R.E.A. HOLDINGS PLC - ANNUAL REPORT
2 0 0 8
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 plantation areas
Summary of results
Key statistics
Chairman’s statement
Review of the group
Directors
Directors’ report
Corporate governance
Directors’ remuneration report
Directors’ responsibilities
Directors’ confirmation
Auditors’ report (group)
Consolidated income statement
Consolidated balance sheet
Consolidated statement of recognised income and expense
Consolidated statement of changes 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
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7
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101
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109
1
Officers and professional advisers
Solicitors
Ashurst LLP
Broadwalk House
5 Appold Street
London EC2A 2HA
Auditors
Deloitte LLP
2 New Street Square
London EC4A 3BZ
Registrars and transfer office
Capita Registrars
Northern House
Woodsome Park
Fenay Bridge
Huddersfield
West Yorkshire HD8 0GA
Directors
R M Robinow
J C Oakley
D J Blackett
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 LLP
2 New Street Square
London EC4A 3BZ
Stockbrokers
Mirabaud Securities LLP
21 St James’s Square
London SW1Y 4JP
2
Maps showing plantation areas
3
Summary of results
for the year ended 31 December 2008
Revenue
2008
$’000
2007
$’000
Change
%
79,630
57,600
+ 38
Earnings before interest, tax, depreciation, amortisation and biological gain*
45,700
43,346
Profit before tax
Profit for the year
Profit attributable to ordinary shareholders
Cash generated by operations+
* see note 5 to consolidated financial statements
+ see note 35 to consolidated financial statements
36,309
47,010
25,773
31,997
23,833
29,453
+ 5
- 23
- 19
- 19
50,896
34,831
+ 46
Earnings per ordinary share (diluted) in US cents
71.5
89.6
- 20
Average exchange rates
2008
2007
2006
2005
2004
Indonesian rupiah to US dollar
US dollar to pound sterling
9,757
1.84
9,166
2.01
9,129
1.86
9,756
1.82
8,978
1.84
4
Key statistics
for the year ended 31 December 2008
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
2008
2007
2006
2005
2004
16,487
9,032
2,781
–
28,300
86,541
13,080
11,814
1,514
11,500+
37,908
84,018
114,841
121,926
13,080
13,085
13,142
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
+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 - group
450,906
393,217
332,704
312,676
293,883
Oil palm fresh fruit bunch crop - external
6,460
2,767
1,372
679
–
457,366
395,984
334,076
313,355
293,883
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
105,597
20,846
93,229
15,660
126,443
108,889
77,597
12,698
90,295
73,262
12,647
85,909
71,473
12,169
83,642
23.1%
4.6%
23.5%
4.0%
23.2%
3.8%
23.4%
4.0%
24.3%
4.1%
27.3
29.6
25.5
23.8
22.4
6.4
1.3
7.7
7.1
1.2
8.3
5.9
1.0
6.9
5.6
1.0
6.6
5.4
0.9
6.3
5
Crude palm oil monthly average price
e
n
n
o
t
/
$
S
U
1400
1200
1000
800
600
400
200
0
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
Share performance graph
REA Ordinary
FT All Share
2004
2005
2006
2007
2008
300
200
100
0
x
e
d
n
I
6
Chairman’s statement
Presentation of annual report
of duty on exports of crude palm oil (“CPO”) from
Indonesia applicable during most of 2008 meant that the
The group continues to report in accordance with
average US dollar price per tonne realised by the group in
International Financial Reporting Standards (“IFRS”) and
respect of 2008 sales of CPO, adjusted to FOB,
to present its consolidated financial statements in US
Samarinda, was $664, not a great deal higher than the
dollars. The company’s individual financial statements are
average price of the preceding year of $624. 2008
presented separately from the consolidated financial
revenues did benefit from the higher production achieved
statements in sterling and in accordance with UK
during the year, but this was significantly offset by a
Generally Accepted Accounting Practice.
higher cost of sales reflecting inflationary increases in
Results
many operating input costs. Specifically, prices for diesel
and fertiliser moved to new highs while labour costs rose
in line with increases in the general cost of living in
Profit before tax for 2008, as shown in the accompanying
Indonesia. The costs of upkeeping an additional 3,189
consolidated income statement, amounted to $36.3
hectares of plantings that were classified as mature from
million against $47.0 million in 2007. The result reflected
the start of 2008 also contributed to the higher cost of
a negative swing in IFRS fair value adjustments between
sales.
2007 and 2008 of $20.5 million with net losses on
revaluation of biological assets and agricultural produce
During 2008, reductions were announced in future rates
inventory of, respectively, $2.7 million and $4.2 million
of Indonesian corporation tax. This has permitted a
against net gains of $8.0 million and $5.6 million in the
reduction in the provision for deferred tax at 31
prior year. Cash generated from operations in 2008 at
December 2008 with a consequential credit to income
$50.9 million was significantly ahead of the $34.8 million
account. Offsetting this, the amount previously provided
generated in 2007.
for tax has been increased to provide in full for an
Indonesian assessment of tax on a group company's
The loss on revaluation of biological assets was largely
2006 profits at a higher level than was originally expected
the result of the decision taken in October 2008, as
although significant elements of the assessment are
referred to under "Land allocations and development"
disputed and a material recovery of the amounts paid on
below, to suspend extension planting. This meant that the
account is expected. The net result is still a reduced rate
hectarage developed or in course of development at 31
of tax charge in 2008 as compared with 2007.
