from R.E.A. Holdings Plc (isin : GB0002349065)
R.E.A. Holdings plc: Annual report in respect of 2022
R.E.A. Holdings plc (RE.) R.E.A. HOLDINGS PLC (the “company”)
ANNUAL FINANCIAL REPORT 2022
The company's annual report for the year ended 31 December 2022 (including notice of the annual general meeting to be held on 8 June 2022) (the “annual report”) will shortly be available for downloading from www.rea.co.uk/investors/financial-reports.
A copy of the notice of annual general meeting will also be available to download from www.rea.co.uk/investors/calendar.
Upon completion of bulk printing, copies of the annual report will be despatched to persons entitled thereto and will be submitted to the National Storage Mechanism to be made available for inspection at https://data.fca.org.uk/#/nsm/nationalstoragemechanism.
The sections below entitled “Chairman's statement", “Dividends”, “Principal risks and uncertainties”, “Viability statement”, “Going concern” and “Directors' responsibilities” have been extracted without material adjustment from the annual report. The basis of presentation of the financial information set out below is detailed in note 1 to the financial statements below.
HIGHLIGHTS
Overview
Financial
Agricultural operations
Stone and coal
Environmental, social and governance
Outlook
CHAIRMAN'S STATEMENT
Following on from the group’s return to profitability in 2021 and the continuing better CPO prices, 2022 was a year of consolidation for the group. Good revenues, reflecting the CPO prices largely offsetting inflationary pressures on costs, enabled a number of key projects to be undertaken, including investment in the transport fleet, improvements to infrastructure including housing stock, the commencement of replanting, and the resumption of extension planting. Expansion of the group’s third oil mill at Satria ("SOM"), doubling its capacity, was also completed during the year.
The investment in the transport fleet (mainly in new tractors and trucks), together with the continuing programme of stoning the group’s road network to improve durability, should afford the group greater resilience to periods of heavy rainfall and thereby benefit harvesting and crop evacuation. Additionally, completion of modification works in the group’s three mills, including the SOM expansion, and, most recently, the repairs to the boiler at Perdana oil mill ("POM") (largely covered by the groups’ insurance arrangements), should enhance the group’s resilience in the mills, facilitating essential maintenance and repairs, as well as ensuring ample processing capacity for the group’s own FFB production and that of third party suppliers. Further, the processing capacity that has been added will allow for the separation of fully certified sustainable FFB from other FFB. This should permit sales of the CPO produced from the sustainable FFB as segregated sustainable CPO, which normally commands a price premium.
The group remains committed to ensuring that its environmental, social and governance ("ESG") policies and practices meet the challenges of climate change and biodiversity loss and can deliver sustainable growth for the benefit of all stakeholders. A review of the group’s sustainability strategy and practices undertaken during 2022 concluded with the development of an implementation road map for evaluating, addressing and monitoring climate-related risks and opportunities. The group has made a commitment to achieve a 50 per cent reduction in net greenhouse gas ("GHG") emissions by 2030 and to work towards the longer term objective of net-zero emissions by 2050. In support of this goal, the group has signed up to the Science Based Targets initiative ("SBTi"), is exploring a range of work programmes and has entered into collaborative agreements with various research based institutions.
The group’s annual participation in the Sustainable Palm Oil Transparency Toolkit ("SPOTT") assessment conducted by the Zoological Society of London ("ZSL") resulted in a further improvement in its score from 84.4 per cent to 87.0 per cent. The average score achieved by the 100 palm oil companies assessed was 45.4 per cent in 2022. The group was ranked 10th.
In furtherance of the group’s policy on human rights and in support of its approach to gender and ethnic diversity, the group has established a diversity, equality and inclusion ("DEI") committee with the aim of ensuring equality of opportunity and treatment at all levels in the group.
In the agricultural operations, although excessive rainfall and periodic flooding presented logistical challenges for crop evacuation throughout the year, the continuing investment in the group’s transport fleet and estate road improvements had a positive impact on both the quantity and quality of crops harvested. As expected, the group’s agricultural production increased during the second half of the year and, for the whole year, FFB harvested amounted to 765,682 tonnes, some 3.7 per cent higher than that achieved in 2021. Third party harvested and bought in FFB totalled 248,969 tonnes, compared with 210,978 tonnes in 2021, an increase of 18.0 per cent.
With the increase in crops, there was a near commensurate increase in production of CPO, CPKO and palm kernels amounting to, respectively, 218,275 tonnes (2021: 209,006 tonnes), 18,206 tonnes (2021: 17,361 tonnes) and 46,799 tonnes respectively (2021: 44,735 tonnes).
The improvement in the group’s operational and financial position in 2022 afforded the opportunity to embark on the necessary replanting of the group’s oldest mature planted areas, where crop yields are starting to ease back, and to commence resupplying the areas where original plantings had been lost through flooding, but where water levels can now be controlled following the construction of bunds. Some 245 hectares were replanted and 67 hectares resupplied.
Additionally, as planned, land preparation commenced at the group’s newest estate at PU where it is expected that an initial area of some 2,000 hectares will be planted during 2023. A further 55 hectares of extension plantings were established within the group’s already developed estates during 2022.
