R.E.A. Holdings plc: Annual report in respect of 2023

R.E.A. HOLDINGS PLC (the company)

ANNUAL FINANCIAL REPORT 2023

The company's annual report for the year ended 31 December 2023 (including notice of the AGM to be held on 6 June 2024) (the annual report) will shortly be available for downloading from www.rea.co.uk/investors/financial-reports.

A copy of the notice of AGM 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

-  Implementation of several strategic initiatives to streamline the group structure and reduce net indebtedness

-  Subscription of further shares in REA Kaltim by the DSN group in March 2024 for estimated consideration of in excess of $50 million, increasing DSN’s investment in the operating sub-group from 15 per cent to 35 per cent

-  Potential divestment of CDM based on a value for CDM’s business of some $25 million

-  Minority interests in subsidiaries bought out and inactive subsidiaries divested, helping to reduce administrative costs

-  Planned simplification of ownership of stone, sand and residual coal interests, including implementation of original agreement with ATP's shareholders to acquire substantial equity participation in ATP

Financial

-  Revenue reduced by 15 per cent to $176.7 million (2022: $208.8 million) primarily reflecting lower CPO and CPKO prices

-  Average selling prices (net of export duty and levy) 13 per cent lower for CPO at $718 per tonne (2022: $821) and 37 per cent lower for CPKO at $749 per tonne (2022: $1,185)

-  Estate operating cost increases below local inflation despite higher fertiliser and workforce expenses

-  EBITDA for the year of $43.6 million (2022: $69.1 million), encompassing a significant improvement in the second half of $28.1 million, compared with the first half of $15.5 million despite lower prices in the second half

-  Loss before tax of $29.2 million (2022: profit before tax of $42.0 million), following losses on disposals of subsidiaries and similar charges of $26.0 million

-  Group net indebtedness at end 2023 $178.2 million (2022: $166.7 million) but contract liabilities (representing pre-sale advances from customers) reduced to $17.1 million (2022: $25.9 million)

-  All outstanding arrears of preference dividend totalling 11.5p per preference share paid in April 2024

Agricultural operations

-  FFB production of 762,260 tonnes (2022: 765,682) on hectarage reduced by some 1,000 hectares due to the replanting programme

-  Replanting and extension planting of, respectively, 741 and 491 hectares

-  Yields per mature hectare increased to: FFB 22.4 tonnes (2022: 21.6 tonnes) and CPO 5.0 tonnes (2022: 4.8 tonnes)

Stone, sand and coal

-  Production of crushed stone at ATP’s stone concession commenced and sales now starting

-  Licences being finalised for sand mining by MCU and arrangements with contractor agreed

-  Coal operations inactive, with intention to withdraw from interest in coal

Environmental, social and governance

-  Increased score in the SPOTT assessment by the Zoological Society of London of 88.7 per cent, up from 87.0 per cent (ranked 12th out of 100 companies assessed)

-  Arrangements progressing to separate processing of fully certified FFB to permit sales of segregated certified CPO, normally commanding a greater price premium

-  Developing projects with smallholders to encourage and improve the sustainable component of the group’s supply chain and promote sustainable palm oil production

-  New medical centre inaugurated on the estates – awarded the highest level of accreditation by the Indonesian department of health

-  Award from the East Kalimantan Province for best management of an area with high conservation value within a plantation designated area in recognition of the group’s dedication to conservation

Outlook

-  CPO prices firm and expected to remain at remunerative levels as limited availability of land and increasing regulatory restrictions constrain expansion of oil palm hectarage

-  ESG initiatives to be channelled into achieving increasing premia for selling certified CPO

-  Stone and sand interests to start contributing to group profits with stone also providing a resource for infrastructure in the agricultural operations

-  Recent strategic initiatives combined with efficiency savings and reduced financing costs should improve cash flows from core operations and permit further reductions in group net indebtedness whilst the group continues to improve and expand the oil palm operations

CHAIRMAN'S STATEMENT

In 2023 the directors implemented several strategic initiatives with the objective of addressing the legacy of excessive net indebtedness. Such debt levels had resulted from a series of operational challenges faced by the group some years ago and, against the background of current interest rates and credit conditions, were increasingly viewed as too high.

First, the structure of REA Kaltim, the main operating sub-group, was simplified with the acquisition of the 5 per cent third party interests in the group’s previously 95 per cent held subsidiaries, thereby helping to reduce administrative costs. Such acquisitions were made possible by the recent removal of an Indonesian requirement for 5 per cent local ownership of all Indonesian companies engaged in oil palm cultivation. Concurrently, three minor or inactive subsidiary companies were divested.

