REG-R.E.A. Holdings plc R.E.A. Holdings plc: Half yearly results <Origin Href="QuoteRef">REAH.L</Origin> - Part 1
22/09/2017 07:06
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R.E.A. Holdings plc (RE.)
R.E.A. Holdings plc: Half yearly results
22-Sep-2017 / 07:00 GMT/BST
Dissemination of a Regulatory Announcement that contains inside information
according to REGULATION (EU) No 596/2014 (MAR), transmitted by EQS Group.
The issuer is solely responsible for the content of this announcement.
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R.E.A. HOLDINGS PLC (the "company")
HALF YEARLY REPORT 2017
The chairman, David Blackett, commented:
Operationally the group has turned around. The accompanying results reflect
the problems of the difficult past two years which are now largely behind us.
FFB production in the second half of 2017 is expected to be 50 per cent higher
than in the first half. Crops started to recover in May and the recovery has
been strengthening month by month since then, driven by improvements in
harvesting, the increased fertiliser programme and optimisation of field
disciplines. Incentive targets for harvesters are supporting the increase in
production while rehabilitation of infrastructure is improving field access
and crop evacuation. There should be further significant progress in 2018
with an FFB crop projected at comfortably over 700,000 tonnes against 468,000
tonnes in 2016.
Since revenues from additional crops and higher extraction rates fall largely
through to the bottom line, financial performance should mirror operational
performance with significantly better results in the second half of 2017 and
again better in 2018.
HIGHLIGHTS
Financial
* Revenues up 18 per cent to $46.3 million (2016: $39.3 million) reflecting
the recovery in operational performance in May and June and firmer selling
prices
* Cost of sales increased to $39.1 million (2016: $32.5 million) reflecting
increased volumes, increased payments for external FFB and investment in
rehabilitation of the mature areas
* EBITDA increased to $8.3 million (2016: $7.5 million), after $1.1 million of
one off costs related to staff changes and the reorganisation of Indonesian
offices
* Pre-tax loss of $15.7 million (2016: $5.2 million) - mainly due to
mark-to-market movements on foreign currency liabilities and produce stocks
* Average selling prices for CPO of $622 (2016: $516) and for CPKO of $1,290
(2016: $985)
* Two year refinancing of group indebtedness largely complete, with £8.3m
sterling notes due December 2017
Agricultural operations
* Improved crop in May and June contributing to increase in FFB to 241,235
tonnes (2016: 225,171 tonnes)
* Third party FFB of 52,780 tonnes (2016: 48,249 tonnes)
* Extraction rates slightly lower at 22.1 per cent (2016: 23.8 per cent),
reflecting harvesting and logistics difficulties in the first four months of
the period; rates improved in May and June
* Strong recovery in July and August: combined FFB of 95,000 tonnes (July and
August 2016: 45,000 tonnes) and extraction rate of 23.2 per cent
* Conclusion of PU land transaction
* After taking into account of adverse weather impact, revised target of 3,000
hectares of new plantings in 2017, with 1,000 hectares carried over to first
quarter of 2018
Stone and coal operations
* Operations started on limestone quarry adjacent to the PBJ property, with
12,000 tonnes of stone now delivered to the crushing facility at PBJ
* Arrangements proceeding for mining Kota Bangun coal concession and acquiring
port access for loading and barging, as well as sale of the existing coal
stockpile
Sustainability
* RSPO recertification of Cakra and Perdana oil mills achieved
* RSPO and ISCC surveillance audits completed successfully
* Third biennial sustainability report to be published shortly
Outlook
* Significant increase in crop production - combined crop for July and August
more than double the same period last year
* Expected FFB crop for 2017 around 600,000 tonnes (2016: 468,000 tonnes); in
excess of 700,000 tonnes in 2018
* Increasing revenues and improving extraction rates with a direct positive
impact on profits in second half due to fixed cost base
SUMMARY OF RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2017
6 months to 6 months to
30 June 30 June
2017 2016
$'000 $'000
Revenue 46,275 39,337
Earnings before interest, tax, depreciation and 8,348 7,477
amortisation
Loss before tax (15,708) (5,190)
Loss for the period (14,449) (4,437)
Loss attributable to ordinary shareholders (14,144) (7,911)
Cash (utilised)/generated by operations (799) 1,165
Loss per share (US cents) (34.6) (21.5)
INTERIM MANAGEMENT REPORT
Results
Salient items, group revenue and loss before tax for the six months to 30 June
2017, with comparative figures for 2016, were as follows:
6 months 6 months Year to
to 30 June to 30 June 31 December
2017 2016 2016
$'m $'m $'m
Mark-to-market items (6.0) 1.3 8.4
One off items (1.1) 1.1 1.1
_______ _______ _______
(7.1) 2.4 9.5
_______ _______ _______
Revenue 46.3 39.3 79.3
Other net costs (54.9) (46.9) (98.1)
_______ _______ _______
(8.6) (7.6) (18.8)
_______ _______ _______
Loss before tax (15.7) (5.2) (9.3)
_______ _______ _______
As reported under "Agricultural operations" below, the year 2017 to-date has
seen a progressive and marked recovery in operational performance and the
group is confident that this will continue. However, crops only started to
improve from May so that crops to end June were only slightly ahead of those
of 2016. With better prices largely offset by additional costs incurred on
rehabilitation of the mature areas and an increase of $1.8 million in the
depreciation charge, it was to be expected that the operating loss for the
first half of 2017 would be not dissimilar from that of the corresponding
period in 2016 and this proved to be the case.
