30 September 2016
("Obtala", the "Group" or the "Company")
Q3 2016 Quarterly Business Update
· Dynamic leadership team identified, hired and now operational
· Comprehensive business review complete, 2 pronged strategy agreed
· Disposal of non-core loss making assets
· Both Agricultural and Forestry businesses exceeding internal expectations, management confident about viability of each division
· Agricultural and Forestry platforms operational, additional capex from this point will be bottom line accretive
· Upgraded website launched with further enhancement to be rolled out in due course
· Meradell structure to be converted into newly issued Argento Preference Share. Further raising via Preference share possible.
Obtala Limited (AIM:OBT), the African focused agricultural and forestry company, is pleased to provide the following business update for the quarter ending September 2016, which is intended to communicate the progress that has been made by the Group since 30th June 2016.
My immediate objective upon taking over as non-executive Chairman in April 2016 was to establish a dynamic leadership team, capable of formulating and executing a strategy to unlock the value within our portfolio of assets, and creating a culture of accountability and success. It is appropriate therefore, for me to begin this quarterly report by welcoming some of our significant hires, each of whom has generated immediate positive impact;
Paul Dolan, CEO. Paul's background is almost 30 years in banking and hedge funds in London and Asia, where he built highly successful, globally integrated teams. Now based in London, Paul is responsible for delivering on group strategy and directly communicating with European investors. As previous chair of Nomura's Corporate Social Responsibility Committee in Asia, Paul is keen for Obtala to leverage its listing on London's Social Stock Exchange, and will spearhead our Social Impact programme. An active investor, Paul owns 5% of Obtala's shares.
Warren Deats, COO. A native South African, Warren joined on August 1st 2016 and has re-located from Hong Kong to Dar es Salaam to manage operations on the ground. Warren's background is in both finance and farming, having worked for Goldman Sachs in London and Barclays in Hong Kong, as well as owning a pomegranate farm in South Africa since 2010. Warren owns ~2% of Obtala shares.
Sophie Hunter, Head of Sales and Distribution. Also based in Dar es Salaam, Sophie joined in July 2016 bringing 10 years of experience in trans-continental marketing and logistics. Sophie has immediately opened up and tested logistic routes into Middle Eastern markets for our fresh farm produce.
Claus Wellov, Head of Logistics, Mozambique. Claus has almost 40 years' experience of managing shipping and logistics operations, the majority of which have been spent in Africa, including 13 years at Maersk Line in South Africa, Nigeria and Mozambique. Claus's vast experience in the region, linguistic abilities and thorough understanding of operations and personnel in our local port Nacala, Mozambique provide a critical link in the supply chain of our timber business.
Strategy / Execution
As announced in the half-year report, a thorough review of all operations beneath the Obtala umbrella was initiated immediately upon my appointment in April 2016, with detailed analysis conducted within every business line. I said that H2 would see the execution of decisions made as a result of this substantial body of work, and promised relentless focus on delivering sustainable, profitable production from the valuable assets within our core businesses.
I'm pleased to announce that findings from the comprehensive business review have helped shape a clear strategy for the future direction of the Group, and no time has been wasted in planning execution of said strategy. Removing non-core businesses that absorbed management time without making a bottom line contribution allows for increased focus on those business lines with substantial potential. The negotiated exit of the LCS operations in Lesotho was an important step in that regard, allowing management time to focus on the two key business lines, forestry and agriculture. The formula for our forestry division is in place, and execution, albeit on a limited scale is underway. The natural advantages offered to us by our farmland in Tanzania afford opportunities to grow an extensive variety of produce and we are currently producing profitably in a limited capacity. We will analyse all available agronomic and cost data related to a variety of crop options in detail before deciding which, if any, to grow on an industrial scale.
With this aim we have initiated a company Mission Statement and implemented a clear and concise Corporate Strategy which can be found on our website:
"To become one of East Africa's largest sustainable food and timber producers, consistently delivering world-class product to the global marketplace. To deliver material, positive social impact in East Africa through commercial enterprise, helping to alleviate poverty and enriching the lives of future generations."
Our farms have seen a complete overhaul of systems and processes since the arrival in April 2016 of Graham Impey (Head of Agriculture Division). There has been a focus on operational excellence and health & safety. We are putting a heavy onus on quality above quantity in order to establish long-term trading relationships for superior higher margin business. Extensive investment has been made to ensure the business is in a scalable position and to mitigate execution risk as production levels increase.
Key milestones reached in Q3:
· Our first melon harvest commenced on September 27th, with higher than anticipated yields achieved.
· Initial butternut samples successfully exported to Dubai
· BRC accreditation was audited and renewed for our Mama Jo's branded dried fruit line.
· Our first international dried fruit order was received from Europe and a trial batch was produced in late September.
· EPZ approval was activated, meaning that the agriculture business in Tanzania will be free from corporate tax and import duties for inputs to production until 2024.
· Further land clearing operations achieved in Q3 which will also continue throughout Q4
· Expanded the scale of our cold storage pack-house facilities by 100% in preparation for first international export harvest.
