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Obtala - talk about a PR own goal: but still a BUY!

By HotStockRockets | Tuesday 4 July 2017

Disclosure: Financial Investigative Media Limited, which is not owned by Tom Winnifrith but by a trust for his dependants, owns shares in companies mentioned in this article. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

We cannot pretend that we are not a bit angry with Obtala (OBT) for the PR own goal it scored on Friday. The shares closed down 3.5% at 17.5-17.75p and are a buy at up to 20.5p but - as shareholders - we are pissed! The own goal is two fold:

1. The accounts are qualified albeit at a trivial level. How did the company manage this? It does appear to be a system failure of the former management team and Miles Pelham the new boss assures us it will not happen again and it is trivial. but it will not go down well.

2. Releasing results after hours on the last day allowed to avoid suspension is what shite companies do. Why? Pelham says the numbers were ready two months ago but that he spent 8 weeks arguing with the auditors about the qualification. That was, in our view, an error of judgement. We are assured that the plan is to have 2017 numbers out by Marcy 31 2018. We hope that happens.

So what is the qualification. It is two fold. The small but is that the auditor says it cannot verify $141,000 of cost of sales because - amazingly - Obtala had deleted all records relating to this. In the greater scheme of a company with net assets of $115 million this is trivial but the auditor is right and Obtala should just have blamed former bosses, took it on the chin and moved on.

The auditor says that it cannot say that the valuation of biological assets of c$174 million is definitely correct. Of course it cannot. How do you value such things? Nearology trade sales? The levels of recent investments in them? a DCF model? In which case what discount rate do you use? Ultimately that will always be a matter of opinion.

So what do the numbers look like? Not spectacular but the new regime only took control mid year. Sales were $600,000 down by a third and the loss was $5.3 million versus $14.8 million. Cash at period end was $3.4 million but Obtala saw an $18.25 million investment into Argento Preference shares - its forestry operation - post year end. The year end NAV was $115 million ( down from c $120 million).

In May of this year we saw the acquisition of Woodbois, a deal Pelham says will be shown to have been transacted on a PE of 1.

Historically we have supported Obtala as an asset play. The market cap is now £52 million (call that $66 million). Feel free to ignore the balance sheet value of the biological assets. Merely looking at the value of forestry based on recent trade investments - that underpins all of the current market cap. The non forestry ops, cash and Woodbois are in for free. That makes the shares cheap.

For 2017 we will see a business that will be by the second half profitable and cash generative. 2018 will see maiden FY profits - analysts forecasts sales of c£36 million, EBITDA of c£9 million and EPS of c 0.4p. We think that those numbers do not appreciate the Woodbois deal and so are too low. And thus plausibly this is a business on a 2018 EV/EBITDA multiple of between 3 and 4 which is clearly too low.

On Monday the company announced that the FD and Frank Scolaro ( the former boss turned NED) were leaving with immediate effect. The new regime has rightly pointed fingers and distanced itself from the PR shambles of last week.

Take advantage of the PR blunder. The stance is BUY at up to 20.5p with a target to sell of 30p.

This article first appeared on HotStockRockets - to catch the next red hot share tip from the HotStockRockets team out shortly as well as two SCORCHERS we tipped on FRIDAY 30th June, for just £5 click HERE

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