December 2008 was lower than it would otherwise have
been and the fair value of the biological assets at that
At the after tax level, profit for the year for 2008 was
date was correspondingly reduced. There was little
$25.8 million against $32.0 million in 2007 while profit
change in the volume of the group's agricultural produce
attributable to ordinary shareholders was $23.8 million
inventory over 2008 but the IFRS requirement to value
against $29.5 million. Fully diluted earnings per share
this inventory at fair market value meant that the
amounted to US 71.5 cents (2007: US 89.6 cents).
movement between opening and closing valuations
showed a loss reflecting the fall in CPO prices over 2008.
Accounting reference date
Deliveries made during 2008 against forward sales
It was noted in the company's 2007 annual report that the
contracted in 2006 and, more materially, the sliding scale
directors were contemplating a change in the company's
7
Chairman’s statement continued
accounting reference date from 31 December to 28
External purchases of FFB from smallholders in 2008
February. A pre-requisite of such a change was the
totalled 6,460 tonnes (2007: 2,767 tonnes). Based on
consent of the holders of the 9.5 per cent guaranteed
the combination of the group's own FFB production and
sterling notes 2015/17 issued by REA Finance B.V.
externally purchased FFB, the CPO and palm kernel
("sterling notes") and this was duly obtained in August
extraction rates for the year amounted to, respectively,
2008. Subsequent discussions with the group's
23.1 per cent and 4.6 per cent (2007: 23.5 per cent and
Indonesian professional advisers have indicated that
4.0 per cent). The decline in the CPO extraction rate is
negative Indonesian fiscal consequences would be likely
attributed by the directors to a combination of overcast
if the company's Indonesian subsidiaries were to change
conditions during part of the year (reducing the
their reporting periods so that these remained co-
photosynthesis upon which oil formation partly depends)
terminous with those of the company following a change
and pressure on harvesting standards. The group is
in the latter’s accounting reference date. Accordingly, the
implementing measures designed to reduce harvester
directors have decided that the company should retain its
turnover and make it easier to recruit additional
existing accounting reference date of 31 December.
harvesters. The improvement in the palm kernel
Operations
extraction rate reflected successful modification of the
palm kernel extraction process to improve nut cracking
efficiency.
The crop out-turn for 2008 amounted to 450,906 tonnes
of oil palm fresh fruit bunches (“FFB”), 7.1 per cent ahead
The capacity of the kernel crushing plant was increased
of the budgeted crop of 421,000 tonnes and an increase
during 2008 from 100 to 150 tonnes per day to cater for
of 14.7 per cent on the FFB crop for 2007 of 393,217
projected crop increases from existing plantings in 2009
tonnes. Yield per hectare for 2008 was 27.3 tonnes
and subsequent years. Crude palm kernel oil (“CPKO”)
compared with 29.6 tonnes in 2007. The reduction
production for 2008 (again based on the combination of
reflected the fact that the 3,189 hectares of previously
the group's own FFB production and externally purchased
immature areas that were brought into harvesting in 2008
FFB) amounted to 8,190 tonnes (2007: 6,414 tonnes).
initially yielded 17.6 tonnes per hectare as compared with
This reflected a CPKO extraction rate for the year of 39.3
the average yield for fully mature areas of 28.9 tonnes per
per cent (2007: 41.0 per cent).
hectare.
Land allocations and development
Rainfall for 2008 averaged 3,504 mm across the group's
operations, down on the 4,413 mm of the previous year
Continuing efforts to ensure the availability of land for
but nevertheless wholly satisfactory for oil palm
expansion resulted in the addition to the group during
cultivation, particularly as the rainfall was well distributed.
2008 of two further Indonesian companies, PT Kutai
During 2008, the capacity of the group's second oil mill
(“PBJ”), each holding a substantial land allocation in the
(which was brought into production in 2006 with an initial
vicinity of the group's existing estates. Each of these
capacity of 40 tonnes per hour) was expanded to 60
further Indonesian companies is, or on completion of
tonnes per hour. Further expansion to 80 tonnes per hour
necessary legal formalities will be, owned as to 95 per
Mitra Sejahtera (“KMS”) and PT Putra Bongan Jaya
is planned for 2010.