The benefits of a surge in CPO prices early in 2022, in line with generally higher commodity prices, were dampened by a range of measures introduced by the Indonesian government in the middle of the year aimed at supporting the local availability of cooking oil at an affordable price. The impact was a dramatic fall in the net prices receivable by the group for its oil which is sold into the local Indonesian market. However, periodic revisions to the government measures saw net prices stabilise and return to remunerative levels later in the year.
The CPO price, CIF Rotterdam, opened the year at $1,350 per tonne, and peaked at $1,990 in early March before falling to close at $995 at the end of 2022. So far in 2023, the price has traded around $1,000 per tonne and currently stands at $1,040 per tonne.
The average selling price for the group’s CPO for 2022, including premia for certified oil but net of export duty and levy, adjusted to FOB Samarinda, was $821 per tonne (2021: $777 per tonne). The average selling price for the group’s CPKO, on the same basis, was $1,185 per tonne (2021: $1,157 per tonne).
Group revenue in 2022 increased by 8.8 per cent, totalling $208.8 million compared with $191.9 million in 2021 as a result of higher average selling prices and CPO volumes. Operating costs increased by 10.0 per cent, totalling $76.6 million (2021: $69.6 million). The increase in costs partially reflected the increased FFB crop but was also due to increases in the cost of fertiliser and fuel and to the expenditure required to meet the challenges for harvesting and crop evacuation as a result of the high rainfall.
Operating profit for 2022 totalled $41.4 million, some $6.7 million lower than the corresponding figure for 2021, principally reflecting a negative movement of $5.5 million in the fair value of agricultural produce, itself in large part a consequence of the lower CPO and CPKO prices at the end of 2022 than at the end of 2021. Earnings before tax, interest, depreciation and amortisation ("EBITDA") amounted to $69.1 million, some $6.8 million lower than that achieved in 2021.
Profit before tax amounted to $42.0 million, compared with $29.2 million in 2021, after a foreign exchange gain of $14.2 million (2021: $1.2 million) relating to the sterling and rupiah borrowings and other monetary items and arising from the depreciation of sterling and the rupiah against the dollar. The investment revenue component of pre-tax profit increased to $5.6 million from $1.5 million in 2021, reflecting the inclusion of interest from, and the reversal of prior year provisions against interest receivable from, one of the coal concession holding companies that is now generating positive cash flows.
Shareholders’ funds less non-controlling interests at 31 December 2022 amounted to $233.9 million, compared with $222.4 million at the end of 2021. Non-controlling interests at 31 December 2022 totalled $23.6 million (2021: $20.3 million)
Total net indebtedness fell in 2022 and stood at $166.7 million at 31 December 2022 (2021: $175.7 million) notwithstanding a substantial commitment of funds, shortly after the commencement of the war in Ukraine, to an advance purchase of fertiliser for 2023. Following the sanctioning of the extension of the redemption date from June 2022 to June 2026 of the group’s 7.5 per cent dollar notes (the "dollar notes"), a total of $27.0 million nominal dollar notes remain outstanding, $8.6 million of which are held by the company’s wholly owned subsidiary, R.E.A. Services Limited ("REAS").
The group remains committed to a progressive reduction of its indebtedness to the extent that cash generation and demands for investment permit. The group is currently in discussion with its Indonesian banker, PT Bank Mandiri Tbk ("Bank Mandiri"), to provide a development loan to fund a proportion of the costs of the extension planting at PU. If concluded, this would moderate the speed of debt reduction but still allow for further overall reductions in net debt.
Progress during 2022 in the stone and coal concession holding companies to which the group has made loans encourages an expectation of continuing significant cash inflows from loan repayments.
Mining at the coal concession holding company, PT Indo Pancadasa Agrotama ("IPA") continued throughout 2022. A total of 11 shipments of coal mined from IPA’s southern pit were made during the year totalling some 346,000 tonnes at selling prices averaging $258 per tonne and some $22.2 million of the loans made by the group to IPA were repaid. Together with the mining of coal from IPA’s northern pit, which commenced at the end of 2022, coal operations are expected to continue at least until the end of 2024. Thereafter, it remains the directors’ intention that the group should withdraw from interest in coal.
Recent investigations of the sand in the overburden overlaying the coal at IPA have indicated that this sand has a commercial value. Subject to the requisite permits being granted, the group has agreed to acquire a 49 per cent shareholding in the company established by the group’s local partners in IPA to extract and market the sand. Arrangements have recently been concluded with IPA’s contractor to extend the mining and profit sharing arrangements relating to IPA to cover the extraction and processing of the sand.
Plans to commence quarrying of the andesite stone concession held by PT Aragon Tambang Pratama ("ATP") have recently been finalised. ATP has appointed a contractor to operate the quarry and is concluding agreements for the supply of stone to the neighbouring coal company as well as to the group, and for the use of neighbouring companies’ roads for transporting the stone. Production is due to commence shortly.
