R.E.A. HOLDINGS PLC - ANNUAL REPORT
2 0 0 7
Secretary and registered office
R.E.A. Services Limited
First Floor
32-36 Great Portland Street
London W1W 8QX
Website
www.rea.co.uk
Registered number
00671099 (England and Wales)
Contents
Officers and professional advisers
Maps showing allocated areas
Summary of results
Key statistics
Chairman’s statement
Review of the group
Directors
Directors’ report
Corporate governance
Directors’ remuneration report
Directors’ responsibilities
Auditors’ report (group)
Consolidated income statement
Consolidated balance sheet
Consolidated statement of recognised income and expense
Reconciliation of movements in equity
Consolidated cash flow statement
Accounting policies (group)
Notes to the consolidated financial statements
Auditors’ report (company)
Company balance sheet
Movement in total shareholders’ funds
Statement of total recognised gains and losses
Accounting policies (company)
Notes to the company financial statements
Notice of annual general meeting
Form of proxy
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3
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103
1
Officers and professional advisers
Solicitors
Ashurst LLP
Broadwalk House
5 Appold Street
London EC2A 2HA
Auditors
Deloitte & Touche LLP
Hill House
1 Little New Street
London EC4A 3TR
Registrars and transfer office
Capita Registrars
Northern House
Woodsome Park
Fenay Bridge
Huddersfield
West Yorkshire HD8 0GA
Directors
R M Robinow
J C Oakley
J M Green-Armytage
J R M Keatley
D H R Killick
L E C Letts
C L Lim
Secretary and registered office
R.E.A. Services Limited
First Floor
32-36 Great Portland Street
London W1W 8QX
Financial advisers
Deloitte & Touche LLP
Athene Place
66 Shoe Lane
London EC4A 3BQ
Stockbrokers
Mirabaud Securities Limited
21 St James’s Square
London SW1Y 4JP
2
Maps showing allocated areas
3
Summary of results
for the year ended 31 December 2007
for the year ended 31 December 20
Revenue
2007
$’000
2006
$’000
Change
%
57,600
33,095
+ 74
Earnings before interest, tax, depreciation, amortisation and biological gain*
43,346
13,733
+ 215
Profit before tax
Profit after tax
47,010
19,762
+ 137
31,997
13,864
+ 130
Profit attributable to ordinary shareholders
29,453
11,546
+ 155
* see note 5 to consolidated financial statements
Earnings per ordinary share (diluted) in US cents
89.6
37.8
+ 137
Closing exchange rates
2007
2006
2005
2004
2003
Indonesian rupiah to US dollar
US dollar to pound sterling
9,419
1.99
9,020
1.96
9,830
1.72
9,290
1.92
8,465
1.79
4
Key statistics
for the year ended 31 December 2007
Allocated area - Hectares
Mature oil palm
Immature oil palm (developed in prior years)
Immature oil palm (developed in current year)
Under preparation for oil palm development
Reserve area o
Total
2007
2006
2005
2004
2003
13,080
11,814
1,514
11,500 +
37,908
84,018
121,926
13,080
13,085
13,142
13,234
5,250
6,564
6,500
31,394
34,022
65,416
3,000
2,250
6,000
24,335
41,801
66,136
–
3,000
4,500
20,642
24,793
45,435
–
–
3,000
16,234
28,094
44,328
+ includes 5,000 hectares outstanding from 2007 planting program.
o includes conservation areas, roads and other infrastructure, areas available for planting and areas under negotiation.
Production - Tonnes
Oil palm fresh fruit bunch crop
Crude palm oil
Palm kernel
Total palm products
Oil extraction rate
Kernel extraction rate
Yields - Tonnes per mature hectare
Fresh fruit bunches
Crude palm oil
Palm kernel
Total palm products
393,217
334,076
313,355
293,883
222,713
93,229
15,660
108,889
77,597
12,698
90,295
73,262
12,647
85,909
71,473
12,169
83,642
55,426
9,189
64,615
23.7%
4.0%
23.2%
3.8%
23.4%
4.0%
24.3%
4.1%
24.9%
4.1%
29.6
25.5
23.8
22.4
16.8
7.1
1.2
8.3
5.9
1.0
6.9
5.6
1.0
6.6
5.4
0.9
6.3
4.2
0.7
4.9
5
Crude palm oil monthly average price
e
n
n
o
t
/
$
S
U
1000
900
800
700
600
500
400
300
200
100
0
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Share performance graph
x
e
d
n
I
1000
900
800
700
600
500
400
300
200
100
0
6
REA Ordinary
FT All Share
2003
2004
2005
2006
2007
Chairman’s statement
Presentation of annual report
programme and the increasing maturity of existing
planted areas.
Following a trend set by several other European
plantation companies, the group has decided to adopt the
At the after tax level, profit for the year at $32.0 million
US dollar as its presentational currency. The directors
was 130 per cent ahead of the $13.9 million achieved in
believe that presentation of the group’s results in US
2006 while profit attributable to ordinary shareholders
dollars will reduce distortions caused by exchange
was 155 per cent ahead of the preceding year. Fully
movements and thereby make it easier for shareholders
diluted earnings per share amounted to US 89.6 cents
to follow the evolution of the group’s financial affairs.
(2006 - US 37.8 cents).
Accordingly, while the group continues to report in
Accounting reference date
accordance with
International Financial Reporting
Standards, the accompanying consolidated financial
The company’s current accounting reference date is 31
statements for the year ended 31 December 2007 are
December. This is not ideal in terms of internal staff
presented in US dollars and the comparative figures,
availability for the preparation of year end reports.
which were originally presented in sterling, have been
Moreover, the end of the calendar year is a popular
restated in US dollars. The company continues to
reporting date and the group finds itself competing with
prepare its individual financial statements in sterling in
other groups (many of them much larger than the group)
accordance with UK Generally Accepted Accounting
to obtain from its auditors allocations of audit staff for the
Practice and, as was the case in the annual report for
time needed to audit the financial statements of the
2006, those statements are presented separately from
company and its subsidiaries.
the consolidated financial statements.
Results
The directors are therefore contemplating a change in the
company’s accounting reference date to 28 February.
Such a change would require the consent of the holders
Profit before tax for 2007, as shown in the accompanying
of the 9.5 per cent guaranteed sterling notes 2015/17
consolidated income statement, amounted to $47.0
(“sterling notes”) issued by REA Finance B.V. (“REA
million representing a 137 per cent increase over the
Finance”), a wholly owned subsidiary of the company. If
profit before tax of the preceding year (as restated in US
the directors decide to proceed with the change and the
dollars) of $19.8 million. The increase reflected a
necessary noteholder consent can be obtained during the
combination of increased production and better selling
course of 2008, the current reporting period of the
prices, more than offsetting cost increases resulting from
company would be extended to 28 February 2009.
inflationary pressures in Indonesia.
Operations
The net gain from changes in the fair value of biological
assets at $8.0 million was much in line with the gain
The crop out-turn for 2007 amounted to 393,217 tonnes
reported in 2006 of $8.7 million. In both years, the gains
of oil palm fresh fruit bunches (“FFB”), 3.5 per cent ahead
principally reflected projected increases in future
of the budgeted crop of 380,000 tonnes and an increase
production arising from the continuing extension planting
of 17.7 per cent on the FFB crop for 2006 of 334,076
7
Chairman’s statement continued
tonnes.
Climatic conditions during 2007 were
assuming completion of the conditional acquisition of
satisfactory with good rainfall of 4,413 mm (2006 –
PBJ, the group will hold land allocations totalling slightly
2,967 mm) generally well distributed through the year.
in excess of 120,000 hectares but the various allocations
are at different stages of titling and a large proportion of
The crude palm oil (“CPO”) and palm kernel extraction
the land allocated is not yet available to the group for
rates for 2007 were, respectively, 23.7 per cent and 4.0
development.
per cent as compared with the rates of 23.2 per cent and
3.8 per cent achieved in 2006. 4.0 per cent remains the
The extent of the new development achieved by the
group’s target rate for kernel extraction but recent
group in 2007 was a significant disappointment with an
adjustments to kernel processing machinery in the
increase during the year of only some 1,500 hectares in
group’s newer oil mill may permit upward revision of this
the total area planted or in course of development. This
target rate in future years.
increase fell very materially short of the target of 6,500
hectares set at the beginning of the year.
In setting that
The palm kernel crushing plant incorporated in the newer
target, the directors did recognise that its achievement
oil mill was brought into full scale production at the start
would depend upon the titling of land allocations held by
of 2007 and now processes all kernel output from both
the group proceeding as planned so that land would
of the group’s oil mills. The plant is economic to run
become available for development in time, and to an
because it operates on power generated from the
extent sufficient, to meet the requirements of the
combustion of waste products from the CPO and palm
development programme. Titling problems in relation to
kernel extraction processes and such power is surplus to
untitled land allocations held meant that this did not
the power requirement for those processes. Moreover, by
happen and the shortfall was the result.
further processing kernels and extracting the crude palm
kernel oil (“CPKO”) that they contain, the plant relieves
Looking to 2008 and beyond, the directors continue to
the group of the material logistical difficulties and cost
regard the availability of land for development as the key
associated with the transport and sale of kernels. The
constraint on expansion. The serious and unexpected
CPKO extraction rate for 2007 was 41.4 per cent.
delays suffered in 2007 have made it clear that any
Land allocations and development
predictions as to land availability may prove inaccurate.
Nevertheless, the directors do believe that significant
areas within the 37,000 hectares of land allocations held
Efforts to ensure the availability to the group of land for
by CDM and KMS will be available for development by
expansion during 2007 and the early months of 2008
the group during 2008 and that a further area held by
have resulted in the group acquiring two further
PBJ will also become available during the year. This will
Indonesian companies, PT Cipta Davia Mandiri (“CDM”)
permit the group to split its development programme
and PT Kutai Mitra Sejahtera (“KMS”) and conditionally
between three separate areas and, if setbacks occur in
agreeing to acquire (subject to confirmation of necessary
one area, hopefully to compensate for these by
land development permits) a third Indonesian company,
accelerating development in the other areas. Although
PT Putra Bongan Jaya (“PBJ”). Each of these three
the delays experienced in 2007 have continued into the
Indonesian companies is, or will be, owned as to 95 per
early months of 2008, the recent acquisitions of CDM
cent by group companies and 5 per cent by East
and KMS should permit large scale development to be
Kalimantan investors. Following these transactions and
resumed upon completion of
land compensation
8
settlements with local villages. These are currently under
notes (carrying value: $40.7 million), $30 million nominal
negotiation.
of 7.5 per cent dollar notes 2012/14 (“dollar notes”)
(carrying value: $29.4 million) and other short term
Subject to the caveats just mentioned, the targeted
indebtedness (including finance leases) of $0.7 million.
development programme for 2008 and 2009 will be
Against this indebtedness, at 31 December 2007 the
6,500 hectares per annum and, in addition, the group will
group held cash and cash equivalents of $34.2 million.
aim to catch up the uncompleted balance of the 2007
programme of some 5,000 hectares. Whilst development
The group has entered into a long term sterling US dollar
of new areas requires a one year lead time in which to
debt swap to hedge against US dollars the sterling liability
procure seed and to develop seedlings for planting out,
for principal and interest payable in respect of the entire
the group’s nurseries are already well stocked and the
issue of the sterling notes (but, in the case of interest,
availability of planting material should be more than
only as respects interest payments falling due up to and
sufficient to meet the targeted programme. If achieved,
including 31 December 2015).
this programme would result by the end of 2009 in a total
area under oil palm or in course of development of slightly
On the basis of present CPO prices, the directors expect
under 45,000 hectares.
Finance
that operating cash flows for the remainder of 2008,
together with the group's existing cash resources, will be
sufficient to fund both the planned development
programme for the year and near term debt repayments.
2007 saw further consolidation of the group’s financial
Looking beyond 2008 and allowing for the fact that CPO
position. In January 2007, the balance of £7,000,000
prices may not be sustained at present levels, the group
nominal of the proposed total issue of £22,000,000
is likely to require some further funding if, as the directors
nominal of sterling notes was issued for cash at a
hope will be the case, high levels of extension planting
subscription price of 99.6574 per cent of par by REA
are achieved. The directors intend to meet this further
Finance. This was followed in April and September 2007
funding requirement with additional borrowings which
by issues of, respectively, 1,500,000 new ordinary shares
they will seek to raise from development and other banks
and 1,064,581 new preference shares for cash to raise
and, if market conditions permit, from further issues of
some £7.6 million, net of expenses. A further 1,085,795
listed debt securities. The directors are confident that
new preference shares were issued in October 2007 by
the group’s equity base is now sufficient comfortably to
way of capitalisation of share premium account pursuant
support the additional debt envisaged.
to the capitalisation issue to ordinary shareholders
referred to under “Dividends” below.
Dividends
The combined effect of the foregoing transactions was to
The fixed semi-annual dividends on the 9 per cent
increase the group’s liquidity and to reduce its
cumulative preference shares that fell due on 30 June
dependence on short term bank borrowings As a result,
and 31 December 2007 were duly paid. Dividends
group indebtedness at 31 December 2007 amounted to
totalling 2p per ordinary share have been paid in respect
$86.2 million, made up of US dollar denominated bank
of 2007 (2006 – 1p per ordinary share). These
indebtedness under an Indonesian consortium loan
comprised a first interim dividend of 1p per ordinary share
facility of $15.4 million, £22 million nominal of sterling
paid on 5 October 2007 and a second interim dividend in
9
Chairman’s statement continued
lieu of final of 1p per ordinary share paid on 25 January
Future direction
2008. In addition, the company made a capitalisation
issue to ordinary shareholders of 1,085,795 new
In seeking to meet the challenges brought by the group’s
preference shares on the basis of one new preference
continuing growth, the directors have seen as their
share for every 30 ordinary shares held on 1 October
highest priority the consolidation of the human resource
2007.
component of the group’s Indonesian operations. To this
end, steps have been taken to provide greater structure
The group’s plans for continued extension planting of oil
to the management of the operations by adding senior
palms will require substantial investment by the group and
staff
(both by
internal promotion and external
the need to fund this investment will inevitably constrain
recruitment) and by enhancing training programmes. The
the rate at which the directors feel that they can prudently
group has also sought to entrench its local capacities by
declare, or recommend the payment of, future ordinary
building on existing relationships with local stakeholders,
dividends. The directors do appreciate that many
by procuring minority local investors in its operations and
shareholders invest not only for capital growth but also
by appointing persons of standing as local advisers to,
for income and that the payment of dividends is
and directors of, Indonesian group companies. Whilst
important. With the prospect of increasing crops for
this process is not yet complete, the directors believe that
several years to come, the directors believe that,
the measures already taken have significantly improved
notwithstanding the constraints of the development
the resilience of existing management and the availability
programme, the group should be able to support
to the group of local independent non-executive advice.
progressive increases in ordinary dividends from the
Moreover, the group now has an expanding cadre of
modest levels established in respect of 2006 and 2007
younger staff who, suitably nurtured, should in the future
but they believe that the rate of progression should be
be capable of running the Indonesian operations.
steady rather than dramatic. The directors intend that any
new level of ordinary dividend set in respect of any given
The directors have also started to address the question of
year should be sustainable in subsequent years.
how best to develop the structure of the group for the
future. The present structure, in which the group is
If the group’s results would appear to justify some
headed by a UK listed company, has served the group
additional return to ordinary shareholders beyond the
well in recent years in permitting the group to raise the
level of ordinary dividends that the directors believe that
capital that it has needed but integral to this structure is
the company can prudently afford having regard to the
a requirement to maintain a London base. That
need to conserve cash resources, the directors may
represents a significant overhead. If, as the directors
consider a further capitalisation issue to ordinary
hope will be the case, the group can in future rely, to a
shareholders of new preference shares.
Staff
greater extent than hitherto, on internally generated
equity, and if the markets for listed securities in
Indonesian and other Asian financial markets continue to
mature, it might be that a reconstitution of the group as
The directors extend their thanks to all of the group's
an entirely Asian based entity would better serve
staff for their continued loyalty and hard work.
investors in the group than continuation of the present
group structure. Having considered the matter,
the
10
directors have concluded that they should defer any far
one further non-executive director would not now pose a
reaching decisions on group structure until it becomes
material distraction from the continuing efforts to address
clearer whether the group’s aspirations on further
other important strategic issues.
expansion can be converted to realities.
Accordingly, the directors have invited the nomination
The directors have previously stated, and it remains the
committee to make recommendations for appointment of
case, that they do not regard diversification as a strategic
an additional non-executive director with the expectation
imperative and that a decision to diversify would be taken
that such director would have a relevant financial
only if the prospective returns from capital invested in
background. The directors hope that an appointment can
diversification are comparable with those achievable from
be completed within a few months. This will facilitate
investment of equivalent capital in continued expansion of
further revisions to the composition of board committees
the oil palm operations in the existing operational areas.
with a view to putting beyond question the compliance of
In recent months, the directors have been tentatively
such committees with the principles of the Combined
considering the possibility of a modest diversification into
Code.
coal mining. It is well established that East Kalimantan
has vast coal deposits, many of which comprise coal of a
In the view of the directors, the business environment in
high quality. Certain of the local investors in Indonesian
Indonesia is fraught with risks and it is essential to the
subsidiaries of the company have interests in, or access
management of that risk to build and maintain
to, coal concessions and have suggested that the group
relationships based on mutual understanding. The
might join them in exploiting such concessions. The
directors will expect any new director to support this view.
directors have concluded that this suggestion should be
explored although there is no current certainty that the
Prospects
apparent opportunity offered can provide an economically
viable project or that, if it does, the group would decide to
The FFB crop for 2008 has been budgeted at 421,000
take on such a project.
tonnes with the expected increase over 2007 reflecting a
budgetary assumption of average rainfall (both as to
As they have previously indicated, the directors do not
quantum and distribution) and increased cropping from
agree with the view of some institutional investors that
the 3,150 hectares of oil palms classified as mature from
long service automatically negates the independence of a
the start of 2008. Crops to end March 2008 were 9,000
non-executive director and that therefore the present
tonnes above budget but, as the monthly phasing of each
constitution of various board committees should be
year's crop varies from year to year, this should not be
considered non-compliant with the principles of the
taken as indicating a likelihood that the FFB crop for
Combined Code on Corporate Governance. However, the
2008 as a whole will be above budget.
directors do accept that it is important to retain
shareholder confidence in the board and, in particular, in
During 2007, the CPO price, spot CIF Rotterdam, rose
the audit committee’s contribution to the integrity of the
progressively from an opening level of some $600 per
audit process. With the progress that has been made in
tonne to a closing level of $950 per tonne. Further
developing resilience in the group’s management in
strong price rises were recorded going into 2008 and
Indonesia, the directors have concluded that appointing
CPO has, during 2008, traded at levels in excess of
11
Chairman’s statement continued
$1,300 per tonne although recent weeks have seen
Inflationary pressures in Indonesia continue to have an
prices fall back from the highest levels. Reports suggest
adverse effect on the group’s cost base and this is being
that the peak prices of vegetable oils were accompanied
exacerbated by the need to provide loyalty incentives to
by heavy speculative buying as well as increased
the group’s employees in the face of competition for
commercial activity and that the recent fall from peak
experienced estate managers and workers from other
levels reflects closing of speculative positions. Certainly,
plantation groups and new entrants to the Indonesian
demand for all vegetable oils appears to remain strong at
plantation industry. Against this, the group now has a
a time when stocks are at historically very low levels and
substantial pipeline of recently developed areas and can
competition for hectarage from corn and grain crops is
look forward to several years of increasing crops. These
limiting the ability of the annual oilseeds to increase
should serve to moderate any contraction of margins that
production and reduce the demand pressure on world
the group might otherwise suffer. Moreover, successful
vegetable oil stocks.
implementation of the planned extension planting
programme should add materially to the group’s longer
The directors retain their previously expressed view that
term revenue generating capacity. The directors
the prices of all commodities are inherently cyclical and
therefore remain optimistic about the group’s future. If
that it would be foolish to assume that the present high
CPO prices continue at or near current levels, the
price levels for CPO will continue indefinitely. Ultimately,
immediate outlook speaks for itself.
they believe that high prices for vegetable oils will lead to
greater production not only of CPO but also of other
competing crops and that that, in turn, will result in lower
RICHARD M ROBINOW
prices. However, they acknowledge that the increasing
interest in bio-fuels represents a new factor in vegetable
Chairman
24 April 2008
oil markets. With the continuing growth in world
population, economic growth in China, India and other
parts of the developing world and the prospect of
declining availability of fossil fuels (upon which it must be
remembered that intensive farming methods are critically
dependent), it may be that the average level of vegetable
oil prices over future price cycles will be higher than in the
past.
During the six months to June 2008, the group will
deliver 12,000 tonnes of CPO under forward sale
contracts at the equivalent of a CIF Rotterdam price of
$620 per tonne. Thereafter the group has forward sales
in respect of 2,000 tonnes per month for the six month
period to December 2008 and the twelve month period to
December 2009 at prices equivalent to CIF Rotterdam
prices of respectively $870 and $860 per tonne.
12
Review of the group
Introduction
Overview
The directors present to shareholders of R.E.A. Holdings
Nature of business and resources
plc the review of the group set out below. This review has
been prepared solely to provide shareholders as a body
The group is engaged in the cultivation of oil palms in the
with information complementing the accompanying
province of East Kalimantan in Indonesia and in the
financial statements in order to facilitate understanding of
production of crude palm oil (“CPO”) and by-products
the group’s business and strategic objectives and to
from fruit harvested from its oil palms. A detailed
permit assessment of the likelihood of the group realising
description of the group's activities is provided under
those objectives. This review should not be relied upon
“Operations” below.
by any other party or for any other purpose.
The group and predecessor businesses have been
This review contains forward-looking statements which
involved for over one hundred years in the operation of
have been included by the directors in good faith based
agricultural estates growing a variety of crops in
on the information available to them up to the time of their
developing countries in South East Asia and elsewhere.
approval of this review. Such statements should be
The group today sees itself as marrying developed world
treated with caution due to the uncertainties, including
capital and Indonesian opportunity by offering investors in
both economic and business risks, inherent in any
and lenders to the company the transparency of a UK
prognosis regarding the future.
listed company and then using capital raised through the
company to develop significant agricultural operations in
In preparing this review, the directors have sought to
Indonesia. In this endeavour, the group’s inheritance from
follow best practice as recommended by the reporting
its past represents a significant intangible resource in
statement on operating and financial reviews published
that it underpins the group’s credibility. This assists
by the Accounting Standards Board but this review has
materially in sourcing capital, in negotiating with the
not been checked for compliance with that reporting
Indonesian authorities in relation to project expansion and
statement by the company’s auditors and may not comply
in recruiting management of a high calibre.
with it in all respects. The directors have relied mainly on
qualitative rather than quantitative assessments in
Other resources that are important to the group are its
relation to environmental and social matters. In the
developed base of operations, bringing with it an
context of the current scale of the group’s operations, the
established management team and trained workforce,
directors consider qualitative assessment an appropriate
and the group’s potential land bank.
evaluation of the group’s performance in these areas.
This review has been prepared for the group as a whole
Objectives
and therefore gives emphasis to those matters that are
The group’s objective is to provide attractive overall
significant to the company and its subsidiaries when
returns to investors in the shares and other securities of
taken together. The review is divided into five sections:
the company from the operation and expansion of the
overview; operations; sustainability; finances; and risks
group’s existing business, while honouring the group’s
and uncertainties.
social obligation to facilitate economic progress in the
locality of the group's activities and to develop the group's
13
Review of the group continued
operations in a responsible and sustainable manner such
existing oil palm operations. The directors have
that
these will enhance
the
local environment.
previously stated, and it remains the case, that they do not
Realisation of this objective is dependent upon the
regard such diversification as a strategic imperative and
group’s ability to generate the increasing operating profits
that a decision to diversify would be taken only if the
that will be needed to finance such realisation.
prospective returns from capital invested in diversification
were to be comparable with those achievable from
Since CPO is a primary commodity, its price is determined
investment of equivalent capital in continued expansion of
by world supply and demand. The CPO price may, and
the oil palm operations in the existing operational areas.
does, fluctuate in ways that are difficult to predict and
which the group cannot control. As its strategy for
One possible area of diversification that the directors
increasing operating profits, the group therefore seeks to
have been tentatively considering in recent months is that
increase crops and to minimise unit production costs with
of coal mining. It is well established that East Kalimantan
the expectation that the lower cost producer of CPO is
has vast coal deposits, many of which comprise coal of a
better placed to weather any downturn in price. To this
high quality. Certain of the local investors in Indonesian
end, the group has adopted a two pronged approach.
subsidiaries of the company have interests in, or access
to, coal concessions and have suggested that the group
First, the group aims to capitalise on its principal
might join them in exploiting such concessions. The
resources by developing the group’s land bank as rapidly
directors have concluded that this suggestion should be
as logistical and financial constraints permit with a view to
explored although there is no current certainty that the
utilising the group’s existing management capacity to
apparent opportunity offered can provide an economically
manage a larger business. Secondly, the group strives to
viable project or that, if it does, the group would decide to
manage its established operations as productively as
take on such a project.
possible. Ancillary to the first component of this
approach, the group seeks to add to its land bank when
Future direction and succession
circumstances permit.
Recent years have seen a significant transformation in
As an additional financial objective, the group aims to
the group. An external indication of this is that at 31
enhance returns to equity investors in the company by
December 2000 the ordinary share capital of the
procuring that a prudent proportion of the group’s funding
company was capitalised at £4.6 million and that, by 31
requirements is met with prior charge capital in the form
December 2007, this figure had grown to £178.1 million.
of fixed return preferred capital and debt.
In part, this change reflects an increase in the number of
Diversification
ordinary shares that the company has in issue and the
fortuitous benefit to the group of the rise in the world
market price of CPO that occurred over the period.
The group recognises that it is dependent upon
Nevertheless, there has also been a major expansion in
operations in a single locality producing a single product.
the scale of the group’s operations and, because of the
This permits significant economies of scale but brings
capital constraints to which the group was formerly
with it risks. The directors have in the past considered,
subject (exacerbated by the litigation that dogged the
and continue to look at possibilities for, diversification into
group from late 2001 until early 2006 when the litigation
another crop or area of activity that complements, and
was settled), much of the expansion occurred in the latter
can be developed within reasonable proximity of, the
part of the 2001 to 2007 period when it became possible
14
to fund it. The transformation of the group has therefore
integral to the present structure is the requirement to
been extremely rapid.
maintain a London base and that base represents a
significant overhead. If, as the directors hope will be the
Whilst the directors have been pleased with the group’s
case, the group can in future rely, to a greater extent than
progress, they have also been concerned to meet the
hitherto, on internally generated equity, and if the markets
challenges that have accompanied it. These include the
for listed securities in Indonesian and other Asian
challenges of augmenting management capacity to
financial markets continue to mature, it might be that a
handle the requirements of the expanding operations, of
reconstitution of the group as an entirely Asian based
providing management succession and of structuring the
entity would better serve investors in the group than
group for the future in a way that will best facilitate
continuation of the present group structure.
continued expansion.
As explained under “Operations” below, the group has
All of the operations of the group are based in Indonesia
made significant progress in recent months in adding to
and the directors have seen consolidation of the human
its land bank and the directors hope that this will permit
resource component of the Indonesian operations as the
further rapid growth in the group’s planted area. The
highest priority. To this end, steps have been taken to
directors have concluded that they should defer any far
provide greater structure to the management of the
reaching decisions on group structure until it becomes
operations by adding senior staff (both by internal
clear whether this hope can be converted into a reality.
In
promotion and external recruitment) and by enhancing
the meanwhile, they intend simply to maintain the status
training programmes. The group has also sought to
quo of the group’s London base. Both the managing
entrench its local capacities by building on existing
director and the chairman have indicated that they would
relationships with local stakeholders, by procuring
wish to remain in their present roles for several more
minority local investors in its operations and by appointing
years and the directors therefore feel that the issue of
persons of standing as local advisers to, and directors of,
London succession can be deferred until it becomes
Indonesian group companies. Whilst the process is not
clearer whether this is needed.
yet complete, the directors believe that the measures
already taken have significantly improved the resilience of
Evaluation of performance
existing management and the availability to the group of
local independent non-executive advice. Moreover, the
In seeking to meet its expansion and efficiency
group now has an expanding cadre of younger staff who,
objectives, the group sets operating standards and
suitably nurtured, should in the future be capable of
targets for most aspects of its activities and regularly
running the Indonesian operations.
monitors performance against those standards and
More difficult is the question of how best to develop the
no single standard or target that, in isolation from other
structure of the group for the future. As noted above, the
standards and targets, can be taken as providing an
group sees itself as marrying developed world capital and
accurate continuing indicator of progress. Rather a
Indonesian opportunity and central to this self perception
collection of measures have to be evaluated and a
targets. In many aspects of the group's activities, there is
has always been the existence of the company as a UK
qualitative conclusion reached.
listed company providing a conduit for capital. This has
served the group well in recent years in permitting the
The directors do, however, rely on regular reporting of
group to raise the capital that it has needed. However,
certain operational progress items that are comparable
15
Review of the group continued
from one year to the next and may be regarded as key
average total equity (less preferred capital) for the
indicators of operating performance. These indicators for
period; and
any given period comprise:
•
the new extension planting area developed; this is
measured as the area in hectares of land cleared and
planted out or cleared and prepared for planting out
during the applicable period;
•
the crop of fresh fruit bunches ("FFB") harvested;
this is measured as the weight in tonnes of FFB
delivered to the group's oil mills during the applicable
period; and
•
the CPO extraction rate achieved; this is measured
as the percentage by weight of CPO extracted from
the FFB crop of the applicable period.
