Final Results
R.E.A. HOLDINGS PLC (the "company")
ANNUAL FINANCIAL REPORT
The company's annual report for the year ended 31 December 2011 (including notice of the annual general meeting to be held on 12 June 2012) (the "annual report") is now available for downloading from the company's web site at 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 www.hemscott.com/nsm.do.
The sections below entitled "Chairman's statement", "Risks and uncertainties" 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
· Crop of fresh fruit bunches of 607,335 tonnes (2010: 518,742 tonnes), an increase of 17%
· Revenue of $148 million (2010: $114 million), an increase of 30%
· Profit before tax of $64.2 million (2010: $50.4 million), an increase of 27%, after gain on revaluation of biological assets of $7.4 million (2010: $1.6 million)
· Ordinary dividend in respect of 2011: 6½p (total paid in respect of 2010: 5½p)
· 37,084 hectares planted or under development at 31 December 2011, an increase of 5,001 hectares during the year
· Two methane conversion plants under construction to improve energy efficiency and reduce greenhouse gas emissions
· Regional office in Singapore established and decision taken to list plantation subsidiary in Jakarta
· Further drilling carried out to determine the full extent of the coal resource within the Kota Bangun and Liburdingding concessions.
CHAIRMAN'S STATEMENT
Results
Group profit before tax for 2011 at $64.2 million was some 27 per cent ahead of the $50.4 million reported for 2010.
The greater level of coal sales achieved in 2011 ($18.2 million against $4.2 million in 2010) was a significant factor in the increased revenue of $147.8 million reported for 2011. Other factors were the higher average selling prices for crude palm oil ("CPO") and crude palm kernel oil ("CPKO") prevailing during 2011 and increased CPO and CPKO output. However, the changes to export duty introduced in August 2011 meant that revenues from CPO and CPKO in the last quarter of the year were some $21 per tonne less than they would otherwise have been. Higher cost of sales, amounting to $68.1 million in 2011 against $48.6 million in the preceding year, also reflected the expansion of the coal activities and the increased CPO and CPKO output, while local cost inflation was a continuing factor.
IFRS fair value adjustments, aggregating $11.4 million in 2011, were significantly ahead of the aggregate adjustments of the $2.0 million reported in the preceding year. The higher net gain from changes in the fair value of biological assets reflected the further development of the group's plantations, while the increased net gain arising from changes in the fair value of agricultural produce inventory was the result of a build up in produce stock at the end of 2011 caused by temporary restrictions on traffic movements on the Mahakam River following the collapse of a bridge at Tenggarong.
2011 saw a further increase in administrative expenses from $10.2 million in 2010 to $16.9 million. The increase was in part the result of inflation and a lower capitalisation rate (reflecting the increasing ratio of mature to immature areas) but higher compliance costs, particularly in discharging the group's social obligations, a one-off cost of payments under a staff long term service scheme and the employment of additional senior management during a period of generational management transition were also factors.
At the after tax level, profit for the year for 2011 was $45.6 million against $35.0 million in 2010 while profit attributable to ordinary shareholders was $40.4 million against $32.3 million. Fully diluted earnings per share amounted to US 121.0 cents (2010: US 96.8 cents).
The non cash components of operating profit were higher in 2011 than in 2010 so that, with the reversal of these, operating cash flows before movements in working capital showed a lesser year on year increase than operating profit. The aggregate increase in working capital of $8.2 million over 2011 was broadly similar to that of the preceding year and reflected significant increases in inventories and receivables offset in part by an increase in payables. The increase in inventories was largely the result of the stock build up at end 2011 referred to above, while the increases in receivables and payables were attributable to a number of factors, including movements arising in connection with the substantial capital projects in progress at end 2011. With tax payments lower in 2011 than in 2010 (when the payments included payment of a disputed tax assessment in respect of 2008), net cash from operating activities for 2011 amounted to $33.8 million against $21.3 million for 2010.
Agricultural operations
Operational matters
The crop out-turn for 2011 amounted to 607,335 tonnes of oil palm fresh fruit bunches ("FFB"). This represented an increase of 17 per cent on the FFB crop for 2010 of 518,742 tonnes and was close to the budgeted crop for the year of 610,957 tonnes. External purchases of FFB from smallholders and other third parties in 2011 totalled 34,146 tonnes (2010: 20,089 tonnes).
Rainfall across the group's estates averaged 3,414 mm for 2011, compared with 4,434 mm for the previous year. After a period of comparatively low rainfall during the third quarter of the year, the fourth quarter was relatively wet. This delayed crop ripening in the final months of 2011 so that the surpluses over budget reported earlier in the year were not maintained.
Processing of the group's own FFB production and the externally purchased FFB, together totalling 641,481 tonnes (2010: 538,831 tonnes), produced 147,455 tonnes of CPO (2010: 127,256 tonnes) and 28,822 tonnes of palm kernels (2010: 24,614 tonnes) reflecting extraction rates of 22.99 per cent for CPO (2010: 23.62 per cent) and 4.49 per cent for kernels (2010: 4.57 per cent). Production of CPKO amounted to 10,815 tonnes (2010: 9,745 tonnes) with an extraction rate of 38.44 per cent (2010: 40.07 per cent).
Good progress was made during the year with a major overhaul of the group's older mill designed to restore the effective capacity of the mill to 80 tonnes per hour. This has involved upgrading of machinery and the installation of a new boiler. Delays in the delivery of new steriliser cages have meant that full completion of the overhaul is now expected for mid 2012. The capacity of the second oil mill, which was brought into production in 2006, has already been expanded to 80 tonnes per hour. The two mills are continuing to cope well with the demands of current crop levels. Construction of a third mill commenced during 2011 and is due for completion in the second half of 2012 in readiness for the expected peak cropping months later in the year. The third mill will, like the second mill, incorporate its own kernel crushing plant.
The group is continuing its effort to improve its agricultural processes with a view to minimising costs of production while paying heed to its social and environmental responsibilities. Previous initiatives have included measures to reduce the use of pesticides and partial substitution of natural fertiliser for inorganic by composting processing waste. These initiatives were extended during 2011 with the start of construction of two methane conversion plants which are intended to reduce the group's greenhouse gas emissions and increase its energy efficiency. This will be achieved in two ways: first, by reducing methane emissions from anaerobic respiration in the effluent ponds and, secondly, through the reduction in consumption of diesel oil and petrol required to run generators as the electricity that these produce is replaced by electricity from the methane plants. The first such plant was commissioned in the first quarter of 2012 and the second plant is expected to be commissioned during the second quarter. The group expects to obtain carbon credits under the Clean Development Mechanism for the period from completion of the plants up to 2020.
The group received an award in 2011, presented by the President of the Republic of Indonesia, for the "Best Company in East Kalimantan" in the provision of equal opportunities for female workers.
Land allocations and development
The group's land titling made further progress during 2011 to the extent that the fully titled agricultural land area held by the group amounted at year end (prior to implementation of the settlement arrangements referred to below) to 70,584 hectares (2010: 63,263 hectares). In addition, at the year end the group held land allocations subject to completion of titling totalling some 27,000 hectares of which some 15,000 hectares are conditional not only upon satisfaction of the normal titling requirements but also upon completion of a planned rezoning of East Kalimantan which is continuing to progress slowly through the governmental authorities who must approve it.
The fully titled areas include 3,557 hectares that are the subject of third party claims in respect of the rights to coal underneath such land. This hectarage, together with a further 2,212 hectares of land allocated but not yet fully titled, is the subject of the conditional settlement agreement reached on 30 December 2011 to resolve such claims. Under this agreement, the group will relinquish the areas in question in exchange for 9,097 hectares of fully titled nearby land held by another company of which ownership will be transferred to the group. Upon, and subject to completion of, this agreement, the fully titled land areas held by the group will increase to 76,124 hectares, while the land allocations still subject to titling will reduce to 24,902 hectares.
Titling of the remaining land allocations may be expected to result in full titles being granted to only part of the allocated areas as areas the subject of conflicting land claims or deemed unsuitable for oil palm cultivation may be excluded. Moreover, not all of the areas in respect of which full land use titles are issued can be planted with oil palms. Some fully titled land may be unsuitable for planting, a proportion will be set aside for conservation and a further proportion is required for roads, buildings and other infrastructural facilities. The directors believe that, of the 76,124 hectares of post settlement fully titled land, between 50,000 and 55,000 hectares will ultimately be plantable with oil palms. The remaining land allocations may in due course provide a further 10,000 plantable hectares.
Areas planted and in the course of development as at 31 December 2011 amounted in total to some 37,000 hectares. Of this total, mature plantings comprised 25,415 hectares having a weighted average age of 10 years. A further 1,234 hectares planted in 2008 was scheduled to come to maturity at the start of 2012. The total of 37,000 hectares includes 2,164 hectares (of which 272 hectares were planted in 2008) to be relinquished upon completion of the land settlement arrangement described above.
