REG-R.E.A. Holdings plc R.E.A. Holdings plc: Trading update

R E A HoldingsAnnouncement

07/02/2020 07:00

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   R.E.A. Holdings plc (RE.)
   R.E.A. Holdings plc: Trading update

   07-Feb-2020 / 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 ("REA" or the "company")

    

   Trading update

    

   Agricultural operations

    

   Key agricultural statistics for the year to 31 December 2019 (with
   comparative figures for 2018) were as follows:

                                     2019    2018
   FFB crops (tonnes)*:                          
   Group harvested                800,666 800,050
   Third party harvested          198,737 191,228
   Total                          999,403 991,278
                                                 
   Production (tonnes)*:                         
   Total FFB processed            979,411 969,356
   CPO                            224,856 217,721
   Palm kernels                    46,326  45,425
   CPKO                            15,305  16,095
                                                 
   Extraction rates (percentage):                
   CPO                               23.0    22.5
   Palm kernel                        4.7     4.7
   CPKO**                            40.7    40.2
                                                 
   Rainfall (mm):                                
   Average across the estates       3,057   2,934

    

   * 2018 crops and production include PBJ (FFB crop 5,782 tonnes), which was
   disposed of on 31 August 2018.

   ** Based on kernels processed.

    

   An industry wide decline in FFB production as palms entered a resting
   phase following very high levels of cropping in 2018 meant that crops in
   2019 fell short of the targeted 900,000 tonnes, albeit still at a record
   level for the group. 

    

   Upgrading and repair works in the mills helped to boost extraction rates
   which should improve further as the continuing works are completed during
   the course of 2020.  Delays with contractors and in supplies of materials
   postponed completion of the full planned expansion of Satria oil mill
   until the current year, but current mill capacity remains sufficient to
   process all of the group's FFB production as well as current levels of
   fruit purchases from third parties.  The full planned expansion is
   expected to be completed well in advance of the group's peak crop
   requirements.

    

   Agreement has recently been reached with a coal company operating in an
   area adjacent to the group's Satria estate on the construction of a road
   through the group's estates (and then, via a major new bridge over the
   Belayan River, further to the Mahakam River).  This will result in the
   loss of approximately 100 hectares of oil palms but will provide the group
   with a valuable alternative route for evacuating its produce at times when
   river levels restrict barge access to the estates.  It is expected that
   the stone for construction of the new road will be sourced at least in
   part from the group's andesite stone concession interest.  Following
   construction of the new road, the neighbouring coal company will, subject
   to payment of compensation, have the right to explore and potentially mine
   for coal in certain areas of the Satria estate that are subject to
   overlapping mining rights.  This right is not expected to materially
   affect the group.

    

   Agreement has also been reached on completion of the transfer of 750
   hectares of 2013 oil palm plantings at KMS to a plasma cooperative.  This
   area has always been earmarked for cooperative ownership, but constitution
   of the cooperative to take over ownership was held up by a now resolved
   dispute between two neighbouring villages as to which would be entitled to
   the plasma area.

    

   CPO and CPKO prices

    

   Opening 2019 at $517 per tonne, CIF Rotterdam, CPO prices drifted to a low
   of $481 per tonne in July, before recovering steadily over the final four
   months of the year to $860 per tonne at the end of December.  The recovery
   has consolidated in the first weeks of 2020 with the CPO price currently
   at $795 per tonne. 

    

   With a slowdown in production, CPKO prices tracked the movement in CPO
   prices, opening at $770 per tonne, CIF Rotterdam, declining to $529 in
   June and ending the year at $1,080 per tonne.  CPKO has re-established its
   premium over CPO to approximately 25 per cent, although the premium
   remains significantly lower than the historic average of around 40 per
   cent.

    

   The long awaited rally in CPO prices, which followed a prolonged period of
   price weakness, reflected continuing growth in demand for vegetable oils
   with a fall off in the rate of growth in supply.   CPO stock levels are
   expected to fall to a four year low in 2019/20 and this is likely at least
   to support current price levels.  The impact of reduced fertiliser
   applications by some producers in response to the CPO price weakness has
   yet to be felt.  Also, many oil palm producers are reporting rainfall
   deficits in the second half of 2019 which may impact 2020 production.

    

   The benefit of the higher CPO and CPKO prices currently prevailing will be
   partially offset by the re-imposition since the beginning of 2020 of an
   Indonesian export levy of $50 per tonne.  In addition, when the Indonesian
   reference price for CPO export sales exceeds $750 per tonne, export tax is
   payable on a sliding scale at rates increasing from an initial $3 per
   tonne, at reference prices of between $751 and $800 per tonne, to $200 per
   tonne at reference prices above $1,250 per tonne.  No export tax was
   payable in respect of January 2020 deliveries but export tax of $18 per
   tonne will be levied on February deliveries (based on the current
   Indonesian reference price which reflects CPO prices prevailing during
   January 2020).  Whilst the group's production is sold predominantly in
   Indonesia, arbitrage between local and export markets results in local
   prices being reduced as compared with export prices by an amount broadly
   equivalent to the combined export levy and tax.

    

   2019 Results

    

   The group's sales are for the most part priced approximately four weeks
   ahead of delivery.  This limited the revenue benefit in 2019 from the
   increased CPO and CPKO prices at the end of the year.  CPO sales reported
   for 2019 as a whole are expected to show an average net selling price, FOB
   Port of Samarinda, net of export levy and duty of $454 per tonne against
   $430 for the first six months of 2019 (2018: $549). 