Of these indicators, the first provides a measure of the
group's performance against its expansion objective. The
second and third indicators are measures of field and mill
efficiency and, as such, provide a basis for assessing the
extent to which the group is achieving its objective of
maximising output from its operations.
Quantifications of the above three indicators for 2007
and comparable quantifications for 2006 (in both cases
as sourced from the group's internal management
reports) are provided under “Land development” and
“Crops and extraction rates” in “Operations” below
together with targets for 2008. Qualitative comment on
the group's social objectives is also provided under
“Employment and social obligations” in “Operations”
below and under “Sustainability” below.
Key indicators used by the directors in evaluating the
group's financial performance for any given period
comprise:
•
return on adjusted equity; this is measured as profit
before tax for the period less amounts attributable to
preferred capital expressed as a percentage of
•
net debt to total equity which is measured as
borrowings and other indebtedness (other than intra
group indebtedness) less cash and cash equivalents
expressed as a percentage of total equity.
Because of the group's material dependence on CPO
prices, which have a direct impact on revenues and on
periodic revaluations of biological assets, in targeting
return on total equity the directors set a norm that they
hope will represent an average of the annual returns
achieved over a period of seven years.
Percentages for the above two indicators for 2007 and
comparable figures for 2006 (derived from figures
extracted from the audited consolidated financial
statements of the company) are provided under “Group
results” and “Financing policies” in “Finances” below,
together with target percentages.
Operations
Group structure
All of the group's operations are located in East
Kalimantan and have been established pursuant to an
understanding dating from 1991 whereby the East
Kalimantan authorities undertook to support the group in
acquiring, for its own account and in co-operation with
local interests, substantial areas of land in East
Kalimantan for planting with oil palms. The oldest planted
areas, which represent the core of the group’s operations,
are owned through PT REA Kaltim Plantations (“REA
Kaltim”) in which a group company holds a 100 per cent
economic interest. With the REA Kaltim land areas
approaching full utilisation, in 2005 and 2006 two new
companies, PT Sasana Yudha Bhakti (“SYB”) and PT
Kartanegara Kumala Sakti (“KKS”), were established with
the object of securing additional land on which to
16
continue the development programme with, in each case,
are at different stages of titling and a large proportion of
95 per cent ownership by the group and 5 per cent by
the land allocated is not yet available to the group for
East Kalimantan investors.
development.
Further efforts to ensure the availability of land for
To-date, full hgu land title certificates have been issued in
expansion during 2007 and the early months of 2008
respect of the entire 30,106 hectares allocated to REA
have resulted in the group acquiring two further
Kaltim and 5,110 hectares of the land areas allocated to
Indonesian companies, PT Cipta Davia Mandiri (“CDM”)
SYB. The balance of the land allocated to SYB amounts
and PT Kutai Mitra Sejahtera (“KMS”) and conditionally
to some 10,000 hectares and it had been expected by
agreeing to acquire (subject to confirmation of necessary
the directors that this land would be released to the group
land development permits) a third Indonesian company,
under three separate titles during 2007. After a major
PT Putra Bongan Jaya (“PBJ”). Each of these three
effort, the group was successful, in the closing months of
further Indonesian companies is, or will be, owned as to
2007, in obtaining the key land development permit in
95 per cent by group companies and 5 per cent by East
respect of the expected first title area of 6,000 hectares.
Kalimantan investors.
Land areas
Under normal circumstances, issue of full hgu title to the
area in question could have been expected to follow
automatically after issue of this key permit. Unfortunately,
in this instance, a setback occurred with the discovery by
Although the 1991 understanding established a basis for
the group that an allocation over the same area had
the provision of land for development by or in cooperation
recently been issued for mineral exploration. Issue of the
with the group, all applications to develop previously
full hgu will therefore be further delayed pending
undeveloped land areas have to be agreed by the
resolution of the resultant conflict of land claims.
Indonesian Ministry of Forestry and to go through a titling
process. This process leads eventually to the issue of a
The position in respect of the land area of some 20,000
registered land title certificate (an hak guna usaha or hgu
hectares allocated to KKS is also unsatisfactory with the
certificate) but only after insertion of boundary markers,
completion of the titling process continuing to await the
as part of a cadastral survey, and completion of other
issue of a decree by the Indonesian Ministry of Forestry
required legal procedures. In the group’s experience, the
that will allow implementation of a new provincial
process, which was never straightforward, has become
development plan that has been drawn up and approved
more complicated in recent years. This has followed the
by the provincial government of East Kalimantan. Issue of
devolution of significant authority in relation to land
this decree, which is being negotiated between the
matters from the Indonesian central government to
Ministry of Forestry and the provincial government of East
Indonesian provincial and district authorities which has
Kalimantan, has been reported to be imminent for some
resulted in an increase in the number of official bodies
time but remains pending.
involved in the titling process.
Following the recent acquisitions of CDM and KMS and
problems affecting the completion of titling of the untitled
assuming completion of the conditional acquisition of
SYB area and the KKS area will ultimately be resolved,
PBJ, the group will hold land allocations totalling slightly
the timing of such resolution is uncertain and significant
in excess of 120,000 hectares but the various allocations
further delay now appears possible. With no further land
Whilst the directors remain hopeful that the outstanding
17
Review of the group continued
available for immediate development within REA Kaltim,
competition for land suitable for development is
SYB or KKS, the directors decided during 2007 that the
intensifying.
group should take urgent steps to acquire additional land
areas in respect of which land development permits had
Land development
already been issued. The result has been the acquisitions
of CDM, KMS and PBJ referred to above, bringing with
Areas planted and in course of development as at 31
them land allocations of, respectively, 20,000 hectares,
December 2007 amounted in total to 26,408 hectares.
17,000 hectares and 20,000 hectares with development
Of this total, mature plantings comprised 13,080
permits covering significant land areas within these
hectares, all of which lie within the REA Kaltim areas and
allocations (subject as respects PBJ to satisfaction of the
derive from plantings initiated between 1994 and 1997.
conditions for acquisition of that company).
Following the economic and subsequent political
The core operations of REA Kaltim are located some 140
destabilisation of Indonesia that occurred during 1997
kilometres north west of Samarinda, the capital of East
and early 1998, and the negative effect of that
Kalimantan, and lie either side of the Belayan river, a
destabilisation on the general availability of finance for
tributary of the Mahakam, one of the major river systems
development, REA Kaltim suspended all new
of South East Asia. The SYB and KKS areas are
development and, from then onwards for several years,
contiguous with the REA Kaltim areas so that the three
concentrated its available resources on carrying to
areas together form a single site. All of these areas fall
maturity the areas that had previously been planted or
within the Kutai Kartanegara district of East Kalimantan.
prepared for planting. Extension planting was resumed in
The prospective PBJ area lies some 70 kilometres to the
2004 and the 3,165 hectares planted in that year
south of the REA Kaltim areas in the West Kutai district
reached maturity at the start of 2008.
of East Kalimantan while the CDM and KMS areas are
located in close proximity of each other in the East Kutai
The extent of the new development achieved in 2007
district of East Kalimantan less than 30 kilometres to the
was a significant disappointment with an increase during
north west of the REA Kaltim areas.
the year of only some 1,500 hectares in the total area
planted or in course of development. This increase fell
At present, access to the REA Kaltim, SYB, KKS, CDM
very materially short of the target of 6,500 hectares set
and KMS areas can be obtained only by river and by air
at the beginning of the year. In setting that target, the
but the completion in 2005 of a road bridge over the
directors did recognise that its achievement would
Mahakam should eventually permit road access as well.
depend upon the titling of land allocations held by the
The PBJ area is already accessible by road. The CDM
group proceeding as planned so that land would become
and KMS areas can be accessed from the REA Kaltim
available for development in time, and to an extent
area by way of abandoned logging roads.
sufficient, to meet the requirements of the development
The group continues to look for further areas suitable for
to the untitled land allocation held by SYB and KKS, as
planting with oil palms within the general vicinity of its
referred to under “Land areas” above, meant that this did
existing land allocations. The directors are optimistic that
not happen. The shortfall was the result.
programme. Unfortunately, the titling problems in relation
it will be possible to augment further the group’s land
bank although it is clear that interest in oil palm
Looking to 2008 and beyond, the directors continue to
development in East Kalimantan has increased and that
regard the availability of land for development as needed
18
as the key constraint on expansion. The serious and
expansion will, however, involve a series of discrete
unexpected delays suffered in 2007 have made it clear
annual decisions as to the area to be planted in each
that any predictions as to land availability may prove
forthcoming year and the rate of planting may be
inaccurate. Nevertheless, the directors do believe that
accelerated or scaled back in the light of prevailing
significant areas within the 37,000 hectares of land
circumstances.
allocations held by CDM and KMS will be available for
development by the group during 2008 and that a further
Processing
area held by PBJ will also become available during the
year. This will permit the group to split its development
The group now operates two oil mills in which the FFB
programme between three separate areas and, if
crops harvested from the mature oil palm areas are
setbacks occur in one area, hopefully to compensate for
processed into CPO and palm kernels. The first mill
these by accelerating development in the other areas.
began operating in 1998 with an initial capacity of 30
Although the delays experienced in 2007 have continued
tonnes of FFB per hour. This has since been expanded
into 2008, the recent acquisitions of CDM and KMS
to a present capacity of 80 tonnes per hour. The second
should permit large scale development to be resumed
mill was brought into production in 2006 with an initial
upon completion of land compensation settlements with
capacity of 40 tonnes per hour. It is planned to expand
local villages. These are currently under negotiation.
this to 60 tonnes per hour during 2008 and further to 80
tonnes per hour in 2009. The additional capacity
Subject to the caveats just mentioned, the targeted
provided by such expansion should be sufficient to
development programme for 2008 and 2009 will be
process the expected increases in FFB crops pending
6,500 hectares per annum and in addition the group will
construction of the group’s third oil mill which is
aim to catch up the uncompleted balance of the 2007
programmed to commence in 2010.
programme of some 5,000 hectares. Whilst development
of new areas requires a one year lead time in which to
The group's second oil mill incorporates, within the overall
procure seed and to develop seedlings for planting out,
facility, a palm kernel crushing plant in which palm kernels
the group’s nurseries are already well stocked and the
can be further processed to extract the crude palm kernel
availability of planting material should be more than
oil (“CPKO”) that the palm kernels contain. The kernel
sufficient to meet the targeted programme. If achieved,
crushing plant was brought into full scale production at
this programme would result by the end of 2009 in a total
the start of 2007 and now processes all kernel output
area under oil palm or in course of development of slightly
from both of the group’s oil mills. The kernel crushing
under 45,000 hectares.
plant is economic to run because it operates on power
generated by the second oil mill from the combustion of
Inflation in Indonesia is impacting development costs but
waste products from the CPO and palm kernel extraction
extension planting in areas adjacent to the existing
processes and such power is surplus to the power
developed areas still offers the prospect of attractive
requirement for those processes. Moreover, processing
returns. Accordingly,
it is the directors' intention that,
kernels into CPKO avoids the material logistical
beyond 2009, the group should continue its expansion
difficulties and cost associated with the transport and
and should seek to plant with oil palms all suitable
sale of kernels.
undeveloped land available to the group (other than areas
set aside by the group for conservation) as rapidly as
The group operates its own fleet of barges for transport
financial and logistical constraints permit. Such
of CPO and CPKO. The fleet is used in conjunction with
19
Review of the group continued
tank storage adjacent to the oil mills and a transhipment
downstream riverside site on which to establish a
terminal owned by the group downstream of the port of
permanent loading point for use during dry periods. The
Samarinda. The fleet comprises one barge of 3,000
necessary loading facilities will be developed following
tonnes, which the group time charters, and a number of
completion of a government road that will provide access
smaller barges, each of 1,500 tonnes or less, which are
to the site. Recent progress on the government road has
owned by the group. The smaller barges are used for
been slow.
transporting palm products from the upriver operations to
the transhipment terminal for collection from that terminal
Crops and extraction rates
by buyers. The 3,000 tonne barge can be used for sea
voyages to Malaysia and within Indonesia. This permits
FFB crops for the years from 2003 to 2007 are shown in
the group to deliver CPO and CPKO to customers'
the “Key statistics” section of this annual report. The crop
nominated destinations in Malaysia and Indonesia. The
out-turn for 2007 amounted to 393,217 tonnes, 3.5 per
directors believe that flexibility of delivery options is
cent ahead of the budgeted crop of 380,000 tonnes and
helpful to the group in its efforts to optimise the net
an increase of 17.7 per cent on the FFB crop for 2006 of
prices, FOB port of Samarinda, that it is able to realise for
334,076 tonnes. Climatic conditions during 2007 were
its produce. Moreover the group’s ability itself to deliver
satisfactory with good rainfall of 4,413 mm (2006 –
CPO and CPKO allows the group to make sales without
2,967 mm) generally well distributed through the year.
the collection delays sometimes experienced with FOB
buyers.
There is a considerable volume of data available on the
FFB yields that are achieved from modern hybrid material
A trial made in 2005 established that it is both feasible
planted on estates with soil and climatic conditions similar
and economic to use the barge fleet to transfer CPO from
to those prevailing on the group's estates. Yields per
the Samarinda transhipment terminal to ships anchored
hectare climb rapidly during the first four years of
offshore outside the port of Samarinda. This provides
production to a peak level that on average is around 24
access to vessels of much greater tonnage than the
tonnes per hectare. Production then remains at or close
vessels that can be loaded within the port of Samarinda
to this peak level for ten years or more, declining
(which are effectively limited to 6,000 tonnes) and
gradually over the last six to eight years of the oil palm's
permits the group to ship palm products to Europe when
25 year economic life. The group has achieved yields in
differentials between European and South East Asian
excess of 30 tonnes per hectare from fully mature
prices for CPO and CPKO make it worthwhile to do so
plantings indicating that, in years when cropping is not
(although this has not been the case in the recent past).
materially affected by abnormal weather conditions, an
average peak yield across all plantings will materially
During periods of lower rainfall (which normally occur for
exceed 24 tonnes per hectare.
short periods during the drier months of May to August of
each year), river levels on the upper part of the Belayan
The FFB crop for 2008 has been budgeted at 421,000
become volatile and palm product outputs at times have
tonnes with the expected increase over 2007 reflecting a
to be transferred by road from the mills to a point some
budgetary assumption of average rainfall (both as to
70 kilometres downstream where year round loading of
quantum and distribution) and increased cropping from
barges of up to 2,000 tonnes is possible. To reduce the
the 3,150 hectares of oil palms classified as mature from
extra cost that this involves, in 2003 the group acquired a
the start of 2008. Crops to end March 2008 were 9,000
20
tonnes above budget but, as the monthly phasing of each
average annual growth in consumption of some 7.0
year's crop varies from year to year, this should not be
million tonnes in the preceding three year period. Major
taken as indicating a likelihood that the FFB crop for
uses of vegetable and animal oils and fats have
2008 as a whole will be above budget.
conventionally been for the production of cooking oil,
margarine and soap. Consumption of these basic
The CPO extraction rate for 2007 was 23.7 per cent as
commodities correlates with population growth and, in
compared with the rate achieved in 2006 of 23.2 per
less developed areas, with per capita incomes and thus
cent. The group has set a target CPO extraction rate of
economic growth. An additional use for vegetable oil,
24 per cent (which, if achieved, should be regarded as
which is currently assuming an increasing importance in
very satisfactory against industry norms).
worldwide demand, is bio-fuels. In particular, bio-diesel
demand has accounted for the significantly higher year
The palm kernel extraction rate for 2007 (being
on year increase in consumption of vegetable oils that
measured as the percentage by weight of palm kernels
has been seen in each of the last three years.
extracted from the FFB crop for the year) was 4.0 per
cent, slightly above the rate of 3.8 per cent achieved in
According to Oil World, CPO production in the year to 30
2006 and in line with the target palm kernel extraction
September 2007
totalled 37.3 million
tonnes,
rate of 4.0 per cent set by the group. Recent machinery
representing some 24.5 per cent of the total world
adjustments to improve the kernel extraction rate in the
production of the 17 major vegetable and animal oils and
newer oil mill may permit upward revision of the target
fats for the same period of 152.1 million tonnes. The
rate of 4 per cent in future years.
principal competitors of CPO are the oils from the annual
oilseed crops, the most significant of which are soybean,
The CPKO extraction rate for 2007 (being measured as
oilseed rape and sunflower. As annual crops, the
the percentage by weight of CPKO extracted from the
production from those three oilseed crops can be rapidly
palm kernels processed by the palm kernel crushing plant
adjusted in response to market surpluses or shortfalls
during the year) was 41.4 per cent.
within the vegetable oils and fats complex. The directors
Revenues and markets
believe that levels of annual oilseed production will
ultimately be driven by fundamental market factors with
the result that imbalances will be corrected within a
Around 85 per cent by weight of oil palm product output
relatively short time frame.
is represented by CPO and the balance by palm kernels.
Accordingly, the group's revenues are critically dependent
It is however possible that normal market mechanisms
on CPO prices.
may be affected by government intervention. It has long
been the case that some areas (such as the EU) have
The outlook for CPO prices must be considered against
provided subsidies to encourage the growing of oilseeds
the background of consumption of vegetable and animal
and that such subsidies have distorted the natural
oils and fats. According to Oil World, worldwide
economics of producing oilseed crops. More recently
consumption of vegetable and animal oils and fats
there has been action by governments to reduce
increased by 4.9 per cent to 153.2 million tonnes in the
dependence on fossil fuels. This has included steps to
year to 30 September 2007. The annual increase of 7.0
enforce mandatory blending of bio-fuel as a fixed
million tonnes that this represented is in line with the
minimum percentage of all fuels and subsidies to support
21
Review of the group continued
the cultivation of crops capable of being used to produce
equity markets and the record price levels of petroleum
bio-fuel. Such action has increased returns for farmers
oil have also significantly increased investment interest in
from growing crops such as corn and has meant that land,
all commodities and in soft commodities in particular.
which under other circumstances could, against the
background of the present levels of vegetable oil prices,
Whilst expectations of bio-fuel demand and concerns
have been expected to have been converted to growing
over availability have probably been the dominant factors
annual oilseed crops has been used for other purposes.
in the recent increase in vegetable oil prices, the CPO
market continues to benefit from health concerns in
A graph of CIF Rotterdam spot CPO prices for the last
relation to trans-fatty acids. Such acids are formed when
ten years, as derived from prices published by Oil World,
vegetable oils are artificially hardened by hydrogenation.
is shown in the “Key statistics” section of this annual
Poly-unsaturated oils, such as soybean oil, rape oil and
report. The monthly average price over the ten years has
sunflower oil, require hydrogenation before they can be
moved between a high of $952 per tonne and a low of
used for shortening or other solid fat applications but
$234 per tonne. The monthly average price over the ten
CPO does not.
years as a whole has been $469 per tonne.
The directors retain their previously expressed view that
During 2007, the CPO price, spot CIF Rotterdam, rose
the prices of all commodities are inherently cyclical and
progressively from an opening level of some $600 per
that it would be foolish to assume that the present high
tonne to a closing level of $950 per tonne, resulting in an
price levels for CPO will continue indefinitely. Ultimately,
average price for the year of $780 per tonne, some 63
they believe that high prices for vegetable oils will lead to
per cent more than the 2006 average. Further strong
greater production not only of CPO but also of other
price rises were recorded going into 2008 and CPO has,
competing crops and that that, in turn, will result in lower
during 2008, traded at levels in excess of $1,300 per
prices. However, they acknowledge that the increasing
tonne although recent weeks have seen prices fall back
interest in bio-fuels represents a new factor in vegetable
from the highest levels. Reports suggest that the peak
oil markets. With the continuing growth in world
prices of vegetable oils were accompanied by heavy
population, economic growth in China, India and other
speculative buying as well as increased commercial
parts of the developing world and the prospect of
activity and that the recent fall from peak levels reflects
declining availability of fossil fuels (upon which it must be
closing of speculative positions. Certainly, demand for all
remembered that intensive farming methods are critically
vegetable oils appears to remain strong at a time when
dependent), it may be that the average level of vegetable
stocks are at historically very low levels and competition
oil prices over future price cycles will be higher than in the
for hectarage from corn and grain crops is limiting the
past.
ability of the annual oilseeds to increase production and
reduce the demand pressure on world vegetable oil
The average US dollar FOB price per tonne realised by
stocks.
the group in respect of 2007 sales of CPO was
approximately 66 per cent higher than that of 2006. In
Material losses of rape seed crop resulting from
2007, approximately 51 per cent of the group's CPO
extremely cold weather in China have recently added to
production was sold in the local Indonesian market and
the pressures on world vegetable oil supplies. The
the balance of 49 per cent was exported. FOB prices
influence of external market factors in the form of US
realised for CPO in the local market during 2007 were for
dollar weakness, uncertainties in the world credit and
the most part marginally higher than those available in the
22
export market but, as sales volumes continue to increase,
With the kernel crushing plant in full operation, sales of
the group wishes to ensure that it can access the larger
palm kernels ceased in early 2007. Sales of CPKO were
CPO markets available internationally when necessary.
made entirely in the local Indonesian market and
Export sales in 2007 continued to be concentrated within
achieved an average premium of some $115 per tonne
the South East Asian region.
over the FOB price per tonne for CPO.
Sales are restricted to a small number of local and
Cost base
regional buyers and are made on contract terms that are
comprehensive and standard for each of the markets into
The group's revenue costs principally comprise: direct
which the group sells. The group therefore has no need
costs of harvesting, processing and despatch; direct costs
to develop its own policies for product quality, customer
of upkeep of mature areas; estate and central overheads
service or customer relations.
in Indonesia; the overheads of the UK head office; and
financing costs. Whilst direct costs vary to an extent with
As a general rule, all CPO produced by the group is sold
crops harvested and the area under cultivation, the crop
for immediate delivery but on occasions, when market
related component of costs is not a high proportion of the
conditions appear favourable, the group makes forward
total. Therefore, for any given total area under cultivation,
sales. When making such sales, the group would not
costs are for the most part fixed.
normally commit a volume equivalent to more than 60 per
cent of its projected CPO production for a forthcoming
The directors believe that the group's senior management
period of twelve months.
team has the capacity to manage a larger area than is
currently under cultivation and do not therefore expect a
During 2007, the group delivered 12,000 tonnes of CPO
proportionate increase in fixed costs as a result of the
under forward sale contracts at the equivalent of a CIF
planned extension planting programme. Increases in
Rotterdam price of $620 per tonne. Otherwise, sales
local costs are resulting in some inflation in costs in US
were made on a spot basis. The 2007 forward sale
dollar terms because the higher Indonesian rupiah costs
contracts are continuing into 2008 at the rate of 2,000
that such
increases are causing are not being
tonnes per month until June (at the same equivalent price
compensated by a commensurate depreciation in the
of $620 per tonne) Thereafter the group has forward
value of the Indonesian rupiah against the US dollar.
sales in respect of 2,000 tonnes per month for the six
month period to December 2008 and the twelve month
Particular factors affecting current Indonesian operating
period to December 2009 at prices equivalent to CIF
costs are substantial increases in the cost of all fertilisers,
Rotterdam prices of respectively $870 and $860 per
higher diesel oil prices reflecting the removal of state
tonne.
diesel oil subsidies in 2005 and subsequent increases in
international petroleum oil prices and wage inflation.
Export duty is now payable on exports of CPO from
Operating efficiencies achievable from the growing
Indonesia on a percentage basis rising from nil per cent
production volumes, coupled with the better absorption of
on sales at prices of up to the equivalent of $550 per
overheads that expansion of planted areas permits,
tonne, CIF Rotterdam, to 25 per cent on sales at prices
provide some scope for mitigating the resultant impact on
above the equivalent, on that basis, of $1,300 per tonne.
margins.
23
Review of the group continued
Employees
emphasis
is placed on health and safety and
With the expansion of the group's operations, the group
sustainability.
is steadily increasing its workforce. At the end of 2007,
The group’s extension planting programme brings with it
the workforce numbered some 6,000. That is sufficient
the need continuously to enlarge the operational
for the current level of operational activity but further
management team and a recruitment programme for
recruitment will be required as the extension planting
graduates with agricultural qualifications is conducted
programme progresses. Almost all members of the
each year. These graduates join the cadet training
workforce and their dependants are housed in group
programme. Those successfully completing this twelve
housing in a network of villages across the group estates.
month programme, which provides a grounding in all
aspects of oil palm estate management, are offered
The group places considerable emphasis on welfare and
positions as assistant managers. The recruitment
remuneration structures and aims to promote a
programme for cadets is sized each year to reflect the
productive and stable workforce. All villages are
future management needs of the extension planting
equipped with potable water and electricity and provided
programme and to allow for staff turnover.
with a range of amenity buildings including mosques,
churches, shops, schools and creches. The group
Courses constructed and operated out of the group's
provides financial assistance to local state schools and
own training school are targeted primarily at lower and
operates its own health service with medical facilities in
middle management levels. The group recognises the
each village and a central hospital. Active support for
importance of developing management skills at all levels
measures to control endemic diseases such as malaria
and the scope of the group’s ongoing training programme
has resulted in a reduction in the incidence of such
includes
the external provision of management
diseases in recent years.
development courses for the group's senior Indonesian
The group has health and safety policies that are clearly
management.
communicated to all employees and are managed
A recent surge of interest in the development of new oil
through regular meetings on each operating unit
palm plantings in Indonesia generally, and in East
attended by management and employee representatives.
Kalimantan in particular, by other plantation groups and
The minutes from all such meetings are reviewed by
new entrants to the plantation industry is putting
senior management. The group promotes a policy for the
significant pressure on the industry’s limited pool of
creation of equal and ethnically diverse employment
competent estate management and experienced workers.
opportunities and encourages the establishment of
The group is taking steps to protect its investment in
forums in which employees or their representatives can
people and skills by giving added focus to the provision of
have free and open dialogue with
the group’s
remuneration incentives designed to discourage its
management.
employees from switching to other employers. Such
steps will inevitably result in further upward pressure on
Training is an important focus for the group in its efforts
future operating costs.
to establish best practice in all aspects of the group's
activities. Regular training programmes are run as part of
the human resource development function. Particular
24
The Indonesian context
encouraged by the government’s indicated commitment
to further expansion of the Indonesian oil palm industry.
During 2007,
the
Indonesian domestic economy
continued to expand at a moderate rate and the
The province of East Kalimantan remained stable and
Indonesian government currently projects economic
prosperous throughout 2007. The province benefits from
growth in 2008 at above 6 per cent. The rate of inflation
a large natural resource base, low population and near full
has been increasing in recent months, driven by price
employment. In particular, the coal mining industry
increases in staple foods, with year on year rates currently
continues to develop rapidly within East Kalimantan.
running at in excess of 8 per cent. The political situation
Although, as noted under “Area of operations” above, the
remains stable but the continuing upward pressure on
devolution of authority from central government to
food prices is a concern. Food shortages would certainly
provincial governments that has resulted from the
have the potential to cause social unrest.
Indonesian regional autonomy legislation of recent years
has brought with it increased bureaucracy in some areas
Having strengthened against the US dollar during 2005,
(in particular land titling), it has also brought benefits to
the Indonesian rupiah to US dollar exchange rate has
outlying provinces such as East Kalimantan in providing
since remained within a narrow range. This, together with
increased resources for provincial development.
a higher domestic cost base and an increasing inflation
rate, continues to have a negative impact on foreign
Sustainability
direct investment which remains at low levels. On the
other hand, Indonesia's economic and political situation
Smallholder programmes
appears to be viewed more positively and the country’s
ability to access international debt markets has improved
The group is active in assisting local villages to establish
significantly in recent years.
their own smallholdings of oil palm on a co-operative
basis. At 31 December 2007, some 1,200 hectares of
Rationally Indonesia's economic policies should include
smallholder plantings adjacent to the group's operations
the encouragement of those US dollar earning export
had been established across nine local villages. Interest
industries that have natural competitive advantage in the
from the local village communities in the cultivation of oil
international markets in which they operate. The country
palm as a secure long term livelihood continues to
has enormous reserves of natural resources in the form
increase and the group remains fully committed to a
of oil, natural gas and other minerals and, with a plentiful
material expansion of the oil palm areas cultivated by the
supply of land and labour, agriculture can be a major
local village communities. Progress is however being
foreign currency earner. In particular, the Indonesian oil
slowed by the difficulties experienced by village co-
palm industry continues to have significant competitive
operatives in identifying, and securing suitable titles over,
advantage over its Malaysian counterpart and over
prospective land areas for smallholder developments.
producers of those vegetable oils derived from the annual
Discussions have recently taken place with the provincial
oilseed crops. This appears to be recognised by the
government in the hope that this problem can be resolved
current Indonesian government and it must be hoped that
and that material areas of land adjacent to the group’s
it will maintain an economic environment in which the oil
estates can be earmarked by the government for the
palm industry can continue to thrive. The directors are
development of smallholder plantings.
