HIGHLIGHTS
Financial
· Operating profit up 72% to US$34.0 million
· Profit for the year US$94.4 million (2016 US$35.3 million), including profit on discontinued operations US$68.0 million
· Continuing EPS up 83% to 40.7 US cents (2016 – 22.3 US cents)
· Reduction in Malaysian property-development profit
· Net current assets of US$92.4 million as at 31 December 2017
· Proposed final dividend of 12.75p per share
Indonesian palm oil
· Record production of crude palm oil (“CPO”): up 23% to 154,000 tonnes
· Acquisition of new 10,000-hectare project (Bumi Mas)
· Group crops increased 9% to 435,000 tonnes
· Crop growth held back by flooding in East Kalimantan
· New planting of 2,200 hectares for Group; 1,000 hectares for smallholders
· Planting at Musi Rawas reached 5,200 hectares: more than half way to expected total
· Sales begun of bio-electricity to Indonesian grid
Malaysian property
· 40 hectares of golf-course land released for development
· Sale of 383 developed properties as property market slowed
Group valuation
· Directors' estimate of Group equity value at 31 December 2017, based on independent valuation, of £10.96 per share
Commenting on the results, Peter Hadsley-Chaplin, executive chairman of MP Evans, said: “I am pleased to report a record year for crops, production and profit, with operating profit rising by 72% to US$34 million. During 2017, the Group also took a significant step forward in executing its strategy by acquiring a new 10,000-hectare project in East Kalimantan. The Group's plantings have an average age of only seven years, underpinning an upward trend in crop that is expected to last until the end of the next decade.”
Results
The Group is able to report a record year for crops, production and profit. A marked increase in production of CPO in the face of very similar prices and cost of production led to an increase in operating profit to US$34.0 million, a 72% increase compared with US$19.7 million achieved in 2016. Results from discontinued operations, namely the Group's Agro Muko palm-oil joint venture, contributed another US$68.0 million to the record profit for the year. Total profit for the year amounted to US$94.4 million.
Dividend
An interim dividend of 5.00p per share (2016 – 2.25p per share) was paid on 3 November 2017. Above its previously announced intention, the board is recommending a final dividend of 12.75p per share (2016 – 12.75p per share). This brings dividends in respect of normal operations to 17.75p per share (2016 – 15.00p per share), an 18% increase.
The board paid a special dividend of 10.00p per share in April 2017 on completion of the sale of the Group's interest in Agro Muko; a special dividend of 5.00p per share was paid in 2016. Hence, subject to shareholder approval, total dividends in respect of 2017 will amount to 27.75p per share (2016 – 20.00p per share) resulting in dividend payments to shareholders of more than US$20 million for the year.
The board's intention continues to be to maintain or increase its normal dividend in future years. The board believes the anticipated increase in yield from its young plantations and the acquisition of Bumi Mas provide a basis for sustained future crop growth and, hence, enhanced dividends.
Palm-oil market
The average price of CPO was US$714 per tonne during 2017, a little higher than the US$700 in 2016. Overall, the price weakened during the year as supplies of palm oil increased in response to the recovery in crops throughout South East Asia after the El Niño. Towards the end of 2017, however, the CPO price began to recover as stocks were rebuilt and the discount to other vegetable oils increased, making CPO more attractive to buyers. The price for palm kernel oil, which directly affects the price of palm kernels sold by the Group, was exceptionally high in January 2017. This level was not maintained and, after a marked dip in the middle of the year, returned to more normal levels during the last quarter. On average, the price of palm kernels sold by the Group was very similar to that in 2016. The Group was able to continue selling its sustainable palm oil and palm kernels at a premium.
Strategic developments
In 2017, the Group consolidated its position as the producer of a single commodity in a single country: Indonesian palm oil. It continues to be the Group's strategic objective to expand its production of sustainable palm oil, in a controlled fashion, from its own operations and those of its associated smallholder co-operatives. Following the successful disposal, in 2016, of its Australian cattle business and, in March 2017, of its share of the substantial Agro Muko palm-oil joint venture, the Group was able to announce, in August 2017, the acquisition of a new 10,000-hectare oil-palm project, PT Bumi Mas Agro (“Bumi Mas”). This was completed in December 2017. The Bumi Mas plantation consists mainly of young oil palms that will quickly contribute to the Group's crop, crude palm oil (“CPO”) production and cash inflow. In Malaysia, 40 hectares of valuable land from the golf course on the Bertam Properties Sdn Berhad project were approved for property development.