Coal operations
The group's major concentration to-date in its embryonic coal mining activities has been on establishing a commercial level of production from the Kota Bangun concession. During 2010, land compensation was completed, mining and environmental management plans settled, necessary permits for mining operations obtained and arrangements for evacuating mined coal concluded. Pre-stripping and removal of overburden (being earth and rock overlaying the coal) started in November 2010 and the coal seams were exposed early in 2011.
In the six months to end June 2011, mining operations at the Kota Bangun concession produced some 20,000 tonnes of coal. The group was aiming to build up to a production level within 2011 of some 16,000 tonnes per month. As previously reported, however, operations were halted in the middle of 2011 following cancellation of the contract with the principal mining contractor who had run into financial difficulties. The group is continuing to review its options for this concession. Further exploration drilling is being carried out to determine the full extent of the coal resource within the concession as well as the potential of an adjacent concession over which the group has secured a period of exclusivity in which to complete due diligence. Production is expected to recommence once an optimised mine plan has been completed.
Good progress is now being made with the further investigation of the Liburdinding concession where the original mining plan had to be abandoned in 2010 when it became clear that the relatively high sulphur content of the coal was making it difficult to sell. The group is looking at blending Liburdinding coal with low sulphur coal mined from a lower seam or purchased from third parties although an alternative option is simply to sell the Liburdinding production without blending and to accept a discount for the sulphur content. Additional mapping has now been completed and a drilling programme to delineate more precisely the available resource is currently in hand. This will be followed by revision of the existing mine plan with an evaluation of the most economic alternatives for selling coal from this concession, after which it is expected that production will be resumed.
Deliveries of traded coal for the year to 31 December 2011 amounted to some 266,084 tonnes. Although trading volumes grew during 2011, growth was not as rapid as was initially projected. Trading prospects do still appear positive and the group hopes to build up volumes during 2012 to an average monthly sales level of 100,000 tonnes. Coal for traded sales is currently sourced by outright purchase from third party suppliers. The option remains to develop long term arrangements for meeting a proportion of the traded coal requirement by mining third party owned concessions against payment of royalties.
Social responsibility
In the agricultural operations, good progress was made during 2011 in completing the planting up of the plasma scheme areas already under development although in identifying additional land areas for plasma development have meant that plans for the further expansion of plasma schemes have taken longer to finalise than originally hoped. The plasma scheme areas planted at 31 December 2011 amounted to 2,623 hectares (2010: 2,131 hectares). Together, these areas are owned by 6 cooperatives with participating members from 10 local villages. With allocations of additional land now under negotiation and existing allocated areas already under development, a useful further increase in plasma areas should be achievable during 2012.
External financing for the group supported plasma schemes initiated to-date has been agreed with a local development bank in the form of fifteen year loans secured on the land and assets of the schemes and guaranteed by the group. These facilities are designed to finance most of the initial development costs of the schemes but will be supplemented to the extent necessary by funds advanced by the group. A first facility was signed in 2010 and is already being utilised. Two further facilities were agreed during 2011 and are expected to be available for drawing during 2012.
The group's conservation department (conducting its activities under the name "REA Kon") continues to expand its database of flora and fauna found within the group's conservation reserves and neighbouring watercourses. In addition, steps are being taken to educate and incentivise the group's resident workforce and its dependants to segregate domestic waste so as to permit recycling of organic and plastic waste. During 2011, REA Kon ran further conservation programmes and education camps for school children as well as a field course entitled "Practical Conservation for Plantations" for a large palm oil company with plantations in Kalimantan. Revenue generated by the latter training course was utilised to support the group's charitable foundation, the Yayasan Ulin or Ironwood Foundation ("YU"). The group has recently established a UK registered charity, The Ironwood Foundation (registered charity number 1145410), to act as a "feeder charity" to YU so as to permit UK donors wishing to support YU to make donations with the benefit of the UK tax incentives available for donations to UK registered charities.
During 2011, the group's principal operating subsidiary, PT REA Kaltim Plantations ("REA Kaltim"), and its associated smallholders were granted accreditation by the Roundtable on Sustainable Palm Oil ("RSPO") for their oil palm plantings and the two REA Kaltim oil mills. Further audits for RSPO accreditation of the established areas held by another of the group's operating subsidiaries took place in early 2012 and certification is expected to be received shortly. Development of new planting areas is being carried out in accordance with the RSPO "New Plantings Procedures".
As a further step in the process of RSPO accreditation of its operations, the group is now also seeking certification of its supply chain under the Supply Chain Certification System ("SCCS"). Separately, it plans to seek certification of its biomass production under the terms of the EU Renewable Energy Directive ("International Sustainability & Carbon Certification" or "ISCC"). This latter should permit the group to export the group's CPO to Europe at a premium price for use as a sustainable bio-fuel in the production of energy.
In the coal operations, the group also remains committed to observing international standards of best environmental and corporate social practice.
Finance
In July 2011, 15 million new preference shares were issued for cash at a price of 103p per share by way of a placing to raise £15 million ($24.3 million) net of expenses. This issue was followed in September 2011 by the issue of a further 2,004,872 new preference shares by way of capitalisation of share premium account pursuant to the capitalisation issue to ordinary shareholders referred to under "Dividends" below.
The proceeds of the placing of new preference shares were applied in reducing indebtedness. Following such reduction, group indebtedness and related engagements at 31 December 2011 amounted to $96.0 million, made up of $35 million nominal of dollar notes (carrying value: $34.0 million), £34.5 million nominal of 9.5 per cent guaranteed sterling notes 2015/17 ("sterling notes") (carrying value: $51.3 million), $10.8 million in respect of the hedge of the principal amount of the sterling notes, $1.5 million in respect of the KCC participating preference shares (which are classified as debt), a term loan from an Indonesian bank of $27.0 million and other short term indebtedness comprising drawings under working capital lines of $2.0 million. Against this indebtedness, at 31 December 2011 the group held cash and cash equivalents of $30.6 million.
Planned extension planting and the requirement for investment in estate buildings and other estate plant and equipment that follows any expansion of the group's planted hectarage, will involve the group in continuing significant capital expenditure for several years to come. In addition, completion of construction of the group's third oil mill and the two new methane conversion plants, together with housing and associated infrastructure, is expected to involve further expenditure of some $30 million in 2012. If CPO prices remain at good levels and existing term loans are refinanced as they mature over the next six years, the directors expect that such capital expenditure can be largely funded from internal cash flow.
The directors intend that further cash advances to the coal operations should be limited to the amount required to complete development of the existing coal concessions. Any expansion beyond this should be self-financing.
Dividends
The fixed semi-annual dividends on the 9 per cent cumulative preference shares that fell due on 30 June and 31 December 2011 were duly paid. An interim dividend in respect of 2011 of 3p per ordinary share was paid in January 2012 and the directors recommend the payment of a final dividend in respect of 2011 of 3½ p per ordinary share to be paid on 27 July 2012 to ordinary shareholders on the register of members on 29 June 2012. The total dividend payable per ordinary share during 2012 in respect of 2011 will thus amount to 6½p. This compares with the total paid during 2011 in respect of 2010 of 5½p.
In recent years, the group has invested heavily in the development of its agricultural operations. This has entailed major capital expenditure and the need to fund this expenditure has constrained the rates at which the directors have felt that they can prudently declare, or recommend the payment of, ordinary dividends. They believe that capitalisation issues of new preference shares to ordinary shareholders provide a useful mechanism for augmenting returns to ordinary shareholders in periods in which good profits are achieved but demands on cash resources limit the scope for payment of cash dividends. In line with this thinking, a capitalisation issue of 2,004,872 new preference shares was made to ordinary shareholders on 29 September 2011 on the basis of 3 new preference shares for every 50 ordinary shares held on 28 September 2011.
If the intended listing of REA Kaltim on the Jakarta Stock Exchange (as referred to below) proceeds and it is decided that the listing should be accompanied by an exchange of a proportion of existing issued ordinary shares of the company for preference shares, the directors expect that any capitalisation issue of new preference shares to ordinary shareholders that they might consider it appropriate to propose during 2012 would be effected in combination with such exchange rather than made separately.
Looking forward, if REA Kaltim becomes listed, it is expected that the planned future expansion of the agricultural operations will permit REA Kaltim to distribute each year around one third of its after tax profits. The directors then intend that the company should adopt a policy of distributing to its ordinary and preference shareholders a large proportion of its share of the REA Kaltim dividends. In practice if, as is contemplated, a proportion of ordinary shares is exchanged for preference shares, this is likely to mean that, for the immediate future, the company's progressive but conservative ordinary dividend policy will simply continue but those ordinary shareholders who wish to obtain a higher yield from their investment in the company will be able to do so by retaining some or all of the preference shares that they will receive as a result of the partial exchange of ordinary shares for preference shares.