The increased loss before tax principally reflected adverse movements between
the six months to 30 June 2017 and the corresponding period of 2016 of $2.2
million in respect of one off items and of $7.3 million in respect of mark to
market differences on foreign currency liabilities and produce stocks. The
one off item of $1.1 million in 2017 comprised costs related to staff changes
and the reorganisation of the group's Indonesian offices while 2016 benefited
from a one off receipt of $1.1 million booked in investment revenues.
Earnings before interest, depreciation, amortisation and tax amounted to $8.3
million for the six months to 30 June 2017 (2016: $7.5 million).
Specific components of the results
Cost of sales for the six months to 30 June 2017, with comparative figures for
2016, was made up as follows:
6 months 6 months Year to
to 30 June to 30 June 31 December
2017 2016 2016
$'m $'m $'m
Depreciation and amortisation 10.8 9.0 21.0
Purchase of external FFB 7.1 3.8 9.1
Estate operating costs 21.2 19.7 41.7
39.1 32.5 71.8
As noted in previous reports, the amendment of IAS 41 Agriculture effective 1
January 2016 has resulted in the discontinuation of the previous movement in
the fair value of biological assets and its replacement by a depreciation
charge. Whilst this change has no effect on the group's cash flows, it means
that the group now reports a depreciation charge that is higher and profits
that are lower than they would have been applying the previous accounting
provisions of IAS 41.
The increased cost of purchasing external fresh fruit bunches ("FFB")
reflected a slight increase in the volume purchased, the payment of higher
purchase prices than in 2016 and the payments of premia for better quality
FFB. The prices for third party fruit are set monthly by a local government
authority and are based on prices prevailing in the preceding month. In a
period of falling prices, such as occurred in the six months to 30 June 2017,
the prices set will be above prevailing spot prices. Margins earned by the
group on milling external FFB during this period were therefore lower than
normal.
The reported increase in operating costs of $1.5 million represented
additional expenditure on harvesting, road upkeep and weeding as part of the
work on the rehabilitation of the mature areas referred to above.
Administrative expenses at $7.3 million were much in line with the $7.2
million reported in 2016. The 2017 figure would have been lower were it not
for the one off costs already mentioned in relation to staff changes and the
combination of the former Jakarta and Samarinda offices into the group's new
office in Balikpapan.
Investment revenues in the six months to 30 June 2016 of $1.2 million included
interest of $1.1 million in respect of a tax refund. This was a one off item
and, as a result, investment revenues for the six months to 30 June 2017 were
substantially lower at $0.3 million.
Finance costs amounted to $13.5 million (2016: $4.9 million). A major
component of the increase was exchange losses of $4.2 million in 2017 (arising
from the strengthening of sterling and the rupiah against the dollar over the
first six months of 2017) against exchange gains of $2.1 million in 2016.
Interest incurred was also higher due to the combination of an increased level
of borrowings and a greater proportion of bank loans being denominated in
rupiah (with rupiah borrowings carrying interest at significantly higher rates
than dollar borrowings).
The tax credit for the six months to 30 June 2017 of $1.3 million has been
stated after providing $0.9 million against deferred tax credits previously
recorded against losses which may not now be capable of use prior to time
expiry and after deduction of a further $1.4 million in respect of interest
charges disallowed in certain of the Indonesian subsidiaries following the
recent introduction of legislation limiting the deductibility of interest.
Ordinary dividend
In line with previous indications and in view of the current financial
performance and the need to fund the continuing development programme that is
important to the group's future, the directors do not consider it appropriate
to declare an interim ordinary dividend in respect of 2017. If crops continue
to recover as expected, prices for the group's palm products are maintained at
around current levels and the coal operations start to return cash to the
group, the directors hope that the payment of ordinary dividends can be
resumed at an early date.
Agricultural operations
The key agricultural statistics were as follows:
6 months to 6 months to
30 June 30 June
2017 2016
FFB crops (tonnes)
Group harvested 241,235 225,171
Third party harvested 52,780 48,249
Total 294,015 273,420
Production (tonnes)
Total FFB processed 288,477 271,317
CPO 63,867 64,618
Palm kernels 12,776 12,967
CPKO 4,583 4,863
Extraction rates (percentage)
CPO 22.1 23.8
Palm kernel 4.4 4.8
CPKO 37.2 31.9
Rainfall (mm)
Average across the estates 2,034 1,574
As previously reported, the harvesting and transportation difficulties
experienced at the end of 2016 continued into the first half of 2017 but the
operating situation steadily improved over the period and this improvement is
continuing into the second half. Crops started to recover in May and
subsequent further recovery has been such that the combined crop for July and
August amounted to 95,000 tonnes against 45,000 tonnes in 2016. Third party
fruit purchases are also increasing.
