R.E.A. HOLDINGS PLC (the “company”)
ANNUAL FINANCIAL REPORT 2021
The company's annual report for the year ended 31 December 2021 (including notice of the annual general meeting to be held on 9 June 2022) (the “annual report”) will shortly be available for downloading from the group's website at www.rea.co.uk.
A copy of the notice of annual general meeting will also be available to download from the Investors section (under Calendar) of the website.
Upon completion of bulk printing, copies of the annual report will be despatched to persons entitled thereto and will be submitted to the National Storage Mechanism to be made available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
The sections below entitled “Chairman's statement”, “Dividends”, “Principal risks and uncertainties”, “Viability statement”, “Going concern” and “Directors' responsibilities” have been extracted without material adjustment from the annual report. The basis of presentation of the financial information set out below is detailed in note 1 to the financial statements below.
HIGHLIGHTS
Overview
- Return to profitability in 2021 and payment of preference dividends resumed
- Higher average selling prices for CPO and CPKO: increased by, respectively, 37 per cent and 88 per cent to $777 per tonne (2020: $566) and $1,157 per tonne (2020: $615)
Financial
- Revenue increased by 38 per cent in 2021 to $191.9 million (2020: $139.1 million)
- EBITDA more than doubled to $75.8 million (2020: $36.8 million)
- Group net indebtedness reduced from $189.4 million in 2020 to $175.7 million in 2021
- Dollar note maturity extended by four years to 30 June 2026
- New Indonesian bank facilities secured with longer maturities and lower interest rates
Agricultural operations
- FFB production of 738,024 (2020: 765,821)
- CPO extraction rate averaging 22.4 per cent (2020: 22.5 per cent)
- Expansion of SOM complete, ensuring sufficient processing capacity for foreseeable future
Stone and coal
- In principle agreement for sale by ATP of 1 million cubic metres of andesite stone to neighbouring coal company over 24 months with quarrying expected to commence in 2022
- Coal mining operations recommenced at IPA's Kota Bangun concession and first 3 coal shipments totalling 94,500 tonnes completed to date in 2022
- Group expecting early recovery of coal loans and to withdraw from coal interests as soon as practicable
Sustainability
- Increased score in the SPOTT assessment by the Zoological Society of London of 84.4 per cent, up from 79.8 per cent (ranked 8th out of 100 companies assessed)
- Independent review of strategy and practices commissioned to evaluate and address climate related risks and opportunities and develop roadmap for further reducing GHG emissions
- Pilot projects established to provide financing and training for smallholders to improve productivity, traceability of FFB supply chain, encourage diversification, and reduce pressure on forests outside the group's concessions
- Platinum certificate awarded by Ministry of Manpower for the group's Covid prevention and control programme
Outlook
- CPO prices firm in the first quarter of 2022 and projected to remain at remunerative levels
- Resumption of extension planting and further replanting of older areas in 2022 to enhance agricultural operations
- Programme to increase durability of roads based on stone to be provided by the ATP quarry
- Third methane capture plant to be constructed at SOM to improve carbon footprint and further reduce dependence on diesel for transport and electricity generation
- Healthy margins again improving the financial position in 2022, despite significant potential inflationary costs, particularly for fertiliser
- Longer term, expansion of planted hectarage and progressive reduction in net indebtedness placing the group on a solid footing for the future
CHAIRMAN'S STATEMENT
2021 was a transformative year for REA. The group saw a return to profitability, resumed payments of current dividends on the preference shares and started to make payments in respect of the dividend arrears on the preference shares. In addition, the group successfully replaced all its bank facilities with new facilities for longer maturities and at lower rates of interest. 2021 also saw the recommencement of coal mining operations at the Kota Bangun concession held by a local company to which the group has extended loans.
Fortunately, the disruptions of Covid to the group's operations have been limited. The group's vaccination and testing programmes continue at a pace with almost 14,000 vaccination doses being administered during 2021. These programmes are continuing through 2022 with second and third vaccine doses now being administered.
The group remains committed to ensuring that its environmental, social and governance (“ESG”) practices meet the evolving challenges of climate change and biodiversity loss and can deliver sustainable growth for the benefit of all stakeholders into the future. In the 2021 annual Sustainable Palm Oil Transparency Toolkit (“SPOTT”) assessment by the Zoological Society of London, the group increased its score from 79.8 per cent to 84.4 per cent and ranked 8th out of the 100 participants assessed against 182 ESG indicators.
