R.E.A. Holdings Plc – Annual Financial Report

HIGHLIGHTS

 

Overview

 

  • Production and revenue saw a progressive improvement in 2017, which is continuing into 2018 
  • Significant plantation disposal recently announced

 

Financial
 

  • Revenue up 26 per cent to $100.2 million (2016: $79.3 million) reflecting initial impact of operational improvements to restore yields to historic norms
  • Cost of sales increased to $86.3 million (2016: $71.8 million) primarily due to expenditure on rehabilitation of the mature estates and increased cost and volume of third party fruit purchases
  • Pre-tax losses of $21.9 million (2016: $9.3 million), mainly due to increase in the value of the group's sterling notes arising from exchange fluctuations, resulting in a charge of $4.8 million in 2017 (2016: credit of $10.5)
  • Balance of 2017 dollar notes ($20.2 million) and 2017 sterling notes (£8.0 million) repaid
  • Sale of 2022 dollar notes held in treasury and placing of preference shares together raising $18.0 million

 

Agricultural operations
 

  • Increased production of 530,565 tonnes of FFB, up 13 per cent (2016: 468,371 tonnes), benefiting from improvements in harvesting, infrastructure and field management practices
  • Increase in third party FFB purchased to 114,005 tonnes (2016: 98,052 tonnes)
  • Consistently improved CPO extraction rates averaging 23 per cent
  • 1,248 hectares of extension planting

 

 

Sale of subsidiary

 

  • Agreement reached on 25 April 2018 for sale of REA Kaltim's 95 per cent shareholding in PBJ to Kuala Lumpur Kepong Berhad; proceeds estimated at $85 million gross or approximately $57 million net of external debt repayments and selling expenses
  • Divestment serves to benefit capital structure by reducing indebtedness and by relieving the group of the further investment that would be required to take the PBJ estates to full maturity;  it will also defer for at least three years the need for a further group oil mill
  • No material negative impact on group's immediate profit outlook as the majority of the plantings at PBJ are immature

 

Stone and coal operations
 

  • Plans to reopen coal concession at Kota Bangun progressed with conclusion of arrangements to acquire loading point and conveyor with permitting now in hand to allow mining operations to recommence
  • Limestone quarry operations commenced
  • Discussions regarding the development of the andesite stone concession continuing
     

Organisational changes 
 

  • Appointment of Carol Gysin as group managing director in February 2017 and several senior management changes implemented
  • Completion of relocation of Indonesian administrative offices to a single location in Balikpapan

 

Outlook
 

  • The recovery seen in 2017 anticipated to strengthen further in 2018 with crop levelsand yields returning closer to historic norms
  • FFB for the four months to April 2018 expected to be around 200,000 (2017: 159,706)
  • Divestment of PBJ to enable group to concentrate operations on the remaining plantation areas in near contiguous locations
  • Coal activities expected to provide cash flows going forward

 

 

CHAIRMAN'S STATEMENT

 

2017 saw the beginnings of a much needed recovery in the group's operations.  Following changes to staffing and staff responsibilities in both estates and mills and with the estates beginning to benefit from the enhanced fertiliser programmes initiated in 2016, harvesting, field management practices, mill efficiency and road maintenance all progressively improved over the course of the year.

 

Total revenue for the year increased to $100.2 million from $79.3 million in 2016. Operating losses were reduced to $2.2 million compared with $5.0 million in 2016. Although the loss before tax increased to $21.9 million compared with $9.3 million for 2016, this was principally the result of a negative swing from year to year of $15.3 million in mark to market movements on the group's foreign currency liabilities, with a charge to profits of $4.8 million in 2017 compared with a credit of $10.5 million in 2016. In addition, and as previously reported, a one off charge of $1.1 million was incurred in 2017 as a result of staff changes arising from the reorganisation of the group's Indonesian offices.  By contrast, the results for 2016 benefited from a one off receipt of $1.1 million received in respect of tax refunds.

 

Fresh fruit bunches (“FFB”) harvested increased by 13 per cent in 2017 to some 530,000 tonnes, compared with 468,000 tonnes in 2016.  This reflected an 8 per cent increase in mature estate hectarage and an improvement in FFB yields to 15.6 tonnes per mature hectare in 2017 from 14.9 tonnes in 2016. There was a similar increase in the volume of purchases of FFB from smallholders and other third parties: 114,000 tonnes in 2017 compared with 98,000 tonnes in the previous year.  Crude palm oil (“CPO”) production in 2017 totalled 144,000 tonnes, compared with 128,000 tonnes in 2016, with CPO extraction in the latter part of 2017 running at consistently higher average rates than in 2016 and the early months of 2017.  The better performance reflected recent mill refurbishment works, a rigorous maintenance programme, as well as an improvement in the quality of FFB being processed. CPO and crude palm kernel oil (“CPKO”) yields of, respectively, 3.6 and 0.3tonnes per mature hectare were achieved during 2017 compared with, respectively, 3.4 tonnes and 0.3 tonnes per hectare in 2016.