    

   Results for the second half of 2019 will benefit from the weighting of
   crops to the second half of the year with group FFB harvested of 465,000
   tonnes against 335,000 tonnes in the first half.  Although the previously
   announced measures to reduce costs had some impact in the second half of
   2019, the savings achieved were limited by one off implementation costs. 
   Accordingly, with a larger crop harvested, estate operating costs reported
   for the second six months of 2019 are expected to be slightly above those
   of the first half.

    

   The strengthening of the Indonesian rupiah that occurred over 2019 is
   projected to result in net group foreign exchange losses for the year of
   $8.5 million against $5 million booked in the six months to 30 June 2019.

    

   Following a review of the group's land reserves, the group has decided not
   to renew a land allocation of 1,964 hectares held by KMS.   Retention of
   untitled land areas is becoming increasingly costly and the directors
   believe that the group should concentrate its resources on those areas
   that it is most likely to be able to plant in the foreseeable future.  The
   KMS land in question is zoned as available for agricultural development
   but such availability is dependent upon it being declassified as forest. 
   The directors feel that pursing such declassification would be
   inconsistent with the group's sustainability policies. Relinquishment of
   the 1,964 hectare allocation will result in a write off estimated at $5
   million.

    

   Coal and stone operations

    

   The contractor appointed to mine the Kota Bangun coal concession held by
   IPA, the company owned by the group's local partners in the coal and stone
   operations, has recently completed some further drilling to confirm the
   existing data and is currently developing a  mine plan.  As noted
   previously, the contractor will fund all expenditure required on
   infrastructure, land compensation and mobilisation in exchange for a
   participation in the profits of the mine.

    

   Following the recent agreement with a neighbouring coal company referred
   to under "Agricultural operations" above, the group is discussing with
   that company arrangements for the opening and quarrying of the group's
   andesite stone concession interest on a basis similar to that agreed for
   the Kota Bangun coal concession.  It is intended that stone offtake for
   the new road planned to be built by the coal company will underpin these
   arrangements.

    

   As previously reported, certain arbitration claims have been made against
   IPA by two claimants (connected with each other) with whom IPA previously
   had conditional agreements relating to the development and operation of
   the IPA coal concession.  The arbitration is scheduled to be heard in late
   June.  The arbitrators have joined the company as a party to the
   arbitration on a prima facie basis and without prejudice to any final
   determination of jurisdiction.  The company, which was never a party to
   any of the agreements between IPA and the claimants, has declined to
   accept jurisdiction or participate in the arbitration.  Further related
   claims have subsequently been made or threatened in respect of, inter
   alia, alleged tortious conduct by the company, its subsidiary, R.E.A.
   Services Limited, and its managing director.  None of the claims is
   considered to have any merit.

    

   Financing

    

   Following rollover of the group's working capital facility in November
   2019, the group has resumed discussions with its Indonesian bankers
   regarding the provision of an additional loan to refinance recent capital
   expenditure on the group's mills.  Discussions are also continuing
   regarding conversion of a proportion of the group's existing bank loans
   from Indonesian rupiahs to dollars to reduce interest costs and foreign
   exchange exposure.

    

   Arrangements with the group's customers for the provision of funding in
   exchange for forward commitments of CPO and CPKO, on the basis that
   pricing is fixed at the time of delivery by reference to prevailing
   prices, have been extended as buyers seek to secure supplies of oil.

    

   Outlook

    

   Notwithstanding financial constraints, the group maintained its fertiliser
   applications at what it believes to have been optimal levels throughout
   2019.  Moreover, the group, by comparison with other oil palm growers,
   enjoyed an acceptable annual average rainfall of 3,000 millimetres across
   its estates.  There were, however, some limited drier periods in the
   second half of 2019 and rainfall was unusually localised with not all
   areas receiving the same levels of rainfall.  The effect of this on 2020
   crops is difficult to predict but crop levels and yields are expected at
   least to be maintained at current levels, with extraction rates gradually
   improving as the mill works are completed. 

    

   With the combined benefit of a range of cost saving initiatives
   implemented in 2019 and further cost saving steps being taken in 2020, as
   well as the recent strengthening of the CPO price, the directors expect
   that the group can look forward to higher revenues and tightly controlled
   costs in 2020.  Because crops and cash flow are normally weighted to the
   second half of the year, the benefits of these improvements are unlikely
   to be fully apparent in the results for the first half of 2020.

    

   The group is now working on arrangements regarding refinancing of the
   £30.9 million nominal of 8.75 per cent sterling notes 2020 that fall due
   for repayment in August 2020. 

    

   Provided that substantially all the sterling notes are successfully
   refinanced, crops continue to achieve budgeted levels and the CPO price is
   at least maintained around current levels, the directors intend to resume
   payment of cash dividends on the group's preference shares in 2020.  The
   directors also plan progressively to catch up the arrears of dividend on
   the preference shares, commencing in 2020 with a payment of 1 per cent per
   share at the end of March 2020.

    

   Publication of results

    

   In line with the timetable adopted in previous years, it is expected that
   the final results for 2019 will be announced, and the annual report in
   respect of 2019 published, in the second half of April 2020.

    

   Enquiries:

   R.E.A Holdings plc

   Tel: 020 7436 7877

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   ISIN:          GB0002349065
   Category Code: TST
   TIDM:          RE.
   LEI Code:      213800YXL94R94RYG150
   Sequence No.:  45256
   EQS News ID:   970067


    
   End of Announcement EQS News Service

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