25
Review of the group continued
Under the current smallholder model, each farmer
Community development programmes currently take two
cultivates oil palm on his own two hectare plot with the
forms. First, each community development team is
group providing technical advice through a management
required to engage with government at local and central
team dedicated
to
the smallholder development
level in order to identify and develop areas where the
programme. Fertilisers and chemicals are supplied by the
communities local to the group’s estates can obtain
group to smallholders on deferred terms. In due course,
government assistance and funding for community
each smallholder farmer will sell his FFB production to
development projects. It is hoped that, with the group’s
the group for processing and the group will, on an agreed
help, local communities can be made fully aware of the
basis, recover from the sale proceeds the deferred
range of government rural assistance programmes
amounts owed by the farmer to the group.
available to them and that the group can act as a catalyst
in helping local communities to avail themselves of the
The ethnic background of the communities living in the
benefits that such programmes could bring.
vicinity of the group’s operations varies materially from
village to village, and this and other factors result in
Secondly, each community development team is required
varying levels of interest in smallholder farming. The
to have a day to day presence on the ground, visiting local
group has developed an alternative structure to the
communities and developing small scale self-help
conventional smallholder co-operative model with a view
projects with individual groups of villagers. The group has
to providing a mechanism that will enable those village
allocated a specific budget to assist in financing these
communities whose lifestyle and culture are not
self-help programmes, which to date have included
conducive to involvement in smallholder co-operatives to
chicken rearing, fish farming and fruit and vegetable
benefit from the economic opportunities afforded by oil
cultivation. The proximity of the sizeable workforce
palm development. Implementation of this alternative
resident on the group’s estates provides a readily
structure has however been held up by the difficulties,
accessible local market for the produce arising from such
referred to immediately above, in securing the land areas
schemes. Some 20 projects are currently operating with
on which to operate the new scheme.
a further 12 in the pipeline for 2008. Each village
Community development
adjacent to the group’s established operations has at
least one active project. The establishment of a credit
union scheme to assist in the provision of finance for
The group believes that successfully involving itself in
community projects is currently under review.
community development will be key to the future growth
and success of its plantation operations. For many years,
Conservation
the group has provided staff and equipment on an ad hoc
basis to give support to the local community but, during
The group continues to develop its conservation
2006, it was decided that a more formal and planned
programmes based on the environmental impact
approach was required. As a result, the group is
assessment made in 1995 by independent experts and
establishing small specialist management teams, resident
since periodically updated to reflect the further external
on each site upon which it operates, that will formulate
expert advice sought by the group. Designated
and manage the group’s community development
conservation reserves, aimed at conserving or enhancing
initiatives. A team of external consultants is used to
landscape level bio-diversity, continue to be established
produce an initial community needs assessment for each
within the group’s operational areas and, with the
of the group’s new development areas.
26
•
•
•
exception of one area that was destroyed by a fire during
All processing waste is recycled. Oil mill effluent is
the 1997/98 El Nino drought, these reserves continue to
treated in effluent ponds and after treatment is
be managed actively and maintained. The total area of
distributed within the oil palm areas as a substitute for
the group’s conservation reserves at the end of 2007
inorganic fertiliser. Empty fruit bunches are similarly
amounted to some 6,700 hectares.
distributed. Fibre extracted during the milling of oil palm
fruit is used to fuel oil mill boilers from which steam is
The group manages conservation issues through a
generated. This steam is then used to drive steam
dedicated on site management team led by an
turbines and to reduce dependence on fossil fuels for
internationally recognised conservation expert. This team
power. The group is developing a programme for the
is responsible for progressive implementation of the
centralisation of electricity generation and
the
group’s conservation policy, which is:
establishment of an electrical distribution network as an
•
to compile a detailed record of the physical attributes
of the landscape, its bio-diversity resources and the
status and value of each to both international and
local communities;
to minimise or eliminate adverse impacts from the
group’s plantations upon soil, water and biological
communities;
alternative to using diesel generators in each estate
village for the provision of electrical power. An evaluation
of the potential for reducing carbon emissions from the
CPO production process was started during 2007 and is
ongoing. This work is focused on the recovery of
methane from the mill effluent ponds. It is hoped that the
group may be able to obtain carbon credits under the
Clean Development Mechanism
to
improve
the
to achieve bio-diversity conservation
through
economics of investing in such recovery.
protection and sustainable use; and
to seek conservation outcomes that accrue long term
benefit to local communities.
General
The directors believe that recent criticism of the oil palm
The group recognises its social obligations in relation to
industry as the alleged principal driver of rain forest
pollution and energy efficiency. The group operates a
destruction in South East Asia is misplaced. Very large
zero burning policy in relation to land development and, in
areas of rain forest in East Kalimantan were cut down
dry periods, maintains active fire patrols in an effort to
during the second half of the twentieth century when little
limit the risks of accidental fires. Corridors are used to
or no oil palm was planted in the province and existing oil
separate all plantings from water courses and the latter
palm developments in East Kalimantan are concentrated
are regularly monitored to ensure that they are not
in areas that have been deforested by logging companies
contaminated by leaching of fertilisers and pesticides.
entirely unconnected with the oil palm companies
The group actively promotes
integrated pest
conducting
the
developments.
Nevertheless,
management throughout its operations. Wherever
sustainability is obviously an area of major importance for
possible, natural predators are preferred to pesticides for
the oil palm industry as a whole.
pest control. Selective varieties of flowering plants have
been planted throughout the group’s estates to promote
Since 2005, the group has employed an international firm
the population of wasps, the natural predators of
of consultants to perform an annual management
bagworm and caterpillars.
performance
review
covering
production
and
environmental practices and social sustainability.
27
Review of the group continued
Conclusions and recommendations are carefully reviewed
movements and thereby make it easier for shareholders
by senior operating management and the group’s
to follow the evolution of the group’s financial affairs.
managing director and appropriate responsive action is
taken.
Accordingly, while the group continues to report in
accordance with
International Financial Reporting
During the year, the group became a member of the
Standards (“IFRS”), the accompanying consolidated
Roundtable on Sustainable Palm Oil (“RSPO”). The
financial statements for the year ended 31 December
RSPO has produced a set of principles and criteria for the
2007 are presented in US dollars and the comparative
sustainable production of CPO. National interpretations
figures, which were originally presented in sterling, have
of these principles and criteria are currently being
been restated in US dollars.
developed in each of the major producer countries so as
to be made consistent with that country’s legal system.
The accounting policies applied under IFRS are set out in
Upon completion of this work, it is anticipated that
the “Accounting policies (group)” section of this annual
procedures will be put in place by which individual
report. The accounting policy relating to biological assets
companies can obtain RSPO accreditation.
(comprising oil palm plantings and nurseries) is of
particular importance. Such assets are not depreciated
The group recognises the importance of developing the
but are instead restated at fair value at each reporting
competences needed to meet the many demands that
date and the movement on valuation over the reporting
sustainability requirements place on responsible oil palm
period, after adjustment for additions and disposals, is
producers. As part of its commitment to achieving best
taken to income. Deferred tax is provided or credited as
practice and in the absence for the time being of an
appropriate in respect of each such movement.
agreed RSPO accreditation process for Indonesian
plantations, the group intends during 2008 to seek ISO
As in previous years, the fair value of the biological assets
14001 certification for its mill and estate operations.
at 31 December 2007 has been derived by the directors
Finances
Accounting policies
on a discounted cash flow basis by reference to the FFB
expected to be harvested from the group's oil palms over
the full remaining productive life of the palms and to an
estimated profit margin based on current costs and an
estimated produce value for transfer to mill derived from
Following a trend set by several other European
a twenty year average of historic CPO prices. Key
plantation companies, the group has decided to adopt the
assumptions made in the derivation of fair value as at 31
US dollar as its presentational currency. The US dollar
December 2007 are an average CPO price, FOB port of
has long been treated as the functional currency of the
Samarinda and net of Indonesian export duty, of $414 per
group’s oil palm operations, CPO is essentially a US dollar
tonne and discount rates of 17.5 per cent in the case of
based commodity, many of the group’s costs are incurred
REA Kaltim and 19 per cent in the case of all other group
in, or arise in respect of items that are priced by reference
companies. These compare with the assumptions of the
to, US dollars and all of the group’s borrowings are in US
preceding year of an average CPO price per tonne, FOB
dollars or are hedged against the US dollar. The directors
port of Samarinda and net of Indonesian export duty of
believe that presentation of the group’s results in US
$397 (equivalent to $402 per tonne before export duty)
dollars will reduce distortions caused by exchange
and a discount rate in all cases of 17.5 per cent.
28
The decision to apply different discount rates to the
increase or reduction of $5 per tonne in the unit profit
valuation of different components of the group’s
margin per tonne of FFB used for the purpose of the
biological assets at 31 December 2007 reflects the
valuation would increase or reduce the valuation by
directors’ view that, with the estates owned by REA
approximately $20 million.
Kaltim now approaching full maturity and with the still
immature areas owned by other group companies
The company continues to prepare its individual financial
expanding, it is no longer appropriate to value all of the
statements in sterling and in accordance with UK
biological assets on a single discount rate. Instead they
Generally Accepted Accounting Practice; accordingly the
believe that it is appropriate to reflect, in the discount rate
company’s individual financial statements are presented
applied in valuing the more immature areas, the greater
separately from the consolidated financial statements.
risks inherent in successfully harvesting the FFB crops
projected to be produced from those areas than in
Accounting reference date
harvesting the projected FFB crops from established
areas. The valuation of the biological assets at 31
The company’s current accounting reference date is 31
December 2007 also reflects one other refinement of
December. This is not ideal in terms of internal staff
valuation methodology. Having reviewed the initial costs
availability for the preparation of year end reports.
of oil palm extension development, the directors have
Moreover, the end of the calendar year is a popular
concluded that, with increasing levels of infrastructural
reporting date and the group finds itself competing with
establishment, the costs of infrastructural development
other groups (many of them much larger than the group)
should no longer be treated as an input to the creation of
to obtain from its auditors allocations of audit staff for the
biological assets. Instead, with effect from the beginning
time needed to audit the financial statements of the
of 2007, such costs are being capitalised and depreciated
company and its subsidiaries.
as permanent infrastructure.
The directors are therefore contemplating a change in the
The directors recognise that the IFRS accounting policy
company’s accounting reference date to 28 February.
in relation to biological assets does have theoretical
Such a change would require the consent of the holders
merits in each year charging to income a proper measure
of the 9.5 per cent guaranteed sterling notes 2015/17
of capital consumed (so that, for example, a fair
issued by REA Finance B.V.. If the directors decide to
distinction is drawn each year between the cost of the
proceed with the change and the necessary noteholder
shortening life expectancy of younger plantings still
consent is obtained during the course of 2008, the
capable of many years of cropping and that of older
current reporting period of the company would be
plantings nearing the end of their productive lives). It
extended to 28 February 2009.
does, however, concern the directors that no estimate of
fair value can ever be completely accurate (particularly in
Group results
a business in which selling prices and margins are subject
to very material fluctuations). Moreover, in the case of the
Group operating profit for 2007 amounted to $49.4
group’s biological assets, small differences in valuation
million and profit before tax to $47.0 million against the
assumptions can have a quite disproportionate effect on
comparable figures of the preceding year (as restated in
results. The biological assets are recorded in the group
US dollars) of $20.8 million and $19.8 million.
balance sheet at 31 December 2007 at $166 million. An
29
Review of the group continued
The principal movements in the components of operating
At the after tax level, profit for the year at $32.0 million
profit reported in 2007 were an increase in revenue of
was 130 per cent ahead of the $13.9 million achieved in
$24.5 million ($57.6 million against $33.1 million), and a
2006 while profit attributable to ordinary shareholders
positive movement of $5.6 million in the amount arising
was 155 per cent ahead of the preceding year. Fully
from changes in the fair value of agricultural produce
diluted earnings per share amounted to US 89.6 cents
inventory. The net gain from changes in the fair value of
(2006 - US 37.8 cents).
biological assets at $8.0 million was much in line with the
biological gain in 2006 of $8.7 million.
The group's target long term average annual return on
adjusted equity is 20 per cent. The return achieved for
The higher revenue reported reflected a combination of
2007 was 42.5 per cent against 25 per cent for 2006.
increased production, better selling prices and additional
revenues from selling CPKO rather than unprocessed
Dividends
palm kernels. The gain from changes in the fair value of
agricultural produce inventory arose from increases over
The fixed semi-annual dividends on the 9 per cent
2007 both in the volume of agricultural produce held as
cumulative preference shares that fell due on 30 June
inventory and in the fair value attributed to each tonne of
and 31 December 2007 were duly paid.
inventory so held (itself the result of the increase in the
prices of CPO and CPKO over the year).
Dividends totalling 2p per ordinary share have been paid
in respect of 2007 (2006 – 1p per ordinary share).
Interest payable in 2007 (before deduction of the interest
These comprised a first interim dividend of 1p per
component added to biological assets) amounted to $9.2
ordinary share paid on 5 October 2007 and a second
million against $6.5 million in 2006. The increased
interim dividend in lieu of final of 1p per ordinary share
charge principally reflected the higher average level of
paid on 25 January 2008. In addition, the company
group indebtedness during 2007 as compared with the
made a capitalisation issue to ordinary shareholders of
previous year. This resulted from the issues of debt
1,085,795 new preference shares on the basis of one
securities made by the group at the end of 2006 and in
new preference share for every 30 ordinary shares held
early 2007.
Interest cover for 2007 (measured as the
on 1 October 2007.
ratio of earnings before interest, tax, depreciation and
amortisation, and biological gain to interest payable) was
As noted under “Land development” in “Operations”
5.1 against 2.3 for 2006.
above, the group has ambitious plans for continued
extension planting of oil palms. These will require
Although the group continues to have substantial tax
substantial investment by the group and the need to fund
losses carried forward these losses are mainly in the UK
this investment will inevitably constrain the rate at which
members of the group and are not available for offset
the directors feel that they can prudently declare, or
against the profits of REA Kaltim. That company
recommend the payment of, future ordinary dividends.
exhausted its remaining tax losses during 2007 and, as a
The directors do appreciate that many shareholders
result, 2007 saw a sharp increase in the current tax
invest not only for capital growth but also for income and
provision which amounted to $5.3 million (against
that the payment of dividends is important. With the
$222,000 in 2006). Provision for deferred tax on timing
prospect of increasing crops for several years to come,
differences and on the biological gain accounted for the
the directors believe that, notwithstanding the constraints
balance of the 2007 tax charge (as also in 2006).
of the development programme, the group should be able
30
to support progressive increases in ordinary dividends
issue to ordinary shareholders referred to under
from the modest levels established in respect of 2006
“Dividends” above.
and 2007, but they believe that the rate of progression
should be steady rather than dramatic. The directors
The combined effect of the foregoing transactions was to
intend that any new level of ordinary dividend set in
increase the group’s liquidity, as discussed under
respect of any given year should be sustainable in
“Liquidity and financing adequacy” and to reduce its
subsequent years.
dependence on short term bank borrowings. As a result,
group indebtedness at 31 December 2007 amounted to
If the group’s results would appear to justify some
$86.2 million, made up of US dollar denominated bank
additional return to ordinary shareholders beyond the
indebtedness under an Indonesian consortium loan
level of ordinary dividends that the directors believe that
facility of $15.4 million, £22 million nominal of sterling
the company can prudently afford having regard to the
notes (carrying value: $40.7 million), $30 million nominal
need to conserve cash resources, the directors may
of 7.5 per cent dollar notes 2012/14 (“dollar notes”)
consider a further capitalisation issue to ordinary
(carrying value: $29.4 million) and other short term
shareholders of new preference shares.
indebtedness (including obligations under finance leases)
Capital structure
of $0.7 million. Against this indebtedness, at 31
December 2007 the group held cash and cash
equivalents of $34.2 million.
The group is financed by a combination of debt and equity
(which under IFRS includes minority interests and the
The sterling notes are secured principally on unsecured
company's preference share capital). Total equity less
loans made by REA Finance to REA Kaltim, are
minority interests at 31 December 2007 amounted to
guaranteed by the company and are repayable by three
$147.8 million as compared with $104.9 million at 31
equal annual instalments commencing 31 December
December 2006. Minority interests amounted at those
2015. The dollar notes are unsecured obligations of the
dates to, respectively, $877,000 and $600,000.
company and are repayable by three equal annual
instalments commencing 31 December 2012.
2007 saw further consolidation of the group’s financial
position. In January 2007, the balance of £7,000,000
Borrowings under the Indonesian consortium loan facility
nominal of the proposed total issue of £22,000,000
are secured on the assets of REA Kaltim and are
nominal of 9.5 per cent guaranteed sterling notes
guaranteed by the company. The outstanding balance of
2015/17 (“sterling notes”) was issued for cash at a
$15.4 million at 31 December 2007 is repayable as
subscription price of 99.6574 per cent of par by REA
follows: 2008 - $2.5 million, 2009 - $10.7 million and
Finance B.V. (“REA Finance”), a wholly owned subsidiary
2010 - $2.2 million.
of the company.
This was followed in April and
September 2007 by issues of, respectively, 1,500,000
The group has entered into a long term sterling US dollar
new ordinary shares and 1,064,581 new preference
debt swap to hedge against US dollars the sterling liability
shares for cash, to raise some £7.6 million, net of
for principal and interest payable in respect of the entire
expenses. A further 1,085,795 new preference shares
issue of the sterling notes (but, in the case of interest,
were issued in October 2007 by way of capitalisation of
only as respects interest payments falling due up to and
share premium account pursuant to the capitalisation
including 31 December 2015).
31
Review of the group continued
Group cash flow
Liquidity and financing adequacy
Group cash inflows and outflows are analysed in the
As noted under “Group cash flows” above, the group held
consolidated cash flow statement. Cash and cash
cash and cash equivalents at 31 December 2007 of
equivalents reduced slightly over 2007 from $37.27
$34.2 million In addition, the group had at that date a
million to $34.22 million.
working capital line of $3.5 million, subject to annual
renewal, under which $0.5 million had been drawn and an
Net cash flow from operating activities amounted to
undrawn balance of $4 million under the Indonesian
$28.18 million against $7.11 million for 2006, an
consortium loan facility available for drawing until 7
increase of $21.07 million. Key components of this
September 2009 and, to the extent drawn, repayable in
increase were a sharply higher operating profit ($49.39
2010.
million against $20.77 million), absorption of $8.76 million
of cash in working capital (2006 - $3.70 million) and
On the basis of present CPO prices, the directors expect
higher tax payments ($3.16 million against $0.22 million).
that operating cash flows for the remainder of 2008,
The movement in working capital included an $8.13
together with the group's existing cash resources, will be
million increase in inventories which reflected an
sufficient to fund both the planned development
unusually high level of CPO stocks at 31 December 2007
programme for the year and near term debt repayments.
as a result of some collections scheduled for the
However, looking beyond 2008 and allowing for the fact
Christmas period being delayed until January 2008.
that CPO prices may not be sustained at present levels,
the group is likely to require some further funding if, as
Investing activities for 2007 involved a net outflow of
the directors hope will be the case, high levels of
$31.78 million (2006 - $33.40 million). This reflected
extension planting are achieved. The directors intend to
expenditure on the group's continuing development
meet this further funding requirement with additional
programme totalling $33.62 million (2006 - $33.67
borrowings which they will seek
to raise from
million), offset by inflows from interest and other items of
development and other banks and, if market conditions
$1.84 million (2006 - $0.27 million). The net outflow in
permit, from further issues of listed debt securities. The
respect of investing activities was financed by a
directors are confident that the group’s equity base is
combination of net cash flow from operating activities and
now sufficient comfortably to sustain the additional debt
opening cash and cash equivalents.
envisaged.
Cash inflows and outflows from financing activities were
The group's financing is materially dependent upon the
broadly in balance with new debt and equity capital
contracts governing the sterling and dollar notes. There
providing $29.64 million, bank debt and finance lease
are no restrictions under those contracts, or otherwise, on
repayments amounting to $26.10 million and dividend
the use of group cash resources or existing borrowings
payments of $3.55 million.
and facilities that the directors would expect materially to
impact the planned development of the group. Under the
Delays to the planned development programmes during
terms of the Indonesian consortium loan facility, REA
2007 meant that the level of development expenditure
Kaltim is restricted to an extent in the payment of interest
was lower than would have been the case had the
on borrowings from, and on the payment of dividends to,
programmes proceeded as planned. This is reflected in
other group companies but the directors do not believe
the closing level of cash and cash equivalents.
32
that the applicable covenants will affect the ability of the
The directors believe that the group’s existing capital
company to meet its cash obligations.
structure is consistent with this policy objective but
The group's oil palms fruit continuously throughout the
planting and the inevitable shortening of the maturity
year and there is therefore no material seasonality to the
profile of the group’s current indebtedness that will result
recognise that planned further investment in extension
group's funding requirement.
from the passage of time will mean that future action will
be required to ensure that the group’s capital structure
Financing policies
continues to meet the objective.
The directors believe that, in order to maximise returns to
Whilst the directors believe that it is important that the
holders of the company's ordinary shares, it is essential
group retains flexibility as to the percentage of the
that a proportion of the group's funding needs are met
group's overall funding that is represented by net debt, as
with prior charge capital. Although the company's
a general indication they believe that, at the present stage
preference share capital is expensive to service, in that
of the group's development, net debt should not exceed
the preference shares entitle the holders of those shares
100 per cent of total equity. Net debt represented 35.0
to a cumulative annual dividend at the rate of 9 per cent
per cent of total equity at 31 December 2007 against a
of the nominal value of the shares (being £1 per share),
target of 60 per cent and a level of 57.4 per cent at 31
the directors consider that the preference capital is a
December 2006. The target for 31 December 2008
valuable component of the group's prior charge capital in
based on budget projections for 2008 is 60 per cent.
that it provides leverage for the ordinary shares but
represents permanent capital. They also believe that the
Other treasury policies
company can now comfortably support preference capital
at the level at which the issued preference capital
The sterling notes and the dollar notes carry interest at
currently stands and that, if circumstances permit, the
fixed rates of, respectively, 9.5 and 7.5 per cent per
company should increase that preference capital in line
annum. Interest going forward is payable on drawings
with growth in the group's equity base.
under the Indonesian consortium loan facility at a floating
rate equal to 2.75 per cent per annum over Singapore
As respects borrowings, the directors believe that the
Inter Bank Offered Rate. As a policy, the group does not
group's interests are best served if the group's
hedge its exposure to floating rates but, where possible,
borrowings are structured to fit the maturity profile of the
borrows at fixed rates. A one per cent increase in the
assets that the borrowings are financing. Since oil palm
floating rate of interest payable on the drawings under
plantings take nearly four years from nursery planting to
the Indonesian consortium loan facility at 31 December
maturity and then a further period of three to four years
2007 would result in an annual cost to the group of
to full yield, the directors aim to structure the group's
approximately $154,000 before taxation.
borrowings so that shorter term bank debt is used only to
finance working capital requirements, while debt funding
The group regards the US dollar as the functional
for the group's development programme is sourced from
currency of most of its operations and seeks to ensure
issues of medium term listed debt securities and
that, as respects that proportion of its investment in the
borrowings from development institutions.
operations that is met by borrowings, it has no material
currency exposure against the US dollar. Accordingly,
33
Review of the group continued
where borrowings are incurred in a currency other than
Operational factors
the US dollar, the group endeavours to cover the resultant
currency exposure by way of a debt swap or other
The group’s productivity is dependent upon necessary
appropriate currency hedge. The group does not cover
inputs, including, in particular, fertiliser and fuel. Whilst
the currency exposure in respect of the component of the
the directors have no reason to anticipate shortages in
investment in its operations that is financed with sterling
the availability of such inputs, should such shortages
denominated equity. The group's policy is to maintain a
occur over any extended period the group’s operations
balance in sterling sufficient to meet its projected sterling
could be materially disrupted. Equally, increases in input
expenditure for a period of between six and twelve
costs would be likely to reduce profit margins.
months and a balance in Indonesian rupiahs sufficient for
its immediate Indonesian rupiah requirements but,
After harvesting, FFB crops become rotten if not
otherwise, to keep all cash balances in US dollars.
processed within a short period. Any hiatus in FFB
Risks and uncertainties
Agricultural factors
collection or processing may therefore lead to a loss of
crop. The group endeavours to maintain resilience in its
processing facilities with two factories operating
separately and some ability within each factory to switch
from steam based to diesel based electricity generation
Although the group's operations are located in an area of
but such resilience would be inadequate to compensate
high rainfall with sunlight hours and soil conditions well
for any material loss of processing capacity for anything
suited to the cultivation of oil palm, weather and growing
other than a short time period.
conditions vary from year to year and setbacks are
possible. As in any agricultural operation, there are also
The group has bulk storage facilities within its main area
risks that crops may be affected by pests and diseases.
of operations and at
its
transhipment
terminal
Agricultural best practice can to some extent mitigate
downstream of the port of Samarinda. Such facilities and
these risks but they cannot be entirely eliminated.
the further storage facilities afforded by the group’s fleet
of barges have hitherto always proved adequate to meet
Unusually high levels of rainfall can disrupt estate
the group’s requirements for CPO and CPKO storage.
operations. Unusually low levels of rainfall that lead to a
Nevertheless, disruptions to river transport between the
water availability below the minimum required for the
main areas of operations and the port of Samarinda, or
normal development of the oil palm may lead to a
delays in collection of CPO and CPKO from the
reduction in subsequent crop levels. Such reduction is
transhipment terminal, could result in a group requirement
likely to be broadly proportional to the size of the
for CPO and CPKO storage exceeding the available
cumulative water deficit.
capacity.
This would be likely to force a temporary
cessation in FFB processing with a resultant loss of crop.
Over a long period, crop levels should be reasonably
predictable but there can be material variations from the
Many of the group’s operational and financial controls are
norm in individual years.
34
dependent, in part, on the group’s management systems.
These include computerised systems. Any damage or
failure of such computerised systems could have a
deleterious effect on the group.
The group maintains insurance to cover those risks
government has continued to allow the free export of
against which the directors consider that it is economic to
CPO and CPKO but has introduced a sliding scale of
insure. Certain risks (including the risk of fire in planted
duties on CPO and CPKO exports. Pursuant to this scale,
areas), for which insurance cover is either not available or
the percentage rate of duty levied on the Indonesian
would,
in
the opinion of
the directors, be
gazetted price of CPO (being broadly the prevailing FOB
disproportionately expensive,
are not
insured.
market price of CPO) currently rises from nil on prices up
Occurrence of an adverse uninsured event could result in
to the equivalent of $550 per tonne CIF Rotterdam to 25
the group sustaining material losses.
per cent on prices equivalent to $1,300 per tonne CIF
Rotterdam or above.
Produce prices
World markets for CPO and CPKO may be distorted by
The profitability and cash flow of the group depend both
the imposition of import controls or taxes in consuming
upon world prices of CPO and CPKO and upon the
countries. The directors believe that the imposition of
group's ability to sell its produce at price levels
such controls or taxes on CPO or CPKO will normally
comparable with such world prices.
result in greater consumption of alternative vegetable oils
within the area in which the controls or taxes have been
CPO and CPKO are primary commodities and as such
imposed and the substitution outside that area of CPO
are affected by levels of world economic activity and
and CPKO for other vegetable oils. Should such
factors affecting the world economy, including levels of
arbitrage fail to occur or prove insufficient to compensate
inflation and interest rates. This may lead to significant
for the market distortion created by the applicable import
price swings although, as noted under “Revenues and
controls or taxes, selling prices for the group’s CPO and
markets” in “Operations” above, the directors believe that
CPKO could be depressed.
such swings should be moderated by the fact that the
annual oilseed crops account for the major proportion of
Expansion
world vegetable oil production and producers of such
crops can reduce or increase their production within a
The group is planning significant extension planting of oil
relatively short time frame.
palm. The directors hope that land allocations obtained
by the group will become available for planting ahead of
The Indonesian authorities have in the past (for short
the land becoming needed for the planned development
periods and in times of very high CPO prices) imposed
programme and that such development programme can
either restrictions on the export of CPO and CPKO or
be funded from available group cash resources and
punitive duties on export sales of such oil. Such
future
operational
cash
flows,
appropriately
measures are damaging not only to large plantation
supplemented with further externally raised capital.
groups but also to the large number of smallholder
Should, however,
land or cash availability fall short of
farmers growing oil palm in Indonesia. Moreover, CPO is
expectations and the group be unable to secure
an important component of Indonesia's US dollar earning
alternative land or funding (as was the case in 2007 as
exports. The directors have been encouraged that the
respects
land),
the planned extension planting
significant rise in CPO and CPKO prices during 2007 and
programme, upon which the group's continued growth is
the early months of 2008 has not seen a reimposition of
critically dependent, may be delayed and could have to be
such restrictions or imposts. Instead, the Indonesian
curtailed.
35
Review of the group continued
If the planned extension planting programme had to be
Such land areas fall within a region that elsewhere
curtailed, the directors consider that it is likely that, for the
includes substantial areas of unspoilt primary rain forest
period of such curtailment, the accounting regime to
inhabited by diverse flora and fauna. As such, the group,
which the company is subject, requiring an annual
in common with other oil palm growers in Kalimantan,
revaluation of biological assets at fair value, would result
must expect scrutiny from conservation groups and could
in lower gains or greater losses on biological assets being
suffer adverse consequences if its environmental policies
reflected in the group's reported income than would
were to be singled out for criticism by such groups.
otherwise be the case. Whilst this would not affect the
group's underlying cash flow, it could adversely affect
The group is committed to sustainable oil palm
market perceptions as to the value of the company's
development and takes great care to follow best practice
securities.
Currency
on environmental issues. An environmental master plan
was constructed at the start of the project using
independent environmental experts. Progress against
this plan has been carefully monitored and the plan has
CPO is essentially a US dollar based commodity.
been updated to reflect modern practice and to take
Accordingly, the group's revenues and the underlying
account of changes in circumstance. In updating the
value of the group's oil palm operations are effectively US
plan, the ecological value of the conservation programme
dollar denominated. All of the group's borrowings other
followed to date was confirmed by the independent
than the sterling notes are also US dollar denominated
experts involved.
and the group has entered into a sterling US dollar debt
swap to hedge the sterling notes. A substantial
Regulatory exposure
component of the group's costs (including fertiliser and
machinery inputs) are US dollar denominated or linked.
Changes in existing, and adoption of new, laws and
Accordingly, the principal currency risk faced by the group
regulations affecting the group (including, in particular,
is that those components of group costs that arise in
laws and regulations relating to land tenure, work permits
Indonesian rupiah and sterling may, if such currencies
for expatriate staff and taxation) could have a negative
strengthen against the US dollar, negatively impact
impact on the group’s activities. Many of the licences,
margins in US dollar terms. The directors consider that
permits and approvals held by the group are subject to
this risk is inherent in the group's business and capital
periodic renewal. Renewals are often subject to delays
structure and the group does not therefore normally
and there is always a risk that a renewal may be refused
hedge against such risk.
or made subject to new conditions.
