REG-R.E.A. Holdings plc R.E.A. Holdings plc: Annual report in respect of 2016 <Origin Href="QuoteRef">REAH.L</Origin>
28/04/2017 07:07
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R.E.A. Holdings plc (RE.)
R.E.A. Holdings plc: Annual report in respect of 2016
28-Apr-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')
ANNUAL FINANCIAL REPORT
The company's annual report for the year ended 31 December 2016 (including notice of the annual
general meeting to be held on 13 June 2017) (the 'annual report') will shortly be available for
downloading from the company's web site at 1 www.rea.co.uk.
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 2 www.hemscott.com/nsm.do
The sections below entitled 'Chairman's statement', 'Dividends', 'Risks and uncertainties',
'Viability statement', 'Going concern' and 'Directors' confirmation of responsibility' 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 of the notes to the financial statements
below.
HIGHLIGHTS
Financial
- Adoption of amended IAS 41, effective 1 January 2016, on biological assets has impacted 2016
profits due to a new additional depreciation charge and the elimination of fair value gains; 2015
comparatives restated to reflect the change with reduction in results before tax of $23.8 million
- Revenues of $79.3 million (2015: $90.5 million), reflecting lower production following two year
severe dry period
- Firmer CPO prices, continued focus on costs and exchange gains limiting the impact of lower
production: loss before tax of $9.3 million (2015: $12.2 million)
- Net new investment of $31.6 million (2015: $34.8 million)
- Permanent capital base to support extension planting programme strengthened by $27.0 million,
net of expenses, from combination of acquisition by DSN group of 15 per cent in the REA Kaltim
group and cash placing of 3.7 million new ordinary shares
- Debt maturity profile improved by exchange of $13.8 million of 2017 dollar notes for new 2022
dollar notes, repackaging of Indonesian bank loans and new funding of $14.4 million to refinance
maturing debt from combination of sale of 2020 sterling notes held in treasury and loans from the
DSN group
Agricultural operations
- Crop of FFB 468,371 tonnes (2015: 600,741 tonnes); CPO production of 127,697 tonnes (2015:
161,844 tonnes)
- Extraction rates averaged 22.8 per cent (2015: 22.2 per cent) despite impact on FFB quality of
disruptions to harvesting and transportation caused by heavy rainfall in final quarter
- Significant progress with new development: over 5,700 hectares of new land planted and a further
1,500 prepared for planting
- Reliability of mill operations benefiting from recent extensive refurbishment programme and
enhanced security systems
- New enhanced fertiliser regime targeted at mature areas initiated
Stone and coal operations
- Long term arrangements agreed for purchasing crushed stone for own use in hardening roads and
other infrastructure and for sale to third parties
- Agreements reached for resumption of coal operations at the coal concession near Kota Bangun
Sustainability
- Renewable energy from methane capture plants supplying 26 local villages and making an
increasing contribution as household take up continues to grow
- RSPO recertification audits competed satisfactorily; ISCC renewals in process
- Completion of new estate school and new housing at KMS
- Completion of five village water treatment community development projects
- REA Kaltim awarded Class 1 status by the regional governor following assessment of local
plantation companies, based on operational, social and environmental criteria
CHAIRMAN'S STATEMENT
The accompanying financial statements for 2016 incorporate a significant change in accounting
policies in accordance with the amendment of IAS 41 Agriculture effective 1 January 2016. The
amendment means that bearer plants are no longer carried as biological assets at fair value but
are instead accounted for as property, plant and equipment, and are depreciated. The 2015
financial statements have been restated to reflect the change.
The effect has been to reduce the previously reported profit before tax for 2015 by $23.8 million
and, whilst the comparable reduction for 2016 has not been computed, it is most probably even
higher given the likely benefit to the fair value of what were formerly biological assets from the
sizeable extension planting achieved in 2016. As a result, with margins already reduced by lower
production, and despite improved crude palm oil ('CPO') prices, the group incurred a loss before
taxation for the year, albeit reduced from the restated loss of the preceding year.