A strong balance sheet enables the Group to continue searching for environmentally-suitable plantation land to acquire, in line with its strategy. The Group regards areas of around 10,000 hectares as being an efficient size but will only expand at a rate that does not compromise its ability to deliver the operational excellence for which it has become known. Acquisition of a new project would further increase future projected crop and CPO growth that even now does not reach a peak until nearly the end of the next decade. In addition, the Group continues to negotiate for smaller pieces of land to add to its existing plantations at Kota Bangun in East Kalimantan, with a view to increasing this project from its current total of 15,100 hectares towards 20,000 hectares.
The strategy exploits the Group's excellent operational management team and proven track record of estate development and improvement. Even without a new acquisition, growth in crop from land already planted, or available to plant, for the Group or its smallholders, underlies its commitment to deliver good and improving results for shareholders.
Operational developments
The Group's crops increased by 9% during 2017; those of its smallholder co-operatives by a similar amount. This reflected strong growth in crops during the first half of the year as the palms recovered from the extreme dryness experienced in 2015-16, a consequence of an 'El Niño' weather pattern in South East Asia. As typically occurs, the El Niño gave way to a period of high rainfall and, in some cases, temporary flooding. On the Group's Kota Bangun estates, this meant the upturn in crops during the first half of 2017 was not maintained and this area recorded a small reduction in crop for the year as a whole compared with 2016. There were no such flooding issues on Bangka Island where crops increased by nearly half during the year. Especially noteworthy is the strong increase in crops bought in from third parties, notably on Bangka Island, enabling the Group to make profitable use of spare capacity in its mills. The Pangkatan group benefited from less extreme variation in weather and an increase in yield from recent replantings. Details of crops for 2017, with comparative figures for 2016, are set out below:-
|
|
|
2017 |
Increase/(decrease) |
2016 |
|
|
|
Tonnes |
% |
Tonnes |
|
Ffb crops |
|
|
|
|
|
Own crop |
|
|
|
|
|
Kota Bangun, East Kalimantan |
147,600 |
(3) |
151,700 |
|
|
Bangka |
90,200 |
48 |
61,100 |
|
|
Musi Rawas |
|
400 |
– |
– |
|
Pangkatan group |
157,400 |
6 |
149,100 |
|
|
Simpang Kiri |
38,900 |
4 |
37,400 |
|
|
|
|
434,500 |
9 |
399,300 |
|
Smallholder co-operative crops |
|
|
|
|
|
Kota Bangun, East Kalimantan |
60,500 |
(10) |
67,400 |
|
|
Bangka |
40,800 |
63 |
25,000 |
|
|
|
|
101,300 |
10 |
92,400 |
|
Outside crop purchased |
|
|
|
|
|
Kota Bangun, East Kalimantan |
16,800 |
(18) |
20,500 |
|
|
Bangka |
85,400 |
260 |
23,700 |
|
|
Pangkatan group |
16,100 |
106 |
7,800 |
|
|
|
|
118,300 |
128 |
52,000 |
|
Total crop |
|
654,100 |
20 |
543,700 |
Extraction of crude palm oil and palm kernels from fresh fruit bunches (“ffb”) continued at good levels. There was a small fall in extraction of CPO in Kalimantan, to 24.7%. The Group monitors carefully the performance of its mills against others and this dip was experienced by all other operators in the region, a consequence of high rainfall that followed the El Niño. A similar small reduction was experienced in the Pangkatan mill and in Bangka, although in the latter's case this is attributable to processing very high levels of third-party ffb, which is not of the same quality as that produced by the Group or its smallholder co-operatives. In respect of extraction rates, the Group continues to perform at a high level in comparison with its peers.