Environmental practices
Land in East Kalimantan held by the group is held subject
to the satisfaction by the group of various continuing
The group's East Kalimantan operations are based on
conditions, including conditions requiring the group to
land areas that have been previously logged and zoned by
promote smallholder developments of oil palm on areas
the Indonesian authorities as appropriate for agricultural
ultimately equivalent to not less than 20 per cent of the
development on the basis that, regrettable as it may be
group’s titled areas.
from an environmental viewpoint, the logging has been so
extensive that primary forest is unlikely to regenerate.
36
Country exposure
members of the local population. Moreover, local
contractors used by the group provide employment
All of the group's operations are located in Indonesia and
opportunities for residents of surrounding villages and
the group is therefore significantly dependent on
such residents also act as suppliers to the group and its
economic and political conditions in Indonesia. In the late
employees. The directors believe that, as a result, the
1990’s, in common with other parts of South East Asia,
group's operations have been a source of increased
Indonesia experienced severe economic turbulence. In
prosperity to the surrounding villages and that the group
recent years, there have been occasional instances of
has reasonable relations with those villages. The group
civil unrest, often attributed to ethnic tensions, in certain
has made progress in recent years in assisting the
parts of Indonesia. As noted under “The Indonesian
surrounding
villages
in establishing
their own
context” in “Operations” above, during 2007 Indonesia
smallholdings of oil palm and it is hoped that this,
remained stable and the Indonesian economy continued
together with other initiatives to encourage local farmers
to grow. Recent upward pressure on food prices is,
in the production of foodstuffs, will assist in developing
however, a concern and food shortages could cause
the group's relationships with the local population.
social unrest.
The group's operations are established in a relatively
Whilst freedom to operate in a stable and secure
remote and sparsely populated area. The operational
environment is critical to the group and the existence of
areas were acquired with the knowledge and support of
security risks should never be underestimated, the group
the local authorities and development has been arranged
has always sought to mitigate those risks and has never,
wholly within the areas in respect of which the group has
since the inception of the East Kalimantan operations,
obtained the required development permits. These areas
been adversely affected by security problems.
are comprised of government owned land which was for
the most part unoccupied prior to the group's arrival.
Although there can be no certainty as to such matters,
However, some small areas of land were previously used
under current political conditions, the directors have no
by local villagers for the cultivation of crops and,
reason to believe that any government authority would
accordingly, when taking over such areas, the group
revoke the registered land titles granted to the group,
negotiates with, and pays compensation to, the affected
impose exchange controls or otherwise seek to restrict
parties.
the group's freedom to manage its operations.
Local relations
The negotiation of compensation payments can involve a
considerable number of local individuals with differing
views and this can cause difficulties in reaching
The operations of the group could be seriously disrupted
agreement with all affected parties. There is also a risk
if there were to be a material breakdown in relations
that, after an agreement has been completed, a party to
between the group and the host population in its area of
the agreement may become disaffected with the terms
operations in East Kalimantan.
agreed and may seek to repudiate the agreement. Such
difficulties and risk have in the past caused, and are likely
Whilst the group does have employees in Indonesia from
to continue periodically to cause, delays to the extension
outside East Kalimantan, care has always been taken to
planting programme and other disruption. The group has
give priority to applications for employment from
to-date been successful in managing such periodic
37
Review of the group continued
delays and disruption 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.
Other 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 minority shareholders in Indonesian
group companies are also important to the group. The
group endeavours to maintain cordial relations with the
persons concerned by seeking their support for decisions
affecting their interests and responding constructively to
any concerns that they may have.
By order of the board
R.E.A. SERVICES LIMITED
Secretary
24 April 2008
38
Directors
Richard Robinow
Chairman (62)
David Killick, FCIS
Independent non-executive director (70)
Was appointed a director in 1978 and has been chairman
Was appointed a director on 21 September 2006. After
since 1984. After early investment banking experience,
qualifying as a barrister, he became a Fellow of the
has been involved for over 25 years in the plantation
Institute of Chartered Secretaries and Administrators. He
industry. Non-executive but devotes a significant
worked for over 28 years for the Commonwealth
proportion of his working time to the affairs of the group.
Development Corporation, serving as a member of its
Chairman of M P Evans Group plc and a director of Sipef
management board from 1980 to 1994. Thereafter, he
NV.
John Oakley
Managing director (59)
has held a number of directorships. He is currently a
director of Siberia Investment Management Company
Limited and Reallyenglish.com Limited and a member of
the council of management of Slough Council for
Voluntary Service.
Was appointed a director in 1985 after early experience
in investment banking and general management.
Appointed managing director in January 2002.
Charles Letts
Independent non-executive director (89)
John Green-Armytage
Independent non-executive director (62)
Was appointed a director in 1989. After serving in the
British Armed Forces in World War II and thereafter in the
British Foreign Office, was a main board director of
Was a non-executive director from 1984 to 1994.
Jardine Matheson & Co. Limited for 15 years and then
Rejoined the board in a non-executive capacity in 1997
set up his own business. Thereafter, for over 40 years,
and is chairman of the audit and remuneration
has held directorships and advisory posts in companies
committees. Chairman of AMEC PLC and a director of
covering a wide range of activities in various countries,
JZ Equity Partners Plc and a number of other companies.
with particular emphasis on the plantation industry.
John Keatley
Senior independent non-executive director (74)
Was a non-executive director from 1975 to 1983 (and
chairman from 1978 to 1983). Rejoined the board in a
Present directorships include The China Club Limited and
China Investment Fund.
Chan Lok Lim
Independent non-executive director (66)
non-executive capacity in 1985 and is chairman of the
Was appointed a director in August 2002. Has been
nomination committee. After a background in the
involved for over 30 years in companies in South East
fertiliser industry is now Chairman of NPK Holdings
Asia engaged in power generation and distribution, water
Limited.
and waste treatment, industrial and agro-industrial
engineering (including palm oil mill design and
construction) and in the plantation industry. Chairman of
SPC Power Corporation listed on the Philippines Stock
Exchange, chairman and president of Agusan Plantations
Inc, Philippines and a director of Pan Abrasives (Private)
Limited, Singapore.
39
Directors’ report
The directors present their annual report on the affairs of
Charitable and political donations
the group, together with the financial statements and
auditors’ reports, for the year ended 31 December 2007.
During the year the group made no charitable or political
Principal activities and business review
donations.
Supplier payment policy
The principal activity of the group is the cultivation of
oil palms in the Indonesian province of East Kalimantan.
It is the company’s policy to establish appropriate
A review of the activities and planned future development
payment terms and conditions for dealings with suppliers
of the group together with the principal risks and
and to comply with such terms and conditions. The
uncertainties facing the group is provided in the
holding company itself does not have trade creditors.
accompanying “Review of the group” section of this
annual report which is incorporated by reference in this
Directors
Directors’ report. In particular,
that review includes
information as to group policy and objectives regarding
The directors are listed on page 39. All the directors
the use of financial instruments. Information as to such
served throughout 2007. Messrs Robinow, Green-
policy and objectives and the risk exposures arising is
Armytage, Keatley and Letts retire at the forthcoming
also included in note 20 to the consolidated financial
annual general meeting and, being eligible, offer
statements.
themselves for re-election, such retirements being, as
respects Messrs Robinow and Green-Armytage, in
The group does not undertake significant research and
compliance with the provisions of the company's articles
development activities.
of association providing for rotation of directors and, as
respects all such retiring directors, in compliance with the
Details of significant events since 31 December 2007
provisions of the Combined Code on Corporate
are contained in note 38 to the consolidated financial
Governance requiring the annual re-election of non-
statements.
executive directors who have served as such for more
Results and dividends
than nine years.
The results are presented in the consolidated income
the company, continuity and familiarity with the issues
The directors believe that, in the present circumstances of
statement and notes thereto.
immediately facing the company are important and that
the variety of backgrounds and skills possessed by the
The fixed annual dividends on the 9 per cent cumulative
longer serving non-executive directors usefully
preference shares that fell due on 30 June and 31
complement those of the other directors, provide
December 2007 were duly paid. A first interim dividend
perspective and facilitate balanced and effective decision
in respect of 2007 of 1p per share was paid on the
making. The board therefore recommends (each affected
ordinary shares on 5 October 2007 and a second interim
director abstaining from such conclusion as it applies to
dividend in lieu of final of a further 1p per share was paid
himself) the re-election of all of the non-executive
on those shares on 25 January 2008. The directors do
directors offering themselves for re-election. The senior
not recommend the payment of any further ordinary
independent non-executive director and the chairman
dividends in respect of 2007.
have confirmed as regards, respectively, the chairman and
40
the other non-executive directors offering themselves for
Substantial shareholders
re-election
that,
following
formal performance
evaluations, each such
individual's performance
As at the date of this report, the company has received
continues
to be effective and
to demonstrate
notifications required by The Disclosure Rules and
commitment to the role assumed, including commitment
Transparency Rules of the Financial Services Authority
of time for board and committee meetings and, where
from the following persons of voting rights held by them
applicable, other assigned duties.
as shareholders through the holdings of ordinary shares
Directors’ interests
indicated :
Emba Holdings Limited
Number
%
9,925,000
30.47
At 31 December 2007, the interests of directors
Alcatel Bell Pensioenfonds VZW
4,007,049
12.30
(including interests of connected persons as defined in
Prudential plc and certain subsidiaries
3,904,870
11.99
section 96B(2) of the Financial Services and Markets Act
Artemis UK Smaller Companies
1,919,400
5.89
2000 of which the company is, or ought upon reasonable
enquiry to become, aware) in the 9 per cent cumulative
In addition, the company has been notified that the above
preference shares of £1 each and the ordinary shares of
interest of Prudential plc and certain subsidiaries includes
25p each of the company were as follows:
3,447,792 ordinary shares (10.58 per cent) in which M&G
R M Robinow
J M Green-Armytage
J R M Keatley
D H R Killick
L E C Letts
C L Lim
J C Oakley
Preference
shares
Ordinary
shares
Investment Funds 3 is also interested.
25,248
9,981,667
as part of the interest of Mr R M Robinow shown under
The shares held by Emba Holdings Limited are included
5,219
24,435
-
7,904
-
513
80,704
680,878
15,000
108,008
-
1,804
“Directors’ interests” above. By deeds dated 24
November 1998 and 10 April 2001, Emba Holdings
Limited has agreed that it will not undertake activities in
conflict with those of the group and that it will deal with
the group only on a basis that is appropriate between a
listed company and its subsidiaries and a significant
Details of an option held by Mr Oakley to subscribe for
shareholder.
ordinary shares of 25p each of the company are provided
in the “Directors’ remuneration report” section of this
Control and structure of share capital
annual report. There have been no changes in the
interests of the directors detailed above between 31
The authorised share capital of the company at 31
December 2007 and the date of this report.
December 2007 amounted to £24,750,000 comprising
Directors’ indemnities
14,500,000 9 per cent cumulative preference shares of
£1 each and 41,000,000 ordinary shares of 25p each of
which, respectively, 13,600,000 preference shares and
Qualifying third party indemnity provisions (as defined in
32,573,856 ordinary shares had been issued and were
section 309B of the Companies Act 1985) were in force
fully paid up. Accordingly, at that date, the issued
for the benefit of directors of the company and of other
preference share capital and the issued ordinary share
members of the group throughout 2007 and remain in
capital represented, respectively, 62.5 and 37.5 per cent
force at the date of this report.
of the total issued share capital. Changes in share capital
41
Directors’ report continued
during 2007 are summarised in note 28 to the
circumstances to refuse to register any transfer of shares
consolidated financial statements.
where the shares are not fully paid, the shares are to be
transferred into a joint holding of more than four persons,
The rights and obligations attaching to the ordinary and
the transfer is not appropriately supported by evidence of
preference shares are governed by the company’s articles
the right of the transferor to make the transfer or the
of association and prevailing legislation. Rights to income
transferor is in default in compliance with a notice served
and capital are summarised in note 28 to the
pursuant to section 793 of the Companies Act 2006.
consolidated financial statements.
The directors are not aware of any agreements between
shareholders that may result in restrictions on the transfer
On a show of hands at a general meeting of the company,
of securities or on voting rights.
every holder of shares and every duly appointed proxy of
a holder of shares, in each case being a holder entitled to
No person holds securities carrying special rights with
vote on the resolution before the meeting, shall have one
regard to control of the company and there are no
vote. On a poll, every holder of shares present in person
arrangements in which the company co-operates by
or by proxy and entitled to vote on the resolution the
which financial rights carried by shares are held by a
subject of the poll shall have one vote for each share held.
person other than the holder of the shares.
Holders of preference shares are not entitled to vote on
a resolution proposed at a general meeting unless, at the
The appointment and replacement of directors is
date of notice of the meeting, the dividend on the
governed by the company’s articles of association and
preference shares is more than six months in arrears or
prevailing legislation, augmented by the principles laid
the resolution is for the winding up of the company or is
down in the Combined Code on Corporate Governance
a resolution directly and adversely affecting any of the
which the company seeks to apply in a manner
rights and privileges attaching to the preference shares.
proportionate to its size as further detailed in the
Deadlines for the exercise of voting rights and for the
“Corporate governance report” section of this annual
appointment of a proxy or proxies to vote in relation to any
report.
resolution to be proposed at a general meeting are
governed by the company’s articles of association and
The articles of association provide that the business of
prevailing legislation and will normally be as detailed in
the company is to be managed by the directors and
the notes accompanying the notice of the meeting at
empower the directors to exercise all powers of the
which the resolution is to be proposed.
company, subject to the provisions of such articles (which
include a provision specifically limiting the borrowing
There are no restrictions on the size of any holding of
powers of the group) and prevailing legislation and to
shares in the company. Shares may be transferred either
such directions as may be given by the company in
through the CREST system (being the relevant system as
general meeting by special resolution. The articles of
defined in the Uncertificated Securities Regulations
association may only be amended by a special resolution
2001 of which CRESTCo Limited is the operator) where
of the company in general meeting and, where such
held in uncertificated form or by instrument of transfer in
amendment would modify, abrogate or vary the class
any usual or common form duly executed and stamped,
rights of any class of shares, with the consent of that
subject to provisions of the company’s articles of
class given in accordance with the company’s articles of
association empowering the directors under certain
association and prevailing legislation.
42
The 7.5 per cent dollar notes 2012/14 of the company
report” section of this annual report. The directors are not
(“dollar notes”) and the 9.5 per cent guaranteed sterling
aware of any agreements between the company and its
notes 2015/17 of REA Finance B.V. (“sterling notes”)
directors or between any member of the group and a
(which are guaranteed by the company) are transferable
group employee that provides for compensation for loss
either through the CREST system where held in
of office or employment that occurs because of a
uncertificated form or by instrument of transfer in any
takeover bid.
usual or common form duly executed in amounts and
multiples, in the former case, of $1 and, in the latter case,
Treasury shares and power to repurchase shares
of £1,000. There is no maximum limit on the size of any
holding in either case.
No shares of the company are at present held in treasury.
Significant holdings of preference shares, dollar notes
The company’s articles of association permit the
and sterling notes shown by the register of members and
purchase by the company of its own shares subject to
registers of dollar and sterling noteholders at 31
prevailing legislation which requires that any such
December 2007 were as follows:
Mellon Nominees (UK) Limited
BSDTABN Account
Rulegale Nominees Limited
JAMSCLT Account
Vidacos Nominees Limited
Vidacos Nominees Limited
CLRLUX Account
Morris Edward Zukerman
Morris Edward Zukerman
ZFT Account
Preference
shares
Dollar
notes
$’000
Sterling
notes
£’000
–
2,344,198
–
–
–
–
–
–
–
3,448
–
9,750
3,315
9,500
9,500
–
–
–
A change of control of the company would entitle holders
of the sterling notes and certain holders of the dollar
notes to require repayment of the notes held by them as
detailed in notes 22 and 23 to the consolidated financial
statements.
The option held by Mr J C Oakley to subscribe for
ordinary shares of 25p each of the company as referred
to under “Directors’ interests” above may be exercised
within six months of a change of control. Awards to
senior group executives under the company’s long term
incentive plan will vest and may be encashed within one
month of a change of control as detailed under “Long
term incentive plan” in the “Directors’ remuneration
purchase, if a market purchase, has been previously
authorised by the company in general meeting and, if not,
is made pursuant to a contract of which the terms have
been authorised by a special resolution of the company in
general meeting. There is no authority extant for the
purchase by the company of its own shares.
Increase in share capital
At the forthcoming annual general meeting, a resolution
will be proposed to increase the authorised share capital
of the company from £24,750,000 to £27,750,000 by the
creation of 3,000,000 additional 9 per cent cumulative
preference shares of £1 each ranking pari pass in all
respects with the existing preference shares and
representing 20.7 per cent of the existing authorised
preference share capital.
As indicated in the “Review of the group” section of this
annual report, the directors believe that, if circumstances
permit, the company should
increase
its
issued
preference share capital in line with growth in the group's
equity base. In particular, if the group’s results would
appear to justify some additional return to ordinary
shareholders beyond the level of ordinary dividends that
43
Directors’ report continued
the directors believe that the company can prudently
preference shares under “Increase in share capital”
afford having regard to the need to conserve cash
above, the directors have no present intention of
resources, the directors may consider a further
exercising these authorities.
capitalisation issue to ordinary shareholders of new
preference shares such as was made during 2007. The
A fresh authority is also being sought under the
proposed creation of additional preference shares is
provisions of section 95 of the Companies Act 1985 to
designed to give the company sufficient authorised
enable the board to make a rights issue or open offer of
preference share capital to permit the directors without
ordinary shares to existing ordinary shareholders without
further approval to issue new preference shares for these
being obliged
to comply with certain
technical
purposes within the specified limit of the authority to allot
requirements of the Companies Act 1985, which create
new preference shares to be sought at the annual
problems with regard to fractions and overseas
general meeting.
Power to issue share capital
shareholders. In addition, the authority will give the board
power to make issues of ordinary shares for cash other
than by way of rights or open offer up to a maximum
nominal amount of £407,173 representing 5 per cent of
At the annual general meeting held on 5 June 2007,
the ordinary share capital in issue at the date of this
shareholders authorised the board under the provisions
report. The section 95 authority will terminate on the date
of section 80 of the Companies Act 1985 to allot
of the annual general meeting to be held in 2009, which
relevant securities within specified limits. Replacements
will be no later than 15 months from the passing of the
of the applicable authorities are being sought at the
resolution granting this authority.
forthcoming annual general meeting when the existing
authorities will expire. The replacement authorities will
Recommendation
provide for the allotment of (i) ordinary share capital up to
an aggregate nominal amount of £2,106,536,
The board considers that increasing the share capital of
(comprising 8,424,144 ordinary shares) equating to the
the company and granting the directors authorities and
unissued ordinary share capital at the date of this report
power as detailed under “Increase in share capital” and
and (ii) preference share capital up to an aggregate
“Power to issue share capital” above is in the best
nominal amount of £3,900,000 (comprising 3,900,000
interests of the company and shareholders as a whole
preference shares) representing the unissued preference
and recommend that ordinary shareholders vote in favour
share capital at the date of this report and the additional
of the resolutions needed to effect the increase and
preference share capital proposed to be created at the
provide the authorities and power as set out in the notice
forthcoming annual general meeting.
of the forthcoming annual general meeting under the
heading “Special business”.
The new ordinary shares and new preference shares the
subject of the new authorities will represent, respectively,
Auditors
25.9 per cent and 28.7 per cent of the ordinary shares
and preference shares in issue at the date of this report.
Each director of the company at the date of approval of
The new authorities will lapse on the date of the annual
this report has confirmed that, so far as he is aware, there
general meeting to be held in 2009, which will be no later
is no relevant audit information of which the company's
than 15 months from the passing of the resolutions
auditors are unaware; and that he has taken all the steps
granting the authorities. Save as indicated in relation to
that he ought to have taken as a director in order to make
44
himself aware of any relevant audit information and to
establish that the company's auditors are aware of that
information.
This confirmation is given and should be interpreted in
accordance with the provisions of section 234ZA of the
Companies Act 1985.
Deloitte & Touche LLP have expressed their willingness
to continue in office as auditors and a resolution to re-
appoint them and to authorise the directors to fix their
remuneration will be proposed at the forthcoming annual
general meeting.
By order of the board
R.E.A. SERVICES LIMITED
Secretary
24 April 2008
45
Corporate governance
General
The directors appreciate the importance of ensuring that
the group’s affairs are managed effectively and with
integrity and acknowledge that the principles laid down in
the Combined Code on Corporate Governance that was
issued in 2006 by the Financial Reporting Council (“the
Code”) provide a widely endorsed model for achieving
this. The directors seek to apply those principles in a
manner proportionate to the group’s size but reserving
the right enshrined in the Code, when it is appropriate to
the individual circumstances of the company, not to
comply with certain Code principles and to explain why.
Save as respects the composition of the audit and
remuneration committees prior to 3 September 2007 as
detailed below and in the “Directors’ remuneration report”
section of this annual report, the company was,
in
throughout the year ended 31 December 2007,
compliance with the provisions set out in section 1 of the
Code. In making this statement, the directors have
the
their view detailed below as
reflected
independence of long serving non-executive directors.
to
Board of directors
The board currently comprises one executive director and
six non-executive directors (including the chairman).
Biographical information concerning each of the directors
is set out in the “Directors” section of this annual report.
The board believes that the variety of backgrounds and
skills provided by its members provides perspective and
facilitates balanced and effective decision making. The
chairman and managing director (as the chief executive is
called) have defined separate responsibilities and neither
has unfettered powers of decision. All of the non-
executive directors, with the exception of the chairman,
are considered by the board to have been independent
throughout the year.
The directors acknowledge that some institutional
investors take the view that non-executive directors who
have served on the board of the company for more than
nine years can never be regarded as independent non-
executive directors and that on this basis three longer
serving non-executive directors who have so served
should not be treated as independent. Although the
Code states that service by a director for more than nine
years is to be taken into account by the board in
assessing the independence of the director concerned, it
is not,
in terms of the Code, determinative of
independence. All three of the long serving non-
executive directors of the company have been re-elected
annually after endorsement of their independence by
their co-directors as required by the Code and none of
these directors is financially or otherwise materially
dependent upon the company. The board is satisfied that
the independence of the long serving independent non-
executive directors is not affected by their length of
service.
Two non-executive directors, who are independent, have
served on the board for less than nine years and the
company would therefore comply with the Code
requirement that at least two members of the board be
independent non-executive directors even if all longer
serving non-executive directors were treated as not
independent. However, the Code also requires that some
or all members of the audit, remuneration and nomination
committees, and the person appointed as senior
independent non-executive director, be independent non-
executive directors. The board’s view as to the
independence of long serving non-executive directors is
relevant to the company’s compliance with these aspects
of the Code.
Whilst, as already noted, the directors do not agree with
the view that long service automatically negates the
independence of a non-executive director, they do accept
that it is important to retain shareholder confidence in the
board and, in particular, in the audit committee’s
contribution to the integrity of the audit process.
Following the rapid growth in the group’s operations in
recent years, the directors have seen as their highest
46
priority the development of resilience in the group’s
management in Indonesia. With the recent progress that
has been made in this area, the directors have concluded
that appointing one further non-executive director would
not now pose a material distraction from the continuing
efforts to address other strategic issues.
Accordingly, the directors have invited the nomination
committee to make recommendations for appointment of
an additional non-executive director with the expectation
that such director would have a relevant financial
background. The directors hope that an appointment can
be completed within a few months. This will further
refresh the board and will facilitate further revisions to the
composition of board committees with a view to putting
beyond question
their compliance with Code
requirements.
Under the company’s articles of association, one third of
the directors other than the executive director retire by
rotation each year and may submit themselves for re-
election. This has the effect that each non-executive
director is subject to re-election at least once every three
years. In addition, in order to comply with the Code, non-
executive directors who have served on the board for
more than nine years submit themselves for re-election
every year.
Board responsibilities
The board is responsible for the proper management of
the company. Full quarterly reports are issued to all
directors following the end of each quarter for their
review and comment. These are augmented by annual
budgets and positional papers on matters of a non routine
nature. The board has a schedule of matters that are
reserved for decision by it. Such matters include strategy,
material investments and financing decisions and the
appointment and removal of executive directors and the
In addition, the board is responsible
company secretary.
for ensuring that resources are adequate to meet
objectives and for reviewing performance, financial
controls and risk.
As noted in the statement on corporate governance in the
2006 annual report, the company ceased to carry
appropriate insurance against legal action against its
directors at the end of 2004 due to actual and threatened
litigation. Following settlement of this litigation, the
company was again able to arrange such insurance which
became effective from 1 January 2007. The company
was therefore compliant with the Code requirement to
carry such insurance for the whole of 2007.
Board committees
The board has appointed audit, nomination and
remuneration committees to undertake certain of the
board’s functions. Such committees have written terms of
reference which are available for inspection on the
company’s website.
the
remuneration of directors is provided in the “Directors’
remuneration report” section of this annual report
together with details of the basis upon which such
remuneration is determined.
Information concerning
Performance evaluation
A formal evaluation of the performance of the board, the
committees and individual directors was undertaken in
2007 and again recently in 2008. Balance of powers,
contribution to strategy, monitoring and accountability to
stakeholders were reviewed by the board as a whole and
the performance of the chairman was appraised by
independent non-executive directors led by the senior
independent director.
Professional development
In view of their previous relevant experience and, in most
cases, length of service on the board, all directors are
familiar with the financial and operational characteristics
of activities of the type conducted by the group. They are
required to ensure that they maintain that familiarity and
keep themselves fully cognisant of the affairs of the
group and matters affecting its operations and finances.
47
Corporate governance continued
Whilst there are no formal training programmes, the board
regularly reviews its own competences and may arrange
training on specific matters where it is thought to be
required. Directors are kept advised of legal and
regulatory requirements affecting the company and are
able to seek the advice of the company secretary and,
individually or collectively, may take
independent
professional advice at the expense of the company if
necessary.
Board proceedings
With effect from September 2007, at least four full board
meetings are to be held each year. Prior to that the
minimum was two full meetings in each year although in
2007 there were, in fact, five such meetings. Other board
meetings are held as necessary to consider corporate
and operational matters with all directors consulted in
advance regarding significant matters to be discussed.
Minutes of board meetings are circulated to all directors.
The executive director, unless travelling, is normally
present at full board meetings but, where appropriate,
telephone discussions take place between the chairman
and the other non-executive directors outside the formal
meetings. Committee meetings are held as and when
such are required.
meetings were held after the change. All meetings were
attended by all committee members. There were no
meetings of the remuneration committee during 2007 as
the meeting that would normally have been held in
December 2007 was delayed to January 2008 (when it
was attended by Mr J M Green-Armytage, Mr D H R
Killick and Mr R M Robinow). There were no meetings of
the nomination committee during 2007.
Nomination committee
The nomination committee comprises Mr J R M Keatley
(chairman), Mr L E C Letts and Mr R M Robinow. It is
responsible for recommending appointments to the
board. Recommendations from the committee are
submitted for full approval by the board. No new board
appointments were considered in 2007.
Audit committee
The audit committee currently comprises Mr J M Green-
Armytage (chairman) and Mr D H R Killick both of whom
were appointed on 3 September 2007 and both of whom
are considered by the directors to have the relevant
financial experience. Prior to that the committee
comprised Mr J R M Keatley (chairman), Mr L E C Letts
and Mr R M Robinow.
The attendance of individual directors at the full and “ad
hoc” board meetings held during 2007 were as follows:
The audit committee is responsible for:
R M Robinow
J C Oakley
J M Green-Armytage
J R M Keatley
L E C Letts
C L Lim
D H R Killick
Full Ad hoc
meeting meeting
5
5
4
5
4
3
5
15
17
-
3
1
-
1
In addition, during 2007, there were three meetings of the
audit committee; the first was held prior to the change in
the composition of the committee and the other two
• monitoring the integrity of the financial statements
and the significant reporting issues and judgements
that they contain;
•
reviewing the effectiveness of the internal control
functions (including the internal audit function and
arrangements whereby
raised staff
concerns as to financial reporting and other relevant
matters are considered);
internally
• making recommendations to the board in relation to
the appointment, reappointment and removal of the
external auditors, their remuneration and terms of
engagement; and
48
•
reviewing and monitoring the independence of the
external auditors and the effectiveness of the audit
process.
The audit committee also monitors the engagement of
the auditors to perform non-audit work. During 2007, the
only non-audit work undertaken by the auditors was
in connection with
routine compliance reporting
documents issued by the company and covenant
obligations applicable to certain group loans. The audit
committee considered that the nature and scope of, and
remuneration payable in respect of, these engagements
was such that the independence and objectivity of the
auditors was not impaired.
The members of the audit committee discharge their
informal discussions between
responsibilities by
themselves and with
the external auditors and
reports by
management, by consideration of
management, the Indonesian internal audit function and
the external auditors and by holding at least three formal
meetings in each year.
Relations with shareholders
The “Chairman's statement” and “Review of the group”
sections of the annual report, when read in conjunction
with the financial statements, directors' report and
directors’ remuneration report, are designed to present a
comprehensive and understandable assessment of the
group's position and prospects.
The respective
responsibilities of the directors and auditors in connection
with the financial statements are detailed in the
“Directors’ responsibilities” section of this report.
operational activities and financial affairs of the group. In
addition, within the limits imposed by considerations of
confidentiality, the company has regular meetings and
institutional and other major
other contact with
shareholders in order to understand their concerns. The
views of shareholders are communicated to the board as
a whole to ensure that the board maintains a balanced
understanding of shareholder opinions and issues arising.
