LONDON (Alliance News) - Obtala Resources Ltd Wednesday said it plans to return between 5.0% to 20.0% of generated funds back to its shareholders as part of its new strategy, but said this is not expected to happen any time soon as the company is focused on reinvesting into the business.
The agriculture and forestry business operating within Africa said recent development activities has given it confidence to supply guidance figures to its shareholders as Obtala outlined a strategy that is primarily focused on reinvestment.
Analysing the new strategy, Obtala is suggesting its fresh produce and forestry divisions could generate combined revenue of at least USD20.5 million per year within the next four to five years - compared to the USD1.7 million booked in 2014 and the USD2.3 million generated in the most recent half which ended in June 2015.
"Over recent months, business development activities have produced encouraging results for both domestic and, more particularly, export market opportunities, to the extent where the company is comfortable affording guidance on the expected build up of revenues and the intended application of funds generated," said Obtala.
Between 60.0% to 75.0% of funds generated by the company will be reinvested into the business to drive further revenue growth whilst 5.0% to 20.0% will be retained to build a cash buffer to cover any unexpected surprises.
"Re-investment into existing business lines for enhancing revenue growth will be directed by the board with a view to balancing both immediate revenue returns and producing more substantial returns within a two to five year time horizon," said Obtala.
"For the immediate future, investment will be focused on areas where predicted revenues have a high probability of achieving targets rather than more speculative, albeit potentially more profitable, areas," the company added.
That will leave between 5.0% to 20% of the funds generated to be returned to shareholders in the form of dividends or buybacks, but Obtala said this is its third priority and would only start once "sustainable levels of profitability are achieved."
"The company intends to return a proportion of any future profits back to shareholders in the form of dividends or buybacks once sustainable levels of profitability are achieved, subject always to the availability of distributable reserves and the maintenance of a suitable cash buffer," said the company.
"The board will determine the most appropriate method of value return to our shareholders, taking into account metrics, which can assess the most valuable form of the return," Obtala added.
The company said metrics such as the ratio between Obtala's enterprise value and earnings before interest, tax, depreciation and amortisation will be compared to its peers to allow the company to make a decision on what would be an appropriate amount of returns, but stressed that this is "not anticipated in the immediate future".
Obtala feels more confident about the sustainable levels of revenue it can generate after transitioning from an asset building strategy to one based around increasing production and profitability, but the company said any guidance is subject to change based on market conditions.
"Below we set out forecasts for the company's key business lines based upon base-case assumptions. However, to set these numbers into context, we recognize that although these forecasts are made to the best of ability by a management team with over 280 cumulative years of direct working experience in African projects they are at present broad and as our business lines mature we should expect them to refine over the coming period," said Obtala.
Within its agricultural unit, Obtala is focused on building an export business after completing its fresh vegetable packing facility. The initial focus will be on selling butternut squash and sweet melon to markets in the Middle East, which has been chosen due to its close proximity, shipping transit times and freight costs.
Obtala said it has 500.0 tonnes of mixed melon varieties and butternut squash crops that are at various stages of growth. Those plantations should be harvested over the next couple of months and around 40% of production will be of good enough quality to be exported and shipped to buyers through existing offtake agreements.
Based on initial orders, Obtala said it plans to initiate plant-to-order farming programmes for a number of export clients over the next four to five years that should generate revenue of over USD3.0 million per year, it said.
With the majority of its produce not good enough to export, around 60% of produce will be sold into the domestic market in Dar-es-Salaam in Tanzania. With Obtala expecting the amount of produce for the domestic market to increase, it has launched a venture using its brand, Mama Jo's Fresh, to target the substantial population of lower income earners, supplying commodities in bulk and at low, competitive market prices.
A small depot in the northern suburbs has been secured and will distributed produce to initially five Mama Jo's branded outlets. Obtala plans to open additional outlets once the concept is operational and proven.
To ensure the new outlets and brand has enough supply, the company plans to purchase additional crops from third-party farmers.
Overall, domestic sales should start generating around USD2.0 million per year over the next four to five years.
The Mama Jo's Dried Fruit brand is ready to go after securing certification and packaging options, and Obtala is working with suppliers in Europe, the Middle East and Asia to secure orders for its dried fruit produce. The unit is expected to deliver annual revenue of over USD2.5 million over a four to five year period.
Production at the sauce division, which is also sold under the Mama Joes brand, remains suspended whilst Obtala moves its production facility and reaches the internationally recognised food safety standard. Production may be re-started in the future once additional capital is made available.
Obtala has also identified bananas as a key area of growth for the company in the future. Banana experts will be on Obtala's site in mid-to-late May once the rainy season has ended to help the company set up phased land development programme.
Each plantation will take around 12 months to bear fruit for sale, and the banana unit is expected to deliver annual revenue of around USD5.0 million over a four to five year period.
Away from produce, Obtala's forestry division has secured interest from domestic markets, the Middle East and from South East Asia, building on orders it is now fulfilling from China, Thailand, Vietnam and South Africa.
As orders are likely to grow, Obtala has increased its investment in drying facilities, with large scale drying sheds under construction, as well as increased harvesting and production facilities. Specifically, new heavy equipment including forklifts, trucks, trailers, new saw mills and drying kilns will all be needed to facilitate growth.
"As orders step up it is anticipated that further capital investment will be required to ensure that production capacity keeps in-line with demand levels," said Obtala.
Overall, the forestry division should generate over USD8.0 million in revenue over the next four to five years.
The final division of Obtala, African Home Stores, is set to be potentially sold to one of two prospective buyers. No other details were revealed but Obtala said it will no longer include the division in its forecasts and stressed any sale will not "materially change" the company's financial position.
Although Obtala has no major operational items to purchase in the immediate future, the company reported a cash balance of only USD1.1 million as of April 27 but remains debt-free.
"The company will continue to seek investors into its forestry investment vehicles and use proceeds for capital expenditure to achieve blue-sky ambitions," said Obtala.
"I acknowledge that the guidance presented today is somewhat broad but is indicative of the potential we see for your business over the short to medium term with significant upside potential," added Miles Pelham, chairman of the company.
Obtala shares were trading down 3.0% to 8.0 pence per share on Wednesday morning.
By Joshua Warner; joshuawarner@alliancenews.com; @JoshAlliance
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