· Developed relationships with quality buyers in Dar es Salaam, signing contracts with first high end supermarket.
· Hired a health and safety officer at the farm
· Comprehensive software system scheduled for roll-out in Q4 which will improve production and management oversight
· Anticipate that 1200 tonnes of fresh produce will be harvested during Q4
The forestry business is gathering momentum, benefiting from the JV with Basic Materials Limited and Capex facilitated via the Meradell investment structure. The business now sits in the advantageous position of having strong demand, stable supply and a critical mass of plant and machinery with which to produce high quality product. The forestry division business currently utilises less than 5% of available permitted cut and as such would benefit from more direct inward investment.
Key milestones reached in Q3 are:
· Work rota implemented to increase working week from 5.5 to 7 days per week
· Leased a 1000 cubic metre secure, modern warehouse in Nacala, with equivalent storage for 100+ containers
· Orders received from South Africa, Mauritius, Vietnam, Thailand, Denmark, Germany and China total over 5000m³ per month. Current ungraded capacity is 400m³ per month
· First order successfully shipped to South Africa, received, inspected, approved and paid in September with follow-on order for expected
· Order-book and operational infrastructure are in place and prepared for material expansion of production
The Company has made efforts to offer transparency by increasing the quality and frequency of communications to the market and investors. It gives me great pleasure therefore to confirm the launch of our updated website, containing our mission statement and a myriad of further information for stakeholders in the company, including customers, shareholders, investors, employees, NGOs and other organisations, and the media. It is intended to inform, while conveying the spirit and driving force of our rapidly expanding business.
As we move forward, we will implement Key Performance Indicators for our businesses and for the Social Impact they are having on the communities in which we work. We intend to set the bar high, and I look forward to communicating our progress to you on both fronts as we build momentum through year-end and into 2017.
Social Stock Exchange
We remain committed to the Social Stock Exchange (SSE) and are presently undergoing the annual audit to renew our membership. The SSE embodies the ethos of our company as we seek to increase shareholder value while improving work and educational opportunities and making a positive economic contribution within our host nations. (www.socialstockexchange.com)
The Company has undertaken a review of its corporate structure and is simplifying its subsidiary structure to reduce costs of maintaining unnecessary empty holding companies. As we look to invest new capital and reinvest profits into Africa we will strengthen ties with local strategic partners whilst at the same look to renegotiate terms that reflect the value of our Foreign Direct Investment (FDI). We aim to foster strong sustainable, mutually beneficial long-term relationships.
The increase in production targets in Q4 for both the agriculture and forestry businesses assume zero additional investment. Although both divisions could grow organically, in order to monetise embedded asset value and accelerate productivity from these assets, additional funding is required and we are looking at a variety of options to achieve this.
It is our intention to find 'patient capital' partners to pursue a full buildout of the agricultural assets but it is not anticipated that funding will be in place within this calendar year.
We intend to issue a Preference Share by our forestry subsidiary Argento Limited, details below. Holders of the existing Meradell structure will be offered conversion into the new Preference share on a 1-for-1 basis. Should all holders accept the conversion, their collective holding in the Preference share will represent 5.7% equity stake of Argento Limited (investment proceeds received for Meradell structure totaled $4.6m).
Argento Preference Share summary
Fixed Dividend 5%
Ordinary Dividends Pro-rata right to Ordinary dividends of Argento
Convertibility At choice of holder into either:
(1) Argento shares on 1-for-1 basis
(2) Obtala at 20p (1-for-1346 basis)
It is our intent that going forwards the new Argento Preference share will be the vehicle used to raise capital for the expansion of the Forestry division. Discussions will be on-going with potential investors throughout the next quarter. For illustrative purposes an additional $10m raising via Argento Preference shares would entitle Pref holders upon conversion to an equity stake of 9.1% in Argento; or alternatively a 12.75% stake in Obtala, as enlarged.
Miles Pelham, Chairman of Obtala commented "I am pleased with the progress made throughout the last quarter and believe the work undertaken has laid foundations that will hold us in good stead as we look to expand production capabilities throughout 2017.
Our new mission statement lays clear our intent to build a business of scale that will hold a large footprint on the East African landscape. In preparation for this there has been an acute focus on building information, management and operational infrastructure that can cope with the stresses of increasing volume by multiple times. This work will continue throughout Q4.
It is pleasing that we look set to restructure the Meradell investment vehicle into a more transparent security such as the proposed Argento Preference Share and I think this is significant in illustrating the value to be unlocked in our substantial asset base. We will be seeking to raise more funds via the Argento Pref going forwards.
The entire management team remains focused to finish this year with both business lines delivering consistently on our orderbooks and entering 2017 on a strong footing to scale up significantly."
Miles Pelham - Chairman
+44 (0)20 7099 1940
ZAI Corporate Finance Limited (Nomad)
Peter Trevelyan-Clark/John Treacy/Jamie Spotswood
+44 (0)20 7060 2220
Brandon Hill Capital (Broker)
+44 (0)20 3463 5000
This information is provided by RNS