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Shares in first listed cocoa-growing specialist jump on debut

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Cocoa is coming home.

United Cacoa, with aims to be the world's biggest supplier of cocoa, is in Peru – where the tree originated - developing a plantation which is set to deliver its first beans next year.

And the homecoming is being welcomed by investors, to judge by the spurt in the shares on their first day of trading, above their flotation price of 128p, after being brought to market by Strand Hanson and VSA Capital in London, and Peru-based Kallpa Securities.

"It's nice to see there is some interest in something we hope will deliver value for investors, into the long-term," Dennis Melka, the United Cacoa chairman and chief executive, told as the shares touched 143p.

Tycoon in trees

It helps that Mr Melka, one of the few people able to call himself a serial plantations entrepreneur, has a record of making money for shareholders, having been the driving force behind Asian Plantations, the Malaysia-based palm oil group.

Asian Plantations, which listed in London in 2009 with a market value of £20m, completed its sale last month for £110m to Malaysia's Felda Global Ventures, having delivered investors an annual internal rate of return of 24%.

Like United Cacao, whose flotation gave it a stockmarket value of £23m, Asian Plantations also started with a few thousand unplanted hectares – which it grew to a 24,000-hectare holding at the time of sale, and with a palm processing mill on top.

Big money?

However, Mr Melka believes there is more than repeat business behind investor interest in Asian Plantations, with simple mathematics indicating the potential for profiting from cocoa.

The business plan, in back-of-the-cigarette-packet terms, goes as follows.

"Comparing cocoa with palm oil, for palm oil, you will get about 6 tonnes of oil per hectare, which, at a price of about $600 a tonne at the moment, gets you to revenues of about $3,500 per hectare," Mr Melka said.

"For cocoa, you produce about 3 tonnes per hectare, but at about $3,000 per tonne, meaning revenues of $9,000 per hectare."

With costs of about $8,500 per hectare to develop plantations, and with trees remaining at peak output for about 30 years before regrafting, the margins indeed appear significant.

United Cacao is working on a base case of net income of $6,500 per hectare at maturity which, with the group initially targeting 3,250 hectares of cocoa plantings, and with plantations groups typically trading at 15 times earnings equates to a market value of, well, some $300m (£190m).

'Extortionist export taxes'

Why such an opportunity has opened up is in part thanks to the focus on palm oil in many of the equatorial areas in which oil palm, cocoa and rubber trees compete for largely the same land.

Indeed, it is testament to the fragmentation of the industry that United Cacao can aim at being the world's biggest supplier with a targeted plantation area of 3,250 hectares, besides being the first stockmarket-listed, pure-play cocoa producer.

"Malaysian production is down, Indonesia is now importing cocoa," although this is a reflection too of a growing domestic processing industry too.

And in Africa, where Ivory Coast and Ghana between them produce 60% of world cocoa output, the incentive for producers to expand and exploit higher prices is being muted by the existence of state buying monopolies, besides what United Cacao terms "extortionist export taxes, which confiscate 40% of revenues in the 2014 growing season".

Mr Melka said: "Producers have to sell to the government. The only buyer is the state," opening up what he termed an "arbitrage" for growers able to tap world market prices directly.

'Porsche of cocoa'

Latin America - where Peru, where United Cacao is based, offers zero export taxes and, where the group operates, no corporate income taxes either - offers the natural outlet for developing cocoa plantations, he said.

Indeed, he termed Peru and neighbouring Ecuador the "Silicon Valley of cocoa" for their research into the bean, and development of varieties such as the CCN 51 type used by the group which is a "game changer".

"CCN 51 is the Porsche of cocoa," Mr Melka said, with good yield potential, and resistance to the diseases which have plagued some South American cocoa operations in the past.

'No such thing as a shortage'

And there is demand for extra cocoa production too, he said, flagging the potential for a step change if Chinese consumers gain the same sweet tooth as Western peers.

Chinese consumption, in cacao terms, at 0.05 kilogrammes per year, is 2% of that in the US, and 1% of that in Belgium or Switzerland, and is poised to make some attempt at a catch-up, rising 40% between 2013-18, Euromonitor believes.

Not that this means that the world will run out of cocoa, as recent headlines have warned of, prompting a warning from the International Cocoa Organization.

"There is no such thing as a shortage," Mr Melka said.

"What will happen is that the price will adjust to make the market in balance."

That would mean higher prices, of course, making United Cacao's business plan appear even more lucrative.


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