All ordinary shareholders may attend the company’s
annual and other general meetings and put questions to
the board. Because two non-executive directors are
based in Singapore and the nature of the group’s
business requires that the chairman and managing
director travel frequently to Indonesia, it is often difficult
for all directors to attend the annual general meeting but
those directors present at the meeting are available to
talk on an informal basis to shareholders after the
meeting has been concluded. All proxy votes are counted
and full details of all proxies lodged for each resolution
are reported to the meeting and made available on the
company’s website. At least twenty working days' notice
of the annual general meeting and related papers are
sent to shareholders.
The company maintains a corporate website at
“www.rea.co.uk.” This provides information regarding the
company, including photographs illustrating various
aspects of the group’s operations, and provides a facility
for downloading recent press releases issued by the
company and other relevant documentation concerning
the company.
Internal control
The directors endeavour to ensure that there is
satisfactory dialogue, based on mutual understanding,
between the company and its shareholder body. The
annual report, interim communications, periodic press
releases and such circular letters to shareholders as
circumstances may require are intended to keep
shareholders fully informed as to progress in the
The board has overall responsibility for the group’s
system of internal control and reviewing its effectiveness.
The board has established a continuous process for
identifying, evaluating and managing the significant risks
the group faces. The board regularly reviews the process,
which was in place since throughout 2007 and has
remained in place up to the date of approval of this report
49
Corporate governance continued
responsibility for specific departmental functions within
each working location, including financial, operational and
compliance controls and risk management, to a number
of senior managers, reporting through the local senior
executive to the managing director.
Management reports to the board on a regular basis by
way of the circulation of progress reports, management
reports and management accounts. Management is
required to seek authority from the board in respect of
any transaction outside the normal course of trading
which is above an approved limit and in respect of any
matter that is likely to have a material impact on the
operations that the transaction concerns. At least two
supervisory visits each year are undertaken to the
overseas operations by the executive director and other
directors make periodic visits to those operations.
Reports of such visits are circulated to the board and
reviewed by the board at the regular board meetings.
Going concern basis
After making enquiries, the directors have formed a
judgement, at the time of approving the financial
statements, that they have a reasonable expectation that
the group has adequate resources to continue in
operational existence for the foreseeable future. For this
reason the directors continue to adopt the going concern
basis in preparing the financial statements.
and which is in accordance with the revised guidance on
internal control published in October 2005. Such a
system is designed to manage rather than eliminate the
risk of failure to achieve business objectives, and can only
provide reasonable and not absolute assurance against
material misstatement or loss.
The board regularly reviews the effectiveness of the
group’s system of internal control. The board’s monitoring
covers all controls, including financial, operational and
compliance controls and risk management. It is based
principally on reviewing reports from management to
consider whether significant risks are
identified,
evaluated, managed and controlled and whether any
significant weaknesses are promptly remedied or indicate
a need for more extensive monitoring.
The board performed a specific review of the system of
internal control on 3 September 2007 (including the
group’s internal audit arrangements) and reconfirmed the
review for the purposes of this annual report. The review,
as reconfirmed, considered all aspects on internal control
arising during the period covered by the report. During
the course of the review, the board did not identify or
become aware of any failings or weaknesses in internal
control which it determined to be significant. Therefore a
confirmation in respect of necessary actions has not been
considered necessary.
Internal audit and reporting
The group’s Indonesian operations have an internal audit
function supplemented where necessary by the use of
external consultants. The function reports regularly and
summaries of the reports are issued to the audit
committee. In the opinion of the board, there is no need
for an internal audit function outside Indonesia due to the
limited nature of the non-Indonesian operations.
The group has an established a system of management
hierarchy which is designed to delegate the day to day
50
Directors’ remuneration report
Introduction
Remuneration policy
This report has been prepared in accordance with
The committee sets the remuneration and benefits of the
Schedule 7A to the Companies Act 1985 (the “Act”). The
chairman and the managing director. The latter is
report also meets the relevant requirements of the Listing
currently the only executive director but the committee
Rules of the Financial Services Authority and describes
would set the remuneration and benefits of any other
how the board has applied the principles relating to
executive directors who might in future be appointed. In
directors’ remuneration set out in the Combined Code on
setting remuneration and benefits, it considers the
Corporate Governance (the “Code”). As required by the
achievement of each individual in attaining the objectives
Act, a resolution to approve the report will be proposed at
set for that individual (including objectives relating to
the annual general meeting at which financial statements
corporate performance on environmental and social
will be approved.
matters and corporate governance), and
the
responsibilities assumed by the individual and, where the
The Act requires the auditors to report to the company’s
role is part time, the time commitment involved. It draws
members on certain parts of the directors’ remuneration
on data of the remuneration of others performing similar
report and to state whether in their opinion those parts of
functions in similarly sized organisations, but does not use
the report have been properly prepared in accordance
independent consultants.
with the Companies Act 1985. The report has therefore
been divided into separate sections for audited and
The key objective of the remuneration policy (which
unaudited information.
Unaudited information
The remuneration committee
applies for 2008 and subsequent years) is to attract,
motivate, retain and fairly reward executive directors of a
high calibre, while ensuring that the remuneration of each
individual executive director is consistent with the best
interests of the company and its shareholders. In framing
its policy on performance related remuneration (which is
The company has established a remuneration committee.
payable only to executive directors) the committee
From the beginning of the year to 3 September 2007 the
follows the provisions of schedule A to the Code.
committee comprised Mr J R M Keatley (chairman), Mr L
E C Letts and Mr R M Robinow. From 3 September 2007
The committee considers all proposals for executive
the committee comprised Mr J M Green-Armytage
directors to hold outside directorships. Such directorships
(chairman), Mr D H R Killick and Mr R M Robinow. Any
are normally permitted only if considered to be of value to
matter concerning Mr Robinow is discussed without Mr
the group and on terms that any remuneration payable
Robinow being present.
will be accounted for to the group.
The membership of the remuneration committee in 2006,
Basis of remuneration
when the directors’ remuneration for 2007 was
considered, was the same as in the period to 3
The policy on remuneration of executive directors is that
September 2007.
basic remuneration of each executive director should
comprise an annual salary, part of which is pensionable,
and certain benefits-in-kind, principally a company car.
In
51
Directors’ remuneration report continued
addition an executive director should be paid non-
Performance graph
pensionable performance related bonuses. These are to
be awarded annually in arrears on a discretionary basis
A performance graph is shown in the “Key statistics”
taking into account the performance of the group during
section of this annual report. This compares the
the relevant year and the contribution to that performance
performance of the company’s ordinary shares (measured
that each director is assessed by the committee as having
by total shareholder return) with that of the FTSE all
made. Bonuses should not normally exceed 50 per cent
share index for the period from January 2003 to
of salary and are paid in cash. There is no separate
December 2007. This index has been selected as there is
pension scheme for executive directors and the only
no index available that is specific to the activities of the
current executive director (the managing director) is a
company.
member of the R.E.A. Pension Scheme.
Long term incentive plan
Service contracts
A long term incentive plan (the "plan") was introduced in
The company’s current policy on service contracts is that
2007. It is designed to provide an incentive, linked to the
contracts should have a notice period of not more than
increase in value of ordinary shares in the company, to a
one year and a maximum termination payment not
small number of key senior executives in Indonesia with a
exceeding one year’s salary. No director has a service
view to their participating over the long term in value
contract that is not fully compliant with this policy.
created for the group. No director may participate. The
plan period commenced on 1 January 2007 and ends on
The group entered into a service contract with Mr J C
31 December 2010 (the "performance period"). Awards
Oakley on 16 December 1988 initially for a period of two
made under the plan will become exercisable depending
years thereafter determinable by either party by giving
on the extent to which targets are achieved over the
notice to the other party of not less than six months. At
performance period. An award may be exercised in whole
31 December 2007 the unexpired term remained as six
or part at any time from 1 January 2011 until 31
months. There are no provisions for compensation for
December 2016.
early termination save that Mr Oakley would be entitled to
a payment in lieu of notice if due notice had not been
Awards are made over a notional number of ordinary
given.
Non-executive directors
shares of the company. At the end of the performance
period, the number of notional ordinary shares over which
an award may be exercised will be calculated. On
exercising an award, the participant will receive a cash
The remuneration of non-executive directors other than
amount for each ordinary share over which the award is
the chairman is determined by the board within the limits
exercised, equal to the excess (if any) of the market price
set by the articles of association, no director taking part in
of an ordinary share on the date of exercise over 433.5p,
the determination of his own remuneration. The level of
being the market price of an ordinary share on 1 January
remuneration is determined having regard to that paid by
2007. The number of ordinary shares over which an
comparable organisations.
award may be exercised depends on three key
performance targets and on continued employment.
52
The three performance targets relate to total shareholder
change of control or other relevant event (as determined
return, cost per tonne of crude palm oil produced and
by the remuneration committee) and time apportioned for
annual planting rate achieved, in each case measured on
the elapsed portion of the performance period up to that
a cumulative basis over the performance period. Each
date expressed as a fraction of the full performance
performance target governs the vesting of one third of
period.
each award and for each performance target there are
threshold, target and maximum levels of performance.
At 31 December 2007, the total number of notional
The number of notional ordinary shares over which
ordinary shares over which awards had been made
awards may be exercised following the end of the
amounted to 195,000. On the basis of the market price
performance period will depend on the level of
of the ordinary shares on 31 December 2007 of 544p
performance achieved. The remuneration committee has
per share, the total value to participants of the awards
discretion to adjust targets if it considers that actual
made would, if such awards had vested in full, have
performance warrants this.
amounted at that date to £215,475.
The exercise of an award is dependent on continued
Audited information
employment with the group. If a participant ceases
employment with the group before the end of the
Directors’ remuneration
performance period, his award will lapse unless he leaves
by reason of death, injury, disability, redundancy or
The following table shows details of the remuneration of
retirement or the remuneration committee exercises a
individual directors holding office during the year ended
discretion to decide that his award should not lapse.
31 December 2007 (with comparative totals for 2006):
Where the award does not lapse, it will become
exercisable, and remain exercisable for a period of twelve
months, from the date that the affected participant
ceases employment with the group (the “cessation date”),
on a basis that reflects achievement of performance
targets up to the end of the financial year last ended
before the cessation date (as determined by the
remuneration committee) and time apportioned for the
elapsed portion of the performance period up to the
cessation date expressed as a fraction of the full
performance period. If a participant leaves after the end
of the performance period, the participant may exercise
an award within six months of leaving.
and fees Other*
Salary
2007
Total
£’000 £’000 £’000
114
104
10
237
-
13
13
-
-
63
-
-
-
-
-
300
-
13
13
-
-
2006
Total
£’000
16
274
-
13
6
3
-
R M Robinow (chairman)
J C Oakley
J M Green-Armytage
J R M Keatley
D H R Killick
L E C Letts
C L Lim
* comprises benefits and, in the case of Mr Oakley, a bonus of £40,000.
367
73
440(cid:19)
312
Mr Robinow, Mr Green-Armytage, Mr Letts and Mr Lim
were interested in service arrangements with four
Awards will also be exercisable for a period of one month
companies whereby aggregate amounts were payable to
following a change in control of the company as a result
those companies for 2007 of £60,000 (2006 £258,000)
of a takeover offer or similar corporate event. In that
in respect of Mr Robinow, £13,000 (2006 £13,000) in
case, the numbers of ordinary shares over which awards
respect of Mr Green-Armytage, £13,000 (2006
may be exercised will be on a basis that reflects
£13,000) in respect of Mr Letts and £13,000 (2006
achievement of performance targets up to the date of
£13,000) in respect of Mr Lim.
53
Directors’ remuneration report continued
In addition to the benefits and bonus shown under “Other”
impose any conditions and the option was based on the
above, Mr Oakley received a benefit in kind relating to the
full market value of the ordinary shares at the date of the
tax liability arising on a gain on exercise of share options
grant. The grant of the option to Mr Oakley on this basis
in 2006 estimated at £163,000. It has been agreed with
was approved by special resolution of the company prior
Mr Oakley that he will effectively refund this amount by
to execution of the option agreement.
commensurate reduction in future non pensionable
remuneration to which he would otherwise become
The number of shares the subject of the option and the
entitled.
option subscription price have been amended from time
to time to take account of share issues since the option
Director’s pension entitlement - Mr J C Oakley
was granted. As a result, at the beginning and end of the
year the number of ordinary shares the subject of the
Mr Oakley (who was aged 59 at 31 December 2007) is
option was 828,113 and the exercise price was
an ordinary member of the R.E.A. Pension Scheme which
44.8289p per share and, at the date of this report, the
is a defined benefit scheme of which details are shown in
number of ordinary shares so subject was 833,534 and
note 35 to the consolidated financial statements.
the exercise price was 44.1286p per share. The option
Pensionable earnings are calculated on part of the annual
expires on 21 May 2012.
salary only. Details of the accrued pension are set out
The market price of the ordinary shares at 31 December
2007 was 544p and the range during the year was 375p
to 610p.
No other options have been granted by the company.
Approved by the board on 24 April 2008
RICHARD M ROBINOW
Chairman
below.
Accrued annual pension at beginning of year
Increase in accrued annual pension during year
Accrued annual pension at end of year
Pension transfer value at beginning of year
Contributions made by the director
Increase in pension transfer value during year*
Pension transfer value at end of year
*net of director’s contributions
£
75,694
6,062
81,756
1,297,617
9,800
399,328
1,706,745
The increase during the year in excess of inflation in
accrued annual pension was £3,001 and in pension
transfer value was £356,634.
Share options - Mr J C Oakley
Pursuant to an option agreement of 22 May 2002, Mr
Oakley was granted an option to subscribe new ordinary
shares of 25p each at a price of 45p per share payable
in cash. There were no performance conditions attached
to the grant of this option as the directors did not
consider, in the particular circumstances in which the
option was granted, that it would be appropriate to
54
Directors’ responsibilities
The directors are responsible for preparing the annual
applicable law). The parent company financial statements
report including the directors’ report, the directors'
are required by law to give a true and fair view of the state
remuneration report and the financial statements in
of affairs of the company. In preparing these financial
accordance with applicable law and regulations.
statements, the directors are required to:
Company law requires the directors to prepare financial
•
select suitable accounting policies and then apply
statements for each financial year. The directors are
them consistently;
required to prepare financial statements for the group in
accordance with
International Financial Reporting
Standards (“IFRS”) as adopted by the European Union,
the Companies Act 1985 and Article 4 of European
Commission Regulation 1606/2002.
International Accounting Standard 1 requires that IFRS
financial statements present fairly for each financial year
the company's financial position, financial performance
and cash flows. This requires the faithful representation
of the effects of transactions, other events and conditions
in accordance with the definitions and recognition criteria
for assets, liabilities, income and expenses set out in the
International Accounting Standards Board's “Framework
for the preparation and presentation of financial
statements”. In virtually all circumstances, a fair
presentation will be achieved by compliance with all
applicable IFRS. However, directors are also required to:
properly select and apply suitable accounting
policies;
present information, including accounting policies, in
a manner that provides relevant, reliable, comparable
and understandable information; and
•
•
•
• make judgments and estimates that are reasonable
and prudent;
•
state whether applicable UK Accounting Standards
have been followed, subject to any material
departures disclosed and explained in the financial
statements; and
•
prepare the financial statements on the going
concern basis unless it is inappropriate to presume
that the company will continue in business.
The directors are responsible for keeping proper
accounting records that disclose with reasonable
accuracy at any time the financial position of the
company and enable them to ensure that the parent
company
financial statements comply with
the
Companies Act 1985. They are also responsible for
safeguarding the assets of the company and hence for
taking reasonable steps for the prevention and detection
of fraud and other irregularities.
The directors are responsible for the maintenance and
integrity of the corporate and financial information
included on the company's website. Legislation in the
provide additional disclosures when compliance with
United Kingdom governing
the preparation and
the specific requirements in IFRS are insufficient to
dissemination of financial statements may differ from
enable users to understand the impact of particular
legislation in other jurisdictions.
transactions, other events and conditions on the
entity's financial position and financial performance.
The directors have elected to prepare the parent
company financial statements in accordance with United
Kingdom Generally Accepted Accounting Practice
(including United Kingdom Accounting Standards and
55
Auditors’ report (group)
Independent auditors’ report to the members of
R.E.A. Holdings plc
Our responsibility is to audit the group financial statements
in accordance with relevant
legal and regulatory
requirements and International Standards on Auditing (UK
We have audited the group financial statements of R.E.A.
and Ireland).
Holdings plc for the year ended 31 December 2007
which comprise the consolidated income statement, the
We report to you our opinion as to whether the group
consolidated balance sheet, the consolidated statement
financial statements give a true and fair view, whether the
of recognised income and expense, the reconciliation of
group financial statements have been properly prepared in
movements in equity, the consolidated cash flow
accordance with the Companies Act 1985 and Article 4 of
statement, the accounting policies and the related notes
the IAS Regulation and whether the part of the directors'
1 to 38. These group financial statements have been
remuneration report described as having been audited has
prepared under the accounting policies set out therein.
been properly prepared in accordance with the Companies
We have also audited the information in the directors'
Act 1985. We also report to you whether in our opinion the
remuneration report that is described as having been
information given in the Directors' Report is consistent with
audited.
the group financial statements. The information given in the
directors' report includes that specific information
We have reported separately on the parent company
presented in the review of the group that is cross referred
financial statements of R.E.A. Holdings plc for the year
from the principal activities and business review section of
ended 31 December 2007
the directors' report.
This report is made solely to the company’s members, as
In addition we report to you if, in our opinion, we have not
a body, in accordance with section 235 of the Companies
received all the information and explanations we require for
Act 1985. Our audit work has been undertaken so that
our audit, or if information specified by law regarding
we might state to the company’s members those matters
director's remuneration and other transactions is not
we are required to state to them in an auditors’ report and
disclosed.
for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility to anyone
We review whether the corporate governance statement
other than the company and the company’s members as
reflects the company's compliance with the nine provisions
a body, for our audit work, for this report, or for the
of the 2006 Combined Code specified for our review by
opinions we have formed.
the Listing Rules of the Financial Services Authority, and
we report if it does not. We are not required to consider
Respective responsibilities of directors and auditors
whether the board's statements on internal control cover all
risks and controls, or form an opinion on the effectiveness
The directors' responsibilities for preparing the annual
of the group's corporate governance procedures or its risk
report, the directors' remuneration report and the group
and control procedures.
financial statements in accordance with applicable law and
International Financial Reporting Standards (IFRSs) as
We read the other information contained in the annual
adopted by the European Union are set out in the
report and consider whether it is consistent with the
statement of directors' responsibilities.
audited group financial statements. The other information
comprises only the directors' report, the chairman's
56
statement,
the unaudited part of
the directors'
Opinion
remuneration report, the review of the group and the
corporate governance statement. We consider the
In our opinion:
implications for our report if we become aware of any
apparent misstatements or material inconsistencies with
the group financial statements. Our responsibilities do not
extend to any further information outside the annual report.
Basis of audit opinion
We conducted our audit in accordance with International
Standards on Auditing (UK and Ireland) issued by the
Auditing Practices Board. An audit includes examination,
on a test basis, of evidence relevant to the amounts and
disclosures in the group financial statements and the part
of the directors' remuneration report to be audited. It also
•
the group financial statements give a true and fair
view, in accordance with IFRSs as adopted by the
European Union, of the state of the group's affairs as
at 31 December 2007 and of its profit for the year
then ended;
•
•
the group financial statements have been properly
prepared in accordance with the Companies Act
1985 and Article 4 of the IAS Regulation;
the part of the directors' remuneration report
described as having been audited has been properly
prepared in accordance with the Companies Act
includes an assessment of the significant estimates and
1985; and
judgments made by the directors in the preparation of the
group financial statements, and of whether the
accounting policies are appropriate to the group's
circumstances, consistently applied and adequately
disclosed.
•
the information given in the directors' report is
consistent with the group financial statements.
We planned and performed our audit so as to obtain all
DELOITTE & TOUCHE LLP
the information and explanations which we considered
Chartered Accountants and Registered Auditors
necessary in order to provide us with sufficient evidence
to give reasonable assurance that the group financial
London, England
24 April 2008
statements and the part of the directors' remuneration
report to be audited are free from material misstatement,
whether caused by fraud or other irregularity or error. In
forming our opinion we also evaluated the overall
adequacy of the presentation of information in the group
financial statements and the part of the directors'
remuneration report to be audited.
57
Consolidated income statement
for the year ended 31 December 2007
Note
2
4
13
7
8
5
9
10
11
2007
$’000
2006
$’000
57,600
5,578
(14,875)
48,303
8,030
6
(1,028)
(5,925)
49,386
1,641
(4,017)
47,010
(15,013)
33,095
(54)
(14,938)
18,103
8,700
9
(450)
(5,590)
20,772
640
(1,650)
19,762
(5,898)
31,997
13,864
29,453
2,266
278
31,997
11,546
1,795
523
13,864
91.9 cents
89.6 cents
40.0 cents
37.8 cents
Revenue
Net gain / (loss) arising from changes in fair value of agricultural produce inventory
Cost of sales
Gross profit
Net gain arising from changes in fair value of biological assets
Other operating income
Distribution costs
Administrative expenses
Operating profit
Investment revenues
Finance costs
Profit before tax
Tax
Profit for the year
Attributable to:
Ordinary shareholders
Preference shareholders
Minority interests
Earnings per 25p ordinary share
Basic
Diluted
All operations in both years are continuing.
58
Consolidated balance sheet
as at 31 December 2007
Non-current assets
Goodwill
Biological assets
Property, plant and equipment
Prepaid operating lease rentals
Deferred tax assets
Non-current receivables
Total non-current assets
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Trade and other payables
Current tax liabilities
Obligations under finance leases
Bank loans
Other loans and payables
Total current liabilities
Non-current liabilities
Bank loans
Sterling notes
US dollar notes
Deferred tax liabilities
Obligations under finance leases
Other loans and payables
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Share premium account
Translation reserve
Special reserve (non-distributable)
Retained earnings
Minority interests
Total equity
Approved by the board on 24 April 2008 and signed on behalf of the board.
RICHARD M ROBINOW
Chairman
Note
12
13
14
15
24
17
18
19
27
25
21
26
21
22
23
24
25
26
28
29
30
29
31
32
2007
$’000
12,578
166,347
41,772
8,823
5,817
1,376
2006
$’000
12,578
143,496
28,645
5,180
10,672
2,236
236,713
202,807
13,040
3,301
34,216
50,557
5,096
3,963
37,266
46,325
287,270
249,132
(7,070)
(2,935)
(111)
(3,000)
(414)
(13,530)
(12,917)
(40,713)
(29,389)
(37,166)
(127)
(4,795)
(8,438)
(220)
(301)
(21,500)
(396)
(30,855)
(19,250)
(27,409)
(29,307)
(33,244)
(32)
(3,514)
(125,107)
(112,756)
(138,637)
(143,611)
148,633
105,521
38,299
29,787
(9,822)
–
89,492
147,756
877
148,633
33,372
19,506
(8,890)
3,254
57,679
104,921
600
105,521
59
Consolidated statement of
recognised income and expense
for the year ended 31 December 2007
Exchange translation differences
Tax on items taken directly to equity
Net (loss) / gain recognised directly in equity
Profit for the year
Share based payment - deferred tax credit
Total recognised income and expense for the year
Attributable to:
Ordinary shareholders
Preference shareholders
Minority interests
Reconciliation of movements in equity
for the year ended 31 December 2007
Total recognised income and expense for the year
Issue of new ordinary shares by way of placings and open offer (net of costs)
Issue of new preference shares by way of placings (net of costs)
Issue of new ordinary shares on exercise of share options
Issue of new ordinary shares on exercise of warrants
Subscription of new shares by minority interest in subsidiaries
Dividends to preference shareholders
Dividends to ordinary shareholders
Liquidation distribution to preference shareholders in a subsidiary
Acquisition of minority interest in a subsidiary
Equity at beginning of year
Equity at end of year
2007
$’000
(1,460)
528
(932)
31,997
385
31,450
28,907
2,266
277
31,450
2007
$’000
31,450
13,027
2,180
–
–
–
(2,266)
(1,279)
–
–
43,112
105,521
2006
$’000
769
417
1,186
13,864
1,798
16,848
14,528
1,795
525
16,848
2006
$’000
16,848
18,391
5,493
150
1,639
215
(1,795)
–
(4,239)
(7,090)
29,612
75,909
148,633
105,521
60
Consolidated cash flow statement
for the year ended 31 December 2007
Net cash from operating activities
Investing activities
Interest received
Proceeds on disposal of property, plant and equipment
Purchases of property, plant and equipment
Expenditure on biological assets
Expenditure on prepaid operating lease rentals
Costs incurred in acquisition of minority interest in subsidiary
Net cash used in investing activities
Financing activities
Preference dividends paid
Ordinary dividends paid
Repayment of borrowings
Repayment of obligations under finance leases
Proceeds of issue of new share capital in subsidiaries to minority shareholders
Proceeds of issue of preference share capital less expenses
Proceeds of issue of ordinary share capital less expenses
Proceeds of issue of ordinary share capital on exercise of warrants
Liquidation distribution to preference shareholders in a subsidiary
Issue of US dollar notes, net of expenses
Issue of sterling notes, net of expenses
New bank borrowings drawn
Net cash from financing activities
Cash and cash equivalents
Net (decrease) / increase in cash and cash equivalents
34
Cash and cash equivalents at beginning of year
Effect of exchange rate changes
Cash and cash equivalents at end of year
Note
2007
$’000
2006
$’000
33
28,176
7,108
1,641
200
(15,010)
(14,820)
(3,787)
–
640
–
(12,036)
(18,775)
(2,862)
(370)
(31,776)
(33,403)
(2,266)
(1,279)
(1,795)
–
(25,833)
(3,750)
(268)
–
2,180
13,027
–
–
–
13,438
1,000
(680)
215
5,493
18,406
1,639
(5,692)
5,394
27,804
6,500
(1)
53,534
(3,601)
37,266
551
27,239
8,612
1,415
34,216
37,266
61
Accounting policies (group)
General information
R.E.A. Holdings plc is a company incorporated in the United
Kingdom under the Companies Act 1985.
Basis of accounting
The consolidated financial statements are prepared in
accordance with International Financial Reporting Standards
(“IFRS”) as endorsed for use by the European Union as at
the date of authorisation of the financial statements and
therefore comply with Article 4 of the EU IAS Regulation.
The statements are prepared under the historical cost
convention except where otherwise stated in the accounting
policies.
Functional and presentation currency
The directors have decided to change the currency in which
the consolidated financial statements of the group are
presented from the pound sterling to the US dollar, which is
considered to be the currency of the primary economic
environment in which the group operates. References to “$”
or “dollar” in these financial statements are to the lawful
currency of the United States of America.
The 2006 comparative figures have been restated. The
consolidated net assets for 2006 have been translated at
rates of exchange ruling at 31 December 2006. The total
consolidated equity of the group as at 1 January 2006 has
been translated at rates of exchange ruling on 31 December
2005. Transactions in 2006 in foreign currency have been
recorded in compliance with the policy detailed in “Foreign
currencies” below.
Adoption of new and revised standards
In the current year the group has adopted IFRS 7 “Financial
instruments: disclosures” and the related amendments to
IAS 1 “Presentation of financial statements” which are
effective for reporting periods beginning on or after 1
January 2007. Adoption of these has resulted in expansion
of the disclosures regarding the group’s financial instruments
and management of capital in note 20. Interpretations issued
by the International Financial Reporting Interpretations
Committee (IFRIC) and brought into effect for the latest
reporting period have not led to any changes in the group’s
accounting policies.
62
At the date of authorisation of the consolidated financial
statements, the following standards and interpretations
which have not been applied in these financial statements
were in issue but not yet effective:
•
•
•
•
•
•
IAS 23 (Revised): “Borrowing costs”
IFRIC 13: “Customer loyalty programmes”
IFRS 8: “Operating segments”
IFRIC 11:
“IFRS 2-group and
treasury share
transactions”
IFRIC 12:
“Service concession arrangements”
IFRIC 14: “IAS 19 – the limit on a defined benefit asset,
minimum funding requirements and their interaction”
The directors anticipate that when the relevant standards
and interpretations come into effect for periods commencing
on or after 1 January 2008 their adoption will have no
material impact on the consolidated financial statements,
save for additional disclosures which may be required.
Basis of consolidation
The consolidated financial statements consolidate those of
the company and its subsidiary companies made up to 31
December of each year.
Unless otherwise stated, the acquisition method of
accounting is adopted with assets and liabilities valued at fair
values at the date of acquisition. The interest of minority
shareholders is stated at the minority’s proportion of the fair
values of the assets and liabilities recognised. Any
subsequent losses attributable to the minority shareholders
in excess of the minority interest are allocated against the
interest of the parent. Results of subsidiaries acquired or
disposed of are included in the consolidated income
statement from the effective date of acquisition to the
effective date of disposal, as appropriate. Where necessary,
adjustments are made to the financial statements of
subsidiaries to bring the accounting policies into line with
those used by the group.
On acquisition, any excess of the fair value of the
consideration given over the fair value of identifiable net
assets acquired is recognised as goodwill. Any deficiency in
consideration given against the fair value of the identifiable
net assets acquired is credited to profit or loss in the
consolidated income statement in the period of acquisition.
All intra-group transactions, balances, income and expenses
are eliminated on consolidation.
Goodwill
Goodwill is recognised as an asset on the basis described in
the above policy “Basis of consolidation” and once
recognised is tested for impairment at least annually. Any
impairment is debited immediately as a loss in the
consolidated income statement and is not subsequently
reversed. On disposal of a subsidiary, the attributable
amount of any goodwill is included in the determination of
the profit or loss on disposal.