Harvester numbers are now close to their full complement and more rigorous
incentive targets are supporting the drive to increase production. As
previously reported, increased fertiliser programmes were introduced into the
mature areas in 2016 and the benefit of these programmes and other measures to
optimise field disciplines, supported by advice from the recently engaged
agronomy adviser, are becoming progressively evident.
Action to strengthen the group's road infrastructure is steadily improving
access to the mature areas and evacuation of harvested crop to the group's
mills. Out of a total of some 244 kilometres of main roads and collection
roads, 120 kilometres are targeted for resurfacing in the coming months.
Mill extraction rates to June 2017 reflect the harvesting and transportation
difficulties of the first four months of the year but are also recovering.
The CPO extraction rate for July and August combined was 23.2 per cent.
Works to improve the resilience of the group's newest mill at Satria and to
refurbish the last of four boilers in the older mills are now expected to be
completed by mid 2018. Existing processing capacity is sufficient for the
group's own processing requirements and to process expected crops from
smallholders; the works currently in hand should ensure that there is adequate
processing capacity at least until 2019 when a further mill is envisaged at
PBJ.
The CPO price, CIF Rotterdam, started the year in strong fashion rising from
$790 per tonne at the beginning of January to $857 per tonne by the middle of
the month on the back of generally lower production. Thereafter, with stock
levels increasing and expectations of significant production growth in the
second half of the year, the price drifted downward reaching a low point of
$645 at the end of June. Subsequent indications that production in the second
half of 2017 may be less buoyant than initially expected have been accompanied
by some recovery in the price to its current level of $737 per tonne and may
be expected to support the price remaining at this level into 2018.
CPKO prices in January maintained the exceptionally high premia over CPO
experienced in the last quarter of 2016, reaching a price of $1,800 per tonne,
CIF Rotterdam, at the end of January. Prices then declined to approximately
$1,000 per tonne in late June before recovering to a current level of $1,300
per tonne, reflecting concerns at the continued inadequacy of supplies of
coconut oil for which CPKO can be a substitute.
The average selling price for the group's CPO for the six-month period to 30
June 2017, on an FOB basis at the port of Samarinda and after payment of
export imposts, was $622 per tonne (2016: $516 per tonne). The average
selling price for the group's CPKO on the same basis was $1,290 per tonne
(2016: $985 per tonne). In addition, the group was able to realise a premium
of $5.20 per tonne on 14,536 tonnes of CPO sold as ISCC certified and a
premium of $50 per tonne on 1,500 tonnes of CPKO sold under the mass balance
system during the half year to 30 June 2017.
Development work at PBJ and CDM was hampered by the weather conditions in the
first half of 2017 as extension planting at both estates, planned to occur
predominantly in lower lying areas, had to be delayed until consistently drier
weather would permit bunding for flood control to be completed. With drier
weather settling in since August, construction of the bunding on the north
west section of PBJ is expected to be completed within the next few weeks.
Bunding at CDM is also progressing well. In both cases, the new bunding is to
the same specification as the previously constructed bunding at PBJ that
proved completely effective throughout the heavy rains of the first half of
the year.
The group had planned to plant 4,000 hectares across the PBJ and CDM estates
during 2017, but the speed at which this planting can be completed will be
dependent upon weather conditions and, as respects a limited portion of the
area, resolution of certain land matters. The group has now set a target of
completing 3,000 hectares in 2017 and the balance of 1,000 hectares in the
first quarter of 2018.
Cumulative development to 30 June 2017 is detailed below:
Six months
to 30 June
2017
Hectares
Cleared, not yet planted at 1 January 2017 1,581
Cleared during the period 393
Cleared, not yet planted at end of period (1,733)
_______
Planted during the period 241
_______
Sales of renewable energy to PLN, the Indonesian national electricity company,
for distribution to local villages amounted to over $305,000 in the six month
period to the end of June 2017 (2016: $278,000) with household take-up
continuing to grow each month.
Implementing agreements were executed in July 2017 in respect of the
arrangements that were finalised late in 2015 to sell land held by the group's
subsidiary company, SYB and acquire land held by PU. The agreements provided
that SYB transfer to an Indonesian company, PT Ade Putra Tanrajeng ("APT"),
land areas of 3,554 hectares held by SYB that overlap with mineral rights held
by APT. In exchange, ownership of PU, an associate of APT that holds 9,097
hectares of fully titled agricultural land, would be transferred to SYB and
its local partner. The transfer of the PU shares has now been completed (with
SYB taking 95 per cent of the shares) and APT and its associates have been
granted access to the SYB mining overlap areas pending the transfer of land
titles relating to those areas which will be completed in due course.