cent by group companies and 5 per cent by Indonesian
local investors. Following these acquisitions and a recent
8
agreement by the Indonesian authorities to issue a land
Following the improvement in CPO prices over 2009 to
title certificate in respect of 11,625 hectares held by PBJ,
date and the development of a seemingly better tone to
the fully titled land areas now held by the group amount
the CPO market, the directors have recently decided that
to 46,841 hectares. In addition, the group holds land
extension planting should be resumed. Given all the
allocations over areas totalling 68,000 hectares that are
economic uncertainties, a target has not yet been set for
not yet fully titled (including, for this purpose, an allocation
2009 development but, when it is, the directors will wish
of 20,000 hectares that is in course of renewal following
to see this at a level such that the prospective costs of
expiry of the original letter of allocation).
development can reasonably be expected to leave the
group with an appropriate cash reserve against further
The not yet fully titled land allocations are at different
weakness in CPO prices.
stages of titling and the titling process may be expected
to result in exclusion of areas the subject of conflicting
The group currently holds substantial stocks of seedlings
land claims that cannot be resolved and those areas
in its nurseries. These were grown from seed in
having special environmental value. Moreover, of the
anticipation of the planting programmes that were
allocated areas in respect of which full titles are
previously planned and have now been cancelled.
eventually issued, a proportion will have to be set aside for
Seedlings not utilised for the group's 2009 development
conservation and a further proportion will be required for
programme or for smallholder cooperative plantings will
roads, buildings and other infrastructural facilities.
be pruned and retained for future use.
Accordingly, it must be expected that of the not yet fully
titled land allocations, the area that eventually becomes
Social responsibility
available for planting with oil palms will be significantly
less than 68,000 hectares.
The group continues to place importance on the
discharge of its social obligations. Internally, employee
The group had hoped that it would be able to develop land
welfare and the training and development of employees
during 2008 and 2009 at a rate sufficient to enable it to
remain a priority. Externally, smallholder plantings and
reach a target of 45,000 developed hectares by the end
community development projects supported by the group
of 2009. With the onset of the international financial
and the work of the group’s conservation department are
crisis and the accompanying sharp fall in commodity
being extended. The group is considering the conversion
prices, the directors concluded in October 2008 that
of the conservation department into a charitable
prudence dictated that the 45,000 hectare target be
foundation with a view to providing access to funding
abandoned and that, until the world financial outlook
from third parties to augment the funding provided by the
became clearer, no material new funds should be
group so as to permit expansion of conservation activities
committed to extension planting. The combination of this
beyond the immediate areas of the group’s activities into
decision and a continuation into the first half of 2008 of
the wider Belayan river basin.
the delays experienced in 2007 in making allocated land
actually available for development meant that the area
The company’s principal operating subsidiary has recently
developed in 2008 amounted only to 1,892 hectares
been awarded ISO 14001 certification in respect of the
against the original target of 6,500 hectares.
group’s two oil mills and kernel crushing plant and hopes
to receive certification for six estate units in the second
half of 2009. The group expects to be in a position to
9
Chairman’s statement continued
seek accreditation from the Roundtable for Sustainable
completed. Contractors appointed to commence mining
Palm Oil in 2010 after the ISO 14001 certification
operations on Liburdinding are now on site and it is hoped
process has been completed.
New initiative
that production from this concession will start in the near
future. Production from the Muser concession should
follow within a few months. A small team of experienced
managers has been recruited to oversee the mining
Following a decision in late 2007 that the group should
operations.
explore opportunities in coal mining in East Kalimantan, in
the second half of 2008, the group acquired rights in
Pending validation of theoretical plans by actual operating
respect of two adjoining coal concessions, the first,
experience, the directors remain cautious as to the
Liburdinding, covering an area of some 1,000 hectares
returns achievable from the group's new coal interests,
and the second, Muser, some 2,000 hectares. The
particularly given that coal prices have fallen significantly
concessions are located in the southern part of East
over the past six months. Nevertheless, the group's
Kalimantan, close to a major established coal mining
internal projections continue to indicate that margins
operation and within easy reach of existing port facilities
achievable even at current coal prices will justify the
through which coal can be shipped.
investment made which amounted at 31 December 2008
Geological surveys conducted to date suggest that the
concessions contain commercial deposits of coal having
Finance
typical gross calorific values per tonne of between 5,800
to $5.4 million.
and 6,200 kcal/kg in the case of Liburdinding and
During 2008, a further £28,000,000 nominal of sterling
between 7,000 and 7,200 kcal/kg in the case of Muser.
notes were created of which £15,000,000 nominal were
A preliminary survey by an independent firm of geologists
issued for cash at a subscription price of 99.8682 per
in Jakarta indicated coal reserves of 14.7 million tonnes
cent of par. The effect of this issue was to increase the
for Liburdinding and 17.6 million tonnes for Muser. The
nominal amount of sterling notes in issue to £37,000,000
group is commissioning a further assessment of reserves
and the prospective total size of the eventual sterling note
in the two concessions in compliance with the rules of the
issue to £50,000,000 although under current market
Australasian Joint Ore Reserves Committee.
conditions an early issue of the unissued balance of
£13,000,000 nominal of sterling notes appears unlikely.