The Group is able to report a record year for CPO production, which reached 154,000 tonnes. The significant increase over the previous record of 126,000 tonnes, achieved in 2016, was due in part to the purchase of substantial quantities of ffb from third parties in Bangka. This used spare capacity in its mill which is temporarily available until the Group's own estates reach their maximum yields. Overall, the Group processed 20% more crop in 2017 than in the previous year. Whilst the Group does not have its own mill at Simpang Kiri, it has a contract to sell its ffb to a local mill based on the commodity price for CPO and an assumed rate of extraction. To reflect the substance of this arrangement, oil produced from Simpang Kiri's crop has been included in CPO production, and the comparative figure for 2016 has been amended to bring it in line with the new presentation. Details of production for 2017, with comparative figures for 2016, are set out below:-
|
|
|
2017 |
Increase/(decrease) |
2016 |
|
|
|
Tonnes |
% |
Tonnes |
|
Production |
|
|
|
|
|
Crude palm oil |
|
|
|
|
|
Kota Bangun, East Kalimantan |
55,600 |
(7) |
60,000 |
|
|
Bangka |
50,000 |
137 |
21,100 |
|
|
Pangkatan group |
39,800 |
10 |
36,200 |
|
|
Simpang Kiri |
8,600 |
4 |
8,300 |
|
|
|
154,000 |
23 |
125,600 |
|
|
Palm kernels |
|
|
|
|
|
Kota Bangun, East Kalimantan |
10,100 |
(8) |
11,000 |
|
|
Bangka |
11,700 |
154 |
4,600 |
|
|
Pangkatan group |
9,800 |
11 |
8,800 |
|
|
Simpang Kiri |
1,900 |
6 |
1,800 |
|
|
|
|
33,500 |
28 |
26,200 |
|
Extraction rates |
|
% |
% |
% |
|
Crude palm oil |
|
|
|
|
|
Kota Bangun, East Kalimantan |
24.7 |
(1) |
25.0 |
|
|
Bangka |
23.1 |
(1) |
23.3 |
|
|
Pangkatan group |
22.9 |
(1) |
23.1 |
|
|
Simpang Kiri |
22.3 |
– |
22.3 |
|
|
Palm kernels |
|
|
|
|
|
Kota Bangun, East Kalimantan |
4.5 |
(2) |
4.6 |
|
|
Bangka |
5.4 |
8 |
5.0 |
|
|
Pangkatan group |
5.7 |
2 |
5.6 |
|
|
Simpang Kiri |
4.9 |
4 |
4.7 |
|
The mills at Kota Bangun in East Kalimantan and in Bangka continue to produce bio-electricity from methane and also valuable compost from empty bunches and mill effluent, which the Group uses in its operations. For the first time, in 2017, the Group began selling surplus power to the Indonesian state electricity company.
The year saw good progress on planting. In total, the Group planted 2,200 hectares for itself and 1,000 hectares for its smallholder co-operatives during the year. Planting in South Sumatra at Musi Rawas has built up good momentum. This area accounted for 90% of the Group's new planting in the year as the estates at Kota Bangun and Bangka are now essentially fully planted. The project at Musi Rawas reached 5,200 planted hectares, including smallholders, by the end of 2017. This is more than half way to the expected total of 10,000 hectares. In North Sumatra, the accelerated replanting programme referred to in previous reports continues. At the end of 2017, including the purchase of Bumi Mas, the Group's share of subsidiaries' land had increased by 37% to stand at 33,000 hectares.
As noted in the Group's interim report, high levels of rainfall in East Kalimantan led to the northern bund on the Kota Bangun estates being overrun. This made it difficult to harvest low-lying areas. The bund has been repaired and is being strengthened to prevent future breaches. Some 580 hectares of planting carried out in 2016 behind the bund had to be replaced, delaying by 12 months the point at which it will come into harvesting.
Group valuation
Continuing development of the Group's Indonesian plantations has enhanced their US Dollar value during the year. Notwithstanding a decline in value of the US Dollar against Sterling, the Group's equity valuation remains at approximately £11 per share, based on an independent valuation of the Group's properties performed at the end of 2017.
Prospects
The board expects crops to continue rising, notably from its projects in East Kalimantan, Bangka Island and South Sumatra. The average age of the Group's palms following the purchase of Bumi Mas is now seven years. This young average age is expected to give rise to increasing crops as the palms mature from the Group's existing plantings and new planting on land it already controls, a trend that should last for another decade.
World production of CPO grew strongly in 2017 as the most recent El Niño receded, putting some pressure on prices and leading to an accumulation of stocks. In the longer term, insufficient levels of replanting in Malaysia and Indonesia are likely to curb growth in production. In the short term, uncertainty about the world trading regime may lead to greater commodity-price volatility. However, the board remains of the view that palm oil is well placed to benefit from rising global demand for vegetable oil and, therefore, that the outlook remains positive.
Peter Hadsley-Chaplin
Chairman