Strategic direction and succession
As shareholders will be aware from past annual reports, the directors have for some time been debating how the group should in future be structured and managed. This debate has been prompted by a combination of factors: the significant enlargement of the group's operations over the past decade, the continuing growth of the Indonesian economy, the progressive maturing of South East Asian capital markets and the ageing of the group's existing senior management.
The directors have now reached certain conclusions. They have rejected the idea which they were at one time considering of reconstituting the group under the ownership of a new parent company listed on a stock exchange in a South East Asian financial centre. Instead, the directors aim to amalgamate all of the group's Indonesian plantation subsidiaries into a single sub-group, headed by the group's principal plantation subsidiary, PT REA Kaltim Plantations ("REA Kaltim"), to sell, to the investing public in Indonesia, a minority shareholding in REA Kaltim (probably 20 per cent) and to list REA Kaltim on the Jakarta Stock Exchange. This could be expected to encourage coverage of the group by South East Asian investment analysts, this being one perceived advantage of a restructuring under a South East Asian listed parent, but would be less expensive to arrange than such a restructuring. Moreover, listing REA Kaltim in Jakarta would have the particular advantage that, as a listed company, REA Kaltim would be treated as a local rather than foreign company for Indonesian regulatory purposes.
The consequence of this proposed course of action is that the company will, for the foreseeable future, remain listed in the UK. However, the directors intend that the management of the group will progressively move to Singapore and Indonesia and that the group's London office will, over time, be reduced to a secretariat managing the company's UK listing and liaising with European shareholders. The existing group managing director and the chairman will remain UK based and are expected to continue in their current roles for a period at least sufficient to ensure management continuity. Following their eventual retirement, it is planned that most of their responsibilities will transfer to Singapore and Indonesia.
The directors believe that establishing a more local profile for the group and facilitating local Indonesian investment in the group's plantation operations is likely to become an increasingly important factor in determining whether the group is able to add to its existing land holdings. Moreover, the directors believe that it is now possible to attract management willing to live and work in Singapore and Indonesia of the calibre needed to run the group and that basing senior management in the same time zone as the group's operations will facilitate management oversight and improve management effectiveness.
Following the steps taken in previous years to enhance operational and administrative management capacity in Indonesia, during 2011 the group established a small regional office in Singapore and recruited a senior executive, Mark Parry, to head this office and assume overall local charge of the Indonesian operations. It is intended that Mr Parry will be appointed as president of REA Kaltim's board of directors with the incumbent president director moving to become chairman of the board of commissioners. These two officials, combined with REA Kaltim's expatriate chief operating and chief financial officers, establish the leadership required to proceed with the planned listing of REA Kaltim.
Whilst the senior executive management of REA Kaltim following the planned listing will be provided by a triumvirate of expatriates, REA Kaltim's president commissioner will be a senior Indonesian national. The group's coal operations are also under the overall charge of an Indonesian national. As a foreign investor in Indonesia, the group needs to remain aware that it is in essence a guest in Indonesia and an understanding of local customs and sensitivities is important. The group's ability to rely on senior Indonesians to handle its interface with Indonesia is therefore a significant asset.
The directors are not motivated in proposing the listing of REA Kaltim on the Jakarta Stock Exchange by any perceived need to secure additional equity capital. Rather, the directors consider that, to the extent that cash is raised from a sale of REA Kaltim shares in Jakarta, the existing equity capital of the company should effectively be reduced. However, the directors also wish the group to take maximum advantage of the new capital that the proposed sale would raise.
Accordingly, if the proposed sale of REA Kaltim shares in Jakarta proceeds, the directors are contemplating the submission to shareholders of a proposal for the exchange of a proportion of issued ordinary shares for preference shares. Such an exchange would not only effectively reduce the equity capital of the company by substituting preference share capital for equity but would also mean that the net cash proceeds from the sale of REA Kaltim shares would remain available to the group and could be used to fund an accelerated expansion programme. Operating cash flows could then be used in part to fund progressive repayment of existing indebtedness with the effect that, over time, existing debt would be replaced by preference share capital.
Corporate governance
In its 2011 evaluation of its performance, the board concluded that it was performing effectively as currently constituted and that its effectiveness was not only not compromised but in fact augmented by the presence of several long serving non-executive directors with a deep knowledge of the plantation industry and the group's own affairs and, in several cases, with material holdings of the company's shares. The board saw as its most immediate challenge establishing the structure and direction of the group going forward and arranging a smooth transition to a younger generation of senior executive management. The board reconfirmed its previous conclusion that once these objectives had been substantially achieved it would be appropriate that the board itself should be reorganised.
The steps being taken in relation to future structure and direction are described above and it is hoped that the planned Jakarta listing of REA Kaltim can be completed during 2012. The four long serving independent non-executive directors, Messrs Green-Armytage, Keatley, Letts and Lim then intend to retire. This will reduce the number of board members to four. It is then proposed to invite Mr Parry to join the board as an executive director and to appoint one new independent non-executive director who has still to be selected.
Prospects
The group's own FFB crop for 2012 has been budgeted at 682,000 tonnes with a normal budgetary assumption of average rainfall (both as to quantum and distribution). The FFB crop to end March 2012 amounted to 136,702 tonnes against the budget for the period of 167,804 tonnes. The directors do not believe that any conclusions as to the likelihood of the group achieving its budgeted crop for 2012 should be drawn from the shortfall as variations from year to year in the monthly phasing of each year's crop are normal. External purchases of FFB during 2012 have been budgeted at some 30,000 tonnes.
CPO is currently trading at above $1,100 per tonne and the prices of other vegetable oils have risen commensurately. These historically high prices may be attributed to a number of factors: the demand drivers of population growth and developing world economic growth; increasing petroleum oil prices and, notwithstanding the high prices, continuing growth in consumption. World stock levels of oilseeds are not at high levels and there are current concerns that hot dry weather in North and South America will limit soybean crops in the first semester of 2012 and that this will prevent rebuilding of stocks to more normal levels. On this basis, CPO prices could reasonably be expected to remain firm for a while longer, particularly if petroleum oil prices are maintained at or near current levels.
While CPO and CPKO remain at current levels, the group will continue to enjoy excellent cash flows. With good progress being made in resolving land issues, these flows should permit the group to maintain its planned extension planting programme. Moreover, if the planned Jakarta listing of REA Kaltim can be successfully concluded, it is intended to accelerate this programme. The directors also hope that the investment in the coal operations will soon begin to show a return. The directors therefore believe that the group is well set for further growth.
ANNUAL GENERAL MEETING
The company's fifty-second annual general meeting will be held at the London office of Ashurst LLP at Broadwalk House, 5 Appold Street, London EC2A 2HA on 12 June 2012 at 10.00 am.
A resolution will be proposed at the annual general meeting to increase the authorised share capital of the company (being the maximum amount of shares in the capital of the company that the company may allot) from £55,250,000 to £60,250,000 by the creation of 5,000,000 9 per cent cumulative preference shares of £1 each ranking pari passu in all respects with the existing preference shares of the company and representing 11.1 per cent of the existing authorised preference share capital of the company.
PRINCIPAL RISKS AND UNCERTAINTIES
The group's business involves risks and uncertainties. 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.
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.
Agricultural operations
Certain of the risks identified below in relation to the agricultural operations are described as risks affecting crop. Any loss of crop or reduction in the quality of harvest will reduce revenues and thus negatively impact cash flow and profitability.
Climatic factors
Although the group's agricultural operations are located in an area of high rainfall with sunlight hours well suited to the cultivation of oil palm, climatic conditions vary from year to year and setbacks are possible.
Unusually high levels of rainfall can disrupt estate operations and result in harvesting delays with loss of oil palm fruit or deterioration in fruit quality. Unusually low levels of rainfall that lead to a water availability below the minimum required for the normal development of the oil palm may lead to a reduction in subsequent crop levels. Such reduction is likely to be broadly proportional to the size of the cumulative water deficit. Over a long period, crop levels should be reasonably predictable but there can be material variations from the norm in individual years.
Low levels of rainfall can also disrupt and, in an extreme situation (not to date experienced by the group) could bring to a standstill the river transport upon which the group is critically dependent for estate supplies and the evacuation of CPO and CPKO. In that event, harvesting may have to be suspended and crop may be lost.
Cultivation risks
As in any agricultural business, there is a risk that the group's estate operations may be affected by pests and diseases with a consequential negative impact on crop. Agricultural best practice can to some extent mitigate this risk but it cannot be entirely eliminated.
Other operational factors
The group's agricultural productivity is dependent upon necessary inputs, including, in particular, fertiliser and fuel. Whilst the directors have no reason to anticipate shortages in the availability of such inputs, should such shortages occur over any extended period, the group's operations could be materially disrupted. Equally, increases in input costs are likely to reduce profit margins.