After a combination of geoelectric surveys and drilling to
delineate and assess the characteristics of the proven
Following this latest issue of sterling notes, group
deposits on both concessions, detailed mining designs
indebtedness at 31 December 2008 amounted to
have been completed for Liburdinding and are being
$108.3 million, made up of US dollar denominated bank
prepared for Muser. The exploration licence held in
indebtedness under an Indonesian consortium loan
respect of Liburdinding has been converted to an
facility of $12.9 million, £37 million nominal of sterling
exploitation licence and the conversion of the exploration
notes (carrying value: $50.2 million), $15.4 million in
licence in respect of Muser is at an advanced stage.
respect of the hedge of the principal amount of sterling
Necessary work on upgrading roads from the concession
notes referred to below, $30 million nominal of 7.5 per
areas to the port facility has taken longer than originally
cent dollar notes 2012/14 (“dollar notes”) (carrying value:
hoped because of heavy rains but has now been
$29.6 million) and other short term indebtedness
10
(including obligations under finance leases) of $0.2
Dividends
million. Against this indebtedness, at 31 December 2008
the group held cash and cash equivalents of $30.3
The fixed semi-annual dividends on the 9 per cent
million. The group has entered into long term sterling US
cumulative preference shares that fell due on 30 June
dollar debt swaps to hedge against US dollars the sterling
and 31 December 2008 were duly paid. Dividends
liability for principal and interest payable in respect of the
totalling 3p per ordinary share have been paid in respect
entire issue of the sterling notes (but, in the case of
of 2008 (2007: 2p per ordinary share). These comprised
interest, only as respects interest payments falling due up
a first interim dividend of 1.5p per ordinary share paid on
to 31 December 2015).
26 September 2008 and a second interim dividend in lieu
of final of 1.5p per ordinary share paid on 30 January
Following recent discussions with the banks providing the
2009. In addition, the company made a capitalisation
Indonesian consortium loan facility, it has been agreed
issue to ordinary shareholders of 1,302,954 new
that the terms of the facility will be reconstituted so as to
preference shares on the basis of one new preference
provide the group going forward with an $11.75 million
share for every 25 ordinary shares held on 24 September
term loan repayable over five years and a revolving
2008.
working capital facility, renewable annually, of $4.75
million.
The group retains ambitious plans for continued
extension planting of oil palms. This will require
At current CPO prices and with the agreement to
substantial investment. Moreover, the uncertainties of the
reconstitute the Indonesian consortium loan facility, the
current world economic situation and the possibility that
group can expect that, excluding expenditure on new
CPO prices may fall back from current levels dictate that
extension planting, cash flows from operations for 2009
the group should be careful to husband its cash
will comfortably exceed the amounts required to fund
resources. While this remains the case, the directors will
planned capital and development expenditure and debt
inevitably feel constrained as to the rate at which they can
service. As indicated under "Land allocations and
prudently declare, or recommend the payment of, future
development" above, the directors have recently decided
ordinary dividends.
that extension planting should be resumed but on the
basis that such resumption will be at a level such that the
The directors do appreciate that many shareholders
prospective costs of development can reasonably be
invest not only for capital growth but also for income and
expected to leave the group with an appropriate cash
that the payment of dividends is important. The directors
reserve against further weakness in CPO prices.
have previously stated their intention that any new level of
ordinary dividend set in respect of any given year should
The group may seek further debt funding to permit the
be sustainable in subsequent years and they expect that
group to proceed with a higher level of extension planting
this will prove the case with the level of total ordinary
than the group could otherwise afford. However, the
dividend set in respect of 2008. Under normal
directors will require that any such additional debt funding
circumstances, the directors would hope that the
is provided predominantly by way of medium term loans
prospective crop increases of coming years will permit a
and will limit additional borrowings to levels that the
progressive ordinary dividend policy albeit that the rate of
directors are confident that the group’s equity base can
progression is likely to be steady rather than dramatic.
comfortably sustain.
11
Chairman’s statement continued
Whilst the directors continue to believe that capitalisation
equivalent age achieved similar yields per hectare in
issues of new preference shares to ordinary shareholders,
2009 to those of 2008. Crops to end March 2009 were
such as were made in both 2007 and 2008, provide a
in line with budget.
useful mechanism for augmenting returns to ordinary
shareholders in periods in which good profits are
During 2008, the CPO price, spot CIF Rotterdam, rose
achieved but demands on cash resources limit the scope
from an opening level of some $950 per tonne to a high
for payment of cash dividends, the current state of
in early March of just under $1,400. It then declined
markets for fixed return securities of smaller listed
steadily to $705 per tonne at the end of September, fell
companies may make it impractical to make another such
sharply during October to a low of $435 per tonne and
issue in 2009.
Staff
then recovered slightly to a closing level at the end of the
year of $525 per tonne. The average price for the year
was $939 per tonne (2007: $780 per tonne). The early
months of 2009 have seen the recovery in prices
The directors extend their thanks to all of the group's staff
continue and the CPO price, CIF Rotterdam, currently
for their continued loyalty and hard work.
stands at $780 per tonne.
