HIGHLIGHTS
· Strong increase in crop as plantings mature and Bumi Mas enters Group
· 23% increase in crude palm oil production
· 10% reduction in average price of crude palm oil to US$663 per tonne
· Operating profit US$10.7 million, down US$6.9 million of which US$4.1 million unrealised foreign exchange loss
· Oil extraction remains at good levels
· 1,090 hectares of new planting, including smallholders
· Interim dividend of 5.00 pence per share (2017 – 5.00 pence per share)
Commenting on the results, the chairman of M.P. Evans, Peter Hadsley-Chaplin, said: –
“With crops 27% higher in the first half of 2018 than last year, the Group is visibly delivering the expected growth in crops as its young plantings mature and its hectarage continues to increase. Our production costs have fallen, but whilst lower CPO prices meant the increases in crops and production were not matched in the first half of 2018 by an increase in profit, the board is maintaining its interim dividend at 5.00 pence per share.”
Overview
Profit for the first half of 2018 was US$5.8 million against US$82.4 million for the first half of 2017. The main reason for the difference is that the result for 2017 included a profit of US$68.0 million relating to the disposal of the Agro Muko joint venture. Operating profit in the first half of 2018 was US$10.7 million compared with US$17.6 million in 2017, mostly reflecting an unrealised exchange rate loss as the Indonesian Rupiah weakened against the US Dollar.
A substantial growth in crop led to a 23% increase in production of crude palm oil (“CPO”) and an even greater increase in production of palm kernels. However, this underlying increase in production was more than offset by a 10% fall in the commodity price of CPO and that of palm kernels, and an increase in the Group's stocks during the first half of 2018. This contrasted with a reduction in stocks during the equivalent period in 2017. Profit margins from the Group's mills remained at good levels, similar to those in 2017.
Oil-palm fresh fruit bunches (“ffb”) on the Group's own areas increased by 27% to 270,700 tonnes, those in the smallholder co-operatives by 40% to 72,400 tonnes. This increase included the contribution of the Bumi Mas project acquired in December 2017. The general increase in crops throughout South East Asia resulted in some pressure on prices. The average price of CPO (cif Rotterdam) was US$663 per tonne during the first half of 2018, US$72 (or 10%) lower than in the same period in 2017.
The Group has continued to implement its strategy to focus on developing and operating majority-held plantations. At the beginning of January 2018, it took operational control of the estates at Bumi Mas acquired at the end of December 2017. The plantings here have excellent potential. However, as can occur, introduction of the Group's management led to some disruption as the workforce was required to adapt to the Group's high agronomic and operating standards. A labour dispute was successfully settled and the estate is being brought up to Group standards. This affected production during the first half of 2018, but crop is projected to rise strongly during the second half of the year. Bumi Mas is expected quickly to contribute to the anticipated acceleration of future growth in Group crops, currently led by its existing young projects in Bangka and at Kota Bangun.
In Musi Rawas, there has been continued good progress with new planting. A total of 980 hectares were planted, 690 of which were for the Group and 290 for the smallholder co-operatives. Planting has reached a conclusion in Bangka. Whilst the Group will continue opportunistically to acquire incidental hectarage, the planting on this project can now be considered complete. Also in Kota Bangun, planting of the Group's original area is all but complete, but here the Group will be able to plant a small additional area recently acquired nearby. In total, during the first half of 2018 the Group newly planted 760 hectares for itself and 330 hectares for smallholder co-operatives. At the end of June 2018, the Group operated 37,800 hectares of oil palm and a further 11,700 hectares on behalf of smallholder co-operatives attached to its projects: a total of 49,500 hectares.
Dividends
The board proposes to pay an interim dividend of 5.00 pence per share. It has previously announced its intention to increase or at least to maintain the level of normal dividends. Hence, barring unforeseen circumstances, shareholders can expect to receive total dividends of at least 17.75 pence per share in respect of the current year. The board believes the anticipated increase in yield from its young plantations, as well as the addition of Bumi Mas, is the basis for sustained future crop and revenue growth.