Total revenue for the year amounted to $79.3 million, compared with $90.5 million in 2015; at the
operating level, the group incurred a loss of $5.0 million for the year, compared with a restated
loss of $6.6 million in 2015. Firmer CPO prices in 2016 as well as continued focus on cost
controls restricted the loss before tax in 2016 to $9.3 million compared with a restated loss of
$12.2 million in 2015.
As previously reported, the group's lower production mirrored the production experience reported
by many other oil palm plantations in East Kalimantan and several other areas of South East Asia
and is attributed to the severe dry periods experienced in both 2014 and 2015. The group's
cropping rates started to recover from September onwards, but heavy rainfall in November and
December disrupted collection, which meant that production in the final months of the year fell
short of crop availability as not all crop could be recovered. Oil quality was also affected.
Whilst the change in precipitation is positive for future productivity, such a dramatic increase
after a prolonged period of drought, with average rainfall in 2016 more than 60 per cent higher
than in 2015, had a short term negative impact on conditions for both harvesting and
transportation. With the easing of the rains, essential repairs to, and hardening of, estate roads
have become feasible and these should progressively benefit production as the current year
progresses.
Fresh fruit bunches ('FFB') harvested in 2016 amounted to some 468,000 tonnes compared with
601,000 tonnes in 2015. Smallholder and other third party FFB purchased by the group also fell
short of 2015 levels at 98,000 tonnes compared with 139,000 tonnes in the previous year. CPO
production amounted to 128,000 tonnes compared with 162,000 tonnes in 2015, while CPO extraction
rates averaged 22.8 per cent compared with 22.2 per cent in 2015. Extraction rates in 2016 would
have been higher were it not for the impact on FFB quality of the disruptions to harvesting and
transportation in the last part of the year.
The CPO price, CIF Rotterdam, edged steadily upwards through 2016 from an opening price of $570
per tonne to close at $801 per tonne but has since fallen back and currently stands at $710 per
tonne. Whilst there is an expectation of better CPO production in 2017, soybean oil production may
be constrained by a relatively weak market for soya meal so that, with vegetable oil and CPO
stocks much depleted following the poor harvests of 2016, there is a reasonable prospect that
prices will stabilise at above the $700 per tonne level during the second half of 2017.
Through PLN, the Indonesian state electricity company, the group now supplies power to 26 villages
and sub-villages surrounding the estates. Revenue from electricity generated from the group's two
methane capture plants amounted to some $563,000 in 2016, compared with $233,000 in the first
eight months of operation in 2015.
Excellent progress was made with the group's extension planting programme in 2016, following
completion of the bunding and construction of the water gates to control the flood prone lower
lying areas of PT Putra Bongan Jaya ('PBJ'). A total of 5,758 hectares were planted during the
year and a further 4,000 hectares of plantings are planned for 2017. The latter programme will
require extension of existing bunding into the northern section of PBJ and new bunding along the
southern boundary of PT Cipta Davia Mandiri ('CDM'). Work on this additional bunding is already
well in hand.
As reported previously, in December 2016, PT Dharma Satya Nusantara Tbk ('DSN') completed its
acquisition of a 15 per cent interest in the group's principal operating subsidiary in Indonesia,
PT REA Kaltim Plantations ('REA Kaltim'). In addition, the DSN group has provided loans to the REA
Kaltim group. DSN's investment and provision of loans will help to finance the group's extension
planting programme and accords with the long-held intention of increasing Indonesian participation
in the group.
The group successfully addressed several key elements of funding that were highlighted in the 2015
annual report. Specifically, the group issued new US dollar denominated notes maturing in 2022 by
way of an exchange offer to existing 2017 dollar noteholders to extend the maturity of $13.8
million and latterly issued 3.7 million ordinary shares by way of a placing to raise some £10.5
million. In addition, £1.5 million of 2020 sterling notes held in treasury were sold by a group
subsidiary and Indonesian bank loans were repackaged so as to extend the maturities and
significantly reduce nearer term repayments under the existing facilities.