Future direction
For the moment, vegetable oil prices appear to have
decoupled from the price of petroleum oil and the
The directors commented in the company's 2007 annual
improving price trend is being driven by good demand for
report that if, as they hoped would be the case, the group
conventional uses of vegetable oil assisted by restocking
was able in future to rely, to a greater extent than hitherto,
in the major consuming countries which had reduced
on internally generated equity, and if the markets for listed
stocks in the immediate aftermath of the international
securities in Indonesian and other Eastern financial
financial crisis. Industry forecasters are predicting some
markets continued to mature, it might be that a
slowdown in the rate of growth in CPO supply in 2009 in
reconstitution of the group as an entirely South East
part reflecting increased replanting of older areas which
Asian based entity would better serve investors in the
are becoming uneconomic to harvest at current CPO
group than continuation of the present group structure.
prices and for which the Malaysian government is
Given the worldwide economic problems that have
currently providing financial incentives. Although reports
subsequently surfaced, the directors do not believe that
indicate that US soybean plantings for the current season
new corporate initiatives are currently appropriate. They
will be at a higher level than for the 2008 season, the
have therefore deferred any further consideration of
increase is projected to be slight. It is likely to be offset
possible changes to the corporate structure of the group
fully by the effects of drought on South American
until the financial environment becomes more stable.
soybean crops which are expected to show a decline.
Prospects
In short, the supply demand balance going forward is
moderately encouraging, particularly as slower growth in
The FFB crop for 2009 has been budgeted at 486,000
meat demand may adversely impact the economics of
tonnes with a normal budgetary assumption of average
future soybean plantings given that revenues from
rainfall (both as to quantum and distribution). This crop is
soybean cultivation depend as much on sales of soya
a little below the level that would result if palms of an
meal to the animal feed market as they do on sales of the
12
oil component of the soybeans harvested. Within the
CPO component of the vegetable oil complex, less readily
available credit and reduced revenues are likely to lead to
some slowdown in extension planting and, particularly as
respects less efficient growers, reduction in fertiliser
applications. This should result in some scaling back in
the rate of future growth in CPO supply.
In the very short term, CPO must expect to lose some
market share to soya oil as a recent reduction in Indian
import duties applicable to soya oil is likely to encourage
some substitution of soya oil for CPO in the Indian market.
Looking further forward, while it appears likely that bio-
fuels will prove a less significant component of future
vegetable oil consumption than was at one time expected,
the fundamentals underlying demand for vegetable oils
for conventional uses have not changed. World
population continues to grow and, in the key markets of
India and China, lower prices are likely to stimulate
demand which will also continue to increase with
economic growth.
With the recent decision to resume extension planting,
the group will continue to expand its planted hectarage.
Moreover the new plantings that have been established in
recent years mean that the group can anyway look
forward to steadily increasing crops for several years to
come. As inflationary pressures on costs subside,
margins may reasonably be expected to remain at
satisfactory levels. The directors therefore retain their
previously expressed confidence in the group's future.
RICHARD M ROBINOW
Chairman
27 April 2009
13
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 principally engaged in the cultivation of oil
with information complementing the accompanying
palms in the province of East Kalimantan in Indonesia and
financial statements in order to facilitate understanding of
in the production of crude palm oil (“CPO”) and by-
the group’s business and strategic objectives and to
products from fruit harvested from its oil palms. A
permit assessment of the likelihood of the group realising
detailed description of the group's oil palm activities is
those objectives. This review should not be relied upon by
provided under “Operations” below.
any other party or for any other purpose.
During 2008, the directors decided to augment the
This review contains forward-looking statements which
traditional plantation operations of the group by
have been included by the directors in good faith based
developing a modest coal mining operation also based in
on the information available to them up to the time of their
East Kalimantan. Details of this diversification are
approval of this review. Such statements should be
provided under "New initiative" below.
treated with caution given the uncertainties inherent in
any prognosis regarding the future and the economic and
The group and predecessor businesses have been
business risks to which the group's operations are
involved for over one hundred years in the operation of
exposed.
agricultural estates growing a variety of crops in
developing countries in South East Asia and elsewhere.
In preparing this review, the directors have sought to
The group today sees itself as marrying developed world
follow best practice as recommended by the reporting
capital and Indonesian opportunity by offering investors
statement on operating and financial reviews published by
in, and lenders to, the company the transparency of a UK
the Accounting Standards Board but this review may not
listed company and then using capital raised through the
comply with that statement in all respects. The directors
company to develop significant natural resource based
have relied mainly on qualitative rather than quantitative
operations in Indonesia (principally in agricultural
assessments in relation to environmental and social
commodities). In this endeavour, the group’s inheritance
matters. In the context of the current scale of the group’s
from its past represents a significant intangible resource
operations, the directors consider qualitative assessment
in that it underpins the group’s credibility. This assists
an appropriate evaluation of the group’s performance in
materially in sourcing capital, in negotiating with the
these areas.