After harvesting, FFB crops become rotten if not processed within a short period. Any hiatus in FFB collection or processing may therefore lead to a loss of crop. The group endeavours to maintain resilience in its palm oil mills with two mills (soon to be increased to three) operating separately and some ability within each mill to switch from steam based to diesel based electricity generation but such resilience would be inadequate to compensate for any material loss of processing capacity for anything other than a short time period.
The group has bulk storage facilities within its main area of agricultural operations and at its transhipment terminal downstream of the port of Samarinda. Such facilities and the further storage facilities afforded by the group's fleet of barges have hitherto always proved adequate to meet the group's requirements for CPO and CPKO storage. Nevertheless, disruptions to river transport between the main area of operations and the port of Samarinda (such as occurred in 2011 when a bridge over the Mahakam river at Tenggarong collapsed), or delays in collection of CPO and CPKO from the transhipment terminal, could result in a group requirement for CPO and CPKO storage exceeding the available capacity. This would be likely to force a temporary cessation in FFB processing with a resultant loss of crop.
The group maintains insurance for the agricultural operations to cover those risks against which the directors consider that it is economic to insure. Certain risks (including the risk of crop loss through fire and other perils potentially affecting the planted areas on the group's estates), for which insurance cover is either not available or would in the opinion of the directors be disproportionately expensive, are not insured. These risks are mitigated to the extent reasonably feasible by management practices but an occurrence of an adverse uninsured event could have a material negative impact on group cash flows and profitability.
Produce prices
The profitability and cash flow of the agricultural operations depend both upon world prices of CPO and CPKO and upon the group's ability to sell those products at price levels comparable with such world prices.
CPO and CPKO are primary commodities and as such are affected by levels of world economic activity and factors affecting the world economy, including levels of inflation and interest rates. This may lead to significant price swings although, as noted under "Markets" in "Agricultural operations" above, the directors believe that such swings should be moderated by the fact that the annual oilseed crops account for the major proportion of world vegetable oil production and producers of such crops can reduce or increase their production within a relatively short time frame.
In the past, in times of very high CPO prices, the Indonesian authorities have for short periods imposed either restrictions on the export of CPO and CPKO or very high duties on export sales of such oil. The directors believe that when such measures materially reduce the profitability of oil palm cultivation, they are damaging not only to large plantation groups but also to the large number of smallholder farmers growing oil palm in Indonesia and to the Indonesian economy as a whole (because CPO is an important component of Indonesia's US dollar earning exports). The directors are thus hopeful that future measures affecting sales of CPO and CPKO will not seriously diminish profit margins.
Above average CPO and CPKO prices during 2007 and the early months of 2008 and again more recently from 2010 to-date have not led to a re-imposition of export restrictions. Instead, the Indonesian government continues to allow the free export of CPO and CPKO but has introduced a sliding scale of duties on exports. Furthermore, the starting point for this sliding scale is set at a level such that when CPO and CPKO prices fell back in the last quarter of 2008, the rate of export duty payable was reduced to nil.
World markets for CPO and CPKO may be distorted by the imposition of import controls or taxes in consuming countries. The directors believe that the imposition of such controls or taxes on CPO or CPKO will normally result in greater consumption of alternative vegetable oils within the area in which the controls or taxes have been imposed and the substitution outside that area of CPO and CPKO for other vegetable oils. Should such arbitrage fail to occur or prove insufficient to compensate for the market distortion created by the applicable import controls or taxes, selling prices for the group's CPO and CPKO could be depressed.
Expansion
The group is planning further extension planting of oil palm. The directors hope that unplanted land held by or allocated to the group will become available for planting ahead of the land becoming needed for development and that the development programme can be funded from available group cash resources and future operational cash flows, appropriately supplemented with further debt funding or capital raised from further issues of preference shares. Should, however, land or cash availability fall short of expectations and the group be unable to secure alternative land or funding, the extension planting programme, upon which the continued growth of the group's agricultural operations will in part depend, may be delayed or curtailed.
Any shortfall in achieving planned extensions of the group's planted areas would be likely to impact negatively the annual revaluation of the group's biological assets, the movements arising from which are dealt with in the group's income statement. Whilst this would not affect the group's underlying cash flow, it could adversely affect market perceptions as to the value of the company's securities.
Environmental, social and governance practices
The group recognises that the agricultural operations are both a large employer and have significant economic importance for local communities in the areas of the group's operations. This imposes environmental, social and governance obligations which bring with them risks that any failure by the group to meet the standards expected of it may result in reputational and financial damage. The group seeks to mitigate such risks by establishing standard procedures to ensure that it meets its obligations, monitoring performance against those standards and investigating thoroughly and taking action to prevent recurrence in respect of any failures identified.
The group's existing agricultural operations and the planned expansion of those operations are based on land areas that have been previously logged and zoned by the Indonesian authorities as appropriate for agricultural development on the basis that, regrettable as it may be from an environmental viewpoint, the logging has been so extensive that primary forest is unlikely to regenerate. Such land areas fall within a region that elsewhere includes substantial areas of unspoilt primary rain forest inhabited by diverse flora and fauna. As such, the group, in common with other oil palm growers in Kalimantan, must expect scrutiny from conservation groups and could suffer adverse consequences if its environmental policies were to be singled out for criticism by such groups.
An environmental impact assessment and master plan was constructed using independent environmental experts when the group first commenced agricultural operations in East Kalimantan and this plan is updated regularly to reflect modern practice and to take account of changes in circumstances (including planned additions to the areas to be developed by the group). Substantial conservation reserves have been established in areas already developed by the group and further reserves will be added as new areas are developed. The group actively manages these reserves and endeavours to use them to conserve landscape level biodiversity as detailed under "Conservation" in "Agricultural operations" above.
The group is committed to sustainable development of oil palm and adopts the measures described under "Sustainable practices" in "Agricultural operations" above to mitigate the risk of its operations causing damage to the environment or to its neighbours. The group supports the principles and criteria established by RSPO and has obtained RSPO accreditation for the most of its operations.
Local relations
The agricultural operations of the group could be seriously disrupted if there were to be a material breakdown in relations between the group and the host population in the area of the operations. The group endeavours to mitigate this risk by liaising regularly with representatives of surrounding villages and by seeking to improve local living standards through mutually beneficial economic and social interaction between the local villages and the agricultural operations. In particular, the group, when possible, gives priority to applications for employment from members of the local population and supports specific initiatives (as described under "Community development" and "Smallholders" in "Agricultural operations" above) to encourage local farmers and tradesmen to act as suppliers to the group, its employees and their dependents and to promote smallholder development of oil palm plantings.
The group's agricultural operations are established in a relatively remote and sparsely populated area which was for the most part unoccupied prior to the group's arrival. However, some areas of land were previously used by local villagers for the cultivation of crops. Accordingly, when taking over such areas, the group negotiates with, and pays compensation to, the affected parties.
The negotiation of compensation payments can involve a considerable number of local individuals with differing views and this can cause difficulties in reaching agreement with all affected parties. There is also a risk that, after an agreement has been completed, a party to the agreement may become disaffected with the terms agreed or the manner in which the agreement has been implemented and may seek to repudiate the agreement. Such difficulties and risk have in the past caused, and are likely to continue periodically to cause, delays to the extension planting programme and other disruptions. The group has to-date been successful in managing such periodic delays and disruptions so that they have not, in overall terms, materially disrupted the group's extension planting programme or operations generally, but there is a continuing risk that they could do so.
Coal operations
Operational risks
Coal delivery volumes from the group's own concession are dependent upon efficiency of production and this can be disrupted by external factors outside the group's control such as the heavy rains that are common in East Kalimantan. Failure to achieve budgeted delivery volumes increases unit costs and may result in operations becoming unprofitable. Whilst weather related impacts cannot be avoided, the group will seek to mitigate such risks by using experienced contractors, supervising them closely and taking care to ensure that they have equipment of capacity appropriate for the planned delivery volumes.
Traded coal delivery volumes are dependent upon supplier performance of contract obligations. The group endeavours to ensure such performance by exercising care in the selection of suppliers and direct supervision of supplier deliveries.
Adverse weather conditions can disrupt land transport of coal while heavy seas may prevent barging of coal to its agreed point of delivery. Failure to load export shipments to an agreed schedule may result in demurrage claims (damages payable for delays) which may be material. The group endeavours to minimise the demurrage risk by establishing stockpiles, and loading barges used for transferring coal from shore to ship, ahead of arrival of ships.
Mining plans are based on geological assessments and the group seeks to ensure the accuracy of those assessments by drilling ahead of any implementation of the plans. Nevertheless geological assessments are extrapolations based on statistical sampling and may prove inaccurate to an extent. In that event, unforeseen extraction complications can occur and may cause cost overruns and delays.