SYB now has full legal access to this additional land bank and plans to
establish nurseries on the PU land and to negotiate compensation arrangements
with local villages that have land overlapping the PU area, in preparation for
the planting out of areas designated for oil palm development.
Stone and coal operations
The limestone quarry adjacent to the group's PBJ property commenced operations
in May 2017 and some 12,000 tonnes of stone have been delivered to the
crushing facility that has been established on PBJ's land. Crushing
operations commenced in early September. A proportion of the crushed stone is
to be purchased by PBJ for road hardening, which is due to begin later in
2017, and the balance sold to third parties.
Further consideration is being given to the development of the group's
andesite stone concession with a recent feasibility study indicating a reduced
upfront cost of opening a quarry at this concession of some $3 million and the
prospect of a payback in a few months. The group remains of the view that
there is local demand for stone in the volumes that the feasibility study
assumes. For the moment, to the extent that any further capital is to be
committed to its stone and coal operations, the group is giving priority to
the reopening of its coal concessions, as it believes that these offer greater
certainty of quicker returns with lower risk than the andesite concession.
Of the group's two coal concessions, the most important is the Kota Bangun
concession as this principally contains high value semi-soft coking coal which
is currently in good demand. The group is at an advanced stage in discussions
with the owners of an adjacent mine and the local Indonesian authorities with
a view to acquiring from the adjacent owner and relicensing an established
loading point on the Mahakam River, together with a coal conveyor crossing the
group's concession and running to the loading point. At the same time, the
group is seeking to obtain rights to use the adjacent mine to access coal on
the border of the group's concession. Dewatering has been deferred pending
completion of these discussions but can start immediately they are
successfully concluded. The group is also taking steps to complete the sale
of the existing coal stockpile at the concession of some 16,000 tonnes, as
soon as access to the loading point on the Mahakam has been confirmed.
Efforts are continuing to conclude arrangements in respect of the group's
Liburdinding concession similar to those applicable to the Kota Bangun
concession whereby a third party would mine on a basis that would give the
group a guaranteed minimum revenue. Past discussions with potentially
interested parties have proved abortive but it is hoped that, with coal prices
now at much better levels than for some time, a potentially interested party
that is currently undertaking a limited drilling programme on the concession
will be willing to proceed to an agreement following completion of that
drilling.
Sustainability
The group's third sustainability report will be published shortly and will be
available for download from the group's website: www.rea.co.uk. This report
monitors the group's progress in meeting its sustainability commitments and
describes in greater detail environmental and social challenges faced by the
group through 2015 and 2016.
After a delay of over a year following the RSPO recertification audits
conducted in May 2016, the outstanding certificate for Cakra oil mill ("COM")
was finally issued by the certifying body in August 2017. This means that
both of the group's older mills, Perdana oil mill ("POM") and COM, which are
subject to audits every five years under the RSPO system, are now successfully
recertified. The newer Satria oil mill ("SOM") has yet to be audited owing to
the continuing process of resolving SYB's outstanding High Conservation Value
("HCV") compensation liability in respect of 20 hectares, which were
inadvertently cleared without completion of the required RSPO procedures.
Resolution of this issue should be concluded in the coming months.
As the HCV compensation process has progressed, the group has constructed
further housing, healthcare and waste facilities at SYB ensuring that villages
meet the required standards for the RSPO assessment. Internal audits have
been conducted at SOM and Satria estate in preparation for the eventual RSPO
audit. All other audits conducted during the first half of 2017 have been
concluded successfully: the annual RSPO surveillance audits were conducted by
a third party assessor for POM and its supply base in April 2017; ISCC audits
for COM were conducted in February and for POM and SOM in May.
For all new oil palm developments, the group follows the RSPO's New Planting
Procedure ("NPP"). Following the reassignment in July 2017 of a land area held
by PBJ2 (known as PBJ2-Bongan) to PBJ, the NPP for PBJ has had to be revised
and resubmitted. The necessary assessments by a third party consultant are in
the final stages and once completed will be submitted to the RSPO for
verification and approval. The NPP for the area held by PBJ2 adjacent to SYB
(PBJ2-Satria) has been audited by consultants and will shortly be submitted to
the RSPO for verification and approval. Now that the shares of PU have been
transferred, PU can move to complete the NPP assessment process. The NPP for
the KKS area to the north of CDM is at a less advanced stage but the requisite
documents have been prepared and a third party consultant is being engaged to
complete the full assessment process.
From 1 January 2017, the group ceased using the GreenPalm platform to sell
certificates derived from the sale of CPO and CPKO. Instead, the group now
uses the RSPO's own book and claim platform, PalmTrace, to facilitate the sale
of RSPO credits with one RSPO credit equivalent to one tonne of RSPO certified
CPO or CPKO. The RSPO no longer endorses GreenPalm and has replaced this with
PalmTrace to make the trading of credits more user friendly, cost effective
and easier for members to register and trace their sustainable CPO and CPKO
volumes.
