R.E.A. Holdings PLC Annual Financial Report 2020
- Limited Covid-19 effect on operations; revenues increased and FFB crop consistent with previous years
- Steady recovery and firm CPO prices with corresponding improvement in group's financial performance
- Revenue up 11 per cent to $139.1 million (2019: $125.0 million)
- Cost of sales reduced by 10 per cent to $110.2 million (2019: $121.8 million) in part reflecting a full year of the cost saving initiatives implemented in previous year
- EBITDA more than doubled to $36.8 million and cash generated doubled to $53.6 million
- Pre-tax loss significantly reduced to $23.2 million (2019: loss of $43.7 million), after non-recurring impairment and similar charges of $9.5 million (2019: $3.3 million)
- Repayment date of £30.9 million nominal of 8.75 per cent sterling notes extended from 2020 to 2025
- $7.5 million of loan from DSN converted to equity in REA Kaltim and repayment date of balance of loan of $11.1 million postponed from 2020 to 2025
- Advanced stage discussions to replace outstanding bank loans to REA Kaltim and SYB with new term loans of longer duration, substantially increasing the net bank funding available to the group over the next three years
- Group net indebtedness reduced from $207.8 million in 2019 to $189.4 million in 2020
- FFB production of 785,850 tonnes (2019: 800,666 tonnes) despite excessively wet weather and Covid-19 related travel restrictions impacting harvester availability in peak cropping months
- Third party FFB of 185,515 tonnes (2019: 198,737 tonnes)
- Pressure on CPO extraction rates from adverse Covid-19 impact on progress of mill works and sub-optimal loose fruit collection in the peak crop period, with average extraction rate of 22.5 per cent (2019: 23.0 per cent)
Stone and coal interests
- Arrangements progressing for quarrying of the andesite stone concession (held by local partner, ATP) to produce crushed stone for a neighbouring coal company road through the group's estates, for local government projects and for other local users of crushed stone
- With better coal prices and Covid-19 concerns subsiding, activity at the Kota Bangun coal concession (held by local partner, IPA) resumed with the contractor aiming to commence operations later in 2021
- Revenue from IPA coal operations also expected in 2021 from shipping coal on behalf of other coal concessions through IPA's port
- Group aiming to recover its loans to the coal concession holding companies and to withdraw from its coal interests as soon as practicable
- Unmeritorious arbitration claims against IPA dismissed and indemnity costs awarded to and recovered by IPA
- CPO prices expected to remain firm at or around current levels with growth in global demand for vegetable oils outstripping the growth in supply
- Annual capital expenditure to be maintained at recent more moderate levels; 2021 expenditure to be concentrated on completing expansion of the group's newest oil mill and extension planting of remaining small pockets of land available in existing estates
- Firm CPO prices and steady operational performance underpinning the group's improving financial position and outlook
- Financing options, including equity, equity-linked instruments and trade finance, being explored to strengthen the balance sheet
- Preference dividends arising in 2021 to be paid during the year with the group aiming progressively to catch up preference dividend arrears as soon as circumstances prudently permit
2020 was a year of two halves. While operationally, satisfactory crop yields were achieved, the sharp fall in the market prices of CPO and CPKO immediately following the onset of the Covid-19 pandemic had a significant negative impact on results for the first half. As prices steadily recovered through the second half, there was a corresponding improvement in financial performance.
Operationally, the impact of Covid-19 on the group has been limited. The group experienced delays in deliveries of some supplies, as well as travel restrictions that prevented or delayed employees and contractors from returning to the estates. Changes to work practices, on-site testing of employees and other preventative measures, as recommended in the Indonesian government's guidelines, have been introduced and it is pleasing to report that, to date, only some 0.2 per cent of the work force has been infected with Covid-19, the majority with no serious symptoms as categorised by the Indonesian health department.
Climatic factors and respect for the environment are integral to the operations of an agricultural group and the directors are conscious of, and seek to mitigate as far as possible, the impacts of climate change. For some years the group has been monitoring and publishing its carbon footprint calculated by using PalmGHG, a tool developed by the Roundtable on Sustainable Palm Oil. For 2020, emissions are now disclosed under "Sustainability" in the "Strategic report" of the annual report in accordance with the recently implemented Streamlined Energy and Carbon Reporting rules ("SECR"); emissions under PalmGHG as well as SECR will continue to be published on the group's website at www.rea.co.uk.