Price risk
The profitability and cash flow of the coal operations depend upon world prices of coal and the group's ability to sell its coal at price levels comparable with such world prices. Coal is a primary commodity and as such is affected by levels of world economic activity and factors affecting the world economy, including levels of inflation and interest rates. This may lead to significant price swings.
Coal is sold on the basis of its calorific value and other aspects of its chemical composition. Supply and demand for specific grades of coal and consequent pricing may not necessarily reflect overall coal market trends and the group may be adversely affected if it is unable to supply coal within the specifications that are at any particular time in high demand.
Environmental practices
Open cast coal mining, as conducted on the coal concessions in which the group has invested, involves the removal of substantial volumes of overburden to obtain access to the coal deposits. The prospective areas to be mined by the group do not cover a large area and the group is committed to international standards of best environmental practice and, in particular, to proper management of waste water and reinstatement of mined areas on completion of mining operations. Nevertheless, the group could sustain reputational damage as a result of environmental criticisms of the coal mining industry as a whole.
General
Currency
Because CPO, CPKO and coal are essentially US dollar based commodities, the group's revenues and the underlying value of the group's operations are effectively US dollar denominated. Moreover, substantial proportions of the group's borrowings and costs are US dollar denominated or hedged against or linked to the US dollar.
Accordingly, the principal currency risk faced by the group is that those components of group costs and funding that arise in, or are denominated in, in Indonesian rupiah and sterling and, as respects group funding, are not hedged against US dollar, may, if such currencies strengthen against the US dollar, negatively impact the group's financial position in US dollar terms.
As respects costs and share capital, the directors consider that this risk is inherent in the group's business and structure and the group does not therefore normally hedge against such risk. As respects borrowings, hedging may itself give rise to risks given the contention of the Indonesian tax authorities (as referred to under "Group results" in "Finances" above) that mark to market losses in Indonesia on hedging derivatives may not be deducted from chargeable profits for Indonesian tax purposes. The directors therefore believe that, pending clarification of this issue, it is preferable for the group to accept some currency risks in respect of borrowings than to constrain the group either to borrow only in US dollars (which may limit the group's ability to borrow or require it to borrow on terms that are in the directors' opinion sub-optimal as respects tenor, covenants or cost) or to hedge all non US dollar borrowings against the US dollar.
Counterparty risk
Export sales of CPO, CPKO and coal are made either against letters of credit or on the basis of cash against documents. However, domestic sales of CPO, CPKO and coal may require the group to provide some credit to buyers and purchases of coal for trading may require the group to part pay ahead of delivery. The group seeks to limit the counterparty risk that such credit and prepayments entail by effective credit controls. Such controls include regular reviews of buyer creditworthiness and limits on the term and amount of credit that may be extended to any one buyer and in total.
Regulatory exposure
Changes in existing, and adoption of new, laws and regulations affecting the group (including, in particular, laws and regulations relating to land tenure and mining concessions, work permits for expatriate staff and taxation) could have a negative impact on the group's activities. Many of the licences, permits and approvals held by the group are subject to periodic renewal. Renewals are often subject to delays and there is always a risk that a renewal may be refused or made subject to new conditions.
Agricultural land and mining rights and interests held by the group are subject to the satisfaction of various continuing conditions, including, as respects agricultural land, conditions requiring the group to promote smallholder developments of oil palm.
Although the group endeavours to ensure that its activities are conducted only on the land areas, and within the terms of the licences, that it holds, licensing rules change frequently and boundaries of large land areas are not always clearly demarcated. There is therefore always a risk that the group may inadvertently, and to a limited extent, conduct operations for which it does not hold all necessary licences or operate on land as respects which it does not have all necessary permits.
The UK Bribery Act 2010, which applies worldwide to interests of UK companies, has created an offence of failure by a commercial organisation to prevent a bribe being paid on its behalf. Such failure may be defended if the organisation has "adequate procedures" in place to combat bribery. The group has traditionally had strong controls in this area because the group operates predominantly in Indonesia, which is classified as high risk by the International Transparency Corruption Perceptions Index 2010. These controls were further enhanced during 2011 to ensure compliance with the provisions of the Act.
Country exposure
All of the group's operations are located in Indonesia. The group is therefore significantly dependent on economic and political conditions in Indonesia. In the late 1990's, in common with other parts of South East Asia, Indonesia experienced severe economic turbulence and there have been subsequent occasional instances of civil unrest, often attributed to ethnic tensions, in certain parts of Indonesia. However, during 2011 Indonesia remained stable and the Indonesian economy continued to grow.
Freedom to operate in a stable and secure environment is critical to the group and the existence of security risks in Indonesia should never be ignored. However, the group has always sought to mitigate those risks and has never, since the inception of its East Kalimantan operations in 1989, been adversely affected by security problems.
Although there can be no certainty as to such matters, the directors are not aware of any circumstances that would lead them to believe that, under current political conditions, any government authority would revoke the registered land titles or mining rights in which the group has invested or would impose exchange controls or otherwise seek to restrict the group's freedom to manage its operations.
Miscellaneous relationships
The group is materially dependent upon its staff and employees and endeavours to manage this dependence as detailed under "Employees" in "Operations" above.
Relationships with shareholders in Indonesian group companies are also important to the group. The group endeavours to maintain cordial relations with its local investors by seeking their support for decisions affecting their interests and responding constructively to any concerns that they may have. Should such efforts fail and a breakdown in relations result, the group would be obliged to fall back on enforcing, in the Indonesian courts, the agreements governing its arrangements with its local partners with the uncertainties that any juridical process involves. Failure to enforce the agreements relating to the coal mining concessions in which the group holds interests could have a material negative impact on the value of the coal operations because the concessions are at the moment legally owned by the group's local partners and, if the arrangements with those partners were successfully to be repudiated (an eventuality that the directors consider highly unlikely), the group could lose its entire interest in the concessions.
DIRECTORS' CONFIRMATION OF RESPONSIBILITY
The directors are responsible for the preparation of the annual report.
To the best of the knowledge of each of the directors:
• the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view of the assets, liabilities, financial position and profit or loss of the company and the undertakings included in the consolidation taken as a whole; and
• the "Directors' report" section of this annual report including the "Chairman's statement" and "Review of the group" sections of this annual report which the Directors' report incorporates by reference provides a fair review of the development and performance of the business and the position of the company and the undertakings included in the consolidation taken as a whole together with a description of the principal risks and uncertainties that they face.
The current directors of the company and their respective functions are set out in the "Directors" section of the annual report.
CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2011
|
|
|
2011 |
|
2010 |
|
|
|
$'000 |
|
$'000 |
|
Revenue |
|
147,758 |
|
114,039 |
|
Net gain arising from changes in fair value of agricultural produce inventory |
|
4,011 |
|
455 |
|
Cost of sales |
|
(68,056) |
|
(48,581) |
|
|
|
_______ |
|
_______ |
|
Gross profit |
|
83,713 |
|
65,913 |
|
Net gain arising from changes in fair value of biological assets |
|
7,375 |
|
1,588 |
|
Other operating income |
|
339 |
|
449 |
|
Distribution costs |
|
(1,719) |
|
(1,455) |
|
Administrative expenses |
|
(16,959 |
|
(10,228) |
|
|
|
_______ |
|
_______ |
|
Operating profit |
|
72,749 |
|
56,267 |
|
Investment revenues |
|
2,889 |
|
1,894 |
|
Finance costs |
|
(11,465) |
|
(7,714) |
|
|
|
_______ |
|
_______ |
|
Profit before tax |
|
64,173 |
|
50,447 |
|
Tax |
|
(18,559) |
|
(15,474) |
|
|
|
_______ |
|
_______ |
|
Profit for the year |
|
45,614 |
|
34,973 |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
Attributable to: |
|
|
|
|
|
Ordinary shareholders |
|
40,453 |
|
32,325 |
|
Preference shareholders |
|
5,006 |
|
2,360 |
|
Non-controlling interests |
|
155 |
|
288 |
|
|
|
_______ |
|
_______ |
|
|
|
45,614 |
|
34,973 |
|
|
|
_______ |
|
_______ |
|
Earnings per 25p ordinary share |
|
|
|
|
|
Basic |
|
121.0 cents |
|
97.0 cents |
|
Diluted |
|
121.0 cents |
|
96.8 cents |
|
|
|
|
|
|
|
All operations for both years are continuing |
|
|
|
|
CONSOLIDATED BALANCE SHEET AT 31 DECEMBER 2011
|
|
|
2011 |
|
2010 |
|
|
|
$'000 |
|
$'000 |
|
Non-current assets |
|
|
|
|
|
Goodwill |
|
12,578 |
|
12,578 |
|
Biological assets |
|
244,433 |
|
221,883 |
|
Property, plant and equipment |
|
102,185 |
|
85,488 |
|
Prepaid operating lease rentals |
|
23,497 |
|
17,277 |
|
Indonesian coal interests |
|
28,580 |
|
18,864 |
|
Investments |
|
1,430 |
|
- |
|
Deferred tax assets |
|
4,689 |
|
5,743 |
|
Non-current receivables |
|
1,835 |
|
1,417 |
|
|
|
_______ |
|
_______ |
|
Total non-current assets |
|
419,227 |
|
363,250 |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
Inventories |
|
25,559 |
|
14,006 |
|
Investments |
|
963 |
|
- |
|
Trade and other receivables |
|
34,162 |
|
28,662 |
|
Cash and cash equivalents |
|
30,601 |
|
36,710 |
|
|
|
_______ |
|
_______ |
|
Total current assets |
|
91,285 |
|
79,378 |
|
|
|
_______ |
|
_______ |
|
Total assets |
|
510,512 |
|
442,628 |
|
|
|
_______ |
|
_______ |
|
Current liabilities |
|
|
|
|
|
Trade and other payables |
|
(19,895) |
|
(12,833) |
|
Current tax liabilities |
|
(8,349) |
|
(8,973) |
|
Bank loans |
|
(2,000) |
|
(7,850) |
|
US dollar notes |
|
(4,527) |
|
- |
|
Other loans and payables |
|
(1,353) |
|
(604) |
|
|
|
_______ |
|
_______ |
|
Total current liabilities |
|
(36,124) |
|
(30,260) |
|
|
|
_______ |
|
_______ |
|
Non-current liabilities |
|
|
|
|
|
Bank loans |
|
(27,018) |
|
(12,625) |
|
Sterling notes |
|
(51,332) |
|
(55,244) |
|
US dollar notes |
|
(29,414) |
|
(43,269) |
|
Preference shares issued by a subsidiary |
|
(1,500) |
|
(1,500) |
|
Hedging instruments |
|
(16,216) |
|
(17,726) |
|
Deferred tax liabilities |
|
(40,283) |
|
(41,010) |
|
Other loans and payables |
|
(5,680) |
|
(5,474) |
|
|
|
_______ |
|
_______ |
|
Total non-current liabilities |
|
(171,443) |
|
(176,848) |
|
|
|
_______ |
|
_______ |
|
Total liabilities |
|
(207,567) |
|
(207,108) |
|
|
|
_______ |
|
_______ |
|
Net assets |
|
302,945 |
|
235,520 |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
Share capital |
|
87,939 |
|
60,548 |
|
Share premium account |
|
21,771 |
|
24,901 |
|
Translation reserve |
|
(11,762) |
|
(18,197) |
|
Retained earnings |
|
202,763 |
|
166,228 |
|
|
|
_______ |
|
_______ |
|
|
|
300,711 |
|
233,480 |
|
Non-controlling interests |
|
2,234 |
|
2,040 |
|
|
|
_______ |
|
_______ |
|
Total equity |
|
302,945 |
|
235,520 |
|
|
|
_______ |
|
_______ |
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 DECEMBER 2011
|
|
|
2011 |
|
2010 |
|
|
|
$'000 |
|
$'000 |
|
Profit for the year |
|
45,614 |
|
34,973 |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
Other comprehensive income |
|
|
|
|
|
Changes in fair value of cash flow hedges: |
|
|
|
|
|
Gains/(losses) arising during the year |
|
1,700 |
|
(4,117) |
|
Reclassification adjustments for losses included in the consolidated income statement |
|
894 |
|
- |
|
|
|
_______ |
|
_______ |
|
|
|
2,594 |
|
(4,117) |
|
Changes in fair value of hedged instrument |
|
(303) |
|
1,825 |
|
Reclassification adjustments for gains included in the consolidated income statement |
|
(611) |
|
- |
|
Exchange differences on translation of foreign operations |
|
4,102 |
|
3,733 |
|
Tax relating to components of other comprehensive income |
|
(329) |
|
(4,944) |
|
|
|
_______ |
|
_______ |
|
|
|
5,453 |
|
(3,503) |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
Total comprehensive income for the year |
|
51,067 |
|
31,470 |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
Attributable to: |
|
|
|
|
|
Ordinary shareholders |
|
45,867 |
|
28,779 |
|
Preference shareholders |
|
5,006 |
|
2,360 |
|
Minority interests |
|
194 |
|
331 |
|
|
|
_______ |
|
_______ |
|
|
|
51,067 |
|
31,470 |
|
|
|
_______ |
|
_______ |
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER 2011
|
|
Share |
Share |
Translation |
Retained |
Sub |
Non- |
Total |
|
|
capital |
premium |
reserve |
earnings |
total |
controlling |
Equity |
|
|
|
|
|
|
|
interests |
|
|
|
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
$'000 |
|
At 1 January 2010 |
43,188 |
27,297 |
(13,630) |
136,499 |
193,354 |
1,314 |
194,668 |
|
Total comprehensive (loss)/income |
- |
- |
(3,546) |
34,685 |
31,139 |
331 |
31,470 |
|
Share based payment - deferred tax credit |
- |
- |
(1,021) |
- |
(1,021) |
- |
(1,021) |
|
Issue of new ordinary shares |
329 |
246 |
- |
- |
575 |
- |
575 |
|
Issue of new preference shares (cash) |
14,389 |
- |
- |
- |
14,389 |
- |
14,389 |
|
Issue of new preference shares (scrip) |
2,642 |
(2,642) |
- |
- |
- |
- |
- |
|
Dividends to preference shareholders |
- |
- |
- |
(2,360) |
(2,360) |
- |
(2,360) |
|
Dividends to ordinary shareholders |
- |
- |
- |
(2,596) |
(2,596) |
- |
(2,596) |
|
Changes in non-controlling interests |
- |
- |
- |
- |
- |
395 |
395 |
|
|
_____ |
_____ |
_____ |
_____ |
_____ |
_____ |
_____ |
|
At 31 December 2010 |
60,548 |
24,901 |
(18,197) |
166,228 |
233,480 |
2,040 |
235,520 |
|
Prior year reclassification |
- |
- |
1,021 |
(1,021) |
- |
- |
- |
|
Total comprehensive income |
- |
- |
5,414 |
45,459 |
50,873 |
194 |
51,067 |
|
Issue of new preference shares (cash) |
24,248 |
13 |
- |
- |
24,261 |
- |
24,261 |
|
Issue of new preference shares (scrip) |
3,143 |
(3,143) |
- |
- |
- |
- |
- |
|
Dividends to preference shareholders |
- |
- |
- |
(5,006) |
(5,006) |
- |
(5,006) |
|
Dividends to ordinary shareholders |
- |
- |
- |
(2,897) |
(2,897) |
- |
(2,897) |
|
|
_____ |
_____ |
_____ |
_____ |
_____ |
_____ |
_____ |
|
At 31 December 2011 |
87,939 |
21,771 |
(11,762) |
202,763 |
300,711 |
2,234 |
302,945 |
|
|
_____ |
_____ |
_____ |
_____ |
_____ |
_____ |
_____ |
CONSOLIDATED CASH FLOW STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2011
|
|
|
2011 |
|
2010 |
|
|
|
$'000 |
|
$'000 |
|
Net cash from operating activities |
|
33,776 |
|
21,292 |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
Investing activities |
|
|
|
|
|
Interest received |
|
2,889 |
|
1,894 |
|
Proceeds on disposal of property, plant and equipment |
|
11 |
|
158 |
|
Purchases of property, plant and equipment |
|
(19,487) |
|
(18,504) |
|
Expenditure on biological assets |
|
(18,001) |
|
(15,824) |
|
Expenditure on prepaid operating lease rentals |
|
(6,729) |
|
(3,505) |
|
Investment in Indonesian coal rights |
|
(9,717) |
|
(6,005) |
|
|
|
_______ |
|
_______ |
|
Net cash used in investing activities |
|
(51,034) |
|
(41,786) |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
Financing activities |
|
|
|
|
|
Preference dividends paid |
|
(5,006) |
|
(2,360) |
|
Ordinary dividends paid |
|
(2,897) |
|
(2,597) |
|
Repayment of borrowings |
|
(13,469) |
|
(1,500) |
|
Repayment of obligations under finance leases |
|
- |
|
(64) |
|
Proceeds of issue of ordinary shares |
|
- |
|
575 |
|
Proceeds of issue of preference shares |
|
24,260 |
|
14,389 |
|
Proceeds of issue of preference shares by a subsidiary |
|
- |
|
1,500 |
|
Issue of dollar notes, net of expenses |
|
- |
|
13,071 |
|
Redemption of US dollar notes |
|
(10,000) |
|
- |
|
Redemption of sterling notes |
|
(3,949) |
|
- |
|
Sterling note reconstruction expenses |
|
- |
|
(180) |
|
New bank borrowings drawn |
|
22,649 |
|
11,743 |
|
Changes in minority interests in subsidiaries |
|
- |
|
395 |
|
|
|
_______ |
|
_______ |
|
Net cash from/(used in) financing activities |
|
11,588 |
|
34,972 |
|
|
|
_______ |
|
_______ |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
Net increase/(decrease) in cash and cash equivalents |
|
(5,670) |
|
14,478 |
|
Cash and cash equivalents at beginning of year |
|
36,710 |
|
22,050 |
|
Effect of exchange rate changes |
|
(439) |
|
182 |
|
|
|
_______ |
|
_______ |
|
Cash and cash equivalents at end of year |
|
30,601 |
|
36,710 |
|
|
|
_______ |
|
_______ |
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of preparation
The accompanying financial statements and notes 1 to 14 below (together the "accompanying financial information") have been extracted without material adjustment from the statutory accounts of the company for the year ended 31 December 2011 (the "2011 statutory accounts"). The auditor has reported on those accounts; the reports were unqualified and did not contain statements under sections 498(2) or (3) of the Companies Act 2006. Copies of the 2011 statutory accounts will be filed in the near future with the Registrar of Companies. The accompanying financial information does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006 of the company.