The dividends due in 2022 on the group’s 9 per cent preference shares were paid on their due dates together with a payment in December of 10p per share of the cumulative arrears of preference dividend. Provided that operational performance and cash flows continue at satisfactory levels, the directors aim to eliminate the remaining 7p per share of arrears of preference dividend by the end of 2023.
On behalf of the board, I would like to welcome Mieke Djalil who joined as a non-executive director in July 2022. Based in Indonesia, Mieke has over 35 years’ experience in business process improvement and project management. Her local, as well as international, knowledge and experience are a valuable resource for the board.
Subject to CPO and CPKO prices remaining at remunerative levels, the group should continue to generate good cash flows which should be augmented by further loan repayments from the coal and stone concession holding companies. The directors expect therefore to continue building on the improvement in the group’s operational and financial position.
David J BLACKETT Chairman
The semi-annual dividends arising on the preference shares in June and December 2022 were paid on their respective due dates. In addition, a payment of 10p per share of arrears of dividend on the group’s preference shares was paid on 31 December 2022. Provided that operational performance and cash flows continue at satisfactory levels, the directors aim to eliminate the remaining arrears of preference dividend (which amount to 7p per share) by the end of 2023.
While the dividends on the preference shares are more than six months in arrear, the company is not permitted to pay dividends on its ordinary shares. No dividend in respect of the ordinary shares has been paid in respect of 2022 or is proposed.
ANNUAL GENERAL MEETING
The sixty third annual general meeting ("AGM") of R.E.A. Holdings plc to be held at the London office of Ashurst LLP at London Fruit & Wool Exchange, 1 Duval Square, London E1 6PW on 8 June 2023 at 10.00 am.
Attendance
To help manage the number of people in attendance, we are asking that only shareholders or their duly nominated proxies or corporate representatives attend the AGM in person. Anyone who is not a shareholder or their duly nominated proxies or corporate representatives should not attend the AGM unless arrangements have been made in advance with the company secretary by emailing company.secretary@rea.co.uk.
Shareholders are strongly encouraged to submit a proxy vote on each of the resolutions in the notice in advance of the meeting:
The company will make further updates, if any, about the meeting at www.rea.co.uk/investors/regulatory-news and on the website's home page. Shareholders are accordingly requested to watch the group’s website for any such further updates.
The directors and the chairman of the meeting, and any person so authorised by the directors, reserve the right, as set out in article 67 in the company’s articles of association, to take such action as they think fit for securing the safety of people at the meeting and promoting the orderly conduct of business at the meeting.
PRINCIPAL RISKS AND UNCERTAINTIES
The group’s business involves risks and uncertainties. Those risks and uncertainties that the directors currently consider to be material or prospectively material are described below. There are or may be other risks and uncertainties faced by the group (such as future natural disasters or acts of God) that the directors currently deem immaterial, or of which they are unaware, that may have a material adverse impact on the group.
Identification, assessment, management and mitigation of the risks associated with ESG matters forms part of the group’s system of internal control for which the board has ultimate responsibility. The board discharges that responsibility as described in Corporate governance in the annual report.
Whilst the war in Ukraine has to date been perceived to have benefited CPO prices, resultant impacts on the pricing of necessary inputs to the group’s operations, such as fuel and fertiliser, has resulted in material inflation in group costs, albeit that such inflation has moderated in recent months. Moreover, lack of availability of such inputs would negatively affect the group’s production volumes.
Climate change represents an emerging risk both for the potential impacts of the group’s operations on the climate and the effects of climate change on the group’s operations. The group has been monitoring and working to minimise its GHG emissions for over ten years, with levels of GHG emissions an established key performance indicator for the group and for accreditation by the independent certification bodies to which the group subscribes. The group has made a commitment to achieve a 50 per cent reduction in GHG emissions by 2030 and to work towards the longer term objective of net-zero emissions by 2050. In furtherance of these commitments, a CCWG has been established to identify, quantify and reduce emission sources across all of the group’s operations and to set actions, priorities and timelines for the group. The group has also recently signed up to the SBTi with the aim of following the science to frame the group’s actions to reduce carbon emissions. In addition to reporting on energy consumption and efficiency in accordance with the UK government’s SECR framework, the group also includes disclosures in accordance with the TCFD recommendations in this annual report.
Material risks, related policies and the group’s successes and failures with respect to ESG matters and the measures taken in response to any failures are described in more detail under Environmental, social and governance above. 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 both identified and unidentified areas of risk, but such management cannot provide insurance against every possible eventuality.
The effect of an adverse incident relating to the stone and coal interests, as referred to below, could impact the ability of the stone and coal companies to repay their loans. As noted elsewhere in the Strategic report, it is the group’s intention to withdraw from its coal interests as soon as practicable.
Risks assessed by the directors as currently being of particular significance, including climate change, are those detailed below under:
In addition, the directors have identified IT security as a new, though not particularly significant, risk as detailed under “General” below.
The directors’ assessment, as respects produce prices and cost inflation, reflects the key importance of those risks in relation to the matters considered in the "Viability statement" below and, as respects climatic and other operational factors, the negative impact that could result from adverse incidence of such risks.
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