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Obtala on path to profitability as researcher initiates with ‘conviction buy’

Align Research is tipping the forestry and agriculture specialist to post a maiden pre-tax profit this year
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Shares in Obtala have tripled over the past year

Align Research has initiated its coverage of Obtala Ltd (LON:OBT) with a ‘conviction buy’ rating after tipping the forestry and agriculture specialist to post its first pre-tax profit this year.

The research house is forecasting Obtala to post a profit before tax for 2017 of £1.05mln as revenues, which it expects to come in at £6.05mln this year, begin to pick up.

As for 2018, Align analyst Richard Jennings is expecting those numbers to continue to rise with pre-tax profits forecast to be £11.9mln on revenues of £23.6mln.

New senior management in favour with investors

The uptick in revenues and the possibility of a maiden profit follow on from an overhaul of senior management last year.

Chairman Miles Pelham, chief executive Paul Dolan and Chief operating officer Warren Deats have all joined the new-look team over the past year or so, while there have also been several appointments at an operational level.

Under the new leadership, Obtala has trimmed the fat and is now very much focused on developing its expanded forestry and agriculture operations towards meaningful and sustainable levels of production.

Since Pelham took up his role as chairman this time last year, Obtala shares have almost tripled reflecting investors’ enthusiasm and appreciation for the new strategy.

Well-funded after recent fundraises

As well as setting the company down a more focused path, the new management team has also helped put Obtala on a secure financial footing.

Since December, more than £18mln has been raised in addition to the £3mln or so it raised earlier in 2016.

It’s always refreshing to see directors put their money where their mouth is and back their company with their own cash and that’s exactly what has happened at Obtala.

Pelham, Dolan and the rest of the board subscribed for a total of around £1.7mln worth of shares which was seen by Align Research as a “significant vote of confidence” from the new team.

Align added: “As a result of the successful fundraisings Obtala has been able to plan for a more aggressive expansion than previously envisaged.”

The cash will be sued to support the expansion of both its forestry and agriculture operations, although the first investment went directly into Obtala’s Argento business.

There is a good reason for that though, which we’ll come to shortly.

Forestry business

Obtala has an effective 58% stake in Argento, which owns multiple 50-year concession leases over 312,465 hectares of natural hardwood forest in northern Mozambique.

These concessions give Obtala access to a large and sustainable supply of more than 20 species of hardwood which can fetch a pretty penny once sold.

“The company estimates these can derive revenues from US$630 per m³ up to US$10,000 per m³ for the valuable African blackwood which is used in high value sectors including the manufacture of musical instruments and fine furniture,” said analysts at Align Research in a note to clients.

The first £6mln from the recent fundraises has gone towards acquiring land and building a saw mill in the town of Nampula, around 160km from the port of Nacala which should help the division to rapidly expand in coming years.

Agriculture business

That’s not to say that Obtala isn’t spending any cash on its agriculture division; in fact, the opposite is quite true. Over the past four years, the company has invested more than £7.5mln into that side of its operations.

The reason for splashing out on the forestry division is much more pragmatic.

Obtala has 1,730 hectares of farmland in Tanzania, which produces multi-annual crops such as tomatoes, melon, sweet potatoes and seed maize.

The plan, eventually, in Tanzania is to move to orchard-style produce such as mango, avocado, pineapple and banana, which would be shipped to Dubai by boat at far lower cost than the fruit currently flown into the emirate.

It will take some time for the plan to (forgive the pun) come to fruition as orchards don’t grow quickly; it could take up to five years to get the agricultural business running at full capacity.

“The obvious thing is to get the forestry into production fast,” CEO Dolan told Proactive Investors.

Shares are “undervalued on a number of metrics”, says Align

“Obtala shares now trade at only a small premium to the value of the stake in Argento alone, priced per the recent fundraise,” said Align Research analyst Richard Jennings.

“This implies the agriculture business, net cash & potential for expanding the timber business are being valued at just £1.2mln.”

Jennings reckons shares, which currently trade around the 18p level, are worth 30.52p and he has initiated his coverage of the stock with a ‘conviction buy’ rating.

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