Second, in November, a conditional agreement was reached with the DSN group to increase the latter's equity interest in REA Kaltim from 15 per cent to 35 per cent by way of a subscription of further shares for a consideration estimated at $52 million. In conjunction with this proposal, it was agreed that the DSN group would be granted a priority right to acquire CDM, the group’s most outlying estate, and that the company would purchase 100 per cent of PU, the group’s new development estate, such that the DSN group would no longer hold an indirect interest, through REA Kaltim, in PU. These proposals were approved at the general meeting of shareholders in February 2024 and closing of the further DSN subscription, including the financial settlements then due, was completed in March 2024. The intra-group sale and purchase of PU was also completed in March affording the group the whole of any profit that can be realised from this new development estate.

To allow time for further discussion, the date for the DSN group to exercise its priority right for the purchase of CDM has been extended to the end of June 2024. Should DSN not exercise this priority right, the directors intend to pursue an alternative sale of CDM for which the group has received expressions of firm interest from unrelated third parties.

While the DSN subscription has diluted the company's interest in REA Kaltim from 85 per cent to 65 per cent, it has provided an immediate and substantial cash injection to the group and permits the group to retain its core operations without disruption of the management of those operations. In addition, the sale of CDM, when concluded, should relieve the group of the need to fund further significant investment that is required to realise CDM's potential and permit the continuing group to focus its financial resources and management on its remaining plantings which will be more concentrated within a single geographical area.

In the agricultural operations, group FFB production in 2023 at 762,260 was broadly in line with 2022, notwithstanding the reduction in the group’s mature hectarage as a result of some 1,000 hectares being cleared for replanting. As is normal, crops were weighted to the second half of the year although, unusually, there was no pronounced peak in the fourth quarter, probably as a consequence of lower rainfall earlier in the year. Purchases of third party FFB totalled 231,823, almost 7 per cent lower than in 2022 reflecting competition from other mills offering enhanced payment terms at the beginning of the year. Third party volumes returned to normal levels in the second quarter after an adjustment to the prices and terms that the group was offering for such fruit.

Production of CPO, CPKO and palm kernels for 2023 amounted respectively to 209,994 tonnes (2022: 218,275 tonnes), 19,393 tonnes (2022: 18,206 tonnes) and 47,324 tonnes (2022: 46,799 tonnes). In the first half, a high number of rain days impacted harvesting rounds and field efficiencies leading to a lower CPO extraction rate of 21.9 per cent in the first half of the year. Tighter field disciplines, including targeted loose fruit recovery, contributed to a welcome improvement in the CPO extraction rate at 22.3 per cent for the second half.

The substantial investment in recent years in the group’s three oil mills has resulted in greater operating reliability and sufficient processing capacity for the group’s own and expected third party FFB for some years to come. Oil losses in the group’s mills have been comfortably below industry standards for some time.

FFB and CPO yields per mature hectare averaged, respectively, 22.4 tonnes and 5.0 tonnes, an improvement on 2022 yields of, respectively 21.6 tonnes and 4.8 tonnes.

Replanting and extension planting continued through 2023 totalling, respectively, 741 hectares and 491 hectares. A further 286 hectares had been prepared for planting or replanting at the start of 2024. Replanting and extension planting of approximately 1,345 and 1,000 hectares, respectively, are planned to be completed in 2024.

The CPO price, CIF Rotterdam, opened the year at $1,090 per tonne but weakened progressively through the first six months to a low of $855 per tonne in early June 2023. The second half of the year saw prices rally and recover to a level of $946 per tonne by the end of 2023.

The average selling price for the group’s CPO during 2023, including premia for certified oil but net of export duty and levy, adjusted to FOB Samarinda, was $718 per tonne, 12.6 per cent lower than the average price of $821 per tonne in 2022. The average selling price for the group’s CPKO, on the same basis, was 36.8 per cent lower in 2023 at $749 per tonne compared with $1,185 per tonne in 2022.

These lower prices, together with the reduction in volumes of CPO and CPKO, impacted performance in 2023, with group revenue amounting to $176.7 million, 15.4 per cent below 2022 revenue of $208.8 million. Cost of sales reduced by 3.7 per cent, principally reflecting the reduced level of purchased FFB, while estate operating costs increased by 1.8 per cent, less than the rate of Indonesian inflation notwithstanding higher fertiliser costs, reflecting increased applications, and higher workforce numbers. Operating profit for 2023 totalled $14.8 million, $26.6 million lower than that of 2022.