After an encouraging start to the year, the CPO price fell sharply to a low of $510 per tonne, CIF Rotterdam, in mid May, reflecting the dramatic slowdown in world demand as a result of Covid-19. The recovery in the second half of the year saw prices closing the year at $940 per tonne as a result of restocking in India and China and reduced production in the major producing countries.
Unfortunately, producers were not able to realise the full benefit of the price increase as the Indonesian government made changes to the export levy scale in order to fund continuing subsidies to Indonesian manufacturers of biodiesel, who were under pressure from relatively low crude oil prices, and to support measures designed to benefit the oil palm industry.
Notwithstanding the impact of export duty and the increased export levy (as set out in the company's press release in December 2020), gross margins in 2020 were a considerable improvement on 2019. The average selling price for the group's CPO in 2020, on an FOB basis at the port of Samarinda, net of export levy and duty, was $558 (2019: $453) per tonne. The average selling price for the group's CPKO, on the same basis, was $601 (2019: $533) per tonne.
Despite the impact of delayed crop ripening and excessively wet weather in the second half of the year, as well as some shortfall in the availability of harvesters who were unable to travel to the estates due to Covid-19 related travel restrictions, the group achieved a good production outcome in 2020. FFB at 785,850 tonnes were slightly short of the total for 2019 of 800,666 tonnes, producing a yield per mature hectare of 22.6 tonnes (2019: 24.2 tonnes). Third party harvested FFB was similarly impacted in 2020, with FFB totalling 185,515 tonnes compared with 198,737 tonnes in 2019.
CPO production totalled 213,536 tonnes in 2020 compared with 224,856 tonnes in 2019, reflecting both the lower level of FFB and lower extraction rates. CPO extraction rates, which averaged 22.5 per cent for the year compared with 23.0 per cent in 2019, were squeezed by a combination of delays in completing scheduled works in the mills and some inefficiencies in loose fruit collection during the peak crop period in the latter months of the year. The mill works were delayed by a shortage of spare parts and the unavailability of contractors during the worst periods of the Covid-19 pandemic. Production of both CPKO and palm kernels fared better by contrast at, respectively, 16,164 (2019: 15,305) tonnes and 47,186 tonnes (2019: 46,326).
Revenue for 2020 amounted to $139.1 million, approximately 11 per cent higher than the $125.0 million for 2019, reflecting the higher prices for CPO and CPKO during the second half of the year. With a full year's benefit of the cost saving initiatives implemented during 2019, cost of sales was successfully reduced by some 10 per cent to $110.2 million compared with $121.8 million in 2019. These improvements led to a doubling of earnings before interest, taxation, depreciation and amortisation ("EBITDA") to $36.8 million in 2020 (2019: $18.2 million) and a significant improvement in the operating result, a profit of $8.8 million in 2020 (2019: loss of $9.1 million).
Finance costs for the year totalled $23.1 million compared with $31.9 million in 2019, although the comparison is distorted by exchange rate movements (arising in relation to sterling and rupiah borrowings) which produced a loss of $0.3 million in 2020 compared with a loss of $8.6 million in 2019. Moreover, additional finance costs of $2.2 million were incurred in 2020 in connection with the extension of the repayment date of the £30.9 million 8.75 per cent sterling notes from 2020 to 2025. Excluding such movements, with the reduction in average borrowings between 2019 and 2020, finance charges were slightly lower in 2020 at $20.6 million against $23.3 million in 2019.
Impairment costs, consisting principally of provisions against costs of transferring land to smallholder schemes and expenditure on a land allocation that has been relinquished and therefore written off, amounted to $9.5 million compared with $3.3 million in 2019. In consequence, the group made a loss before tax of $23.2 million compared with $43.7 million in 2019.
Immediate cash constraints and the prospect of the very significant debt repayments falling due in 2021 and 2022 caused the directors again to defer payment of dividends on the preference shares.
