Obtala Limited (AIM: OBT), the African focused agricultural and forestry company, is pleased to announce the first step in the expansion of its Timber Trading Division.
In June 2017, Obtala acquired WoodBois International ApS (‘WoodBois’). Since its founding in 2004, WoodBois has generated over $135m in cumulative revenue trading timber primarily sourced from a network of over 100 African suppliers. WoodBois have always maintained a diversified trading portfolio, with sales by customer, geography, and species shifting year to year with the market. As a result, the business has experienced only one default (a single container sent during the financial crisis). We were delighted to have acquired an exceptional trading business and management team.
Since the completion of the WoodBois acquisition, Obtala has been learning how to best drive profitable growth of WoodBois’ trading business. Since 2013, WoodBois’ profits from timber trading had been diverted towards financing timber production in Gabon. Without reinvesting profits into the pool of available trading capital, trading revenues had remained flat in the $15-19m range, less than 0.5% of our estimate of the total market size for African timber exports. According to FAOSTAT, over $770m of sawn wood and $230m of veneer and plywood were exported from the Ivory Coast, Gabon and Cameroon alone in 2016.
Obtala saw an opportunity to dramatically grow WoodBois’ trading revenues by providing the business with an external trade finance facility (trading capital). Trade finance allows for a higher volume of business by ‘freeing up’ capital otherwise tied up in the form of inventory in warehouses or containers at sea. As announced in our Q3 2017 update, we have been in discussion with a number of parties to provide such a facility. During these conversations we learned that as a result of Basel III Banking Supervision measures, traditional banks are generally no longer providing commodity trade finance at affordable rates due to the greater amount of capital they must hold against commodity exposure. According to the African Development Bank’s Trade Finance in Africa survey report released in October 2017, the resulting value of the trade finance ‘gap’ in Africa remains significant at an estimated $91bn in 2014. This despite the estimated default rate on trade finance transactions being half the average of all bank asset classes.
Obtala’s discussion with trade finance providers have primarily been with funds, some of whom are funded by social impact investors with the shared aim of addressing the trade finance gap for African enterprises. We have found that structured commodity trade finance is typically priced at 12-18%, with equipment finance over 20% with less than 1 year duration. As these discussions have moved forward and preparations for the implementation of an external facility have been put in place (e.g. increasing insurance coverage at our warehouse and signing a new trade credit insurance policy), as announced on 2 January 4, 2018 the Board decided to raise a separate or ‘internal’ pool of loan capital in order to complement the proposed external facility. There are funding gaps in any external trade finance facility (even fully insured receivables cannot be funded 100%) which our own separate pool of loan capital can cover. It also provides an opportunity for the Group to develop the internal risk management discipline and processes which can help raise additional loan capital and bring down the cost of these funds, both internal and external, over time.
On 2 January 2018, Obtala announced it had secured an initial $1m of loan capital at an 11.5% annual interest rate to complement the external facility we are preparing to implement. This initial amount demonstrates senior management’s personal commitment to each stage of the Group’s fundraising and comes with a commitment to develop market leading policies and procedures to manage it.
Additional trade finance is just the first step in unlocking the potential of our timber trading division. Management has also been deepening relationships with our key suppliers and trading partners, identifying the most profitable trades and markets to develop in order to maximize our return on capital. We expect 2018 to be an exciting year for our timber trading division as we begin to increase our share of the growing African export market.
Miles Pelham – Chairman
Martin Collins – Deputy Chairman
|+44 (0)20 7099 1940|
|Northland Capital Partners Ltd (Nomad and Joint Broker)|
|+44 (0)20 3861 6625|
|Brandon Hill Capital (Joint Broker)|
Beaufort Securities Limited (Joint Broker)
|+44 (0)20 3463 5000|
+44 (0)20 7382 8300