year).

·     H1 invoiced sales US$7.3m*

·     H1 Revenue US$5.9m*

·     Current order book (contracted sales) US$11m

·     Record 3800m3 sawn timber produced in Q2 vs 3600m3 in Q1 2018

·     Record 70 containers of our own production shipped in Q2 vs 53 in Q1

·     Gabon veneer factory complete, production to commence July 2018.

·     Logistics team in Gabon strengthened in preparation for further increases in sawmill and veneer factory output

·     US$750k additional trade finance raised at the end of June and utilised

·     Further trade finance facility negotiations ongoing

·     Mozambique strategy under review given late issue of 2018 cutting and export licences

* These bullet points have been corrected from the statement released at 7am today to reflect that the numbers are for the current financial period to the end of Q2, therefore comprising H1 numbers.

Forestry

West Africa continues to perform strongly, benefitting from investments in new bulldozers and trucks following the capital raise in Q1 2018.  A faster flow of raw material and improved logistics at our sawmill in Gabon saw monthly production of sawn timber in June reach a level 30 percent above the Q1 average, and for the division to set a new quarterly record of 3800m3 of sawn timber produced.

Testing continues at our new veneer factory in Gabon where we expect production to commence in July. Substantial investment has been made in this facility, with local management working tirelessly on this project since November 2017. The team of installation engineers are currently in the process of handing over to the new production team.

Although currently behind schedule, the project is within budget. The veneer peeling machinery is world class and its revised installation gives greater flexibility to expand than originally specified, fully warranting the delay. We will select and send appropriate raw material direct from our forests to either the sawmill for processing or to the veneer factory for peeling. This selection process will help to increase our overall recovery rate, and veneer is expected to be our highest margin product.

Shipping logistics have improved under the control of Mrs Anne Laure Boichot who joined the Libreville team in April 2018. Anne Laure has had immediate impact, overseeing the shipping of 70 containers in Q2, a 30% increase over Q1 2018. We are encouraged by the level of organization and impact Anne Laure has brought to this critical chain within our business. Her team is looking forward to meeting the challenge of further increasing exports as the veneer factory comes online.

In Mozambique, cutting licences were issued significantly later than expected on 12 June 2018 and export licences followed on 25 June 2018. Our Mozambican subsidiary, Argento Mozambique, was one of only 28 companies in Mozambique to be granted an export licence. The level of processing that each species is subject to in order for export to be permitted has however, yet to be announced.

While improved processes have been implemented at the new sawmill in Nampula, the uncertainty created by repeated delay in the issue of licences has forced management to review the business in detail, leading us to conclude that a strategic pivot and cost reduction exercise is appropriate.

Mozambique appears to be following the approach of Malaysia and other forest-rich nations where a ban on exporting whole logs has seen a significant increase in domestic timber processing over time.  We are closely following a MoU signed in June 2018 between the governments of Mozambique and China to create domestic timber trading and processing hubs and to this end, we have appointed one of our key employees, Mr Adriano Rafael, to develop domestic sales within Mozambique.

Timber Trading

During the first half of 2018, working capital allocation to our growing production facilities in Gabon has quite naturally taken precedence over funding for trading. The overall pace of revenues from trading in 2018 has matched that of the forestry division. This ratio has the potential to increase substantially in favour of trading revenues as we leverage our African supplier network and global distribution capabilities using additional trade finance funding.

The internal trade finance facility that management put in place in January 2018 has been fully utilized and has performed well. The internal trade finance facility was increased by a new loan of US$750k in late June 2018. 

Having satisfied the criteria of one major trade finance provider, we continue to negotiate terms ahead of commencing the relationship. With a large outstanding order book we are ready to deploy additional capital, but the cost and administrative terms attached to such capital must allow sufficient pay-back for each trade. As well as allowing us to capture an appropriate level of margin, any solution must allow sufficient flexibility for our highly experienced operations team in Copenhagen to efficiently process all trading related documentation.  The main challenge in our search for trade finance has been the adoption by the banking industry of the Basel III capital adequacy regulations, the technical implementation deadline for which is 2019. This has reduced the willingness of banks to lend against receivables and inventory, particularly in developing markets and hence our focus on partnering with a specialist fund or funds to convert a greater percentage of our order book into revenue.

The Ivory Coast is a main hub for our trading business. In Q2 we invested in the repair of kilns, increasing our drying capacity to 1000m3 of sawn timber at our rented facility in Abidjan. This upgrade will allow for up to 17,000m3 of sawn timber to be kiln dried annually, species dependent. Investment was also made into the reconditioning of a container crane on the same facility to allow quicker and more efficient movement of containers, a key development as our trading volumes start to increase there.

Agriculture

During H2 2018 we will continue to implement our hybrid model plan without increasing capacity. Contribution to the group from Agri is likely to be minimal whilst we search for a strategic partner to co-fund expansion.

Financial reporting

This time last year we had just released our financial results for 2016. Twelve months on it is not just our financial results that have changed beyond recognition. Internal financial reporting and management information systems within the company have been significantly upgraded. This improved visibility has allowed management to make better informed decisions more quickly across all divisions. This enhanced ability to measure performance across the group has allowed management to set realistic targets for improvement, track progress, and adjust or make wholesale changes where necessary. These improvements have also informed our capital allocation decisions, as well as helping to determine where management time and effort is most optimally spent.

Additionally, our audited numbers for 2017 were released more than a month earlier than those for 2016, despite the requirement to consolidate and integrate new subsidiaries in Denmark and Gabon. At the time of writing, our finance department is already busy preparing our 2018 half-year financial results which we look forward to announcing in due course.

February 2018 Equity Raise

£250k of the £4.6m February 2018 equity raise has not been settled as expected and we are taking advice as to the resolution of this situation.

Chairman of Obtala, Miles Pelham, commented "I am pleased to report another quarter of operational growth and improved controls as well as record volumes of sawn timber produced and containers shipped to customers. The company is increasingly well positioned to attract strategic funding partners, for the trading division and co-operating partners for the agricultural business to drive our next phase of revenue growth.  Finding optimal partners with whom we can align interests is a process that we are fully committed to. The trend of de-risking by international banks is clearly cutting Africa off from traditional sources of international finance. In trade finance alone the African Development Bank estimates an annual shortfall of US$120bln. Given the growth backdrop of the continent however, very significant opportunities clearly exist for companies that prove themselves capable of delivering the necessary funding solutions. Obtala intends to be amongst them."

Obtala Limited Miles Pelham - Chairman Paul Dolan - CEO Martin Collins - Deputy Chairman www.obtala.com	[phone]
Northland Capital Partners Ltd (Nomad and Broker) Tom Price Jamie Spotswood	[phone]

 

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