Under fresh agreements recently reached with third parties, operations at the group's coal
concession near Kota Bangun are expected to resume shortly following dewatering of the concession
area. Under these agreements, the group should receive a steady cash flow based upon the
prevailing coal prices but with an agreed floor. Previously reported negotiations with another
third party in relation to the Liburdinding concession proved abortive but the group is continuing
to hold discussions regarding this concession with several potentially interested parties.
The group is also continuing to review options for developing suitable road access to the group's
andesite stone concession. This will be a necessary preliminary to commencing extraction
operations. Previous discussions with potential strategic investors have not been renewed pending
the outcome of such review. Arrangements have been agreed, however, in respect of a limestone
deposit adjacent to PBJ. These arrangements will provide the group with the crushed stone required
for infrastructure in the agricultural operations and other construction programmes, as well as
for sale to third parties.
Revenue from these recent developments in the stone and coal operations will provide a useful
addition to the group's cash flow. However, depending upon the level of CPO prices and operational
performance during the remainder of 2017, some further funding may be required to enable the group
to continue its expansion programme at the speed that it would like. Accordingly, the group is
actively engaged in discussions to obtain new longer term debt financing to replace, or replace in
part, the remaining component of the group's maturing sterling and dollar notes that has not yet
been refinanced. The directors are optimistic of a successful outcome to these discussions.
In view of the financial performance in 2016, the directors have not declared, or recommended the
payment of any ordinary dividend in respect of the year. Provided that crops continue to recover
as expected and prices for the group's produce are maintained around current levels, the directors
will consider recommending the payment of a final ordinary dividend in respect of 2017.
Following the resignation of Mark Parry, I would like to welcome Carol Gysin as the company's new
managing director. Carol has worked for the group for over eight years and is very familiar with
its operations. Further, I also welcome Michael St Clair-George who joined the board in October
2016 as the senior independent non-executive director and chairman of both the audit and
remuneration committees. Michael has over 40 years' experience in the plantation and agribusiness
industries in Malaysia and Indonesia.
Looking ahead, the recent return to more normal levels of rainfall, allowing harvesting rounds
gradually to improve and renovation and repairs to the estate roads to become fully effective,
should see both harvesting and production levels increase. With extraction rates expected to
improve further, an increasing hectarage of mature plantings and CPO prices that could well remain
around current levels, a significant improvement in revenues should be possible. This and the
continuing development of the group's land bank, coupled with further progress in the stone and
coal operations, should lead to enhanced shareholder value.
DIVIDENDS
The fixed semi-annual dividends on the 9 per cent cumulative preference shares that fell due on 30
June and 31 December 2016 were duly paid. In view of the difficult conditions that faced the group
during 2016, 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 2016.
The group's programme of planting its land bank remains ongoing. This will continue to require
major capital expenditure and constrain the rates at which the directors feel that they can
prudently declare, or recommend the payment of, ordinary dividends over the next few years.
Nevertheless, the directors will consider recommending the payment of a final ordinary dividend in
respect of 2017, although this will necessarily depend upon crops and CPO prices over the balance
of 2017.
ANNUAL GENERAL MEETING
The fifty-seventh annual general meeting of R.E.A. Holdings plc will be held at the London office
of Ashurst LLP at Broadwalk House, 5 Appold Street, London EC2A 2HA on 13 June 2017 at 10.00 am.
RISKS AND UNCERTAINTIES
The group's business involves risks and uncertainties. Identification, assessment, management and
mitigation of the risks associated with environmental, social and governance matters forms part of
the group's system of internal control for which the board of the company has ultimate
responsibility. The board discharges that responsibility as described in 'Corporate governance' in
the annual report.
Those risks and uncertainties that the directors currently consider to be material are described
below. There are or may be other risks and uncertainties faced by the group that the directors
currently deem immaterial, or of which they are unaware, that may have a material adverse impact
on the group.
Material risks, related policies and the group's successes and failures with respect to
environmental, social and governance matters and the measures taken in response to any failures
are described in more detail under 'Sustainability' in the annual report.