Whilst the 2011 statutory accounts have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union as at the date of authorisation of those accounts, the accompanying financial information does not itself contain sufficient information to comply with IFRS.
The 2011 statutory accounts and the accompanying financial information were approved by the board of directors on 27 April 2012.
2. Revenue
|
|
|
2011 |
|
2010 |
|
|
|
$'000 |
|
$'000 |
|
Sale of goods |
|
147,523 |
|
113,805 |
|
Revenue from services |
|
235 |
|
234 |
|
|
|
_______ |
|
_______ |
|
|
|
147,758 |
|
114,039 |
|
Other operating income |
|
339 |
|
449 |
|
Investment income |
|
2,889 |
|
1,894 |
|
|
|
_______ |
|
_______ |
|
Total revenue |
|
150,986 |
|
116,382 |
|
|
|
_______ |
|
_______ |
3. Agricultural produce inventory movement
The net gain arising from changes in fair value of agricultural produce inventory represents the movement in the fair value of that inventory less the amount of the movement in such inventory at historic cost (which is included in cost of sales).
4. Segment information
In the table below, the group's sales of goods are analysed by geographical destination and the carrying amount of net assets is analysed by geographical area of asset location.
|
|
|
2011 |
|
2010 |
|
|
|
$'m |
|
$'m |
|
Sales by geographical location: |
|
|
|
|
|
Indonesia |
|
53.2 |
|
47.0 |
|
Rest of Asia |
|
94.3 |
|
66.8 |
|
|
|
_______ |
|
_______ |
|
|
|
147.5 |
|
113.8 |
|
|
|
_______ |
|
_______ |
|
Carrying amount of segment net assets by geographical area of asset location:
|
|
|
|
|
|
UK, Continental Europe and Singapore |
|
44.6 |
|
23.8 |
|
Indonesia |
|
258.3 |
|
211.7 |
|
|
|
_______ |
|
_______ |
|
|
|
302.9 |
|
235.5 |
|
|
|
_______ |
|
_______ |
The group has three reportable segments under IFRS 8. These comprise two operating segments, cultivation of oil palms and coal operations, and a head office segment comprising the activities of the parent company and its UK, European and Singaporean subsidiaries. Segment profit is the operating profit or loss earned by each segment before investment revenues, finance costs and taxation. This is the measure by which the group's chief executive assesses segment performance.
|
Year to 31 December 2011 |
Plantations |
Coal |
Head Office |
Total |
|
|
$'000 |
|
$'000 |
$'000 |
|
Revenue |
129,542 |
18,216 |
- |
147,758 |
|
|
_______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
Gross profit |
82,218 |
1,495 |
- |
83,713 |
|
Net gain from changes in fair value of biological assets |
7,375 |
- |
- |
7,375 |
|
Other operating income |
339 |
- |
- |
339 |
|
Distribution costs |
(1,719) |
- |
- |
(1,719) |
|
Administrative expenses |
(10,756) |
(1,158) |
(5,045) |
(16,959) |
|
|
_______ |
_______ |
_______ |
_______ |
|
Operating profit/(loss) |
77,457 |
337 |
(5,045) |
72,749 |
|
|
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
Investment revenues |
|
|
|
2,889 |
|
Finance costs |
|
|
|
(11,465) |
|
|
|
|
|
_______ |
|
Profit before taxation |
|
|
|
64,173 |
|
Taxation |
|
|
|
(18,559) |
|
|
|
|
|
_______ |
|
Profit for the period |
|
|
|
45,614 |
|
|
|
|
|
_______ |
|
|
|
|
|
|
|
Consolidated total assets |
453,384 |
36,403 |
20,725 |
510,512 |
|
Consolidated total liabilities |
113,379 |
2,341 |
91,847 |
207,567 |
|
Depreciation charged to consolidated income statement |
5,385 |
7 |
52 |
5,444 |
|
Additions to non-current assets |
51,686 |
9,721 |
1,630 |
63,037 |
|
|
_______ |
_______ |
_______ |
_______ |
|
Year to 31 December 2010 |
Plantations |
Coal |
Head Office |
Total |
|
|
$'000 |
|
$'000 |
$'000 |
|
Revenue |
109,866 |
4,171 |
2 |
114,039 |
|
|
_______ |
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
Gross profit |
65,612 |
300 |
1 |
65,913 |
|
Net gain from changes in fair value of biological assets |
1,588 |
- |
- |
1,588 |
|
Other operating income |
449 |
- |
- |
449 |
|
Distribution costs |
(1,455) |
- |
- |
(1,455) |
|
Administrative expenses |
(5,914) |
(310) |
(4,004) |
(10,228) |
|
|
_______ |
_______ |
_______ |
_______ |
|
Operating profit/(loss) |
60,280 |
(10) |
(4,003) |
56,267 |
|
|
_______ |
_______ |
_______ |
|
|
|
|
|
|
|
|
Investment revenues |
|
|
|
1,894 |
|
Finance costs |
|
|
|
(7,714) |
|
|
|
|
|
_______ |
|
Profit before taxation |
|
|
|
50,447 |
|
Taxation |
|
|
|
(15,474) |
|
|
|
|
|
_______ |
|
Profit for the period |
|
|
|
34,973 |
|
|
|
|
|
_______ |
|
|
|
|
|
|
|
Consolidated total assets |
391,833 |
23,434 |
27,361 |
442,628 |
|
Consolidated total liabilities |
102,834 |
778 |
103,496 |
207,108 |
|
Depreciation charged to consolidated income statement |
3,667 |
6 |
41 |
3,714 |
|
Additions to non-current assets |
40,623 |
6,087 |
13 |
46,723 |
|
|
_______ |
_______ |
_______ |
_______ |
5. Administrative expenses
|
|
|
2011 |
|
2010 |
|
|
|
$'000 |
|
$'000 |
|
Net foreign exchange losses/(gains) |
|
519 |
|
(74) |
|
Release of provision for UK pension |
|
(253) |
|
(225) |
|
Loss on disposal of fixed assets |
|
408 |
|
- |
|
Indonesian operations |
|
11,445 |
|
6,254 |
|
Head office |
|
4,840 |
|
4,273 |
|
|
|
_______ |
|
_______ |
|
|
|
16,959 |
|
10,228 |
|
|
|
_______ |
|
_______ |
6. Finance costs
|
|
|
2011 |
|
2010 |
|
|
|
$'000 |
|
$'000 |
|
Interest on bank loans and overdrafts |
|
2,510 |
|
974 |
|
Interest on US dollar notes |
|
3,671 |
|
3,883 |
|
Interest on sterling notes |
|
5,679 |
|
5,666 |
|
Interest on obligations under finance leases |
|
- |
|
1 |
|
Reclassification from translation reserve in equity |
|
283 |
|
- |
|
Other finance charges |
|
1,942 |
|
1,910 |
|
|
|
_______ |
|
_______ |
|
|
|
14,085 |
|
12,434 |
|
Amount included as additions to biological assets |
|
(2,620) |
|
(4,720) |
|
|
|
_______ |
|
_______ |
|
|
|
11,465 |
|
7,714 |
|
|
|
_______ |
|
_______ |
The reclassification from equity arises from the early repurchase for redemption of £2.46 million of 9.5 per cent guaranteed sterling notes 2015/17 which was hedged by a cross currency interest swap. Deferred tax previously provided in respect of this amount has also been reclassified to income.
Amount included as additions to biological assets arose on borrowings applicable to the Indonesian operations and reflected a capitalisation rate of 20.9 per cent (2010: 39.7 per cent); there is no directly related tax relief.