EBITDA for 2023 amounted to $43.6 million, a $25.5 million reduction on the 2022 comparative of $69.1 million. As in previous years, EBITDA in the second half of $28.1 million showed a significant improvement over EBITDA of the first half of $15.5 million.

Losses on disposals of subsidiaries and similar charges incurred during the year totalled $26.0 million. Of this amount, $23.6 million reflected the impairment of the CDM asset now held for sale and the effect of adjusting CDM’s assets to their fair value (less costs to sell) in accordance with the terms of the potential sale to the DSN group. The further $2.4 million arose from the reorganisation of the REA Kaltim sub-group. Other gains and losses in 2023 included a foreign exchange loss of $4.2 million compared to a $14.2 million gain in 2022, principally in relation to sterling and rupiah borrowings, and a $0.4 million loss on the sale of the dollar notes held in treasury. In 2022 there was a $0.5 million gain on the extension of the redemption date of the dollar notes.

Finance costs for 2023 were $1.9 million lower than in 2022 at $17.5 million, reflecting lower interest rates charged during the year compared to 2022 and $0.9 million additional capitalisation of interest in connection with the increase in the area of immature plantings at the year end. Interest income during 2023, principally arising from the group’s stone, sand and coal interests, totalled $4.1 million compared to $5.3 million in 2022.

As a result of the above, the group incurred a loss before tax of $29.2 million in 2023 compared with a profit before tax of $42.0 million in 2022. The loss after tax was $17.7 million (2022: profit after tax $32.9 million).

Shareholders’ funds less non-controlling interests at 31 December 2023 amounted to $219.8 million compared with $233.9 million at 31 December 2022. Non-controlling interests at 31 December 2023 amounted to $14.3 million (2022: $23.6 million). Total net debt increased during the year to $178.2 million at 31 December 2023 (2022: $166.7 million).

The group continues to develop its ESG strategy and to drive towards fulfilling its stated commitments to address climate change whilst also increasing revenues generated from sustainable production. Average premia realised during the year for sales of certified oil increased to $13 per tonne (2022: $10 per tonne) for CPO sold with ISCC certification and respectively, $15 (2022: $11) and $213 (2022: $209) per tonne for CPO and CPKO sold with RSPO certification.

Plans are progressing to separate processing of fully certified FFB from processing of other FFB so as to permit sales of segregated certified CPO which normally commands a greater price premium. In parallel, the group is working with smallholder suppliers to improve the sustainable component of the group’s supply chain and promote sustainable palm oil production.

As in past years, in 2023 the group participated in the SPOTT assessment conducted by ZSL. The group’s score increased from 87.0 per cent to 88.7 per cent against an average score of 47.2 per cent, ranking the group 12th out of the 100 companies assessed.

Following on from the initiatives implemented in the agricultural operations, the group is now also pursuing plans as regards the interests in the stone, sand and coal concession holding companies to which the group has made loans.

Taking advantage of the currently more permissive Indonesian mining regulations, the group intends to implement its original agreement with the shareholders of the stone concession holding company, ATP, to acquire majority ownership of ATP. Good progress was made during 2023 with development of the stone concession. Towards the end of the year, two stone crushers arrived at the quarry site and production of crushed commenced with the initial output being used to surface the access roads. Commercial sales of stone are now starting.

Pursuant to its agreement with the sand concession holding company, MCU, the group will acquire a 49 per cent participation in MCU, once the necessary licences for sand mining have been finalised. IPA’s coal mining contractor has been appointed to mine the MCU sand on terms similar to those that applied to mining coal at IPA, with profits from sales of quartz sand to be shared between MCU and the contractor in the approximate proportion 70:30. Commercial production is expected to commence later in 2024.

A substantial fall in prices for semi-soft and high calorie thermal coal led to mining operations at IPA being suspended from mid-2023, although sales of stockpiled coal continued. Under current conditions, further mining of IPA remains uneconomic. The loan to IPA has been substantially repaid and the group does not intend to make further loans for coal operations. Additionally, the group intends to withdraw from further involvement with PSS, the coal concession holding company that has not yet commenced mining.

The semi-annual dividend arising in June 2023 on the group’s 9 per cent preference shares was paid on the due date. The semi-annual dividend arising in December 2023 was temporarily deferred but, following the DSN share subscription becoming unconditional, the directors declared a dividend in respect of all arrears of preference dividend (amounting in aggregate to 11.5p per preference share) and such dividend was duly paid on 15 April 2024.

The directors expect the dividends due on the preference shares in June and December 2024 will be paid in full on the due dates.