Demand for book and claim credits is expected to weaken in the future as
global demand for segregated sustainable CPO increases. Producing segregated
sustainable CPO offers the prospect of larger sustainability premia than the
mass balance system. However, as long as the group receives FFB from
non-certified smallholders, its CPO production and sales must follow the mass
balance supply chain model. Refusing to process non-RSPO certified smallholder
FFB could have a significant negative socio-economic impact on the local
communities and could damage the relationships with these communities that are
now well established.
The group is therefore investigating the possibility of reconfiguring its
supply base, production and transport logistics so as to allow one of the
RSPO-certified mills to produce segregated sustainable CPO, using FFB
exclusively from the group's own certified plantations, while maintaining the
mass balance approach at the other mills. This strategy presents significant
logistical challenges that will require capital investment, but the group
believes that it represents the best option for achieving the higher premia
available for segregated CPO sales while securing the most sustainable and
prosperous future for local communities and the group's business.
Financing
At 30 June 2017, the group continued to be financed by a combination of debt
and equity (comprising ordinary and preference share capital). There was a
decrease in total equity including non-controlling interests to $296.7 million
from $309.5 million at 31 December 2016.
Group indebtedness and related engagements at 30 June 2017 totalled $238.5
million against $229.7 million at 31 December 2016. Against this
indebtedness, the group held cash and cash equivalents of $3.0 million (31
December 2016: $24.6 million). The composition of the resultant net
indebtedness of $235.5 million was as follows:
$'m
7.5 per cent dollar notes 2022 ("2022 dollar notes") ($24.0 million 23.6
nominal)
9.5 per cent guaranteed sterling notes 2015/17
("2017 sterling notes") (£8.3 million nominal) 10.8
8.75 per cent guaranteed sterling notes 2020
("2020 sterling notes") (£31.9 million nominal) 39.9
Loan from related party 5.4
Loans from non-controlling shareholder 29.5
Indonesian term bank loans 72.0
Drawings under revolving credit facilities 57.3
238.5
Cash and cash equivalents (3.0)
Net indebtedness 235.5
The above statement reflects the receipt in the period of additional loans
from the non-controlling shareholder, Dharma Satya Nusantara Tbk ("DSN") and
its subsidiaries, of $11.7 million and £3.9 million, a related party loan of
$5.4 million, the sale of $4.9 million nominal of the 2022 dollar notes held
by the group in treasury at the end of 2016 and the repayment of $20.2 million
nominal of 2017 dollar notes on 30 June 2017.
Since 30 June 2017, a further $1.0 million nominal of the 2022 dollar notes
held by the group in treasury at end 2016 have been sold leaving $4.0 million
still available for sale. In addition, the group has received a refund of
previously overpaid taxes equivalent to $4.7 million and, as a result of this
refund, a further $750,000 from DSN as additional consideration for DSN's
acquisition of the 15 per cent interest in REAK that DSN acquired in 2016.
The revolving credit facilities provided by the group's principal Indonesian
bankers were rolled over for a further twelve months at the end of July 2017.
As previously reported, the group's financial position has been much improved
over the last two years by the subscription of some $28.0 million for
additional ordinary and preference capital, the issue of replacement sterling
and dollar notes, maturing in, respectively, 2020 and 2022, totalling $65.0
million, the loan and equity investment by the group's new Indonesian
partners, DSN, of $44.0 million, a new Indonesian term bank loan equivalent to
$18.0 million and extensions to the maturity of other Indonesian bank
borrowings. As a result, the refinancing of the group's indebtedness is now
substantially complete, leaving £8.3 million of 2017 sterling notes falling
due for redemption at the end of 2017.
To the extent that markets permit, during the coming months, the directors
will seek to refinance a proportion of the 2017 sterling notes by placing
additions to existing issues of fixed interest securities. At the same time,
the group is continuing, and expects successfully to conclude, discussions
with a number of parties to increase the group's immediate resources and to
provide further funding going forward for the planned extension planting
programme and expansion of milling capacity.
Whilst the foregoing measures should continue to ensure availability of the
funding that the group requires, the group recognises that it is now incurring
a relatively high level of interest charges. As an immediate step to address
this, the group is currently discussing with its principal Indonesian bankers
the conversion of a substantial proportion of its rupiah denominated
borrowings into dollar denominated borrowings, upon which the group would then
be charged interest at dollar interest rates which are significantly lower
than rupiah interest rates. The group is also exploring the possible
divestment of certain outlying plantation assets which, if effected, would
materially reduce the group's overall borrowings.
Staff
Following the resignation of Mark Parry in February 2017, Carol Gysin assumed
the position of group managing director and George Kapitan moved from the role
of President Commissioner of REA Kaltim to that of President Director. With
the appointment of an Indonesian President Director, the group has been able
to assuage the concerns expressed by the Indonesian authorities that
contributed to Mark Parry's resignation and cordial relations with the
authorities have been restored.