Monitoring and reporting its greenhouse gas (“GHG”) emissions have been central to the group's sustainability credentials for over ten years. In addition to the disclosures of emissions in accordance with the Streamlined Energy and Carbon Reporting rules (“SECR”), Taskforce on Climate-related Financial Disclosures (“TCFD”) are now also included in the annual report.
The group is committed to adopting an open approach to recruitment, promotion and career development irrespective of age, gender, national origin or professional background. Substantial progress has been made in implementing this open approach to diversity as evidenced by the composition of the group board, Indonesian subsidiary boards, senior management and the recent establishment of a diversity, equality and inclusion committee.
Following the growth in the group's agricultural production in the first half of the year, there were some setbacks during the second half. In particular, above average rainfall and the number of rain days made harvesting and crop evacuation difficult. These delays were exacerbated by delays in road maintenance and upkeep with some roads being impassable for considerable periods of time.
Some crop was lost as a result of the previously reported fire in one of the two boilers at the Perdana oil mill (“POM”). Further, while crop levels were higher in the second half of the year than the first, the normal higher peak levels expected in the last quarter of the year were not as significant as expected. Reports of similar experiences were common throughout East Kalimantan, reflecting delayed fruit ripening, most likely caused by reduced hours of sunlight consequent upon the number of rain days.
The reinstatement work to the boiler at POM should be completed towards the end of 2022. In the meantime, the expansion of the Satria oil mill and maintenance works at the Cakra oil mill are near completion ensuring that the group has sufficient capacity to process all its FFB crops for the foreseeable future.
Crops harvested during the year amounted to 738,024 tonnes, some 4 per cent below the level achieved in 2020 of 765,821 tonnes. The crop yield per mature hectare was 20.7 tonnes compared with 22.0 tonnes in 2020. Crops harvested by third parties amounted to 210,978 tonnes compared with 205,544 tonnes in 2020.
With slightly lower crop levels, production of CPO was also marginally down on the previous year and totalled 209,006 tonnes (2020: 213,536 tonnes). Whilst considerable effort was made during the year to improve CPO extraction rates, the overall result was 22.4 per cent, marginally lower than the result achieved in 2020 of 22.5 per cent, reflecting the generally lower quality of processed fruit because of the delays in harvesting and crop evacuation. Production of CPKO and palm kernels amounted to 17,361 tonnes and 44,735 tonnes, respectively, similar to the production levels achieved in 2020 of, respectively, 16,164 tonnes and 47,186 tonnes. Oil extraction rates for palm kernels and CPKO were again similar to those achieved the previous year at 4.8 per cent and 39.5 per cent respectively.
CPO prices remained firm throughout 2021 aided by a shortage of foreign labour in Malaysia and a lack of growth in Indonesian production. The CPO price, CIF Rotterdam, opened the year at $1,050 per tonne and closed at $1,275 per tonne after reaching a high of $1,425 per tonne at the end of October. The benefit of these higher prices was partially offset by the significant levels of export duty and levy imposed by the Indonesian government in 2021.
The group's average selling price for CPO during 2021, including the premia for certified oil, but net of export levy and duty, adjusted to FOB Samarinda, was $777 per tonne, some 37 per cent higher than that obtained in 2020 of $566 per tonne. The group's average selling price for CPKO on the same basis was $1,157 per tonne, an increase of 88 per cent on the average 2020 price of $615 per tonne.
Revenues increased by 38 per cent in 2021, totalling $191.9 million compared with $139.1 million in 2020, reflecting the considerably higher selling prices more than offsetting the slightly lower production volumes. Estate operating costs were some 17 per cent higher compared with 2020, primarily due to increased fertiliser applications in 2021(including a delayed fertiliser application postponed from 2020) and the additional costs incurred for harvesting and evacuating crops as a result of the high rainfall and consequent poor condition of estate roads and normal road upkeep programmes being severely delayed.
Earnings before interest, taxation, depreciation and amortisation (“EBITDA”) amounted to $75.8 million for 2021, a $39.0 million improvement on the 2020 comparative of $36.8 million. EBITDA in the second half of the year was $48.1 million, significantly higher than in the first half ($27.7 million) reflecting the weighting of the group's crops to the second half of the year and the higher selling prices obtained during that period. Profits before tax amounted to $29.2 million compared with a loss of $23.3 million in 2020 although the loss incurred in 2020 included impairments and similar charges of $9.5 million.