The outlook for the group is encouraging. CPO and CPKO prices have firmed since the beginning of the year with the local price, FOB Belawan/Dumai, increasing from $716 per tonne to a current level of $1,015 per tonne. Given that limited availability of plantable land and increasing regulatory restrictions are likely to constrain future expansion of oil palm hectarage, prices may reasonably be expected to remain at remunerative levels for the foreseeable future. With increasing sustainability premia on the group’s oil sales, efficiency initiatives and reduced financing costs resulting from borrowing reductions, this should lead to improving cash flows from the agricultural operations.

With the cash inflow from the DSN group's additional investment in REA Kaltim and the expected sale of CDM, 2024 will see a material reduction in group net indebtedness. Going forward, the directors will seek to derive maximum value from the group’s ancillary interests in stone and sand and to use such extracted value, supplemented by the cash flow from the core oil palm business, to reduce further group net indebtedness while continuing to invest in improvements to and the expansion of the oil palm operations.

David J BLACKETT

Chairman

DIVIDENDS

The semi-annual dividend arising on the preference shares in June 2023 was paid on the due date. The semi-annual dividend arising in December 2023 was temporarily deferred but on the basis that, if the agreement for the subscription by the DSN group for further shares in REA Kaltim became unconditional, the directors would declare a dividend representing all outstanding arrears of preference dividend. Accordingly, following the DSN share subscription becoming unconditional, the directors declared a dividend in respect of all of such arrears and such dividend (amounting in aggregate to 11.5p per preference share) was duly paid on 15 April 2024.

The directors expect the semi-annual dividends arising on the preference shares in June and December 2024 will be paid in full on the due dates.

While the dividends on the preference shares were more than six months in arrear, the company was not permitted to pay dividends on its ordinary shares but with the payment in full of the outstanding arrears of preference dividend that is no longer the case.  Nevertheless, in view of the results for the year, no dividend in respect of the ordinary shares has been paid in respect of 2023 or is proposed.

ANNUAL GENERAL MEETING

The sixty fourth 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 6 June 2024 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:

(i)  by visiting Computershare’s electronic proxy service www.investorcentre.co.uk/eproxy (and so that the appointment is received by the service by no later than 10.00 am on 4 June 2024); or

(ii) via the CREST electronic proxy appointment service; or

(iii)  by completing, signing and returning a form of proxy to the Company’s registrar, Computershare Investor Services PLC, The Pavilions, Bridgwater Road, Bristol BS99 6ZY as soon as possible and, in any event, so as to arrive by no later than 10.00 am on 4 June 2024; or

(iv)  by using the Proxymity platform if you are an institutional investor (for more information see 2024 notice).

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 visit the group’s website for any such further updates.

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.

Geo-political uncertainty, such as may be caused by wars, can lead to pricing volatility and shortages of the necessary inputs to the group’s operations, such as fuel and fertiliser, inflating group costs and negatively impacting the group’s production volumes. The impact of input shortages, however, may be offset by a consequential benefit to prices of the group’s outputs, CPO and CPKO.

Climate change represents a particular 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 net GHG emissions by 2030 and to work towards the longer term objective of net-zero emissions by 2050. In furtherance of these commitments, the group’s CCWG, under the direction of the chief sustainability officer, is tasked with identifying and quantifying emission sources across all of the group’s operations and with developing actions, priorities and timelines for emission reductions. The group signed up to the SBTi in early 2023 with the aim of following the science to frame the group’s actions to reduce carbon emissions. Science-based targets demonstrate how much and how quickly the group needs to reduce its GHG emissions in line with what is deemed necessary to meet the goals of the Paris Agreement, that is aimed at limiting global warming to well-below 2°C above pre-industrial levels and pursuing efforts to limit global warming to 1.5°C. 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 in the annual report. Where risks are reasonably capable of mitigation, the group seeks to mitigate them. Beyond that, the directors endeavour to manage the group’s finances on a basis that leaves the group with some capacity to withstand adverse impacts from 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 sand interests, as referred to below, could impact the ability of the concession holding companies to repay their loans. As noted elsewhere in the Strategic report of the annual report, the active coal concession has been largely mined out and it is the group’s intention to withdraw from its coal interests. Accordingly, coal interests are no longer considered to represent a principal risk for the group.

Risks assessed by the directors as currently being of particular significance are those detailed below under:

-  Agricultural operations – Climatic factors

-  Agricultural operations – Produce prices

-  Agricultural operations – Other operational factors.

In addition, the directors have identified IT security as a substantial yet remote risk as detailed under General below.

The directors’ assessment, as respects produce prices, 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.