Indonesian authorities in relation to project development
and in recruiting management of a high calibre.
This review has been prepared for the group as a whole
and therefore gives emphasis to those matters that are
Other resources that are important to the group are its
significant to the company and its subsidiaries when
developed base of operations, bringing with it an
taken together. The review is divided into six sections:
established management team familiar with Indonesian
overview; operations; sustainability; new
initiative;
regulatory processes and social customs, a trained
finances; and risks and uncertainties.
workforce and the group’s land bank.
14
Objectives
of fixed return permanent preferred capital and debt with
a maturity profile appropriate to the group's projected
The group’s objective is to provide attractive overall
future cash flow.
returns to investors in the shares and other securities of
the company from the operation and expansion of the
Diversification
group’s existing business, while honouring the group’s
social obligation to facilitate economic progress in the
The group recognises that it is principally dependent upon
localities of the group's activities and to develop the
operations in a single locality producing a single product.
group's operations in accordance with best corporate
This permits significant economies of scale but brings
social
responsibility and sustainability standards.
with it risks. The directors therefore believe that the
Achievement of this objective is dependent upon, among
group should be willing to consider possibilities for
other things, the group’s ability to generate the operating
diversification into areas of activity that complement, and
profits that are needed to finance its realisation.
can be developed within reasonable proximity of, the
existing oil palm operations. However, they do not regard
Since CPO is a primary commodity, its price is determined
diversification as a strategic imperative and believe that a
by world supply and demand. The CPO price may, and
decision to diversify should be taken only if a new area of
does, fluctuate in ways that are difficult to predict and
activity offers the prospect of returns on capital invested
which the group cannot control. As its strategy for
comparable with, or ideally better than, those achievable
increasing profits from its agricultural operations, the
from investment of equivalent capital in continued
group therefore seeks to increase crops and to minimise
expansion of the oil palm operations in the existing
unit production costs with the expectation that the lower
operational areas.
cost producer of CPO is better placed to weather any
downturn in price than less efficient competitor producers
After reviewing and rejecting in recent years a number of
of CPO and other vegetable oils. To this end, the group
diversification opportunities, the directors concluded
has adopted a two pronged approach.
during 2008 that coal mining in East Kalimantan had the
potential to meet the directors' minimum criteria for taking
First, the group aims to capitalise on its principal
the group into another sphere of activity. Accordingly, as
resources by developing the group’s land bank as rapidly
described under "New initiative" below, an initial
as logistical and financial constraints permit with a view to
investment has been made in establishing a modest coal
utilising the group’s existing management capacity to
mining operation.
manage a larger business. Secondly, the group strives to
manage its established operations as productively as
Future direction and succession
possible. Ancillary to the first component of this
approach, the group seeks to add to its land bank when
Since 2004, the area of oil palm under cultivation by the
circumstances are conducive to its doing so.
group has doubled. The group has also increased its
processing capacity and, as described under
As an additional financial objective, the group aims to
"Sustainability" below, has significantly extended its
enhance returns to equity investors in the company by
interaction with the local communities. The directors are
procuring that a prudent proportion of the group’s funding
confident that this major expansion in the scale of the
requirements is met with prior charge capital in the form
group's activities will produce significant financial benefits
15
Review of the group continued
for the group and its shareholders. However, it has also
local independent non-executive support that is now
meant that the group has had to move from a situation in
available, does provide reasonable resilience. Moreover,
which a few people could together control all of the
an expanding cadre of younger staff has the capacity to
group's operations to a more structured environment in
provide for management succession in Indonesia by
which responsibilities are departmentalised and senior
internal promotion.
management has had to learn to manage operations
through departments rather than by direct involvement in
The directors commented in the company's 2007 annual
all operational decisions.
report that, whilst the model of marrying developed world
capital and Indonesian opportunity with the company as a
A significant and continuing challenge has been to ensure
listed company providing a conduit for UK capital had
that, in embedding a more structured environment, the
served the group well, it did require the maintenance of a
group does not lose the efficiencies of rapid and well
UK base involving significant overhead. If, as the directors
informed decision making and the benefits of an internal
hoped would be the case, the group was able in future to
culture of shared ambitions and mutual respect and
rely, to a greater extent than hitherto, on internally
loyalty that a smaller organisation can engender. Greater
generated equity, and if the markets for listed securities in
structure inevitably brings with it increased overheads and
Indonesian and other Eastern financial markets continued
it is clearly important that those overheads increase
to mature, it might be that a reconstitution of the group as
returns not internal bureaucracy.
an entirely South East Asian based entity would better
serve investors in the group than continuation of the
In enhancing its management capacity, the group has
present group structure. Given the worldwide economic
focused primarily on the management of its Indonesian
problems that have subsequently surfaced, the directors
operations since all of the group's operating activities
do not believe that new corporate initiatives are currently
take place in Indonesia. Work on designing and
appropriate and have therefore deferred any further
implementing a new departmental structure for the
consideration of possible changes to the corporate
Indonesian operations has now been completed and the
structure of the group until the financial environment
additional staff positions created by the new structure
becomes more stable.