Goodwill arising between 1 January 1998 and the date of
transition to IFRS is retained at the previous UK Generally
Accepted Accounting Practice amount subject to testing for
impairment at that date. Goodwill written off to reserves prior
to 1 January 1998, in accordance with the accounting
standards then in force, has not been reinstated and is not
included in determining any subsequent profit or loss on
disposal.
Revenue recognition
Revenue is measured at the fair value of the consideration
received or receivable in respect of goods and services
provided in the normal course of business, net of VAT and
other sales related taxes. Sales of goods are recognised
when the significant risks and rewards of ownership of the
goods are transferred to the buyer and include contracted
sales in respect of which the contracted goods are available
for collection by the buyer in the accounting period. Income
from services is accrued on a time basis by reference to the
rate of fee agreed with the buyer.
Interest income is accrued on a time basis by reference to
the principal outstanding and at the effective interest rate
applicable (which is the rate that exactly discounts estimated
future cash receipts, through the expected life of the
financial asset, to that asset’s net carrying amount). Dividend
income is recognised when the shareholders’ rights to
receive payment have been established.
Leasing
Assets held under finance leases and other similar contracts
are recognised as assets of the group at their fair values or,
if lower, at the present values of minimum lease payments
(for each asset, determined at the inception of the lease) and
are depreciated over the shorter of the lease terms and their
useful lives. The corresponding liabilities are included in the
balance sheet as finance lease obligations. Lease payments
are apportioned between finance charges and a reduction in
the lease obligation to produce a constant rate of interest on
the balance of the capital repayments outstanding. Hire
purchase transactions are dealt with similarly, except that
assets are depreciated over their useful lives. Finance and
hire purchase charges are charged directly against income.
Rental payments under operating leases are charged to
income on a straight-line basis over the term of the relevant
lease.
Foreign currencies
Transactions in foreign currencies are recorded at the rates
of exchange ruling at the dates of the transactions. At each
liabilities
balance sheet date monetary assets and
denominated in foreign currencies are retranslated at the
rates of exchange prevailing at that date. Non-monetary
items that are measured in terms of historical cost in a
foreign currency are not retranslated. Exchange differences
arising on the settlement of monetary items, and on the
retranslation of other items that are subject to retranslation,
are included in the net profit or loss for the period, except for
exchange differences arising on non-monetary assets and
liabilities, including foreign currency loans, which, to the
extent that they relate to investment in overseas operations
or hedge the group’s investment in such operations, are
recognised directly in equity.
For consolidation purposes, the assets and liabilities of any
group entity with a functional currency other than the US
dollar are translated at the exchange rate at the balance
sheet date. Income and expenses are translated at the
average rate for the period unless exchange rates fluctuate
significantly. Exchange differences arising are classified as
equity and transferred to the group’s translation reserve.
Such exchange differences are recognised as income or
expenses in the period in which the entity is sold.
63
Accounting policies (group) continued
Goodwill and fair value adjustments arising on the acquisition
of an entity with a functional currency other than the US
dollar are treated as assets and liabilities of that entity and
are translated at the closing rate of exchange.
Borrowing costs
Borrowing costs incurred in financing construction or
installation of qualifying property, plant or equipment are
added to the cost of the qualifying asset, until such time as
the construction or installation is substantially complete and
the asset is ready for its intended use. Borrowing costs
incurred in financing the planting of extensions to the
developed agricultural area are treated as expenditure
relating to biological assets until such extensions reach
maturity. All other borrowing costs are recognised in the
consolidated income statement of the period in which they
are incurred.
Operating profit
Operating profit is stated after any gain or loss arising from
changes in the fair value of biological assets (net of
expenditure relating to those assets up to the point of
maturity) but before investment income and finance costs.
Retirement benefit costs
For defined benefit retirement schemes, the estimated
regular cost of providing for the benefits is calculated so that
it represents a substantially level percentage of current and
future pensionable payroll and is charged as an expense as
it is incurred.
Amounts to recover actuarial losses, which are assessed at
each valuation, are payable over a recovery period agreed
with the scheme trustees. Provision is made for the present
value of future amounts payable by the group to cover its
share of such losses. The provision is reassessed at each
accounting date, with the difference on reassessment being
charged or credited to the consolidated income statement in
addition to the adjusted regular cost for the period.
Taxation
The tax expense represents the sum of tax currently payable
and deferred tax. Tax currently payable represents amounts
expected to be paid (or recovered) based on the taxable
64
profit for the period using the tax rates and laws that have
been enacted or substantially enacted at the balance sheet
date. Deferred tax is calculated on the balance sheet liability
method on a non-discounted basis on differences between
the carrying amounts of assets and liabilities in the financial
statements and the corresponding fiscal balances used in
the computation of taxable profits (temporary differences).
Deferred tax liabilities are generally recognised for all taxable
temporary differences and deferred tax assets are
recognised to the extent that it is probable that taxable
profits will be available against which deductible temporary
differences can be utilised. A deferred tax asset or liability is
not recognised in respect of a temporary difference that
arises from goodwill or from the initial recognition of other
assets or liabilities in a transaction which affects neither the
profit for tax purposes nor the accounting profit.
Deferred tax is calculated at the tax rates that are expected
to apply in the periods when deferred tax liabilities are settled
or deferred tax assets are realised. Deferred tax is charged
or credited in the consolidated income statement, except
when it relates to items charged or credited directly to equity,
in which case the deferred tax is also dealt with in equity.
Biological assets
Biological assets comprise oil palm trees and nurseries, in
the former case from initial preparation of land and planting
of seedlings through to maturity and the entire productive life
of the trees and in the latter case from planting of seed
through to field transplanting of seedlings. Biological assets
do not include the land upon which the trees and nurseries
are planted, or the buildings, equipment, infrastructure and
other facilities used in the upkeep of the planted areas and
harvesting of crops. Up to 31 December 2006 biological
assets included plantation infrastructure, which includes
such assets as roads, bridges and culverts. With effect from
1 January 2007 new expenditure on these assets is included
in property, plant and equipment. Prior year comparatives
have not been restated in respect of this change as the
effect is not considered material.
The biological process commences with
initial
preparation of land and planting of seedlings and ceases
with the delivery of crop in the form of fresh fruit bunches
(“FFB”) to the manufacturing process in which crude palm oil
and palm kernel are extracted from the FFB.
the
Biological assets are revalued at each accounting date on a
discounted cash flow basis by reference to the FFB
expected to be harvested over the full remaining productive
life of the trees, applying an estimated produce value for
transfer to the manufacturing process and allowing for
upkeep, harvesting costs and an appropriate allocation of
overheads. The estimated produce value is derived from a
long term average of historic crude palm oil prices buffered
so that the implied movement in unit profit margin in any year
does not exceed 5 per cent, and further, so as to restrict any
implied change in unit profit margin in contradiction of the
trend in current margins. Assets which are not yet mature at
the accounting date, and hence are not producing FFB, are
valued on a similar basis but with the discounted value of the
estimated cost to complete planting and maintain the assets
to maturity being deducted from the discounted FFB value.
All expenditure on the biological assets up to maturity,
including interest, is treated as an addition to the biological
assets. Expenditure to maturity includes an allocation of
overheads to the point that trees are brought into productive
cropping. Such overheads include the cost of the Indonesian
head office, the cost of providing agricultural buildings,
equipment, plantation infrastructure and vehicles, personnel
costs, local fees and general expenses.
The variation in the value of the biological assets in each
accounting period, after allowing for additions to the
biological assets in the period, is charged or credited to profit
or loss as appropriate, with no depreciation being provided
on such assets.
Property, plant and equipment
All property, plant and equipment (including, with effect from
1 January 2007, additions to plantation infrastructure) is
carried at original cost less any accumulated depreciation
and any accumulated impairment losses. Depreciation is
computed using the straight line method so as to write off
the cost of assets, other than property and plant under
construction, over the estimated useful lives of the assets as
follows: buildings - 20 years; plant and machinery - 5 to 16
years.
Assets held under finance leases are depreciated over their
expected useful lives on the same basis as owned assets or,
where shorter, over the terms of the relevant leases. The
gain or loss on the disposal or retirement of an asset is
determined as the difference between the sales proceeds
and the carrying amount of the asset and is recognised in the
consolidated income statement.
Prepaid operating lease rentals
Payments to acquire leasehold interests in land are treated
as prepaid operating lease rentals and amortised over the
periods of the leases.
Impairment of tangible and intangible assets excluding
goodwill
At each balance sheet date, the group reviews the carrying
amounts of its tangible and intangible assets to determine
whether there is any indication that any asset has suffered
an impairment loss. If any such indication exists, the
recoverable amount of the asset is estimated in order to
determine the extent of the impairment loss (if any). Where
the asset does not generate cash flows that are independent
from other assets, the group estimates the recoverable
amount of the cash-generating unit to which the asset
belongs. An intangible asset with an indefinite useful life is
tested for impairment annually and whenever there is an
indication that the asset may be impaired.
The recoverable amount of an asset (or cash-generating
unit) is the higher of fair value less costs to sell and value in
use. In assessing value in use, estimated future cash flows
are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time
value of money and those risks specific to the asset (or
cash-generating unit) for which the estimates of future cash
flows have not been adjusted. If the recoverable amount of
an asset (or cash-generating unit) is estimated to be less
than its carrying amount, the carrying amount of the asset
(or cash-generating unit) is reduced to its recoverable
amount. An impairment loss is recognised as an expense
immediately, unless the relevant asset is carried at a revalued
amount, in which case the impairment loss is treated as a
revaluation decrease.
Where an impairment loss subsequently reverses, the
carrying amount of the asset (or cash-generating unit) is
increased to the revised estimate of its recoverable amount,
but so that the increased carrying amount does not exceed
the carrying amount that would have been determined had
no impairment loss been recognised for the asset (or cash-
65
Accounting policies (group) continued
generating unit) in prior years. A reversal of an impairment
loss is recognised as income immediately, unless the
relevant asset is carried at a revalued amount, in which case
the reversal of the impairment loss is treated as a revaluation
increase.
receivables. All loans and receivables held by the group are
non interest bearing and are stated at their nominal amount,
as reduced by appropriate allowances for irrecoverable
amounts.
Cash and cash equivalents
Cash and cash equivalents comprise cash on hand and
demand deposits and other short-term highly liquid
investments that are readily convertible to a known amount
of cash and, being subject to an insignificant risk of changes
in value, are stated at their nominal amounts.
Non-derivative financial liabilities
The group’s non-derivative financial liabilities of the group
comprise note issues, bank borrowings, finance leases and
trade payables. The group does not hold any financial
liabilities classified as held for trading or designated as held
at FVTPL.
Note issues, bank borrowings and finance leases
Note issues, bank borrowings and finance leases are
classified in accordance with the substance of the relative
contractual arrangements. Finance costs are charged to
income on an accruals basis, using the effective interest
method, and comprise, with respect to notes, the coupon
payable together with the amortisation of note issuance
costs (which include any premiums payable on settlement or
redemption) and, with respect to bank borrowings and
finance leases, the contractual rate of interest together with
the amortisation of costs associated with the negotiation of,
and compliance with, the contractual terms and conditions.
Note issues are recorded in the accounts at their redemption
value net of the relative unamortised balances of issuance
costs. Bank borrowings and finance leases are recorded at
the amounts of the proceeds received with the relative
unamortised balance of costs treated as non-current
receivables.
Trade payables
All trade payables owed by the group are non interest
bearing and are stated at their nominal value.
Inventories
Inventories of agricultural produce harvested from the
biological assets are stated at the fair value, less estimated
sale costs, at the point of harvest of the FFB from which the
produce derives plus costs incurred in the processing of such
FFB (including direct labour costs and overheads that have
been incurred in bringing such inventories to their present
location and condition) or at net realisable value if lower.
Inventories of engineering and other items are valued at the
lower of cost, on the weighted average method, or net
realisable value. For these purposes, net realisable value
represents the estimated selling price (having regard to any
outstanding contracts for forward sales of produce) less all
estimated costs of processing and costs incurred in
marketing, selling and distribution.
Recognition and derecognition of financial instruments
Financial assets and liabilities are recognised in the group’s
financial statements when the group becomes a party to the
contractual provisions of the relative constituent instruments.
Financial assets are derecognised only when the contractual
rights to the cash flows from the asset expire or if the group
transfers substantially all the risks and rewards of ownership
to another party. Financial liabilities are derecognised when
the group’s obligations are discharged, cancelled or have
expired.
Non-derivative financial assets
The group’s non-derivative financial assets comprise loans
and receivables, and cash and cash equivalents. The group
does not hold any financial assets designated as held at ‘fair
value through profit and loss’ (“FVTPL”), or as ‘held-to-
maturity’ or ‘available-for-sale’ financial assets.
Loans and receivables
Trade receivables, loans and other receivables in respect of
which payments are fixed or determinable and which are not
quoted in an active market are classified as loans and
66
Derivative financial instruments
Share-based payments
The group has applied the requirements of IFRS 2 “Share-
based payment” which contain transitional provisions which
provide certain exemptions for grants of equity instruments
prior to 7 November 2002.
The group enters into derivative financial instruments to
manage its exposure to interest rate and foreign exchange
rate risk; further details are disclosed in note 20. Derivatives
are initially recognised at fair value at the date of the contract
and remeasured to their fair value at the balance sheet date.
The resulting gain or loss is recognised immediately in profit
or loss unless the derivative is designated and qualifies as a
hedging instrument (either as a cash flow hedge or a fair
value hedge), in which case the timing of the recognition in
profit or loss depends on the nature of the hedge
relationship.
A derivative is presented as a non-current asset or non-
current liability if the remaining maturity of the instrument is
more than 12 months and the derivative is not expected to
be realised or settled within 12 months. Other derivatives are
presented as current assets or liabilities.
Cash flow hedges
Changes in the fair value of derivatives which are designated
and qualify as cash flow hedges are deferred in equity to the
extent attributable to the components of the derivatives that
are effective hedges. Other gains or losses arising are
recognised immediately in profit or loss, and are included as
‘other gains and losses’ in the consolidated income
statement. Hedge accounting is discontinued when the
group revokes the hedging relationship or the hedging
instrument expires, is sold, terminated, or exercised, or no
longer qualifies for hedge accounting. Any cumulative gain or
loss deferred in equity at discontinuance remains in equity.
Fair value hedges
The group does not hold any derivatives designated and
qualifying as fair value hedges.
Equity instruments
Instruments are classified as equity instruments if the
substance of
the relative contractual arrangements
evidences a residual interest in the assets of the group after
deducting all of its liabilities. Equity instruments issued by
the company are recorded at the proceeds received, net of
direct issue costs. The preference shares of the company
are regarded as equity instruments.
67
Notes to the consolidated financial
statements
1. Critical accounting judgements and key sources of estimation uncertainty
In the application of the group’s accounting policies, which are set out in the “Accounting policies (group)” section of this annual report, the
directors are required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily
apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are
considered to be relevant. Actual values of assets and amounts of liabilities may differ from these estimates. The estimates and underlying
assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are
revised.
The key sources of estimation uncertainty at the balance sheet date, which have a significant risk of causing a material adjustment to the
carrying amounts of assets and liabilities within the next financial year, are described below.
Biological assets
The method by which the directors have determined the fair value of the group’s biological assets is described in “Accounting policies (group)”
above. Because of the inherent uncertainty associated with such fair valuation methodology and in particular the volatility of prices for the
group’s agricultural produce and the absence of a liquid market for oil palm plantations, the carrying value of the biological assets may differ
from their realisable value (see note 13).
Derivatives
As described in note 20, the directors use their judgement in selecting appropriate valuation techniques for financial instruments not quoted
in an active market. For derivative financial instruments, assumptions are made based on quoted market rates adjusted for the specific
features of the instruments.
Income taxes
The group is subject to income taxes in various jurisdictions. Significant judgement is required in determining the group’s liability to income
tax both current and deferred having regard to the uncertainties relating to the availability of tax losses and to the future periods in which
timing differences are likely to reverse.
2. Revenue
Sales of goods
Revenue from services
Other operating income
Investment income
Total revenue
2007
$’000
57,581
19
57,600
6
1,641
59,247
2006
$’000
32,891
204
33,095
9
640
33,744
The crop of oil palm fresh fruit bunches for 2007 amounted to 393,217 tonnes (2006 - 334,076 tonnes). The fair value of the crop of
fresh fruit bunches was $39,269,000 (2006: $18,916,000), based on the price formula determined by the Indonesian government for
purchases of fresh fruit bunches from smallholders.
68
3. Segment information
In the table below, the group’s sales are analysed by geographical destination and the carrying amount of segment net assets and additions
to property, plant and equipment by geographical area of location. No analyses are provided by business segment as the group has only one
business segment.
Sales by geographical destination:
United Kingdom and Continental Europe
Indonesia
Rest of Asia
Carrying amount of segment net assets by geographical area of asset location:
United Kingdom and Continental Europe
Indonesia
Additions to property, plant and equipment by geographical area of asset location:
United Kingdom and Continental Europe
Indonesia
2007
$’m
–
28.1
29.5
57.6
38.2
110.4
148.6
0.4
14.8
15.2
2006
$’m
0.2
25.3
7.6
33.1
26.5
79.0
105.5
–
12.0
12.0
4. Agricultural produce inventory movement
The net gain / (loss) 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).
5. Profit before tax
Profit before tax has been arrived at after charging / (crediting):
Net foreign exchange gains
Movement in inventories (at historic cost)
Depreciation of property, plant and equipment
Amortisation of prepaid operating lease rentals
2007
$’000
(232)
(2,161)
1,846
144
2006
$’000
(935)
465
1,569
92
The amount payable to Deloitte & Touche LLP for the audit of the company’s financial statements was $137,000 (2006: $169,000).
Amounts payable to Deloitte & Touche LLP for the audit of accounts of associates of the company pursuant to legislation were $10,000
(2006: $7,000).
Amounts payable to Deloitte & Touche LLP for other services pursuant to legislation were $48,000 (2006: $653,000). These have been
added to the capitalised costs of the relevant transactions and relate wholly to corporate finance work.
69
Notes to the consolidated financial
statements continued
5. Profit before tax - continued
Earnings before interest, tax, depreciation and amortisation and net biological gain:
Operating profit
Depreciation and amortisation
Net biological gain
6. Staff costs, including directors
Average number of employees (including executive directors):
Agricultural - permanent
Agricultural - temporary
Head office
Their aggregate remuneration comprised:
Wages and salaries
Social security costs
Pension costs
7. Investment revenues
Interest on bank deposits
8. Finance costs
Interest on bank loans and overdrafts
Interest on US dollar notes
Interest on sterling notes
Interest on other loans
Interest on obligations under finance leases
Amount included as additions to biological assets
Amount capitalised on acquisition
Other finance charges
Exchange gain on repayment of preference shares held by minority shareholders in a subsidiary
70
2007
$’000
49,386
1,990
(8,030)
43,346
2006
$’000
20,772
1,661
(8,700)
13,733
2007
Number
2006
Number
3,059
2,488
7
5,554
$’000
11,869
598
707
13,174
2007
$’000
1,641
1,641
2007
$’000
1,916
2,360
4,443
–
23
8,742
(5,164)
–
3,578
439
–
4,017
2,849
1,042
6
3,897
$’000
7,505
1,207
382
9,094
2006
$’000
640
640
2006
$’000
3,799
2,011
194
64
62
6,130
(3,644)
(107)
2,379
377
(1,106)
1,650
8. Finance costs - continued
Amount included as additions to biological assets arose on the general pool of borrowings applicable to the Indonesian operations and
reflected a capitalisation rate of 43.7 per cent (2006 - 44.7 per cent).
9. Tax
Current tax:
UK corporation tax
Foreign tax
Total current tax
Deferred tax:
Current year
Attributable to a decrease in the rate of tax
Total deferred tax
Total tax
2007
$’000
–
5,318
5,318
9,466
229
9,695
2006
$’000
–
222
222
5,676
–
5,676
15,013
5,898
Taxation is provided at the rates prevailing for the relevant jurisdiction, which for Indonesia is 30 per cent (2006: 30 per cent). For the
United Kingdom, the taxation provision reflects the proposed reduction in the corporation tax rate from 30 per cent to 28 per cent for
2008/09, the effect of which is also disclosed below and in note 24. The charge for the year can be reconciled to the profit per the
consolidated income statement as follows:
Profit before tax
Tax at the standard rate
Tax effect of the following items:
Expenses not deductible in determining taxable profit
Deferred tax asset not recognised
Non taxable income
Overseas withholding taxes, net of relief
Tax effect of unrelieved tax losses not recognised for deferred tax
Tax effect of change in rate on UK net deferred tax asset
Other
Tax expense at effective tax rate for the year
10. Dividends
Amounts recognised as distributions to equity holders:
Preference dividends of 9p per share
Ordinary dividends
2007
$’000
47,010
2006
$’000
19,762
14,103
5,929
161
–
(10)
541
6
229
(17)
270
(87)
(688)
474
–
–
–
15,013
5,898
2007
$’000
2,266
1,279
3,545
2006
$’000
1,795
–
1,795
71
Notes to the consolidated financial
statements continued
10. Dividends - continued
An interim dividend of 1p per ordinary share in lieu of final in respect of the year ended 31 December 2007 was paid on 25 January 2008.
In accordance with IAS10 “Events after the balance sheet date” this dividend has not been included in the 2007 financial statements.
11. Earnings per share
Earnings for the purpose of basic and diluted earnings per share *
* being net profit attributable to ordinary shareholders
Weighted average number of ordinary shares for the purpose of basic earnings per share
Effect of dilutive potential ordinary shares
Weighted average number of ordinary shares for the purpose of diluted earnings per share
12. Goodwill on acquisition of minority interest in subsidiary
Beginning of year
End of year
2007
$’000
29,453
‘000
32,044
837
32,881
2006
$’000
11,546
‘000
28,857
1,666
30,523
$’000
12,578
12,578
The goodwill arose from the acquisition by the company on 23 January 2006 of a 12.3 per cent minority interest in the issued ordinary share
capital of Makassar Investments Limited, the parent company of PT REA Kaltim Plantations (“REA Kaltim”), for a consideration comprising
the issue of $19 million nominal of 7.5 per cent dollar notes 2012/14. The goodwill of $12.6 million at the end of the year is considered by
the directors to be fully supported by the long-term prospects for REA Kaltim.
13. Biological assets
Beginning of year
Reclassification of expenditure in prior years between land, plantations and other non-current assets
Additions to planted area and costs to maturity
Net biological gain
End of year
Net biological gain comprises:
Gain arising from movement in fair value attributable to physical changes
Gain arising from movement in fair value attributable to price changes
Gain in relation to prior year reclassification
2007
$’000
143,496
–
14,821
8,030
166,347
8,030
–
–
8,030
2006
$’000
117,289
(1,303)
18,810
8,700
143,496
7,120
469
1,111
8,700
The nature of the group’s biological assets and the basis of determination of their fair value is explained under “Biological assets” in
“Accounting policies (group)”. The valuation assumed a discount rate of 17.5 per cent in the case of REA Kaltim and 19 per cent in the case
of all other group companies (2006: 17.5 per cent for all group companies) and a twenty year average CPO price of $414 per tonne, net
of Indonesian export duties, FOB Samarinda (2006 - twenty year average of $397 per tonne). The effect of the accounting policy on
biological assets was that there was no change in the unit profit margin assumed.
72
13. Biological assets - continued
The valuation of the group’s biological assets would have been reduced by $10,310,000 (2006: $6,949,000) if the crops projected for the
purposes of the valuation had been reduced by 5 per cent; by $10,915,000 (2006: $9,246,000) if the discount rates assumed had been
increased by 1 per cent and by $20,595,000 (2006: $17,340,000) if the assumed unit profit margin per tonne of oil palm fresh fruit bunches
had been reduced by $5.
As a general rule, all palm products produced by the group are sold for immediate delivery but on occasions, when market conditions appear
favourable, the group makes forward sales. 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 the balance sheet date, the group had outstanding forward sales of crude
palm oil at the rate of 2,000 tonnes per month for the two year period to 31 December 2009 at prices equivalent to $620 per tonne, CIF
Rotterdam, for the period January to June 2008 (inclusive), $870 per tonne for the period July to December 2008 (inclusive) and $860 per
tonne for the period January to December 2009 (inclusive) (2006: no forward sales).
At the balance sheet date, biological assets of $141,571,000 (2006 - $128,784,000) had been charged as security for bank loans (see
note 21) but there were otherwise no restrictions on titles to the biological assets (2006 – none). Expenditure approved by the directors
for the development of immature areas in 2008 amounts to $28,000,000 (prior year - $18,555,000).
14. Property, plant and equipment
Buildings
and structures
Cost:
At 1 January 2006
Reclassifications
Additions
Exchange differences
Disposals
Transfers
At 31 December 2006
Additions
Exchange differences
Disposals
Transfers
At 31 December 2007
Accumulated depreciation:
At 1 January 2006
Charge for year
Exchange differences
Eliminated on disposals
At 31 December 2006
Charge for year
Exchange differences
Eliminated on disposals
At 31 December 2007
$’000
3,759
43
99
–
–
1,806
5,707
8,123
–
(6)
4,178
18,002
684
190
–
–
874
295
–
(2)
1,167
Plant, Construction
in progress
Total
$‘000
$‘000
equipment
and vehicles
$’000
16,089
7
863
56
(30)
241
17,226
1,392
2
(460)
11,430
29,590
5,179
1,379
42
(27)
6,573
1,551
3
(258)
7,869
4,186
(54)
11,074
–
–
(2,047)
13,159
5,665
–
–
(15,608)
3,216
–
–
–
–
–
–
–
–
–
24,034
(4)
12,036
56
(30)
–
36,092
15,180
2
(466)
–
50,808
5,863
1,569
42
(27)
7,447
1,846
3
(260)
9,036
73
Notes to the consolidated financial
statements continued
14. Property, plant and equipment - continued
Carrying amount:
End of year
Beginning of year
Buildings
and structures
$’000
16,835
4,833
Plant, Construction
in progress
Total
$‘000
$‘000
equipment
and vehicles
$’000
21,721
10,653
3,216
13,159
41,772
28,645
At the balance sheet date, the book value of finance leases included in property, plant and equipment was $413,000 (2006 - $1,119,000).
At the balance sheet date, the group had entered into contractual commitments for the acquisition of property, plant and equipment
amounting to $4,093,000 (2006 - $231,000).
15. Prepaid operating lease rentals
Cost:
Beginning of year
Reclassification of expenditure in prior years between land, plantations and other non-current assets
Additions
End of year
Accumulated depreciation:
Beginning of year
Relating to the reclassification of expenditure in prior years
Charge for year
End of year
Carrying amount:
End of year
Beginning of year
2007
$‘000
5,401
–
3,787
9,188
221
–
144
365
2006
$‘000
1,249
1,290
2,862
5,401
113
16
92
221
8,823
5,180
5,180
1,136
Land title certificates have been obtained in respect of areas covering 35,216 hectares.
16. Subsidiaries
A list of the principal subsidiaries, including the name, country of incorporation and proportion of ownership is given in note (i) to the
company’s individual financial statements.
Certain borrowings incurred by PT REA Kaltim Plantations (“REA Kaltim”) limit the payment of dividends by REA Kaltim to a proportion of
REA Kaltim’s annual profit after tax.
74
17. Inventories
Agricultural produce
Engineering and other operating inventory
2007
$’000
8,603
4,437
13,040
2006
$’000
935
4,161
5,096
The fair value of the agricultural produce as at 31 December 2007 has taken into account certain outstanding forward sales contracts for
delivery in 2008 at a CIF Rotterdam price of $620 per tonne of crude palm oil (2006: no forward sales contracts) as disclosed in note 13.
18. Trade and other receivables
Due from sale of goods
Prepayments and advance payments
Advance payment of taxation
Deposits and other receivables
2007
$’000
444
853
1,149
855
3,301
2007
$’000
2,039
476
–
1,448
3,963
Sales of goods are normally made on a cash against documents basis with an average credit period of 6 days (2006 - 25 days). The directors
consider that the carrying amount of trade and other receivables approximates their fair value.
19. Cash and cash equivalents
Cash and cash equivalents comprise cash held by the group and short-term bank deposits with a maturity of one month or less.
20. Financial instruments
Capital risk management
The group manages as capital its debt, which includes the borrowings disclosed in notes 21 to 23, cash and cash equivalents and equity
attributable to shareholders of the parent, comprising issued ordinary and preference share capital, reserves and retained earnings as
disclosed in notes 28 to 31. The group is not subject to externally imposed capital requirements.
The directors’ policy in regard to the capital structure of the group is to seek to enhance returns to holders of the company's ordinary shares
by meeting a proportion of the group's funding needs with prior charge capital and to constitute that capital as a mix of preference share
capital and borrowings from banks and development institutions and from the public debt market, in proportions which suit, and as respects
borrowings having a maturity profile, which suits the assets that such capital is financing. In so doing, the directors regard preference share
capital as permanent capital and then seek to structure the group's borrowings so that shorter term bank debt is used only to finance working
capital requirements while debt funding for the group's development programme is sourced from issues of medium term listed debt securities
and borrowings from development institutions.
Net debt to equity ratio
Whilst the directors believe that it is important that the group retains flexibility as to the percentage of the group's overall funding that is
represented by net debt, as a general indication, they believe that, at the present stage of the group's development, net debt should not
exceed 100 per cent of total equity. The target for 31 December 2008 is 60 per cent (2007: 60 per cent). Net debt, equity and the net
debt to equity ratio at the balance sheet date were as follows:
75
Notes to the consolidated financial
statements continued
20. Financial instruments - continued
Debt *
Cash and cash equivalents
Net debt
* being long and short term borrowings as detailed in the table below under “Fair value of financial instruments”.