A number of changes have been made to strengthen the senior staff in the
agricultural operations. A new head of mills has recently joined the group
and two new estate controllers will be joining in the next few weeks. All
three of these new staff members are expatriates with many years of experience
working on plantations in Indonesia. This will further assist the return to
best agricultural practices.
The group has also made changes to enhance coordination between senior staff
in London and Indonesia. The group's chief financial and legal officers,
Martin Cooper and Matthew Salthouse, who are based in Singapore continue
regularly to visit Indonesia for extended periods to oversee the
implementation of the group's strategies and policies. Matthew Salthouse is
also a director of REAK. Similarly, Luke Robinow, who lives in Indonesia and
is a commissioner of REAK, provides the group with oversight of operational
activities.
The group completed the relocation of its Indonesian head office to
Balikpapan, in East Kalimantan, during the first half of 2017 with the
transfer to Balikpapan of the remaining staff from the finance and
administration office in Samarinda. Combining all administrative activities
within a single location, closer to the group's operations, is facilitating
improved internal communication and other efficiencies.
Outlook
Crop yields are showing a material improvement and bunch censuses indicate
that cropping should continue at good levels for the rest of 2017. The
overall FFB crop for the year (excluding third party fruit) should be in the
region of 600,000 tonnes. This would represent a 50 per cent increase in
second half crops over those of the first half. With improved disciplines in
the field, yields gradually benefiting from a more intensive fertiliser regime
and improved transport conditions, the directors have confidence that crops
will continue to recover. The directors expect to budget for an FFB crop
comfortably in excess of 700,000 tonnes in 2018 and also expect that crops
will continue to grow for several years thereafter.
The resumption of coal mining activities, with operational risks being
undertaken by third parties, now provides the opportunity to realise value
from the group's investment in coal concessions where activity has been
suspended since 2014. This will provide additional capital to fund the
planned extension planting programme. At the same time, the recent completion
of the acquisition of PU surmounts a critical hurdle in ensuring the
continuance of extension planting.
The group's financial performance is driven by crop levels, extraction rates
and prices. For a given mature area, costs of agricultural operations are for
the most part fixed and therefore the major part of the extra revenue that
should be generated by the projected 50 per cent increase in crop in the
second half of 2017, and the projected further increases in 2018 and beyond,
can be expected to flow through to profit. Such flow through will be further
enhanced by any improvement in extraction rates. Self-evidently the group
has, in recent years, been through a difficult period but, with prices likely
to remain stable into next year, the impact on profits of increased crops and
improved extraction rates should not only provide clear evidence that the
financial condition of the group is being restored but also progressively
enable the group to achieve a level of returns commensurate with its capital
base.
Approved by the board on 21 September 2017 and signed on its behalf by
DAVID J BLACKETT
Chairman
RISKS AND UNCERTAINTIES
The principal risks and uncertainties, as well as mitigating and other
relevant considerations, affecting the business activities of the group as at
the date of publication of the 2016 annual report (the "annual report") were
set out on pages 36 to 41 of that report, under the heading "Risks and
uncertainties". A copy of the report may be downloaded from the company's
website at www.rea.co.uk. Such risks and uncertainties in summary comprise:
Agricultural operations
Climatic factors Material variations from the norm
Cultivation risks Impact of pests and diseases
Other operational factors Logistical disruptions to the production cycle,
including transportation and input shortages or cost increases
Produce prices Consequences of lower realisations from sales of CPO and CPKO
Expansion Delays in securing land or funding for the extension planting
programme
Environmental, social and
government practices Failure to meet expected standards
Community relations Disruptions arising from issues with local stakeholders
Stone and coal operations
Operational factors Failure by external contractors to achieve agreed targets
Prices Consequences of stone or coal price weakness
Environmental, social and
government practices Failure to meet expected standards
General
Currency risk Adverse exchange movements between sterling or the Indonesian
rupiah and the dollar
Funding Meeting liabilities as they fall due in periods of weaker produce
prices
Counterparty risk Default by suppliers, customers or financial institutions
Regulatory and country exposure Failure to meet or comply with expected
standards or applicable regulations; adverse political or legislative changes
in Indonesia
At the date of the annual report, the directors considered the risks in
relation to climatic and other operational factors, produce prices and funding
to be of particular significance. In the case of climatic and other
operational factors and produce prices, the directors' assessment reflected
the negative impact on revenues that could be caused by adverse climatic
conditions or operational circumstances and, in the case of funding, the
possibility that the group's expansion programme might have to be curtailed.
More stable selling prices for the group's produce combined with increasing
production are improving revenues, which, together with the further planned
measures to improve the group's funding position (as described under
"Financing" in the Interim management report above) are mitigating the funding
risk. Subject to that, the directors consider that the principal risks and
uncertainties for the second six months of 2017 continue to be those set out
in the annual report as summarised above.
In reaching the above conclusion, the directors have also considered the
implications of termination of UK membership of the European Union in the
context of the group and its operations. Any further weakness of sterling will
positively impact the group as its operations are essentially dollar
denominated and, accordingly, costs and borrowings incurred in sterling will
be reduced in dollar terms.