7. Tax
|
|
|
2011 |
|
2010 |
|
|
|
$'000 |
|
$'000 |
|
Current tax: |
|
|
|
|
|
UK corporation tax |
|
- |
|
1,042 |
|
Foreign tax |
|
14,634 |
|
12,817 |
|
|
|
_______ |
|
_______ |
|
Total current tax |
|
14,634 |
|
13,859 |
|
|
|
_______ |
|
_______ |
|
Deferred tax: |
|
|
|
|
|
Current year |
|
3,925 |
|
1,615 |
|
|
|
_______ |
|
_______ |
|
Total tax |
|
18,559 |
|
15,474 |
|
|
|
_______ |
|
_______ |
Taxation is provided at the rates prevailing for the relevant jurisdiction. For Indonesia, the current and deferred taxation provision is based on a tax rate of 25 per cent (2010: 25 per cent) and for the United Kingdom, the taxation provision reflects a corporation tax rate of 26.5 per cent (2010: 28 per cent) and a deferred tax rate of 26 per cent (2010: 28 per cent).
8. Earnings per share
|
|
|
2011 |
|
2010 |
|
|
|
$'000 |
|
$'000 |
|
Earnings for the purpose of earnings per share* |
|
40,453 |
|
32,325 |
|
|
|
_______ |
|
_______ |
|
* being net profit attributable to ordinary shareholders |
|
|
|
|
|
|
|
'000 |
|
'000 |
|
Weighted average number of ordinary shares for the purposes of basic earnings per share |
|
33,415 |
|
33,343 |
|
Effect of dilutive potential ordinary shares |
|
- |
|
66 |
|
|
|
_______ |
|
_______ |
|
Weighted average number of ordinary shares for the purposes of diluted earnings per share |
|
33,415 |
|
33,409 |
|
|
|
_______ |
|
_______ |
9. Dividends
|
|
|
2011 |
|
2010 |
|
|
|
$'000 |
|
$'000 |
|
Amounts paid and recognised as distributions to equity holders: |
|
|
|
|
|
Preference dividends of 9p per share |
|
5,006 |
|
2,360 |
|
Ordinary dividends of 5.5p per share (2010: 4.5p) |
|
2,897 |
|
2,596 |
|
|
|
_______ |
|
_______ |
|
|
|
7,903 |
|
4,956 |
|
|
|
_______ |
|
_______ |
10. Biological assets
|
|
|
2011 |
|
2010 |
|
|
|
$'000 |
|
$'000 |
|
Beginning of year |
|
221,883 |
|
204,087 |
|
Reclassification of infrastructure |
|
- |
|
1,076 |
|
Additions to planted area and costs to maturity |
|
15,502 |
|
15,028 |
|
Transfers (to)/from property, plant and equipment |
|
(76) |
|
772 |
|
Transfers to non-current receivables |
|
(3) |
|
(227) |
|
Transfers to current receivables |
|
(248) |
|
(441) |
|
Net biological gain |
|
7,375 |
|
1,588 |
|
|
|
_______ |
|
_______ |
|
End of year |
|
244,433 |
|
221,883 |
|
|
|
_______ |
|
_______ |
|
Net biological gain comprises: |
|
|
|
|
|
Fair value of crops harvested during the year |
|
(90,906) |
|
(65,344) |
|
Gain arising from changes in fair value attributable to physical changes |
|
87,186 |
|
66,932 |
|
Gain arising from changes in fair value attributable to price changes |
|
11,095 |
|
- |
|
|
|
_______ |
|
_______ |
|
|
|
7,375 |
|
1,588 |
|
|
|
_______ |
|
_______ |
The fair value determination assumed a discount rate of 16 per cent in the case of PT REA Kaltim Plantations ("REA Kaltim"), 17.5 per cent in the case of PT Sasana Yudha Bhakti ("SYB") and 19 per cent in the case of all other group companies (2010: 16 per cent in the case of REA Kaltim, 17.5 per cent in the case of SYB and 19 per cent in the case of all other group companies) and a standard unit margin of $52.50 per tonne of oil palm fresh fruit bunches ("FFB"). (2010: standard unit margin of $50.00 per tonne of FFB).
The fair valuation of the group's biological assets as at 31 December 2011 determined on the basis of the methodology utilised as at 31 December 2010 would have amounted to $232 million.
The valuation of the group's biological assets would have been reduced by $13,600,000 (2010: $12,560,000) if the crops projected for the purposes of the valuation had been reduced by 5 per cent; by $12,890,000 (2010: $12,000,000) if the discount rates assumed had been increased by 1 per cent and by $25,880,000 (2010: $25,100,000) if the assumed unit profit margin per tonne of oil palm FFB had been reduced by $5.
As a general rule, all palm products produced by the group are sold at prices prevailing immediately prior to delivery but on occasions, when market conditions appear favourable, the group makes forward sales at fixed prices. When making such sales, the group would not normally commit more than 60 per cent of its projected production for a forthcoming period of twelve months. At 31 December 2011, the group had no outstanding forward sale contracts at fixed prices (2010: none).
At 31 December 2011, the group had outstanding forward sales of 6,000 tonnes per month for the eleven month period to November 2012, on terms that the sales price of each delivery be determined immediately ahead of delivery by reference to prevailing open market prices (31 December 2010: 6,000 tonnes per month for the five month period to 31 May 2011).
At the balance sheet date, biological assets of $64,349,000 (2010: $215,700,000) had been charged as security for bank loans (see note 23) but there were otherwise no restrictions on titles to the biological assets (2010: none). Expenditure approved by the directors for the development of immature areas in 2012 amounts to $47,000,000 (2010: $33,000,000).
10. Capital expenditure on property, plant and equipment and capital commitments
During the year, there were additions to property, plant and equipment of $22,192,000 (2010: $19,276,000).
At the balance sheet date, the group had entered into contractual commitments for the acquisition of property, plant and equipment amounting to $37,849,000 (2010: $1,367,000).
11. Issuance of equity securities
Changes in share capital:
• on 14 June 2011, the authorised share capital of the company was increased from £37,750,000 to £55,250,000 by the creation of 17,500,000 new 9 per cent cumulative preference shares.
• on 19 July 2011, 15,000,000 9 per cent cumulative preference shares were issued, fully paid, by way of a placing at 103p per share.
• on 29 September 2011, 2,004,872 9 per cent cumulative preference shares were issued, credited as fully paid, to ordinary shareholders by way of capitalisation of share premium account.
12. Movement in net borrowings
|
|
|
2011 |
|
2010 |
|
|
|
$'000 |
|
$'000 |
|
Change in net borrowings resulting from cash flows: |
|
|
|
|
|
(Decrease)/increase in cash and cash equivalents |
|
(5,670) |
|
14,478 |
|
Net increase in borrowings |
|
(9,180) |
|
(10,243) |
|
|
|
_______ |
|
_______ |
|
|
|
(14,850) |
|
4,235 |
|
Issue of US dollar notes, net of amortisation issue expenses |
|
- |
|
(13,579) |
|
Redemption of US dollar notes, net of amortisation issue expenses |
|
9,328 |
|
- |
|
Redemption of sterling notes, net of amortisation issue expenses |
|
3,609 |
|
- |
|
Sterling note reconstruction expenses less amortisation |
|
- |
|
(104) |
|
Proceeds of issue of preference shares by a subsidiary |
|
- |
|
(1,500) |
|
Lease repayments |
|
- |
|
64 |
|
|
|
_______ |
|
_______ |
|
|
|
(1,913) |
|
(10,884) |
|
Currency translation differences |
|
501 |
|
1,981 |
|
Net borrowings at beginning of year |
|
(83,778) |
|
(74,875) |
|
|
|
_______ |
|
_______ |
|
Net borrowings at end of year |
|
(85,190) |
|
(83,778) |
|
|
|
_______ |
|
_______ |
13. Related parties
Transactions between the company and its subsidiaries, which are related parties, have been eliminated on consolidation and are not disclosed in this note. Transactions between the company and its subsidiaries are dealt with in the company's individual financial statements. The remuneration of the directors, who are the key management personnel of the group, is set out below in aggregate for each of the categories specified in IAS 24 "Related party disclosures".
|
|
|
2011 |
|
2010 |
|
|
|
$'000 |
|
$'000 |
|
Short term benefits |
|
1,315 |
|
1,128 |
|
Post employment benefits |
|
- |
|
- |
|
Other long term benefits |
|
- |
|
- |
|
Termination benefits |
|
- |
|
- |
|
Share based payments |
|
- |
|
- |
|
|
|
_______ |
|
_______ |
|
|
|
1,315 |
|
1,128 |
|
|
|
_______ |
|
_______ |
14. Events after the reporting period
An interim dividend of 3p per ordinary share in respect of the year ended 31 December 2011 was paid on 27 January 2012. In accordance with IAS10 "Events after the reporting period" this dividend, amounting in aggregate to $1,562,000, has not been reflected in these financial statements.
Press enquiries to:
Richard Robinow
R.E.A. Holdings plc
Tel: 020 7436 7877
This information is provided by RNS
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