Equity
Net debt to equity ratio
Significant accounting policies
2007
$’000
86,257
(34,216)
52,041
2006
$’000
97,798
(37,266)
60,532
148,633
35.0%
105,521
57.4%
Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of measurement and the
basis on which income and expenses are recognised, in respect of each class of financial instrument are disclosed in the “Accounting policies
(group)” section of this annual report.
Categories of financial instruments
Non-derivative financial assets as at 31 December 2007 comprised loans and receivables and cash and cash equivalents amounting to
$35,953,000 (2006: $40,724,000).
Non-derivative financial liabilities as at 31 December 2007 comprised liabilities at amortised cost amounting to $93,032,000 (2006:
$106,215,000).
Derivative financial instruments at 31 December 2007 comprised instruments in designated hedge accounting relationships at fair value
amounting to $1,268,000 (2006: nil).
Financial risk management objectives
The group’s head office provides services to the business, co-ordinates access to domestic and international financial markets and monitors
and manages the financial risks relating to the operations of the group through internal reports which permit the degree and magnitude of
such risks to be assessed. These risks include market risk, credit risk and liquidity risk.
The group seeks to reduce risk by using, where appropriate, derivative financial instruments to hedge risk exposures. The use of derivative
financial instruments is governed by group policies set by the board of directors of the company. The board also sets policies on foreign
exchange risk, interest rate risk, credit risk, the use of non-derivative financial instruments, and the investment of excess liquidity. Compliance
with policies and exposure limits is reviewed on a continuous basis. The group does not enter into or trade financial instruments, including
derivative financial instruments, for speculative purposes.
Market risk
The financial market risks to which the group is primarily exposed are those arising from changes in interest rates and foreign currency
exchange rates.
76
20. Financial instruments - continued
The group’s policy as regards interest rates is to borrow whenever possible at fixed interest rates, but where borrowings are raised at floating
rates the directors would not normally seek to hedge such exposure. The sterling notes and the US dollar notes carry interest at fixed rates
of, respectively, 9.5 and 7.5 per cent per annum. In addition, the company’s preference shares carry an entitlement to a fixed annual dividend
of 9 pence per share.
Interest is payable on drawings under the Indonesian consortium loan facilities at a floating rate equal to 2.75 per cent per annum over
Singapore Inter Bank Offered Rate (“SIBOR”) (2006: 4 per cent), and on the Indonesian working capital facility at 3.5 per cent over SIBOR
(2006: 3.5 per cent).
A one per cent increase in interest applied to those financial instruments shown in the table below entitled “Fair value of financial instruments”
as held at 31 December 2007 (other than the cross currency interest rate swap) which carry interest at floating rates would have resulted
over a period of one year in a pre-tax profit (and equity) increase of approximately $183,000 (2006: pre-tax profit and equity decrease of
$34,000).
The group regards the US dollar as the functional currency of most of its operations and seeks to ensure that, as respects that proportion
of its investment in the operations that is met by borrowings, it has no currency exposure against the US dollar. Accordingly, where
borrowings are incurred in a currency other than the US dollar, the group endeavours to cover the resultant currency exposure by way of a
debt swap or other appropriate currency hedge. The group does not cover the currency exposure in respect of the component of the
investment that is financed with sterling denominated equity. The group's policy is to maintain limited balances in sterling sufficient to meet
its projected sterling expenditure for a period of between six and twelve months and a balance in Indonesian rupiahs sufficient for its
immediate Indonesian rupiah requirements but, otherwise, to keep all cash balances in US dollars. The group does not normally otherwise
hedge its revenues and costs arising in currencies other than the US dollar.
At the balance sheet date, the group had non US dollar monetary items denominated in pounds sterling and Indonesian rupiah. A 5 per cent
strengthening of the pound sterling against the US dollar would have resulted in a gain dealt with in the consolidated income statement and
equity of $400,000 on the net sterling denominated, non-derivative monetary items (excluding the sterling notes which are hedged) (2006:
loss of $108,000). A 5 per cent strengthening of the Indonesian rupiah against the US dollar would have had a negligible effect as respects
the net Indonesian rupiah denominated, non-derivative monetary items (2006: negligible).
Credit risk
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the group. The directors
consider that the group is not exposed to any major concentrations of credit risk. Deposits are made by the group only with banks with high
credit ratings. Substantially all sales of goods are made against documents. At the balance sheet date, no trade receivables were past their
due dates, nor were any impaired. The maximum credit risk exposures in respect of the group’s financial assets at 31 December 2007 and
2006 equal the amounts reported under the corresponding balance sheet headings.
Liquidity risk
Ultimate responsibility for liquidity risk management rests with the board of directors of the company, which has established an appropriate
framework for the management of the group’s short, medium and long-term funding and liquidity requirements. Within this framework, the
board continuously monitors forecast and actual cash flows and endeavours to maintain adequate liquidity in the form of cash reserves and
borrowing facilities while matching the maturity profiles of financial assets and liabilities. Undrawn facilities available to the group at balance
sheet date are disclosed in note 21.
77
Notes to the consolidated financial
statements continued
20. Financial instruments - continued
The board reviews the cash forecasting models for the operations of the plantations and compares these with the forecast outflows for debt
obligations and projected capital expenditure programmes for the plantations, applying sensitivities to take into account perceived major
uncertainties. In their review, the directors place the greatest emphasis on the cash flow of the first two years.
The following tables detail the contractual maturity of the group’s non-derivative financial liabilities. The tables have been drawn up based on
the undiscounted amounts of the group’s financial liabilities based on the earliest dates on which the group can be required to discharge
those liabilities. The table includes liabilities for both principal and interest.
2007
Bank loans
US dollar notes
Sterling notes
Trade and other payables
Obligations under finance leases
2006
Bank loans
US dollar notes
Sterling notes
Trade and other payables
Obligations under finance leases
Weighted
average
interest
rate
8.4%
8.0%
10.4%
10.0%
Weighted
average
interest
rate
9.0%
8.0%
10.4%
10.0%
Under
1 year
$’000
4,167
2,250
4,096
3,989
127
Between
1 and 2
years
$’000
11,344
2,250
4,034
–
143
Over 2
years
$’000
2,181
39,000
69,908
–
–
Totals
$’000
17,692
43,500
78,038
3,989
270
14,629
17,771
111,089
143,489
Under
1 year
$’000
23,526
2,250
2,864
5,732
313
34,685
Between
1 and 2
years
$’000
7,088
2,250
2,793
–
33
Over 2
years
$’000
14,047
41,250
50,415
–
–
Totals
$’000
44,661
45,750
56,072
5,732
346
12,164
105,712
152,561
At 31 December 2007, the group’s non-derivative financial assets (other than receivables) comprised cash and deposits of $34,216,000
(2006: $37,266,000) carrying a weighted average interest rate of 4.5 per cent (2006: 3.8 per cent) all having a maturity of under one year.
The following table details the contractual maturity of the group’s derivative financial liabilities. These arise under the cross currency interest
rate swap (“CCIRS”) described under “Fair value of financial instruments below”. The cash flows are settled gross and, therefore, the table
takes no account of sterling receipts under the CCIRS.
Under
1 year
$’000
4,570
–
Between
1 and 2
years
$’000
4,596
–
Over 2
years
$’000
70,474
–
Totals
$’000
79,640
–
Amount payable - 2007
Amount payable - 2006
78
20. Financial instruments - continued
Fair value of financial instruments
The table below provides an analysis of the book values and fair values of financial instruments, excluding receivables and trade creditors,
as at the balance sheet date.
Cash and deposits +
Debt - within one year +
Debt - after more than one year +
Finance leases o
US dollar notes o
Sterling notes o
Net debt
Cross currency interest rate swap o
+ bearing interest at floating rates
o bearing interest at fixed rates
2007
Book value
$’000
34,216
(3,000)
(12,917)
(238)
(29,389)
(40,713)
(52,041)
(1,268)
2007
Fair value
$’000
34,216
(3,000)
(12,917)
(238)
(28,050)
(42,248)
(52,237)
(1,268)
2006
Book value
$’000
37,266
(21,500)
(19,250)
(333)
(29,307)
(27,408)
(60,532)
–
2006
Fair value
$’000
37,266
(21,500)
(19,250)
(333)
(27,001)
(29,400)
(60,218)
–
(53,309)
(53,305)
(60,532)
(60,218)
The fair values of cash and deposits and bank debt approximate their carrying values since these carry interest at current market rates. The
fair value of the US dollar notes is based on the latest price at which the notes were traded prior to the balance sheet date. The fair value
of the sterling notes have been estimated by the directors, based on a yield comparision with UK government debt issues.
At 31 December 2007 the group had outstanding a contract for the forward purchase of £22 million and sale of $42.9 million maturing in
2015 (2006: nil) pursuant to the cross currency interest rate swap (“CCIRS”) entered into by the group to hedge the foreign currency
exposure of the group arising from the interest and principal repayment obligations of its 9.5 per cent guaranteed sterling notes 2015/17
(“sterling notes”). During the year, the hedge was effective in hedging the related sterling interest payment obligations on the sterling notes
up to and including 31 December 2015 and in providing the £22 million required to meet the principal repayment obligations.
The fair value of the CCIRS has been derived by a discounted cash flow analysis using quoted foreign forward exchange rates and yield
curves derived from quoted interest rates with maturities corresponding to the applicable cash flows. The valuation of the CCIRS at 31
December 2007 at fair value resulted in a loss of $1,268,000. A 50 basis points movement in the spread between the assumed yield curves
for pounds sterling and the US dollar would increase or decrease the valuation by approximately $600,000.
21. Bank loans
Bank loans
The bank loans are repayable as follows:
On demand or within one year
Between one and two years
Between three and five years
After five years
2007
$‘000
15,917
3,000
10,750
2,167
–
15,917
2006
$‘000
40,750
21,500
5,750
13,500
–
40,750
79
Notes to the consolidated financial
statements continued
21. Bank loans - continued
Amount due for settlement within 12 months (shown under current liabilities)
Amount due for settlement after 12 months
2007
$‘000
3,000
12,917
15,917
2006
$‘000
21,500
19,250
40,750
All bank loans are denominated in US dollars and are at floating rates, thus exposing the group to interest rate risk. The weighted average
interest rate in 2007 was 8.4 per cent (2006: 9.0 per cent). Bank loans of $15,417,000 (2006: $37,250,000) are secured on substantially
the whole of the assets and undertaking of PT REA Kaltim Plantations (amounting to $215 million - 2006: $200 million) and are the subject
of an unsecured guarantee by the company. The banks are entitled to have recourse to their security on usual banking terms.
At the balance sheet date, the group had undrawn bank facilities of $7.0 million (2006: $4.0 million).
22. Sterling notes
The sterling notes comprise £22 million nominal of 9.5 per cent guaranteed sterling notes 2015/17 issued by the company’s subsidiary,
REA Finance B.V.. Unless previously redeemed or purchased and cancelled by the issuer, the sterling notes are repayable in three equal
instalments commencing on 31 December 2015.
The repayment obligation in respect of the sterling notes of £22 million ($43.8 million) is hedged by a forward foreign exchange contract for
the purchase of £22 million and for the sale of $42.9 million and is carried in the balance sheet net of the unamortised balance of the note
issuance costs.
If a person or group of persons acting in concert obtains the right to exercise more than 50 per cent of the votes that may generally be cast
at a general meeting of the company, each holder of sterling notes has the right to require that the notes held by such holder be repaid at
101 per cent of par, plus any interest accrued thereon up to the date of completion of the repayment.
23. US dollar notes
The US dollar notes comprise US$30 million nominal of 7.5 per cent dollar notes 2012/14 of the company, and are stated net of the
unamortised balance of the note issuance costs. Unless previously redeemed or purchased and cancelled by the company, the US dollar
notes are redeemable in three equal annual instalments commencing on 31 December 2012.
Pursuant to a supplemental rights agreement dated 23 January 2006, between the company and the holders of $19 million nominal of US
dollar notes, the latter have the right, exercisable under certain limited circumstances, to require the company to purchase the US dollar notes
held by them at a price equal to the aggregate of the nominal amount of the notes being purchased and any interest accrued thereon up to
the date of completion of the purchase. Such circumstances include a material disposal of assets by the group or a person or group of
persons acting in concert obtaining the right to exercise more than 50 per cent of the votes that may generally be cast at a general meeting
of the company.
24. Deferred tax
Deferred tax liabilities
Deferred tax assets
Net position
80
2007
$’000
37,166
(5,817)
31,349
2006
$’000
33,244
(10,672)
22,572
24. Deferred tax - continued
Movement in the net deferred tax position during the year:
Beginning of year
Charge to income for the year
Charge to equity for the year
Exchange differences
Effect of change in tax rate - income statement
Effect of change in tax rate - equity
End of year
2007
$’000
2006
$’000
22,572
9,466
(649)
(476)
229
207
31,349
20,215
5,674
(1,934)
(1,383)
–
–
22,572
The following are the major deferred tax liabilities and assets recognised by the group and the movements thereon during the year and
preceding year:
Deferred tax liabilities
At 1 January 2006
Charge to income for the year
Charge to equity for the year
Exchange differences
At 31 December 2006
Charge to income for the year
Charge to equity for the year
Transferred from assets
Exchange differences
Effect of change in tax rate - income statement
Effect of change in tax rate - equity
At 31 December 2007
* included as income or recognised gains for reporting purposes but not yet charged to tax.
+ allowed for tax but not yet recognised for reporting purposes.
Deferred tax assets
At 1 January 2006
Charge to income for the year
Charge to equity for the year
Exchange differences
At 31 December 2006
Charge to income for the year
Charge to equity for the year
Transferred against liabilities
Exchange differences
Effect of change in tax rate - income statement
Effect of change in tax rate - equity
At 31 December 2007
* included as costs or recognised losses for reporting purposes but not yet allowed for tax.
Accelerated
tax depreciation
$’000
27,916
2,837
–
(6)
30,747
4,724
–
12
(495)
–
–
34,988
Lower tax
depreciation
$’000
2
25
–
–
27
(10)
–
–
1
–
–
18
Income *
Exchange
Total
$’000
1,964
500
–
33
2,497
1,758
–
(2,738)
–
–
–
1,517
Expenses*
$’000
2,685
902
–
398
3,985
(1,198)
–
(1,753)
(70)
(60)
–
904
losses +
$’000
–
–
–
–
–
92
–
608
11
(50)
–
661
Tax
losses
$’000
6,978
(3,264)
1,934
1,012
6,660
(1,684)
649
(365)
61
(219)
(207)
4,895
$’000
29,880
3,337
–
27
33,244
6,574
–
(2,118)
(484)
(50)
–
37,166
Total
$’000
9,665
(2,337)
1,934
1,410
10,672
(2,892)
649
(2,118)
(8)
(279)
(207)
5,817
81
Notes to the consolidated financial
statements continued
24. Deferred tax - continued
At the balance sheet date, the group had unused tax losses of $17.4 million (2006 - $22.2 million) available to be applied against future
profits. A deferred tax asset of $4,895,000 (2006 - $6,660,000) has been recognised in respect of these losses.
At the balance sheet date, the aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which
deferred tax liabilities have not been recognised was $4,750,000 (2006 - $2,548,000). No liability has been recognised in respect of these
differences because the group is in a position to control the reversal of the temporary differences and it is probable that such differences will
not significantly reverse in the foreseeable future.
The deferred tax asset in respect of tax losses assumes that losses for tax purposes incurred by the plantation companies in Indonesia may
be carried forward for five years.
The proposed reduction in UK corporation tax from 30% to 28% (for 2008/2009) has reduced the net amount of UK deferred tax assets
by $436,000 (2006: nil).
25. Obligations under finance leases
Minimum lease payments:
Amounts payable under finance leases
Within one year
In the second to fifth years inclusive
Less: Future finance charges
Present value of lease obligations
Representing:
Amounts payable under finance leases
Within one year
In the second to fifth years inclusive
Present value of lease obligations
Amount due for settlement within 12 months (shown under current liabilities)
Amount due for settlement after 12 months
2007
$’000
2006
$’000
127
143
270
32
238
111
127
238
111
127
238
344
34
378
45
333
301
32
333
301
32
333
The group leases certain items of plant and equipment under finance leases. The average lease term is 1 to 2 years (2006 - 1 to 2 years).
Interest rates are fixed at the contract rate. The average borrowing rate for the year was 10.0 per cent (2006 - 10.0 per cent). All leases
are on a fixed repayment basis and no arrangements have been entered into for contingent rental payments. Most lease obligations are
denominated in Indonesian rupiahs. Obligations under finance leases are secured by the lessor’s charge over the leased assets.
82
26. Other loans and payables
Retirement benefit obligations
Fair value provision for cross currency interest rate swap
Other loans and payables
The amounts are repayable as follows:
On demand or within one year (shown under current liabilities)
In the second year
In the third to fifth years inclusive
After five years
Amount due for settlement after 12 months
Amounts of liabilities by currency:
Sterling
Indonesian rupiahs
2007
$’000
3,800
1,268
141
5,209
2006
$’000
3,910
–
–
3,910
414
396
406
1,306
3,083
4,795
388
1,117
2,009
3,514
5,209
3,910
4,485
724
5,209
3,283
627
3,910
The directors estimate that the fair value of retirement benefit obligations and of other loans and payables approximates their carrying value.
The method for ascertaining the fair value of the cross currency interest rate swap is disclosed in note 20.
27. Trade and other payables
Trade purchases and ongoing costs
Other tax and social security
Accruals
Other payables
The average credit period taken on trade payables is 29 days (2006 - 59 days).
The directors estimate that the fair value of trade payables approximates their carrying value.
28. Share capital
Authorised (in pounds sterling):
14,500,000 - 9 per cent cumulative preference shares of £1 each (2006 - 14,500,000)
41,000,000 - ordinary shares of 25p each (2006 - 41,000,000)
2007
$’000
3,331
230
2,851
658
7,070
2006
$’000
5,173
397
2,309
559
8,438
2007
£’000
14,500
10,250
24,750
2006
£’000
14,500
10,250
24,750
83
Notes to the consolidated financial
statements continued
28. Share capital - continued
Issued and fully paid (in US dollars):
13,600,000 - 9 per cent cumulative preference shares of £1 each (2006 - 11,449,624)
32,573,856 - ordinary shares of 25p each (2006 – 31,073,856)
2007
$’000
24,069
14,230
38,299
2006
$’000
19,891
13,481
33,372
The preference shares entitle the holders thereof to payment, out of the profits of the company available for distribution and resolved to be
distributed, of a fixed cumulative preferential dividend of 9 per cent per annum on the nominal value of the shares and to repayment, on a
winding up of the company, of the amount paid up on the preference shares and any arrears of the fixed dividend in priority to any distribution
on the ordinary shares. Subject to the rights of the holders of preference shares, holders of ordinary shares are entitled to share equally with
each other in any dividend paid on the ordinary share capital and, on a winding up of the company, in any surplus assets available for
distribution among the members.
Changes in share capital:
•
•
•
on 9 May 2007, 1,500,000 ordinary shares were issued, fully paid, by way of a placing at 450p per share to Mirabaud Pereire
Nominees Limited (at close of business on 30 April 2007, the day the terms of the placing were fixed, the middle market share price
was 495p);
on 5 September 2007, 1,064,581 9 per cent cumulative preference shares were issued, fully paid, by way of a placing at £1.05 per
share; and
on 2 October 2007, 1,085,795 9 per cent cumulative preference shares were issued, credited as fully paid, at par to ordinary
shareholders by way of capitalisation of share premium account.
Details of a director’s share options are disclosed in the audited part of the directors’ remuneration report, as required by FRS 20 “Share
based payments”.
29. Capital reserves
At 1 January 2006
Issue of new ordinary shares
Issue of new preference shares
Expenses of issue
Exercise of warrants
Exercise of share options
Reduction of capital
Transfers
At 31 December 2006
Issue of new ordinary shares
Issue of new preference shares
Capitalisation issue of new preference shares
Expenses of issue
Release of special reserve
At 31 December 2007
84
Share
premium
account
$’000
4,519
17,498
268
(1,109)
3,012
66
(4,748)
–
19,506
12,731
108
(2,016)
(542)
–
29,787
Warrant
reserve
$’000
1,998
–
–
–
(1,998)
–
–
–
Capital
redemption
reserve
$’000
5,572
–
–
–
–
–
(5,572)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Special
reserve
$’000
–
–
–
–
–
–
10,320
(7,066)
3,254
–
–
–
–
(3,254)
–
29. Capital reserves - continued
Pursuant to a reduction of capital confirmed by the High Court and effective on 17 May 2006, the company’s capital redemption reserve
was cancelled and the amount standing to the credit of the company’s share premium account was reduced by £2,760,334 ($4,747,774);
as a result the sum of £6,000,000 ($10,320,000) was credited to a special reserve. Since that date, the company has issued fresh capital
of more than £1,891,550 ($3,254,000) in 2007 and of £4,108,450 ($7,066,000) in 2006 and, as permitted under the terms of the
undertaking given to the High Court, has transferred an equivalent sum from special reserve to the company’s profit and loss account.
30. Translation reserve
At 1 January 2006
Exchange difference arising on translation of overseas operations during the year
At 31 December 2006
Exchange difference arising on translation of overseas operations during the year
Fair value loss on cash flow hedge
At 31 December 2007
31. Retained earnings
Beginning of year
Profit for the year
Ordinary dividend paid
Transfer from special reserve
Share based payment - deferred tax credit taken directly to equity
End of year
32. Minority interest
Beginning of year
Share of profit after taxation
Proceeds of issue of new share capital in subsidiaries to minority shareholders
Liquidation distribution to preference shareholders in a subsidiary
Exchange translation differences
Acquisition of 12.3 per cent of issued ordinary share capital of Makassar Investments Limited
End of year
Hedging
reserve
$’000
–
–
–
–
(506)
(506)
Other
reserve
$’000
(10,076)
1,186
(8,890)
(426)
–
(9,316)
2007
$’000
57,679
29,453
(1,279)
3,254
385
89,492
2007
$’000
600
278
–
–
(1)
–
877
Total
$’000
(10,076)
1,186
(8,890)
(426)
(506)
(9,822)
2006
$’000
37,269
11,546
–
7,066
1,798
57,679
2006
$’000
11,190
523
215
(4,239)
–
(7,089)
600
85
Notes to the consolidated financial
statements continued
33. Reconciliation of operating profit to operating cash flows
Operating profit
Depreciation of property, plant and equipment
Amortisation of prepaid operating lease rentals
Amortisation of sterling and US dollar note issue expenses
Biological gain
Loss on disposal of property, plant and equipment
Operating cash flows before movements in working capital
Increase in inventories
Decrease in receivables
Decrease in payables
Exchange translation differences
Cash generated by operations
Taxes paid
Interest paid
Net cash from operating activities
2007
$’000
49,386
1,846
144
242
(8,030)
6
43,594
(8,133)
1,283
(583)
(1,330)
34,831
(3,165)
(3,490)
28,176
2006
$’000
20,772
1,569
92
57
(8,700)
–
13,790
(1,415)
1,008
(2,707)
(590)
10,086
(222)
(2,756)
7,108
Additions to property, plant and equipment during the year amounting to $171,000 (2006 - $nil) were financed by new finance leases.
Cash generated by operations in 2006 of US$10,086,000 is stated after reflecting a payment of US$6,000,000 made in February 2006
as a part of a litigation settlement which was accrued as at 31 December 2005.
34. Movement in net borrowings
Change in net borrowings resulting from cash flows:
(Decrease) / increase in cash and cash equivalents
Decrease / (increase) in borrowings
Issue of US dollar notes less amortised expenses
Issue of US dollar notes for the acquisition of minority interest in a subsidiary
Issue of sterling notes less amortised expenses
Lease repayments
New leases
Currency translation differences
Net borrowings at beginning of year
Net borrowings at end of year
35. Pensions
2007
$’000
(3,601)
24,833
21,232
(94)
–
(13,587)
268
(171)
7,648
843
(60,532)
(52,041)
2006
$’000
27,239
(2,750)
24,489
(5,442)
(19,000)
(27,813)
680
–
(27,086)
1,783
(35,229)
(60,532)
The company is the principal employer of the R.E.A. Pension Scheme (the “Scheme”) and a subsidiary company is a participating employer.
The Scheme is a multi-employer contributory defined benefit scheme with assets held in a trustee-administered fund, which has participating
employers outside the group. The Scheme is closed to new members.
86
35. Pensions - continued
As the Scheme is a multi-employer scheme, in which the employer is unable to identify its share of the underlying assets and liabilities
(because there is no segregation of the assets) and does not prepare valuations on an IAS 19 basis, the group accounts for the Scheme as
if it were a defined contribution scheme.
A non-IAS 19 valuation of the Scheme was last prepared, using the attained age method, as at 31 December 2005. This method was
adopted in the previous valuation, as at 1 January 2003, as this was considered the appropriate method of calculating future service benefits
as the Scheme is closed to new members. At 31 December 2005 the Scheme showed an overall shortfall in assets (deficit), when measured
against the Scheme’s technical provisions, of £3,549,000. The technical provisions were calculated using assumptions of an annual
investment return of 6.1 per cent pre-retirement and 4.7 per cent post-retirement, an annual increase in pensionable salaries of 3.75 per
cent and an annual increase in present and future pensions of 2.75 per cent in respect of accruals to 31 December 2005 and 2.5 per cent
thereafter. The rate of increase in the retail price index was assumed to be 2.75 per cent. It was further assumed that both non-retired and
retired members’ mortality would reflect PA92 tables with short cohort improvements and that members would take the maximum cash sums
permitted on retirement from April 2006. Had the scheme been valued at 31 December 2005 using the projected unit method and the same
assumptions, the overall deficit would have been similar. The next actuarial valuation is due at 31 December 2008.
The Scheme has agreed a statement of funding principles with the principal employer and has also agreed a schedule of contributions with
the principal and participating employers covering normal contributions which are payable at a rate to cover future service benefits under the
Scheme. The Scheme has further agreed a recovery plan with the employers which sets out the basis for the recovery of the deficit shown
by the 31 December 2005 valuation through the payment of quarterly additional contributions over the period from 1 January 2007 to 31
December 2015, after taking account of the additional contributions paid in 2006 under the 1 January 2003 valuation.
The normal contributions paid by the group in 2007 were £63,000 - $128,000 (2006: £51,000 - $95,000) and represented 24.9 per cent
(2006: 20.9 per cent) of pensionable salaries. From 1 January 2008 the contribution rate will remain at 24.9 per cent. The additional
contribution applicable to the group for 2007 was £206,000 - $414,000 (2006: £148,800 - $277,000) and in 2008 the additional annual
contribution will rise to £212,000 - $422,000. The total for the period from 2009 to 2015 is £1,656,000 - $3,295,000. A liability of
£1,546,000 - $3,077,000 (2006: £1,675,000 - $3,282,000) for these additional contributions adjusted for the time value of money and
an equal expense in profit or loss has been recognised within retirement benefit obligations (see note 26).
The company has a contingent liability for additional contributions payable by other (non-group) employers in the Scheme; such liability will
only arise if other (non-group) employers do not pay their contributions. There is no expectation of this at the present time, and, therefore,
no provision has been made.
36. Related party transactions
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”. Further information about the remuneration of, and fees paid in respect of services
provided by, individual directors is provided in the audited part of the “Directors’ remuneration report”.
87
Notes to the consolidated financial
statements continued
36. Related party transactions - continued
Short term benefits
Post employment benefits
Other long term benefits
Termination benefits
Share-based payments
37. Rates of exchange
Indonesia rupiah to US dollar
US dollar to pound sterling
38. Post balance sheet events
2007
$’000
1,083
98
–
–
–
1,181
2006
Closing
9,141
1.96
2006
$’000
1,125
73
–
–
–
1,198
2006
Average
9,020
1.86
2007
Closing
2007
Average
9,419
1.99
9,166
2.01
An interim dividend of 1p per ordinary share in lieu of final in respect of the year ended 31 December 2007 was paid on 25 January 2008.
In accordance with IAS10 “Events after the Balance Sheet Date” this dividend has not been included in these financial statements.
88
Auditors’ report (company)
Independent auditors’ report to the members of
R.E.A. Holdings plc
and regulatory requirements and International Standards
on Auditing (UK and Ireland).
We have audited the parent company financial
We report to you our opinion as to whether the parent
statements of R.E.A. Holdings plc for the year ended 31
company financial statements give a true and fair view
December 2007 which comprise the balance sheet, the
and whether the parent company financial statements
movement in total shareholders’ funds, the statement of
have been properly prepared in accordance with the
total recognised gains and losses, the accounting
Companies Act 1985. We also report to you whether in
policies and the related notes (i) to (xiv). These parent
our opinion the directors' report is consistent with the
company financial statements have been prepared under
parent company financial statements. The information
the accounting policies set out therein.
given in the directors' report includes that specific
information presented in the review of the group that is
We have reported separately on the group financial
cross referred from the principal activities and business
statements of R.E.A. Holdings plc for the year ended 31
review section of the directors' report.
December 2007 and on the information in the directors'
remuneration report that is described as having been
In addition we report to you if, in our opinion, the
audited.
company has not kept proper accounting records, if we
have not received all the information and explanations
This report is made solely to the company’s members, as
we require for our audit, or if information specified by law
a body, in accordance with section 235 of the
regarding directors' remuneration and other transactions
Companies Act 1985. Our audit work has been
is not disclosed.
undertaken so that we might state to the company’s
members those matters we are required to state to them
We read the other information contained in the annual
in an auditors’ report and for no other purpose. To the
report and consider whether it is consistent with the
fullest extent permitted by law, we do not accept or
audited parent company financial statements. The other
assume responsibility to anyone other than the company
information comprises only the directors' report, the
and the company’s members as a body, for our audit
chairman's statement and the review of the group. We
work, for this report, or for the opinions we have formed.
consider the implications for our report if we become
aware of any apparent misstatements or material
Respective responsibilities of directors and auditors
inconsistencies with the parent company financial
statements. Our responsibilities do not extend to any
The directors' responsibilities for preparing the annual
further information outside the annual report.
report and the parent company financial statements in
accordance with applicable law and United Kingdom
Basis of audit opinion
Accounting Standards (United Kingdom Generally
Accepted Accounting Practice) are set out in the
We conducted our audit in accordance with International
statement of directors' responsibilities.