have been filled. Improvements have also been made to
communications with local stakeholders to provide for
Nevertheless, the directors concern remains as to
more regular exchanges of views. In particular, efforts are
whether a structure in which an Indonesian business is
being made to ensure that management can take
owned through a UK listed company, with the UK
maximum advantage of the valuable advice and support
overheads that this entails, is really the appropriate long
that can be provided by local minority investors in group
term structure for the group. This will have to be kept
companies, the local boards of the company's Indonesian
under review. In the meanwhile, the directors intend
subsidiaries and the other local advisers that the group
simply to maintain the status quo of the group’s London
now has in place.
base. Both the managing director and the chairman have
indicated that they would like to remain in their present
The group values its staff and would not wish to lose any
roles for several more years and the directors therefore
of them but the directors believe that, should losses occur,
feel that the issue of London succession can be deferred
the increased capacity provided by the group's new
until it becomes clearer whether succession is needed.
management structure in Indonesia, coupled with the
16
The Indonesian context
Evaluation of performance
During 2008, the
Indonesian domestic economy
In seeking to meet its expansion and efficiency objectives,
continued its expansion growing by 6.1 per cent. There
the group sets operating standards and targets for most
has been some slowdown following the international
aspects of
its activities and
regularly monitors
financial crisis but the World Bank still projects continuing
performance against those standards and targets. In
economic growth during 2009 albeit at a lower rate of 3.4
many aspects of the group's activities, there is no single
per cent per annum. Until September 2008, the
standard or target that, in isolation from other standards
Indonesian rupiah remained broadly stable against the US
and targets, can be taken as providing an accurate
dollar around the levels of the preceding two years within
continuing indicator of progress. Rather a collection of
a range around Rp9,000 = $1. Subsequent months have
measures have to be evaluated and a qualitative
seen a decline with the current rate standing at Rp10,650
conclusion reached.
= $1. Whilst this decline will obviously impact negatively
on inflation, other inflationary pressures within the
The directors do, however, rely on regular reporting of
Indonesian economy have eased following the recent
certain operational progress items that are comparable
declines in raw material prices.
from one year to the next and may be regarded as key
indicators of operating performance. These indicators for
The Indonesian political situation remains stable. It must
any given period comprise:
be expected that in the run up to the presidential election
to be held later in 2009 there will be some renewed
debate as to the role of foreign investment in the
Indonesian economy but Indonesia's continuing need for
capital to fund its development appears to be generally
recognised. Indonesia is one of the few emerging market
countries successfully to have accessed the international
bond markets for capital during 2009.
The province of East Kalimantan remained stable and
prosperous throughout 2008. The province benefits from
a large natural resource base, low population and near full
employment. In particular, the coal mining industry
continues to develop rapidly within East Kalimantan.
Although, as noted under “Area of operations”
in
"Operations" below, the devolution of authority from
central government to provincial governments that has
resulted from
the
Indonesian regional autonomy
legislation of recent years has brought with it increased
bureaucracy in some areas (in particular land titling), it
has also brought benefits to outlying provinces such as
East Kalimantan in providing increased resources for
provincial development.
(cid:129)
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;
(cid:129)
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
(cid:129)
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 2008
and comparable quantifications for 2007 (in both cases
17
Review of the group continued
as sourced from the group's internal management
Operations
reports) are provided under “Land development” and
“Crops and extraction rates”
in “Operations” below
Group structure
together with targets for 2009. Qualitative comment on
the group's social objectives is also provided under
All of the group's plantation operations are located in East
“Employment and social obligations” in “Operations” below
Kalimantan and have been established pursuant to an
and under “Sustainability” below.
understanding dating from 1991 whereby the East
Kalimantan authorities undertook to support the group in
Key indicators used by the directors in evaluating the
acquiring, for its own account and in co-operation with
group's financial performance for any given period
local interests, substantial areas of land in East
comprise:
Kalimantan for planting with oil palms.
(cid:129)
return on adjusted equity which is measured as profit
before tax for the period less amounts attributable to
preferred capital expressed as a percentage of
average total equity (less preferred capital) for the
period; and
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, the
(cid:129)
net debt to total equity which is measured as
company has since 2005 established or acquired several
borrowings and other indebtedness (other than intra
additional Indonesian subsidiaries, each bringing with it a
group indebtedness) less cash and cash equivalents
substantial allocation of land in the vicinity of the REA
expressed as a percentage of total equity.