 

The CPO price, CIF Rotterdam, had a strong start to the year rising from $790 per tonne at the beginning of January to a high of $857 per tonne on the back of generally lower production before declining to a low of $640 per tonne reflecting increasing stock levels and expectations of significant production growth in the second half of the year. The price closed at the end of the year at $670 per tonne and has traded in the range $640 to $710per tonne in 2018 to date.  Prices are currently at $640 per tonne. Consumption growth and weaker soybean production in South America appears likely to support prices around these levels.

 

Progress with development of both PT Putra Bongan Jaya (“PBJ”) and PT Cipta Davia Mandiri (“CDM”) was slower than expected in 2017.  Weather conditions throughout the year hampered extension planting in PBJ and a review of the programme for CDM resulted in a decision to cancel planting of some 1,000 hectares that had been originally planned so as to concentrate on larger, near contiguous blocks as well as to reconsider the status of the conservation reserves. Planting in PBJ and CDM combined amounted to some 1,161 hectares in 2017, with the balance of the targeted 3,000 hectares carried over to 2018.

 

Plans to reopen the group's coal concession at Kota Bangun were progressed during 2017 leading to the conclusion by the group, in April 2018, of arrangements to acquire an established loading point on the Mahakam River, together with a coal conveyor that crosses the group's concession and runs to the loading point.  This acquisition is an essential prerequisite to efficient evacuation of coal from the Kota Bangun concession.  With it concluded, the group is applying for the requisite permits to recommence mining operations and to sell the previously mined coal currently held in stockpile.  Discussions regarding the development of the group's andesite stone concession continue.

 

The group further addressed its funding arrangements during 2017, raising monies from the sale of the $7.2 million of 2022 dollar notes held in treasury, the issue of 8.4 million new £1 cumulative preference shares and the completion of the arrangements agreed with the group's new local partner in 2016.  In addition, revolving working capital facilities were rolled over for a further 12 months at the end of July 2017.  All of the outstanding $20.2 million of 2017 dollar notes and the outstanding £8.0 million of 2017 sterling notes were repaid in June and December 2017 respectively.

 

Further to the statement in the group's half yearly report published in September 2017 regarding a potential divestment of certain outlying plantation assets, the group reached an agreement on 25 April 2018 for the sale of its PBJ subsidiary.  Completion of the sale, which is subject to shareholder approval, is expected to take place later in 2018 and will result in group indebtedness being reduced by the bank borrowings in PBJ and a cash inflow to the group provisionally estimated at $57 million. The PBJ estate is located some distance from the group's principal estates and would, in the near future, have required the construction of a new mill and other infrastructure for harvesting and processing crop.  Divestment of PBJ will therefore both reduce the funding required for the group's immediate development programme and permit the group's management to focus on a geographically more compact area of operations.

 

The proceeds from the divestment of PBJ will principally be applied in reducing group indebtedness.  Coupled with the funding actions taken over the last two years, this divestment leaves the group in a stronger financial position.  It will permit the group to operate with significantly reduced indebtedness and, at the same time, to proceed quickly to develop suitable areas of its remaining undeveloped land bank.  Following the completion in 2017 of the agreements for the transfer to SYB of fully titled land areas held by PU, the remaining developable land bank following the sale of PBJ is currently estimated at about 10,000 hectares.  The immediate impact on production of the sale of PBJ will be immaterial as the majority of this estate is not yet mature.

 

In view of the results for 2017, the directors have concluded that they should not declare or recommend the payment of any ordinary dividend in respect of the year.

 

The recovery in group operations that began in 2017 has continued into 2018, with production in March demonstrating a noticeable upturn, against a background of generally poorer cropping in East Kalimantan. The positive trend has continued into April, with daily cropping rates suggesting an FFB crop for the month approaching 60,000 tonnes (2016: 32,070 tonnes).  Higher production combined with increases in mill efficiency should result in further progress in the group's operational performance during the current year.

 

The improvements to the group's balance sheet that will follow from the divestment of PBJ and a resumption of coal revenues should help the group accelerate development of its land bank.  With CPO prices expected to remain around current levels, the prospects for the group are more encouraging than they have been for some years.

 

 

DIVIDENDS

 

The fixed semi-annual dividends on the 9 per cent cumulative preference shares that fell due on 30 June and 31 December 2017 were duly paid.  In line with previous indications and in view of the financial performance during  2017, the directors have concluded that, as previously announced, they should not declare or recommend the payment of any dividend on the ordinary shares in respect of 2017. 

 

As previously indicated, if crops continue to recover as expected, prices for the group's palm products are maintained at around current levels, the sale of PBJ is successfully completed and the coal operations start to generate suitable returns, the directors intend to resume the payment of ordinary dividends.  However, the programme of development of the group's land bank remains ongoing and will require further significant capital expenditure.   The need to fund such expenditure will necessarily influence the rates at which the directors feel that they can prudently declare, or recommend the payment of, ordinary dividends over the next few years.

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