GOING CONCERN
In the statements regarding viability and going concern on pages 43 and 44 of
the 2016 annual report published in April 2017, the directors set out the
considerations with respect to the group's capital structure and their
assessment of liquidity and financing adequacy.
As noted under "Financing" in the Interim management report above, the group's
financial position has been strengthened by the receipt in April 2017 of
further loans from the Dharma Satya Nusantara Tbk group ("DSN"), by rollover
of the group's working capital facilities in Indonesia in July 2017, by the
sale since the beginning of 2017 of $5.9 million nominal of the 7.5 per cent
dollar notes 2022 (the "2022 dollar notes") held in treasury and by a
significant recovery of previously overpaid Indonesian tax and a related
further payment by DSN. In addition, the group expects successfully to
conclude current discussions to increase the cash resources immediately
available to the group and to provide funding going forward for planned
expansion.
These measures, combined with increasing cash flows from the plantation
operations and the sale in due course of the remaining $4.0 million nominal of
2022 dollar notes held in treasury, will underpin the group's improving
liquidity. That position will be further augmented if, as is proposed, the
group refinances a proportion of the £8.3 million nominal of 9.5 per cent
sterling notes 2017 by placing additions to existing issues of fixed interest
securities.
Accordingly, the directors have a reasonable expectation that the company and
the group have adequate resources to continue in operational existence for the
foreseeable future and they continue to adopt the going concern basis of
accounting in preparing the accompanying financial statements.
DIRECTORS' RESPONSIBILITIES
The directors are responsible for the preparation of this half yearly
financial report.
The directors confirm that:
* the accompanying condensed set of financial statements has been prepared in
accordance with IAS 34 "Interim Financial Reporting"
* the "Interim management report" and "Risks and uncertainties" sections of
this half yearly report include a fair review of the information required by
rule 4.2.7R of the Disclosure and Transparency Rules of the Financial Conduct
Authority, being an indication of important events that have occurred during
the first six months of the financial year and their impact on the condensed
set of financial statements, and a description of the principal risks and
uncertainties for the remaining six months of the year; and
* note 14 in the notes to the consolidated financial statements includes a
fair review of the information required by rule 4.2.8R of the Disclosure and
Transparency Rules of the Financial Conduct Authority, being related party
transactions that have taken place in the first six months of the current
financial year and that have materially affected the financial position or
performance of the group during that period, and any changes in the related
party transactions described in the 2016 annual report that could do so.
The current directors of the company are as listed on page 42 of the company's
2016 annual report.
Approved by the board on 21 September 2017
DAVID J BLACKETT
Chairman
CONSOLIDATED INCOME STATEMENT FOR THE SIX MONTHS ENDED 30 JUNE 2017
6 months to 6 months to Year to
30 June 30 June 31 December
2017 2016 2016
Note $'000 $'000 $'000
Revenue 2 46,275 39,337 79,265
Net (loss)/gain arising from changes in
fair value of agricultural inventory
4 (1,830) (660) 632
Cost of sales:
Depreciation and amortisation (10,837) (9,007) (20,959)
Other costs (28,280) (23,531) (50,868)
_______ _______ _______
Gross profit 5,328 6,139 8,070
Other operating income 2 - - 1
Distribution costs (563) (508) (1,110)
Administrative expenses 5 (7,254) (7,161) (11,987)
_______ _______ _______
Operating loss (2,489) (1,530) (5,026)
Investment revenues 2 263 1,238 1,742
Finance costs 6 (13,482) (4,898) (6,005)
_______ _______ _______
Loss before tax (15,708) (5,190) (9,289)
Tax 7 1,259 753 (2,019)
_______ _______ _______
Loss for the period (14,449) (4,437) (11,308)
_______ _______ _______
Attributable to:
Ordinary shareholders (14,144) (7,911) (17,800)
Preference shareholders 3,720 3,901 7,402
Non-controlling interests (4,025) (427) (910)
_______ _______ _______
(14,449) (4,437) (11,308)
_______ _______ _______
(34.6)
Loss per 25p ordinary share (US cents) 8 (21.5) (48.2)
All operations in all periods are
continuing
CONSOLIDATED BALANCE SHEET AS AT 30 JUNE 2017
30 June 30 June 31 December
2017 2016 2016
$'000 $'000 $'000
Non-current assets
Goodwill 12,578 12,578 12,578
Intangible assets 3,956 - 4,176
Property, plant and equipment 472,469 476,066 471,922
