M.P. Evans Group Plc – Final Results

HIGHLIGHTS

Financial

−  Profit for the year US$7.2 million on lower palm-oil prices (2017 US$95.0 million, including US$68.0 million profit on sale of share in Agro Muko joint venture)

−  Operating profit US$19.5 million after uncrystallised foreign exchange loss of US$4.1 million

−  Continuing EPS 9.9 US cents (2017 – 41.8 US cents)

−  Proposed to maintain final dividend at 12.75p per share

Indonesian palm oil

−  Group crops increased 32% to 573,000 tonnes

−  Costs down by 14% to US$320 per tonne of palm product including depreciation and regional overheads

−  Group's high agronomic standards introduced at Bumi Mas, acquired in December 2017

−  Record production of crude palm oil: up 25% to 192,500 tonnes

−  77% of palm oil operations are RSPO certified with expectation of near 100% by 2023

−  Mill-building programme continuing

−  New planting of 1,500 hectares for Group; 600 for smallholders

−  Palm-oil price recovering in 2019

Group value

−  Net current assets of US$43.0 million at 31 December 2018

−  Group equity value of £11.33 per share at 31 December 2018

Commenting on the results, Peter Hadsley-Chaplin, executive chairman of MP Evans, said: “A record year for production of crude palm oil, which increased by 25%, but even this combined with falling costs could not outweigh a year of significantly lower palm-oil prices, so profit for the year fell to US$7.2 million.”

Results

Whilst 2018 marked another record year for crops and production, profit was lower than in 2017 in the face of a weak crude palm oil (“CPO”) price, especially during the second half of the year. Operating profit was US$19.5 million compared with US$34.0 million in the previous year, as lower operating costs per tonne of production were not enough to outweigh the reduction in the price of CPO. Furthermore, the Group incurred both a deferred-tax charge and a translational foreign-exchange loss in the year.  There was no repeat in 2018 of the US$68.0 million profit recorded in 2017 on selling the Group's Agro Muko palm-oil joint venture. Overall, profit for the year fell to US$7.2 million (2017 US$95.0 million).

Dividend

An interim dividend of 5.00p per share (2017 – 5.00p per share) was paid on 2 November 2018.  No special dividend was paid in 2018 (2017 – 10.00p per share) but the board is recommending a final dividend of 12.75p per share (2017 – 12.75p per share). This maintains dividends for the year in respect of normal operations at 17.75p per share.

Whilst, most unusually, the proposed dividend for the year is not covered by earnings, the board proposes this year to maintain its long-standing policy of a progressive dividend given the strong increase in crop and production projected over the coming years. The board's intention continues to be, where possible, to maintain or increase its normal dividend in future years. It 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 in 2018 was US$598 per tonne, 16% lower than the US$714 in 2017. The fall in price was concentrated during the second half of the year as a widespread surge in production of CPO coincided with plentiful supplies of competing vegetable oils. This led to a significant build-up of CPO stocks and downward pressure on prices. Despite measures introduced by Indonesia to stimulate the production of domestic biofuel using palm oil, year-end world stocks of palm oil reached a record level of 15.1 million tonnes. However, the price of CPO had reached a low point of US$440 per tonne in the middle of November before climbing strongly to finish the year at US$508 per tonne. The price of palm-kernel oil, and hence that of palm kernels which the Group sells, experienced similar pressures but without the mitigating use of the oil as a feedstock for biofuel production. As a result, the price received by the Group for palm kernels in 2018 fell by 28% compared with the previous year.

Strategic developments

The Group has become well established as a producer of sustainable Indonesian palm oil. During 2018, the Group continued to consolidate its position in line with its strategy of controlling all its operations and wherever possible milling its own crop of fresh fruit bunches (“ffb”). The Group already has three mills: at Pangkatan, Bangka and in Kota Bangun, which are all certified by the Roundtable on Sustainable Palm Oil (“RSPO”). A second mill in Kota Bangun is being constructed and is expected to go into operation at the end of 2020. It will be followed by new mills at Bumi Mas and Musi Rawas, so that by the end of 2023 the Group plans to have six mills in operation where, little more than ten years earlier, it had only a single mill at Pangkatan. In this way the Group is extracting the best possible returns from its land and oil-palm plantings, increasing value for shareholders.

Currently, 77% of the Group's production is certified sustainable palm oil. This percentage will rise as the Group constructs its own mills and works with third-party smallholders wanting to supply it with ffb to achieve certification by the Roundtable for Sustainable Palm Oil (“RSPO”). Before the end of 2023, the Group anticipates that all of its production, other than from Simpang Kiri (too small an estate to warrant construction of a mill), will be certified sustainable.

The Group's strategy of controlling all its operations means it is best able to draw on its excellent operational management team, with a proven track record of developing and improving estates in the most effective, productive and sustainable way. A strong balance sheet enables the Group to maintain its planned programme of investment in development projects notwithstanding a cyclical fall in the price of CPO. The need to build roads, permanent housing and water-management infrastructure, quite apart from the construction of mills, represents a significant commitment for a number of years after the palms in its new projects are planted. A strong balance sheet also allows the Group to acquire incremental hectarage for planting around its existing projects, or to provide working capital loans to support the creation or extension of smallholder co-operative areas attached to its own hectarage.

Operational developments

The Group's crops increased by 32% in 2018; by 48% on the smallholder areas attached to its new projects. This maintained the momentum experienced during the first half of the year as the Group increased the areas of palms being harvested and its existing areas continued to mature, giving rise to higher yields. The increase in crops was concentrated in the newer estates at Kota Bangun and Bangka. The latter in particular had a very strong year, with crops increasing by 48% in the Group's area and 41% in the associated smallholder co-operatives. The Group also benefited from the crop harvested at Bumi Mas, the estate in East Kalimantan acquired in December 2017, and the first full year of harvesting at Musi Rawas in South Sumatra. Allowing for a small fall in ffb bought from third parties, the Group processed 27% more crop than in the previous year.