Wed, 27th Apr 2016 07:00
27 April 2016
Obtala Resources Limited
("Obtala", the "Group" or the "Company")
Strategy Update - April 2016
Obtala Resources Limited (AIM:OBT), the African focused agricultural and forestry business, today provides a strategy update and outlook guidance on its businesses in Africa.
· Confidence in forward looking sales pipeline leads to overall strategy of reinvestment
· Commitment to the building of a cash buffer and, in time, direct shareholder returns
· Additional export orders in pipeline for timber products
· New fresh vegetable pack house in Tanzania completed and operational
· Rollout of 'Mama Jo's Fresh' fruit and vegetable outlets in Tanzania
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. It is the intention of the Company to enter into a defined strategy of re-investment within the following indicative parameters:
Reinvestment for revenue growth 60-75%
Accumulation of cash buffer for contingencies 5-20%
Return to shareholders 5-20%
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 2-5 year time horizon. 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 also anticipates the creation of a cash buffer from future retained profits primarily to insure against contingencies but, once a comfortable level is secured, to take advantage of growth opportunities without requiring the Company to seek further external investment.
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. 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. Metrics such as the Obtala's EV/EBITDA compared to market peers will be assessed and the decision will be announced at the appropriate time. This is not anticipated to be in the immediate future.
As the Company transitions from asset building to increased production, confidence has grown regarding our outlook for sustainable revenue generation. As such we believe it is appropriate that this be communicated to investors. It is important to recognize that this guidance is subject to execution risk and may change based on varying market conditions, which are beyond our control.
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.
As per the announcement made on 4 April 2016, the farm projects are operational with the completion of a fresh vegetable packing facility. The drive remains towards building an export business with the focus initially on sweet melon and butternut squash. The initial target market is the Middle East owing to the close proximity, good shipping transit times and freight costs.
1. Banana Plantation
This remains a key target growth project for the Company and we plan for experts to be on site in mid- to late May, once the seasonal rains end. The objective over the near term will be the production of a phased land development program. Once the ground assessment plan is completed, we expect to begin development of the land and first planting. A banana pack house and associated infrastructure will be required for each 100-150 hectare block of established plantation with banana, typically, taking 12+ months to bear fruit for sale. Over a 4 - 5 year period we see annual turnover from the banana plantations reaching in excess of $5 million.
2. Fresh Produce (Export)
We currently have, amongst other crops, c.500 tonnes of mixed melon varieties and butternut at various growth stages in the fields to be harvested over the next couple of months. We anticipate that approximately c.40% of our produce will be considered export quality and shipped to confirmed buyers through our offtake agreement with CMF. Trial container shipments are temporarily suspended at the farm until the seasonal rains end, within the next two to three weeks, to ensure a high quality product is delivered to the customer. We anticipate that based on these initial orders we will establish plant to order farming programs for a number of clients based on their seasonal requirement and over the next 4 -5 years we anticipate annual turnover from fresh produce exports in excess of $3 million.
3. Fresh Produce (Domestic sales)
Domestic sales continue in Dar-es-Salaam; the main target market for the non-export grade melon and butternut together with other crops being cultivated. In anticipation of these increased volumes available for domestic sale we have launched a 'Mama Jo's Fresh' venture to maximize profits for non-exportable quality produce. The concept is 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. The target will be open additional outlets once the concept is operational and proven. To support our own produce, we will buy-in additional crops from out-growers and contracted farmers to offer a basket of staple requirements. We are targeting turnover from domestic sales of fresh produce to reach some $2 million annually over the next 4 - 5 years.
4. Mama Jo's Dried Fruit
We now have everything ready in terms of certification and packaging options, and are working with suppliers in Europe, Middle East and Asia to secure orders for our dried produce. We are targeting building annual turnover in excess of $2.5 million over a 4 - 5 year time horizon.
5. Sauces (Mama Joes branded)
Production of the Mama Jo's sauce range has been suspended whilst the manufacturer's production facility is re-located, upgraded and achieves the required level of internationally recognized food safety standard and certification. When additional capital is available to invest in a coordinated sales and marketing campaign we will take a decision on re-starting production. There are no forecasts for this business segment.
In addition to the orders recently received from China, Thailand, Vietnam and South Africa, which the Company is now fulfilling, there is also further qualified interest both domestically, in South East Asia and in the Middle East. To fulfill the growth in order volumes the Company has increased its investment in drying facilities, with large scale drying sheds under construction, as well as increased harvesting and production facilities. 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. Specifically, new heavy equipment including forklifts, trucks, trailers, new saw mills and drying kilns. We expect turnover from the forestry division to build to in excess of $8m per annum over the next 4 - 5 years.
African Home Stores
The Company is currently considering various options with regard to our African Home Stores franchise, including active dialogue with 2 different potential buyers. Given the advanced nature of these discussions, it is inappropriate to include this business segment within our continuing forecasts. Any disposal is not expected to materially change the Company's financial position.
The Company currently has cash balances of $1.1m as of 27 April 2016 and has no imminent large ticket operational items to fund having fully paid for the Tanzanian fresh packing house, refrigerated container units, substantial packaging materials; and drying shed construction and heavy plant equipment purchases in Mozambique
The Company will continue to seek investors into its forestry investment vehicles and use proceeds for capex to achieve blue-sky ambitions. The Company remains debt-free.
Miles Pelham, Chairman of Obtala commented, "After several years of significant investment in the building and successful build up of our agricultural and forestry platforms and our recent focus on international business development and marketing it is extremely rewarding to see the solid levels of customer demand for our produce. The confidence we have leads us to believe that ongoing re-investment of a significant portion of short and medium-term profits will generate even greater returns in addition to the Company building a cash buffer and making direct returns to shareholders. I am strongly committed to enhancing shareholder value by monetising the substantial capital investment made into our African ventures in recent years.
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".
Obtala Resources Limited
Miles Pelham - Chairman Kevin Milne - Deputy Chairman
Simon Rollason - Managing Director
+44 (0)20 7099 1940
ZAI Corporate Finance Limited (Nomad)
+44 (0)20 7060 2220
Brandon Hill Capital (Broker)
+44 (0)20 3463 5000