THE PALM-OIL MARKET
The CPO price (cif Rotterdam) closed the year 2017 at US$674 per tonne. The price then continued to move in a corridor between US$650 and US$700 per tonne for the first quarter of 2018. However, a rebound in production of palm oil in South East Asia and plentiful supply amongst all the world's major vegetable oils led to a weakening of future price expectations. Excepting a rally during the first part of May, the CPO price then fell from US$669 per tonne at the beginning of the second quarter to US$610 per tonne at the end of June. On average, the price of CPO during the first half of 2018 was US$663 per tonne compared with US$735 during the first half of 2017: a 10% fall. Notwithstanding significantly increased production, the low price of CPO and a pronounced discount to soybean oil led to palm-oil stocks falling by some 5% during the period. Since June 2018, the CPO price has further weakened before recovering to around US$560 per tonne.
During the first half of 2018, the price of palm kernels was much lower than during the equivalent period in 2017. This price movement reflects the unusual conditions for palm kernels – low stocks and a shortage of its main competitor, coconut oil – that persisted throughout much of 2017, notably in the early months of that year. The price of palm kernels fell sharply from March 2018 as supplies increased with the burgeoning global ffb crop.
RESULTS FOR THE PERIOD
Crops
The acceleration in the Group's crop growth that began in 2017 has continued into 2018, gathering momentum from the first to the second quarter of the year. In the first half, crops from the Group's own estates increased by 19%, in addition to which the Group added, for the first time, crops from Bumi Mas with the result that its own crop increased in total by 27% to 270,700 tonnes compared with 213,800 tonnes in the first half of 2017.
Performance has been strong across the Group's estates (see table below). As well as adding the crop from Bumi Mas, the Group has begun harvesting in its Musi Rawas project in South Sumatra. The only area in which crop has fallen is Simpang Kiri, where the Group is coming to the end of a planned replanting programme. This sacrifices crop in the short term in order to reduce the time to when the Group can benefit from the crop of younger palms from better seeds. The Group does not have a mill at Simpang Kiri, so is freed from the consideration of having to maintain mill throughput during a period of replanting.
As described in the 2017 annual report, a rebound in crop was anticipated in 2018 in the estates at Kota Bangun in East Kalimantan, which had suffered from an unusual combination of conditions in 2017 which were not expected to persist. Crop from these estates increased by 22% compared with the first half of 2017, demonstrating that the final echoes of the 2015-16 El Niño have died away. There is potential to improve on this result. The dramatic increase in crop put pressure on harvesting capacity and the availability of vehicles to transport crop from the field to the mill. The Group plans to construct more bunds (earthen embankments) to protect the estates from the Mahakam river when in flood, and manage the flow of water through the estate from neighbouring higher ground.
Crops in Bangka have continued to rise on the back of excellent rainfall, but this area is prone to intermittent dry spells and so crop here may prove to be more volatile in future than that in the Group's other areas. Crop from Bumi Mas was below potential during the first half of 2018, as the Group took operational control of the estate and began to introduce new operating procedures and new staff and management.
The level of crop from the smallholder co-operatives attached to the Group's projects rose even more strongly than crops in the Group's own areas: the 72,400 tonnes from these areas was 40% ahead of those in 2017. In addition to the increase in crops processed by the Group from its own areas and those of the smallholder co-operatives, the Group was able to maintain the significant volume of ffb bought in from third parties, notably in Bangka. This mill was designed to handle the Group's and smallholder co-operatives' crop at the point these plantings reach peak yield; until then the mill has spare capacity, which is being profitably used by buying in ffb from third parties.
Crop on the Group's 38%-owned associated-company estate, Kerasaan, was 21,600 tonnes during the first half of 2018, similar to that in the previous year.