Group equity (including preference share capital) at 31 December 2020 totalled $225.8 million compared with $239.7 million at 31 December 2019. The group's local partner in REA Kaltim supported the group in increasing the equity of REA Kaltim during 2020, converting $7.5 million of loans to REA Kaltim into new equity. Similar changes to the capital structures of CDM, KMS and SYB resulted in new equity being contributed by the minority shareholders of those subsidiaries resulting in an overall increase in the equity of REA Kaltim and its subsidiaries of $9.9 million. As a result, non-controlling interests at 31 December 2020 amounted to $20.0 million compared with $13.0 million at 31 December 2019.
Current liabilities shown by the consolidated balance at 31 December 2020 amounted to $113.1 million, reflecting the inclusion of amounts totalling $30.5 million of loans from the group's Indonesian bankers, PT Bank Mandiri (Persero) Tbk ("Mandiri"), to SYB and KMS that would have been classified as non-current liabilities were it not for certain breaches by those companies of loan covenants applicable at the balance sheet date. Mandiri has subsequently waived the breaches in question.
Bank indebtedness was reduced by $15.8 million in 2020, although the reduction was in part financed by increased pre-sale advances from customers against forward sale commitments of CPO and CPKO. As at 31 December 2020, net indebtedness amounted to $189.4 million, compared with $207.8 million at 31 December 2019.
Proposals are currently under discussion with Mandiri whereby the existing Mandiri loans to REA Kaltim and SYB would be repaid and replaced with new loans to those companies. The working capital facility provided to REA Kaltim would also be repaid and replaced with two new annual revolving working capital facilities. The new term loans would provide additional funding to the group and would be repayable over a period of eight years while the new working capital facilities would be renewable annually. The proposals are subject to approval by the credit committee of Mandiri. If approved, net bank funding available to the group over the three years to end 2023 would be substantially increased.
Concurrently with the discussions with Mandiri, the directors have been exploring other financing options, including equity (in the form of ordinary or preference shares), equity linked instruments and trade finance with the aim of strengthening the group's balance sheet and addressing the arrears of preference dividend.
Provided that CPO prices remain at current levels, the directors believe that cash flows are currently adequate to support payment of the current year's preference share dividends but, pending greater certainty on future cash flows, they are not yet in a position to provide guidance regarding payment of the arrears of preference dividend, which now stand at 18p per share. The directors recognise the importance of paying these arrears and will aim progressively to catch up such arrears as soon as circumstances prudently permit.
The group aims to recover its loans from the coal concession holding companies and to withdraw from its coal interests as soon as practicable. Following a recovery in Indonesian coal prices, activity is now resuming at the Kota Bangun coal concession held by the group's local partners in its stone and coal interests with a view to commencing operations later in 2021. Additional revenues are expected to accrue to the concession holding company, PT Indo Pancadasa Agrotama ("IPA"), from fees charged to two neighbouring coal concessions that are planning to ship coal through IPA's port, as well as potentially through the sale of building sand recovered from the overburden that will be removed when mining recommences.
During 2020, the stone concession holding company entered into an agreement with a neighbouring coal company to supply andesite stone for a new road to be built by the coal company through the group's estates. After being put on hold for much of the year due to Covid-19, road building works are now being progressed. For both the coal mining and stone quarrying projects, it is intended that the appointed contractors will fund the required development expenditure in exchange for a participation in the profits from the mine or quarry.
The first few months of 2021 have seen continuing firm CPO prices. At reference prices (being prices broadly equivalent to CIF Rotterdam prices) between $770 and $1,000 per tonne, an Indonesian exporter of CPO receives, after deduction of export duty and levy, substantially the same net price per tonne. However, the CPO price, CIF Rotterdam, currently stands at $1,240 per tonne and exporters benefit from approximately half of the excess of this price over $1,000. With these good prices, the group's financial position and outlook continues to improve. Production is at good levels, and maintenance and completion of repair works throughout the operations should enhance efficiencies between the estates and mills leading to improving extraction rates. Whilst some capital expenditure will necessarily be incurred on replacement of plant, replanting of the oldest plantings and limited extension planting, completion of the extension of the group's newest mill, which was delayed by the Covid-19 pandemic, will ensure that the group continues to have sufficient processing capacity for the foreseeable future. With better cash flows, the group looks forward to strengthening the group balance sheet and addressing the arrears on the preference dividend.
David J BLACKETT