Where risks are reasonably capable of mitigation, the group seeks to mitigate them. Beyond that,
the directors endeavour to manage the group's finances on a basis that leaves the group with some
capacity to withstand adverse impacts from identified areas of risk but such management cannot
provide insurance against every possible eventuality.
Risks assessed by the directors as being of particular significance are those detailed below under
climatic and other operational factors, produce prices and funding. In the case of climatic and
other operational factors and produce prices, the directors' assessment reflects 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.
┌────────────────────────────────┬─────────────────────────────┬─────────────────────────────────┐
│ Risk │ Potential impact │ Mitigating or other relevant │
│ │ │ considerations │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Agricultural operations │ │ │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Climatic factors │ │ │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Material variations from the │ A loss of crop or reduction │ Over a long period, crop levels │
│ norm in climatic conditions │ in the quality of harvest │ should be reasonably │
│ │ resulting in loss of │ predictable │
│ │ potential revenue │ │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Unusually low levels of │ A reduction in subsequent │ Operations are located in an │
│ rainfall that lead to a water │ crop levels resulting in │ area of high rainfall. │
│ availability below the minimum │ loss of potential revenue; │ Notwithstanding some seasonal │
│ required for the normal │ the reduction is likely to │ variations, annual rainfall is │
│ development of the oil palm │ be broadly proportional to │ usually adequate for normal │
│ │ the cumulative size of │ development │
│ │ the water deficit │ │
├────────────────────────────────┼────────────── │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ A material breakdown in │ Disruption of operations, │ The group seeks to foster │
│ relations between the group │ including blockages │ mutually beneficial economic │
│ and the host population in the │ restricting access to oil │ and social interaction between │
│ area of the agricultural │ palm plantings and mills, │ the local villages and the │
│ operations │ resulting in reduced and │ agricultural operations. In │
│ │ poorer quality CPO and CPKO │ particular, the group gives │
│ │ production │ priority to applications for │
│ │ │ employment from members of the │
│ │ │ local population, encourages │
│ │ │ local farmers and tradesmen to │
│ │ │ act as suppliers to the group, │
│ │ │ its employees and their │
│ │ │ dependents and promotes │
│ │ │ smallholder development of oil │
│ │ │ palm plantings │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Disputes over compensation │ Disruption of operations, │ The group has established │
│ payable for land areas │ including blockages │ standard procedures to ensure │
│ allocated to the group that │ restricting access to the │ fair and transparent │
│ were previously used by local │ area the subject of the │ compensation negotiations and │
│ communities for the │ disputed compensation │ encourages the local │
│ cultivation of crops or as │ │ authorities, with whom the │
│ respects which local │ │ group has developed good │
│ communities otherwise have │ │ relations and who are therefore │
│ rights │ │ generally supportive of the │
│ │ │ group, to assist in mediating │
│ │ │ settlements │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Individuals party to a │ Disruption of operations, │ Where claims from individuals │
│ compensation agreement │ including blockages │ in relation to compensation │
│ subsequently denying or │ restricting access to the │ agreements are found to have a │
│ disputing aspects of the │ areas the subject of the │ valid basis the group seeks to │
│ agreement │ compensation disputed by │ agree a new compensation │
│ │ the affected individuals │ arrangement; where such claims │
│ │ │ are found to be falsely based │
│ │ │ the group encourages │
│ │ │ appropriate action by the local │
│ │ │ authorities │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Stone and coal operations │ │ │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Operational factors │ │ │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Failure by external │ Loss of prospective revenue │ The group endeavours to use │
│ contractors to achieve agreed │ │ experienced contractors, to │
│ production volumes │ │ supervise them closely and to │
│ │ │ take care to ensure that they │
│ │ │ have equipment of capacity │
│ │ │ appropriate for the planned │
│ │ │ production volumes once │
│ │ │ operations have commenced │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ External factors, in │ Delays to receipt or loss │ Deliveries are not normally │