Shareholders' funds less non-controlling interests at 31 December 2021 amounted to $225.6 million compared with $226.8 million at the end of 2020. Non-controlling interests at 31 December 2021 totalled $20.8 million (2020: $19.0 million).
Total net indebtedness was reduced from $189.4 million at 31 December 2020 to $175.7 million on 31 December 2021. The reduction of $13.7 million was due to the increase in cash of $35.1 million and repayment of loans to non-controlling shareholder and related parties of $5.0 million, set against an increase in bank borrowings of $27.0 million.
The group successfully negotiated the provision of new banking facilities with its Indonesian bankers, PT Bank Mandiri (Persero) Tbk (“Mandiri”). The new facilities provide for increased borrowings, longer maturities and lower rates of interest. The group has also reached understandings with its principal customers on the continued availability of pre-sale advances at levels that are satisfactory to the group.
Following the 2021 year end, proposals were submitted to the holders of what were then the company's 7.5 per cent dollar notes 2022 to extend the maturity date of the notes by four years, but on terms whereby the group would purchase, on the existing maturity date of 30 June 2022, any notes held by those holders who do not wish to retain their notes for the extended period and that have not already been on sold to new or other existing noteholders. It is the intention to sell any notes purchased by the group in this way as and when market conditions allow. The noteholders approved the proposals and they became effective on the 3 March 2022. The number of notes, if any, to be purchased by the group will be known on 21 June 2022.
Coal mining operations at the PT Indo Pancadasa Agrotama (“IPA”) concession in Kota Bangun recommenced at the end of 2021. Two initial coal sale contracts, together amounting to 61,500 tonnes, were shipped during the first quarter of 2022, and a third contract of 33,000 tonnes has been shipped in April. Regular monthly shipments are now planned for the rest of 2022. Based on current selling prices and costs, such sales may result in a profit contribution of in excess of $200 per tonne to be shared between IPA and its contractor in the proportion 70:30. The rapid extraction of coal at IPA encourages an expectation of significant near term recovery of the group's loans to IPA. It remains the directors' intention that the group should withdraw from its coal interests as soon as practicable.
An in principal agreement between the stone concession holding company, PT Aragon Tambang Pratama (“ATP”), and a neighbouring coal company was signed towards the end of 2021. The agreement provides for the sale, over a period of 24 months, of 1 million cubic metres of andesite stone by ATP to the coal company for the construction of a new road to be built by the coal company from its coal concession area through the company's estates and on to the Mahakam River. ATP will also supply stone for other infrastructure projects, including all weather roads in the group's agricultural operations. Negotiations for the appointment of a contractor to operate the quarry are being finalised and quarrying is expected to commence later in 2022.
The payment of dividends on the company's 9 per cent cumulative preference shares was resumed in June 2021. In addition to the payment in December 2021 of the current preference share dividend of 4.5p per share, a further 1p per share was paid in respect of the cumulative arrears then outstanding of 18p per share. It is the directors' intention that, in addition to paying the preference dividends accruing in respect of 2022, the company will also pay not less than 10p per share of the remaining 17p arrears of dividend during 2022.
On behalf of the board of directors, I would like to record our thanks to Ms Irene Chia who, for health reasons, retired at the end of 2021 after 10 years of service as a non-executive director of the company. Ms Chia's wide experience of business in South East Asia and independence of thought will be much missed. The company intends to appoint during the course of 2022 a new director who ideally will be resident in South East Asia.
CPO prices have continued to be firm in the first quarter of 2022 with CIF Rotterdam prices reaching a high of $1,990 per tonne in March and currently trading around $1,720 per tonne. At such levels, the group should continue to generate healthy margins after Indonesian export duties and levies and thereby further improve its financial position. The group does face significant potential inflation in costs, particularly in relation to fertiliser, but nevertheless expects to benefit from strong cash generation in its operations during 2022. The position should be further improved by loan repayments from IPA and, following the commencement of stone quarrying operations, from ATP.
The group intends to enhance the agricultural operations by resuming extension planting and further replanting of older areas where crop yields are no longer sufficient to generate acceptable margins. The resultant prospect of longer term increases in crop, coupled with the expected progressive reduction in net indebtedness, should place the group on a solid footing for the future.