Standards on Auditing (UK and Ireland) issued by the
Auditing Practices Board. An audit includes examination,
Our responsibility is to audit the parent company
on a test basis, of evidence relevant to the amounts and
financial statements in accordance with relevant legal
disclosures in the parent company financial statements.
89
Auditors’ report (company) continued
It also includes an assessment of the significant
estimates and judgments made by the directors in the
preparation of the parent company financial statements,
and of whether the accounting policies are appropriate
to the company's circumstances, consistently applied
and adequately disclosed.
We planned and performed our audit so as to obtain all
the information and explanations which we considered
necessary in order to provide us with sufficient evidence
to give reasonable assurance that the parent company
financial statements are free from material misstatement,
whether caused by fraud or other irregularity or error. In
forming our opinion we also evaluated the overall
adequacy of the presentation of information in the parent
company financial statements.
Opinion
In our opinion:
•
the parent company financial statements give a true
and fair view, in accordance with United Kingdom
Generally Accepted Accounting Practice, of the
state of the company's affairs as at 31 December
2007;
•
•
the parent company financial statements have been
properly prepared
in accordance with
the
Companies Act 1985; and
the information given in the directors' report is
consistent with the parent company financial
statements.
DELOITTE & TOUCHE LLP
Chartered Accountants and Registered Auditors
London, England
24 April 2008
90
Company balance sheet
as at 31 December 2007
Fixed and non-current assets
Investments
Tangible fixed assets
Deferred tax asset
Current assets
Debtors
Cash
Total current assets
Creditors: amounts falling due within one year
Net current assets
Note
(i)
(ii)
(vi)
(iii)
(iv)
2007
£’000
47,596
112
2,390
50,098
842
11,419
12,261
(1,084)
11,177
2006
£’000
46,537
–
2,728
49,265
5,130
3,111
8,241
(935)
7,306
Total assets less current liabilities
61,275
56.571
Creditors: amounts falling due after more than one year
US dollar notes
Provision for liabilities and charges
Net assets
(v)
(vi)
(14,767)
(670)
(14,951)
(1,148)
45,838
40,472
Capital and reserves
Called up share capital
Share premium account
Special reserve (non-distributable)
Exchange reserve
Profit and loss account
Total shareholders’ funds
(vii)
(viii)
(viii)
(viii)
(viii)
21,743
16,005
–
213
7,877
45,838
19,218
10,928
1,892
536
7,898
40,472
Approved by the board on 24 April 2008 and signed on behalf of the board.
RICHARD M ROBINOW
Chairman
91
Movement in total shareholders’
funds
for the year ended 31 December 2007
Total recognised (losses) / gains for the year
Dividends to preference shareholders
Dividends to ordinary shareholders
Issue of new ordinary shares by way of placings and open offer
Issue of new preference shares by way of placings
Issue of new ordinary shares on exercise of a director’s share option
Issue of new ordinary shares on exercise of warrants
Issue costs of ordinary shares, preference shares and debt securities
Shareholders' funds at beginning of year
Shareholders' funds at end of year
2007
£’000
2006
£’000
(472)
(1,127)
(637)
6,750
1,118
–
–
(266)
5,366
40,472
45,838
3,515
(965)
–
10,920
3,150
82
876
(632)
16,946
23,526
40,472
Statement of total recognised gains and losses
for the year ended 31 December 2007
(Loss) / profit for the year
Share based payment - deferred tax credit
Currency translation (loss) / gain taken direct to reserves
2007
£’000
(340)
191
(323)
(472)
2006
£’000
2,012
967
536
3,515
92
Accounting policies (company)
Accounting convention
Taxation
Current tax including UK corporation tax and foreign tax is
provided at amounts expected to be paid (or recovered)
using the tax rates and laws that have been enacted or
substantially enacted by the balance sheet date. Deferred
tax is calculated on the liability method. Deferred tax is
provided on a non discounted basis on timing and other
differences which are expected to reverse, at the rate of
tax likely to be in force at the time of reversal. Deferred
tax is not provided on timing differences which, in the
opinion of the directors, will probably not reverse. No
deferred tax has been provided in respect of any future
remittance of earnings of overseas subsidiaries where no
commitment has been made to remit such earnings.
Deferred tax assets are only recognised to the extent that
it is regarded as more likely than not that there will be
suitable taxable profits from which the future reversal of
timing differences can be deducted.
Tangible fixed assets
Tangible fixed assets are stated at cost, net of depreciation
and provision for impairment. Depreciation is provided on
all tangible fixed assets at rates calculated to write off the
cost, less estimated residual value, of each asset on a
straight line basis over its expected useful life as follows:
land and buildings (short leasehold) - 10 years, and
fixtures and fittings - 5 years.
Separate financial statements of R.E.A. Holdings plc (the
“company”) are required by the Companies Act 1985; as
permitted by that act they have been prepared in
accordance with generally accepted accounting practice in
the United Kingdom (“UK GAAP”). The principal
accounting policies have been applied consistently and are
unchanged from the previous year.
The accompanying financial statements have been
prepared under the historical cost convention.
By virtue of section 230 of the Companies Act 1985, the
company is exempted from presenting a profit and loss
account. Equally, no cash flow statement has been
prepared, as permitted by FRS 1 (revised 1996) “Cash
flow statements”.
Investments
The company’s investments in its subsidiaries are stated at
cost less any provision for impairment. Impairment
provisions are charged to the profit and loss account. Only
dividends declared by subsidiaries are credited to the
company's profit and loss account.
Foreign exchange
Transactions in foreign currencies are recorded at the rates
of exchange at the dates of the transactions. Monetary
assets and liabilities denominated in foreign currencies at
the balance sheet date are reported at the rates of
exchange prevailing at that date. Differences arising on
the translation of foreign currency borrowings have been
offset against those arising on an equivalent amount of
investment in the equity of, or loans to, foreign subsidiaries
and taken to reserves, net of any related taxation. All other
exchange differences are included in the profit and loss
account.
93
Notes to the company financial
statements
(i) Investments
Shares in subsidiaries
Loans to subsidiaries
Beginning of year
Additions to shares in and loans to subsidiaries
Exchange translation difference arising on foreign currency hedge
End of year
2007
£’000
24,139
23,457
47,596
2006
£’000
24,250
22,287
46,537
£’000
46,537
1,289
(230)
47,596
The principal subsidiaries at the year end, together with their countries of incorporation, are listed below. Details of dormant subsidiaries
and UK subsidiary sub-holding companies are not shown.
Subsidiary
Activity
Makassar Investments Limited (Jersey)
Sub holding company
PT REA Kaltim Plantations (Indonesia)
Plantation agriculture
PT Sasana Yudha Bhakti (Indonesia)
Plantation agriculture
PT Kartanegara Kumala Sakti (Indonesia)
Plantation agriculture
PT Cipta Davia Mandiri (Indonesia)
Plantation agriculture
REA Finance B.V. (Netherlands)
Group finance
R.E.A. Services Limited (England and Wales)
Group services
Class of
shares
Percentage
owned
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
100
95
95
95
100
100
The entire shareholdings in Makassar Investments Limited, R.E.A. Services Limited and REA Finance B.V. are held direct by the company.
All other shareholdings are held by subsidiaries.
(ii) Tangible fixed assets
Cost:
Beginning of year
Additions
End of year
Accumulated depreciation:
Beginning of year
Charge for year
End of year
Carrying amount:
End of year
Beginning of year
94
Land and buildings
(short leasehold)
£’000
Fixtures and
fittings
£‘000
–
85
85
–
9
9
76
–
–
45
45
–
9
9
36
–
Total
£‘000
–
130
130
–
18
18
112
–
(iii) Debtors
Trade debtors
Amount owing by group undertakings
Other debtors
Prepayments and accrued income
(iv) Creditors: amounts falling due within one year
Trade creditors
Amount owing to group undertakings
Other taxation and social security
Other creditors
Accruals
(v) Creditors: amounts falling due after more than one year
US dollar notes:
Amounts due between two and five years
Amounts due after five years
2007
£’000
5
761
22
54
842
2007
£’000
22
285
–
12
765
1,084
2007
£’000
4,917
9,850
14,767
2006
£’000
–
5,025
66
39
5,130
2006
£’000
–
233
112
23
567
935
2006
£’000
–
14,951
14,951
The US dollar notes comprise US$30 million (2006 - US$30 million) nominal of 7.5 per cent dollar notes 2012/14 issued by the company
(“US dollar notes”) and are stated net of the unamortised balance of the issuance costs. Unless previously redeemed or purchased and
cancelled by the company, the notes are redeemable in three equal annual instalments commencing on 31 December 2012.
As disclosed in note (ix), the company’s US dollar notes are designated as a hedge against the exchange translation exposure in respect of
an equivalent amount of the company’s investment in subsidiaries whose functional currency is the US dollar.
Pursuant to a supplemental rights agreement dated 23 January 2006 between the company and holders of $19 million nominal of US dollar
notes, those holders have the right, exercisable under certain limited circumstances, to require the company to purchase the US dollar notes
held by them at a price equal to the aggregate of the nominal amount of the notes being purchased and any interest accrued thereon up to
the date of completion of the purchase. Such circumstances include a material disposal of assets by the group or a person or group of
persons acting in concert obtaining the right to exercise more than 50 per cent of the votes that may generally be cast at a general meeting
of the company.
(vi) Deferred tax asset and provision for liabilities and charges
Deferred tax:
Beginning of year
Net amount credited to profit and loss account
Net amount debited / (credited) to reserves
End of year
2007
£’000
(1,580)
(350)
210
(1,720)
2006
£’000
105
(327)
(1,358)
(1,580)
95
Notes to the company financial
statements continued
(vi) Deferred tax asset and provision for liabilities and charges - continued
Disclosed in provisions for liabilities and charges
Disclosed in non-current assets
Net deferred tax asset at end of year
The provision for deferred tax is made up as follows:
Timing differences
Tax losses available
Undiscounted deferred tax
(vii) Called up share capital
Authorised:
14,500,000 - 9 per cent cumulative preference shares of £1 each (2006 - 14,500,000)
41,000,000 - ordinary shares of 25p each (2006 - 41,000,000)
Called-up and fully paid:
13,600,000 - 9 per cent cumulative preference shares of £1 each (2006 - 11,449,624)
32,573,856 - ordinary shares of 25p each (2006 – 31,073,856)
2007
£’000
670
(2,390)
(1,720)
670
(2,390)
(1,720)
2007
£’000
14,500
10,250
24,750
13,600
8,143
21,743
2006
£’000
1,148
(2,728)
(1,580)
1,148
(2,728)
(1,580)
2006
£’000
14,500
10,250
24,750
11,450
7,768
19,218
The preference shares entitle the holders thereof to payment, out of the profits of the company available for distribution and resolved to be
distributed, of a fixed cumulative preferential dividend of 9 per cent per annum on the nominal value of the shares and to repayment, on a
winding up of the company, of the amount paid up on the preference shares and any arrears of the fixed dividend in priority to any distribution
on the ordinary shares. Subject to the rights of the holders of preference shares, holders of ordinary shares are entitled to share equally with
each other in any dividend paid on the ordinary share capital and, on a winding up of the company, in any surplus assets available for
distribution among the members.
Changes in share capital:
•
•
•
on 9 May 2007, 1,500,000 ordinary shares were issued, fully paid, by way of a placing at 450p per share to Mirabaud Pereire
Nominees Limited (at close of business on 30 April 2007, the day that the terms of the placing were fixed, the middle market share
price was 495p);
on 5 September 2007, 1,064,581 9 per cent preference shares were issued, fully paid, by way of a placing at £1.05 per share; and
on 2 October 2007, 1,085,795 9 per cent preference shares were issued, credited as fully paid, at par to ordinary shareholders by way
of capitalisation of share premium account.
Details of a director’s share options are disclosed in the audited part of the directors’ remuneration report, as required by FRS 20 “Share
based payments”.
96
(viii) Movement in reserves
Beginning of year
Dividends to preference shareholders
Dividends to ordinary shareholders
Issue of new ordinary shares for cash
Issue of new preference shares for cash
Capitalisation issue of new preference shares
Expenses of issue
Release of special reserve
Recognised losses for the year
End of year
Share
premium
account
£’000
10,928
–
–
6,375
53
(1,085)
(266)
–
–
16,005
Special
reserve
Exchange
reserve
£’000
1,892
–
–
–
–
–
–
(1,892)
–
–
£’000
536
–
–
–
–
–
–
–
(323)
213
Profit
and loss
account
£’000
7,898
(1,127)
(637)
–
–
–
–
1,892
(149)
7,877
As permitted by section 230 of the Companies Act 1985, a separate profit and loss account dealing with the results of the company has
not been presented. The loss before dividends recognised in the company's profit and loss account is £340,000 (2006: profit £2,012,000).
Pursuant to a reduction of capital confirmed by the High Court and effective on 17 May 2006, the company’s capital redemption reserve
was cancelled and the amount standing to the credit of the company’s share premium account was reduced by £2,760,334; as a result the
sum of £6,000,000 was credited to a special reserve. Since that date, the company has issued fresh capital of more than £1,891,550 in
2007 and of £4,108,450 in 2006 and, as permitted under the terms of the undertaking given to the High Court, has correspondingly
released the special reserve to the company’s profit and loss account.
(ix) Financial instruments and risks
Financial instruments
The company’s financial instruments comprise borrowings, cash and liquid resources and in addition certain debtors and trade creditors
that arise from its operations. The main purpose of these financial instruments is to raise finance for, and facilitate the conduct of, the
company’s operations. The table below provides an analysis of the book and fair values of financial instruments excluding debtors and
creditors at balance sheet date.
Cash and deposits
US dollar notes
Net debt
2007
Book value
£’000
11,419
(14,767)
2007
Fair value
£’000
11,419
(14,095)
2006
Book value
£’000
3,111
(14,951)
2006
Fair value
£’000
3,111
(13,776)
(3,348)
(2,676)
(11,840)
(10,665)
The fair value of the US dollar notes reflects the last price at which transactions in those notes were effected prior to the year end.
97
Notes to the company financial
statements continued
Risks
The main risks arising from the company’s financial instruments are liquidity risk, interest rate risk and foreign currency risk. The board
reviews and agrees policies for managing each of these risks. These policies have remained unchanged since the beginning of the year.
It is and was throughout the year, the company’s policy that no trading in financial instruments be undertaken. On occasions, the
company enters into short term contracts for the sale of crude palm oil on behalf of its subsidiaries.
The company finances its operations through a mixture of share capital, retained profits, borrowings in US dollars at fixed rates and credit
from suppliers. At 31 December 2007, the company had outstanding US$30 million of 7.5 per cent dollar notes 2012/14. In
accordance with a decision of the board of the company at the time of issue of the first tranche of these notes, such notes are treated
as a currency hedge against the company’s long term loans to subsidiaries (which are denominated in US dollars) and the additional
investment in Makassar Investments Limited that was acquired during 2006 for a consideration of US$19 million. The company’s policy
towards currency risk is not to cover the long-term exposure in respect of its investment in subsidiaries (whose operations are mainly
conducted in US dollars) to the extent that this exposure relates to the component of investment that is financed with sterling
denominated equity.
A limited degree of interest rate risk is accepted. A substantial proportion of the company’s financial instruments at 31 December 2007
carried interest at fixed rates and on the basis of the company’s analysis, it is estimated that a rise of one percentage point in all interest
rates would give rise to an increase of approximately £115,000 (2006: £31,000) in the company’s interest revenues in its profit and
loss account.
(x) Pensions
The company is the principal employer of the R.E.A. Pension Scheme (the “Scheme”) and a subsidiary company is a participating employer.
The company has no active members of the Scheme, which is a multi-employer contributory defined benefit scheme with assets held in a
trustee-administered fund and has participating employers outside the group. The Scheme is closed to new members.
As the Scheme is a multi-employer scheme, in which the participating employer is unable to identify its share of the underlying assets and
liabilities (because there is no segregation of the assets), pension costs are being accounted as if the Scheme were a defined contribution
scheme. The subsidiary company that is a participating employer and other participating employers in the Scheme have entered into an
agreement with the Scheme to make special contributions to the Scheme to cover any deficit. The company made no payments to the
Scheme in 2007 (2006: nil). The company has a contingent liability for special contributions payable by other participating employers in the
Scheme; such liability will only arise if such other participating employers do not pay their contributions. There is no expectation of this at the
present time, and, therefore, no provision has been made.
A non-FRS 17 valuation of the scheme was last prepared, using the attained age method, as at 31 December 2005. This is considered to
be the most appropriate method of calculating contributions to cover future service benefits at 31 December 2005. Had the scheme been
valued at 31 December 2005 using the projected unit method and the same other assumptions, the overall deficit would have been similar.
The principal actuarial assumptions adopted in this valuation were annual pre-retirement and post-retirement returns of respectively 6.1 per
cent and 4.7 per cent, an annual increase in pensionable salaries of 3.75 per cent and an annual increase in present and future pensions
and in the retail price index of 2.75 per cent. The overall valuation deficit applicable to all participants was £3,549,000 which is being funded
by special contributions by participating employers over the period to 31 December 2015. The next actuarial valuation is due at 31 December
2008.
98
(xi) Related party transactions
Aggregate directors’ remuneration:
Salaries and fees
Benefits
Annual bonus
Gains on exercise of share options
2007
£’000
2006
£’000
466
33
40
–
539
513
36
60
163
772
During 2007 and 2006, there were service arrangements with companies connected with certain directors as detailed under “Directors’
remuneration” in the “Directors’ remuneration report”.
(xii) Rates of exchange
See note 37 to the consolidated financial statements.
(xiii) Commitments
The company has guaranteed a principal obligation of £7,747,000 (2006: £20,790,000) in respect of bank loans to PT REA Kaltim
Plantations, a principal obligation of £251,000 (2006: nil) in respect of bank loans to PT Sasana Yudha Bhakti and a principal obligation of
£22 million (2006: £15 million) relating to the outstanding 9.5 per cent guaranteed sterling notes 2015/17 issued by REA Finance B.V.. In
each case, the company has also guaranteed all interest payments arising. The company’s contingent liability for pension contributions is
disclosed in note (x) above.
(xiv) Post balance sheet events
An interim dividend of 1p per ordinary share in lieu of final in respect of the year ended 31 December 2007 was paid on 25 January 2008.
In accordance with FRS 21 “Events after the balance sheet date” this dividend has not been reflected in the financial statements.
99
Notice of annual general meeting
This notice is important and requires your immediate
attention. If you are in any doubt as to what action to take,
you should consult your stockbroker, solicitor, accountant
or other appropriate independent professional adviser
authorised under the Financial Services and Markets Act
2000. If you have sold or otherwise transferred all your
shares in R.E.A. Holdings plc, please forward this
document (including the form of proxy contained herein)
to the person through whom the sale or transfer was
effected, for transmission to the purchaser or transferee.
conclusion of the next general meeting at which accounts
are laid before the company and to authorise the directors
to fix the remuneration of the auditors.
As special business
To consider and if thought fit to pass the following resolutions of
which resolutions 8 to 10 will be proposed as ordinary
resolutions and resolution 11 will be proposed as a special
resolution:
Notice is hereby given that the forty eighth annual general
meeting of the company will be held at the London office of
Ashurst LLP at Broadwalk House, 5 Appold Street, London
EC2A 2HA on 6 June 2008 at 10.00 am for the following
purposes:
8 That the authorised share capital of the company be and is
hereby increased from £24,750,000 to £27,750,000 by the
creation of 3,000,000 9 per cent cumulative preference
shares of £1 each ranking pari passu with the existing 9 per
cent cumulative shares of £1 each.
As ordinary business
9 That
1 To receive the company’s annual report for the year ended
31 December 2007.
2 To approve the directors’ remuneration report for the year
ended 31 December 2007.
3 To re-elect as a director Mr R M Robinow, who, in
accordance with the articles of association and having been
a non-executive director for more than nine years, retires by
rotation and as required by the Combined Code on
Corporate Governance.
4 To re-elect as a director Mr J M Green-Armytage, who, in
accordance with the articles of association and having been
a non-executive director for more than nine years, retires by
rotation and as required by the Combined Code on
Corporate Governance.
5 To re-elect as a director Mr J R M Keatley, who, having been
a non-executive director for more than nine years, retires as
required by the Combined Code on Corporate Governance.
6 To re-elect as a director Mr L E C Letts, who, having been a
non-executive director for more than nine years, retires as
required by the Combined Code on Corporate Governance.
(i)
the directors of the company be and are hereby
generally and unconditionally authorised in accordance
with section 80 of the Companies Act 1985 to exercise
all the powers of the company to allot relevant securities
(as defined in sub-section (2) of section 80 of the
Companies Act 1985) other than 9 per cent cumulative
preference shares up to an aggregate nominal amount
of £2,106,536, such authority to expire at the
conclusion of the annual general meeting to be held in
2009; and
(ii)
the authority conferred on the directors pursuant to
paragraph (i) above includes the power to make an offer
or agreement which would or might require relevant
securities to be allotted after the authority has expired.
10 That
(i)
the directors of the company be and are hereby further
generally and unconditionally authorised in accordance
with section 80 of the Companies Act 1985 to exercise
all the powers of the company to allot 9 per cent
cumulative preference shares up to an aggregate
nominal amount of £3,900,000, such authority to expire
at the conclusion of the annual general meeting to be
held in 2009; and
7 To re-appoint Deloitte & Touche LLP, chartered accountants,
as auditors of the company to hold office until the
(ii)
the authority conferred on the directors pursuant to
paragraph (i) above includes the power to make an offer
100
or agreement which would or might require 9 per cent
cumulative preference shares to be allotted after the
authority has expired.
11 That
(i)
the directors of the company be and are hereby
empowered in accordance with section 95 of the
Companies Act 1985 to allot equity securities (as
defined in sub-section (2) of section 94 of the
Companies Act 1985) pursuant to the authority
conferred on them by resolution 9 set out in the notice
of the annual general meeting of the company to be
held in 2008, as if sub-section (1) of section 89 of the
Companies Act 1985 did not apply to the allotment,
such power to expire at the conclusion of the annual
general meeting of the company to be held in 2009,
provided that this power is limited to:
(a) the allotment of equity securities in connection with
a rights issue or open offer in favour of the holders
of ordinary shares in the capital of the company
(“ordinary shares”), where the equity securities are
proportionate (as nearly as practicable) to the
respective numbers of ordinary shares held by such
holders, subject only to such exclusions or other
arrangements as the directors consider necessary
or expedient to deal with fractional entitlements or
legal or practical problems arising in, or pursuant to,
the laws of any territory or the requirements of any
regulatory body or stock exchange in any territory;
and
(b) the allotment (otherwise than pursuant to (a) above)
of equity securities up to an aggregate nominal
value of £407,173; and
(ii)
the power conferred on the directors by paragraph (i)
above includes the power to make an offer or
agreement which would or might require equity
securities to be allotted after the power has expired.
By order of the board
R.E.A. SERVICES LIMITED
Secretary
24 April 2008
Notes
The sections of the accompanying “Directors’ report”
entitled “Increase in share capital”, “Power to issue share
capital” and “Recommendation” contain information
regarding, and recommendations by the board of the
company as to voting on, the resolutions to be considered
as special business.
A member of the company entitled to attend and vote at the
meeting may appoint one or more proxies to exercise all or any of
his or her rights to attend, speak and vote at the meeting provided
that each proxy is appointed to exercise the rights attaching to (a)
different share(s) held by the member. A proxy need not be a
member. To appoint more than one proxy please photocopy the
proxy form provided. The instrument appointing a proxy must be
deposited at the registered office of the company not less than
forty-eight hours before the time appointed for holding the
meeting. The appointment of a proxy will not prevent a member
from attending and voting at the meeting should he or she wish to
do so.
The right to appoint a proxy does not apply to persons whose
shares are held on their behalf by another person and who have
been nominated to receive communications from the company in
accordance with section 146 of the Companies Act 2006
(“nominated persons”). Nominated persons may have a right under
an agreement with the registered shareholder who holds the
shares on their behalf to be appointed (or to have someone else
appointed) as a proxy. Alternatively, if nominated persons do not
have such a right, or do not wish to exercise it, they may have the
right under such an agreement to give instructions to the person
holding the shares as to the exercise of voting rights.
In order to facilitate voting by corporate representatives at the
meeting, arrangements will be put in place at the meeting so that
(i) if a corporate shareholder has appointed the chairman of the
meeting as its corporate representative with instructions to vote on
a poll in accordance with the directions of all of the other corporate
representatives for that shareholder at the meeting, then on a poll
those corporate representatives will give voting directions to the
chairman and the chairman will vote (or withhold a vote) as
corporate representative in accordance with those directions; and
(ii) if more than one corporate representative for the same
corporate shareholder attends the meeting but the corporate
shareholder has not appointed the chairman of the meeting as its
corporate representative, a designated corporate representative
101
Notice of annual general meeting continued
will be nominated, from those corporate representatives who
attend, who will vote on a poll and the other corporate
representatives will give voting directions to that designated
corporate representative.
The company, pursuant to Regulation 41(1) of the Uncertificated
Securities Regulations 2001, specifies that in relation to securities
held in dematerialised form only those holders of shares registered
in the register of members of the company at 6.00 pm on 4 June
2008 shall be entitled to attend and vote at the meeting in respect
of the number of shares registered in their name at that time.
Changes to entries specified after 6.00 pm on 4 June 2008 shall
be disregarded in determining the rights of any person to attend
and vote at the meeting.
Copies of letters setting out the terms and conditions of
appointment of non-executive directors are available for inspection
at the company's registered office during normal business hours
and will be available for inspection at the place of the annual
general meeting for at least 15 minutes prior to and during the
meeting.
As at the date of this notice, the issued share capital of the
company comprises 32,573,856 ordinary shares and 13,600,000
9 per cent cumulative preference shares. Only holders of ordinary
shares (and their proxies) are entitled to attend and vote at the
annual general meeting. Accordingly, the voting rights attaching to
shares of the company exercisable in respect of each of the
resolutions to be proposed at the annual general meeting total
32,573,856 as at the date of this notice.
102
Form of proxy
R.E.A. Holdings plc Annual general meeting convened for 6 June 2008
I/We the undersigned, being (a) member(s) of the above-named company, hereby appoint the chairman of the
(see notes)
meeting
as my/our proxy to vote and act for me/us and on my/our behalf at the annual general meeting of the company referred to
For Against withheld
Vote
above and at any adjournment thereof.
If this proxy form is one of multiple appointments being made, please state in the
adjacent box the number of shares in respect of which the proxy is appointed
Ordinary resolutions
1
2
3
4
5
6
7
8
9
To receive the annual report for the year ended 31 December 2007
To approve the directors’ remuneration report for the year ended 31 December 2007
To re-elect Mr R M Robinow as a director
To re-elect Mr J M Green-Armytage as a director
To re-elect Mr J R M Keatley as a director
To re-elect Mr L E C Letts as a director
To re-appoint Deloitte & Touche LLP as auditors of the company and
to authorise the directors to fix their remuneration
To increase the authorised share capital of the company
To grant authority in accordance with section 80 of the Companies Act 1985
10 To grant further authority in accordance with section 80 of the Companies Act 1985
in respect of preference shares of the company
Special resolution
11 To grant power in accordance with section 95 of the Companies Act 1985
I/We would like my/our proxy to vote on the resolutions proposed at the meeting as indicated on this form. Where no
indication is given, the proxy may vote or abstain as he or she sees fit in relation to any business of the meeting.
Signature:
Initials and surname:
Address:
Date:
Please
use
block
capitals
Notes
•
•
•
•
•
•
•
!
You may appoint one or more proxies of your own choice, if you are unable to attend the meeting but would like to vote. If it is desired to appoint any
other person (who need not be a member of the company) to act as proxy, insert the name on this form and strike out the words “the chairman of the
meeting”. If no name is entered, the return of this form duly signed will authorise the chairman of the meeting to act as your proxy..
The “vote withheld” option is provided to enable you to abstain on any particular resolution. A vote withheld is not a vote in law and will not be counted
as a vote for or against a resolution.
Any alterations made in this form of proxy should be initialled.
If the appointer is a corporation, this form of proxy must be executed under its common seal or under the hand of an officer
or attorney duly authorised. Alternatively, a company to which section 44 of the Companies Act 2006 applies may execute this
form of proxy by two authorised signatories or by a director of the company in the presence of a witness who attests the signature
(in which case the name of the company should be clearly stated).
In the case of joint holders of a share, any one holder may sign this form of proxy, but the vote of the senior who votes whether in person or by proxy,
shall be accepted to the exclusion of the votes of the other joint holders, and for this purpose seniority shall be determined by the order in which the
names stand in the Register of Members in respect of the share. In any event, the names of all joint holders should be stated on the proxy form.
This form (and the power of attorney or other authority if any under which it is signed, or a notarially certified copy of such power
or authority) must reach the registered office of the company at the address given overleaf not less than 48 hours before the
time appointed for holding the meeting.
Completion and return of a form of proxy will not prevent a member entitled to attend and vote at the meeting from attending and voting in person if
he or she so wishes.
103
THIRD FOLD AND TUCK IN
R.E.A. Services Limited
First Floor
32-36 Great Portland Street
London
W1W 8QX
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SECOND FOLD
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