│ particular weather, delaying │ of revenue │ time critical and adverse │
│ or preventing delivery of │ │ external factors would not │
│ extracted stone and coal │ │ normally have a continuing │
│ │ │ impact for more than a limited │
│ │ │ period │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Geological assessments, which │ Unforeseen extraction │ The group seeks to ensure the │
│ are extrapolations based on │ complications causing cost │ accuracy of geological │
│ statistical sampling, proving │ overruns and production │ assessments of any extraction │
│ inaccurate │ delays │ programme and taking expert │
│ │ │ geological advice on the │
│ │ │ results │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Prices │ │ │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Local competition reducing │ Reduced revenue and a │ There are currently no other │
│ stone prices and volatility of │ consequent reduction in │ stone quarries in the vicinity │
│ international coal prices │ cash flow and profit │ of the group's deposits and the │
│ │ │ cost of transporting stone │
│ │ │ should restrict competition. In │
│ │ │ relation to coal, the │
│ │ │ cooperation arrangement │
│ │ │ negotiated for the mining of │
│ │ │ the group's main coal │
│ │ │ concession provides a floor │
│ │ │ price for the coal mined │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Imposition of additional │ Reduced revenue and a │ The Indonesian government has │
│ royalties or duties on the │ consequent reduction in │ not to date imposed measures │
│ extraction of stone or coal │ cash flow and profit │ that would seriously affect the │
│ │ │ viability of Indonesian stone │
│ │ │ quarrying or coal mining │
│ │ │ operations │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Unforeseen variations in │ Inability to supply product │ Geological assessments ahead of │
│ quality of deposits │ within the specifications │ commencement of extraction │
│ │ that are, at any particular │ operations should have │
│ │ time, in demand with │ identified any material │
│ │ consequent loss of revenue │ variations in quality │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Environmental, social and │ │ │
│ governance practices │ │ │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Failure by the stone and coal │ Reputational and financial │ The area of the stone and coal │
│ operations to meet the │ damage │ concessions are relatively │
│ expected standards │ │ small and should not be │
│ │ │ difficult to supervise. The │
│ │ │ group is committed to │
│ │ │ international standards of best │
│ │ │ environmental and social │
│ │ │ practice and, in particular, to │
│ │ │ proper management of waste │
│ │ │ water and reinstatement of │
│ │ │ quarried and mined areas on │
│ │ │ completion of extraction │
│ │ │ operations │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ General │ │ │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Currency │ │ │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Strengthening of sterling or │ Adverse exchange movements │ As respects costs and sterling │
│ the Indonesian rupiah against │ on those components of │ denominated shareholder │
│ the dollar │ group costs and funding │ capital, the group considers │
│ │ that arise in Indonesian │ that this risk is inherent in │
│ │ rupiah or sterling and are │ the group's business and │
│ │ not hedged against the │ structure and must simply be │
│ │ dollar │ accepted. As respects │
│ │ │ borrowings, where efficient the │
│ │ │ group seeks to borrow in │
│ │ │ dollars but, when borrowing in │
│ │ │ another currency, considers it │
│ │ │ better to accept the resultant │
│ │ │ currency risk than to hedge │
│ │ │ that risk with hedging │
│ │ │ instruments │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Funding │ │ │
├────────────────────────────────┼─────────────────────────────┼─────────────────────────────────┤
│ Bank debt repayment │ Inability to meet │ The group maintains good │
│ instalments and other debt │ liabilities as they fall │ relations with its bankers and │
│ maturities coincide with │ due │ other holders of debt who have │
│ periods of adverse trading and │ │ generally been receptive to │
│ negotiations with bankers and │ │ reasonable requests to moderate │
│ investors are not successful │ │ debt profiles when │
│ in rescheduling instalments, │ │ circumstances require; │
│ extending maturities or │ │ moreover, the directors believe │
│ otherwise concluding │ │ that the fundamental │
│ satisfactory refinancing │ │ profitability of the group's │
│ arrangements │ │ business will facilitate │
│ │ │ divestment of assets or │
│ │ │ procurement of additional │
│ │ │ equity capital should this │
│ │ │ prove necessary │
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