Prepaid operating lease rentals 34,761 34,460 34,230
Stone and coal interests 38,232 36,063 37,208
Deferred tax assets 12,702 13,970 12,781
Non-current receivables 2,142 1,870 3,136
_______ _______ _______
Total non-current assets 576,840 575,007 576,031
_______ _______ _______
Current assets
Inventories 10,379 8,761 15,767
Biological assets 1,832 - 2,037
Investments 4,930 1,954 9,880
Trade and other receivables 43,611 36,531 42,554
Cash and cash equivalents 2,974 4,463 24,593
_______ _______ _______
Total current assets 63,726 51,709 94,831
_______ _______ _______
Total assets 640,566 626,716 670,862
_______ _______ __ __
Current liabilities
Trade and other payables (19,267) (27,517) (43,426)
Current tax liabilities (8) (3,175) (317)
Bank loans (29,398) (54,992) (28,628)
Sterling notes (10,803) - (10,103)
US dollar notes - (33,725) (20,048)
Other loans and payables (5,400) (117) (519)
_______ _______ _______
Total current liabilities (64,876) (119,526) (103,041)
_______ _______ _______
Non-current liabilities
Bank loans (99,844) (67,274) (97,771)
Sterling notes (39,877) (50,522) (37,037)
US dollar notes (23,614) - (23,646)
Deferred tax liabilities (79,124) (81,005) (80,830)
Other loans and payables (36,553) (16,060) (18,987)
_______ _______ _______
Total non-current liabilities (279,012) (214,861) (258,271)
_______ _______ _______
Total liabilities (343,888) (334,387) (361,312)
_______ _______ _______
Net assets 296,678 292,329 309,550
_______ _______ _______
Equity
Share capital 121,426 120,288 121,426
Share premium account 42,585 30,683 42,585
Translation reserve (33,473) (41,365) (39,127)
Retained earnings 147,338 181,188 161,839
_______ _______ _______
277,876 290,794 286,723
Non-controlling interests 18,802 1,535 22,827
_______ _______ _______
Total equity 296,678 292,329 309,550
_______
_______ _______
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED 30 JUNE 2017
6 months to 6 months to Year to
30 June 30 June 31 December
2017 2016 2016
$'000 $'000 $'000
Loss for the period (14,449) (4,437) (11,308)
_______ _______ _______
Other comprehensive income
Items that may be reclassified to profit
or loss:
Actuarial losses - - (569)
Deferred tax on actuarial losses - - 143
_______ _______ _______
- - (426)
Items that will not be reclassified to
profit or loss:
Exchange differences on translation of
foreign operations
5,575 2,551 5,222
Exchange differences on deferred tax (278) 2,125 2,617
_______ _______ _______
5,297 4,676 7,413
_______ _______ _______
Total comprehensive income for the period (9,152) 239 (3,895)
_______ _______ _______
Attributable to:
Ordinary shareholders (8,847) (3,813) (10,387)
Preference shareholders 3,720 4,479 7,402
Non-controlling interests (4,025) (427) (910)
_______ _______ _______
(9,152) 239 (3,895)
_______ _______ _______
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE SIX MONTHS ENDED 30 JUNE 2017
Non-
Share Share Translation Retained Sub controlling Total
capital premium reserve earnings total interests Equity
2017 $'000 $'000 $'000 $'000 $'000 $'000 $'000
At 1 January 121,426 42,585 (39,127) 161,839 286,723 22,827 309,550
2017
Total
comprehensive - - 5,654 (10,781) (5,127) (4,025) (9,152)
income
Dividends to
preference
shareholders - - - (3,720) (3,720) - (3,720)
_____ _____ _____ _____ _____ _____ _____
At 30 June 121,426 42,585 (33,473) 147,338 277,876 18,802 296,678
2017
_____ _____ _____ _____ _____ _____ _____
2016
At 1 January 120,288 30,683 (46,282) 187,481 292,170 1,652 293,822
2016
Total
comprehensive - - 4,917 (4,479) 438 (199) 239
income
Dividends to
preference
shareholders - - - (3,901) (3,901) - (3,901)
_____ _____ _____ _____ _____ _____ _____
At 30 June 120,288 30,683 (41,365) 179,101 288,707 1,453 290,160
2016
Total
comprehensive - - 2,238 (6,345) (4,107) (27) (4,134)
income
Sale of
shareholding
in sub-group - - - (7,416) (7,416) 21,401 13,985
Issue of new
ordinary
shares (cash) 1,138 11,902 - - 13,040 - 13,040
Dividends to
preference
shareholders - - - (3,501) (3,501) - (3,501)
_____ _____ _____ _____ _____ _____ _____
At 31 121,426 42,585 (39,127) 161,839 286,723 22,827 309,550
December 2016
_____ _____ _____ _____ _____ _____ _____
CONSOLIDATED CASH FLOW STATEMENT FOR THE SIX MONTHS
ENDED 30 JUNE 2017
6 months to 6 months to Year to
30 June 30 June 31 December
2017 2016 2016
Note $'000 $'000 $'000
Net cash (used in)/from operating
activities
12 (13,253) (6,658) 2,598
_______ _______ _______
Investing activities
Interest received 263 1,238 1,742
Proceeds on disposal of property,
plant and equipment
- - 61
Purchases of property, plant and (11,871) (8,486) (31,137)
equipment
Expenditure on prepaid operating
lease rentals
(701) (165) (367)
Investment in stone and coal (1,860)
interests (1,024) (725)
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