Kaltim estates. These additional subsidiaries comprise
PT Sasana Yudha Bhakti (“SYB”) and PT Kartanegara
Because of the group's material dependence on CPO
Kumala Sakti (“KKS”), established during 2005 and
prices, which have a direct impact on revenues and on
2006, PT Cipta Davia Mandiri (“CDM”) acquired at the
periodic revaluations of biological assets, in targeting
end of 2007, and PT Kutai Mitra Sejahtera (“KMS”) and
return on total equity the directors set a norm that they
PT Putra Bongan Jaya (“PBJ”), added during 2008. Each
hope will represent an average of the annual returns
of these subsidiaries is, or on completion of necessary
achieved over a period of seven years.
legal formalities will be, owned as to 95 per cent by group
companies and 5 per cent by Indonesian local investors.
Percentages for the above two indicators for 2008 and
comparable figures for 2007 (derived from figures
Land areas
extracted from the audited consolidated financial
statements of the company) are provided under “Group
Although the 1991 understanding established a basis for
results” and “Financing policies”
in “Finances” below,
the provision of land for development by or in cooperation
together with target percentages.
with the group, all applications to develop previously
undeveloped land areas have to be agreed by the
Indonesian Ministry of Forestry and to go through a titling
process. This process begins with the grant of a land
allocation. This is followed by environmental and other
18
assessments to delineate those areas within the
hectares just listed. Moreover, of the areas in respect of
allocation that are suitable for development, settlement of
which full hgu titles are issued, a proportion will have to be
compensation claims from local communities, other
set aside for conservation and a further proportion will be
necessary legal procedures that vary from case to case
required for roads, buildings and other infrastructural
and the issue (often in stages) of development permits
facilities. Accordingly, it must be expected that of the
and land clearing licences. The process is completed by
areas currently allocated or applied for, the land area that
a cadastral survey (during which boundary markers are
eventually becomes available for planting with oil palms
inserted) and the issue of a formal registered land title
will be significantly less than 68,000 hectares.
certificate (an hak guna usaha or hgu certificate).
All of the not yet fully titled land allocations held or applied
In the group’s experience, the process, which was never
for by the group include some areas that require
straightforward, has become more complicated in recent
resolution of conflicting claims or some element of
years. This has followed the devolution of significant
rezoning. A particular problem affecting the 11,000
authority in relation to land matters from the Indonesian
hectares held by SYB has been that of overlapping coal
central government to Indonesian provincial and district
exploration
licences
(although publicly available
authorities which has resulted in an increase in the
geological surveys indicate that such coal as the area
number of official bodies involved in the titling process.
contains is low grade and therefore uneconomic to mine
at current coal prices). The position in respect of one
The group has for some years held hgu land title
such
licence was resolved during the year but,
certificates in respect of 30,106 hectares held by REA
disappointingly, SYB was then told of the existence of
Kaltim and 5,110 hectares held by SYB. These titled
another overlapping licence, although the directors
areas have recently been augmented by 11,625 hectares
believe that the position in respect of this second licence
held by PBJ in respect of which the Indonesian
will also prove capable of resolution.
authorities have agreed that an hgu land title certificate
can be issued. As a result, the fully titled land areas held
In relation to the 20,000 hectares previously allocated to,
by the group now amount to 46,841 hectares.
and now reapplied for by, KKS, progress on titling
remains, as previously reported, subject to the issue of a
Land allocations held by the group but not yet fully titled
decree by the Ministry of Forestry to allow implementation
comprise some 11,000 hectares held by SYB, 20,000
of a new development plan for the Province of East
hectares held by CDM and 17,000 hectares held by KMS.
Kalimantan. Whilst the directors remain hopeful that this
In addition, the group is seeking renewal of a 20,000
decree will ultimately be forthcoming, its timing is
hectares land allocation previously given to KKS as
uncertain and further delay is quite likely. The issues
respects which the original letter of allocation has expired.
affecting the land allocations of, respectively, 20,000
These land allocations are at different stages of titling and
hectares and 17,000 hectares held by CDM and KMS are
the titling process may be expected to result in exclusion
less significant and the titling process in respect of these
of areas in respect of which conflicting land claims cannot
areas is proceeding satisfactorily.
be resolved and those areas having special environmental
value. Accordingly, the group is likely to be granted full
The core operations of REA Kaltim are located some 140
hgu land titles in respect of only a part of the 68,000
kilometres north west of Samarinda, the capital of East
19
Review of the group continued
Kalimantan, and lie either side of the Belayan river, a
Of this total, mature plantings comprised 16,487
tributary of the Mahakam, one of the major river systems
hectares. A further 2,257 hectares planted in 2005 came
of South East Asia. The SYB and KKS areas are
to maturity at the start of 2009.
contiguous with the REA Kaltim areas so that the three
areas together form a single site. All of these areas fall
The group had hoped that it would be able to develop land
within the Kutai Kartanegara district of East Kalimantan.
during 2008 and 2009 at a rate sufficient to enable it to
The PBJ area lies some 70 kilometres to the south of the
reach a target of 45,000 developed hectares by the end
REA Kaltim areas in the West Kutai district of East
of 2009. With the onset of the international financial
Kalimantan while the CDM and KMS areas are located in
crisis and the accompanying sharp fall in commodity
close proximity of each other in the East Kutai district of
prices, the directors concluded in October 2008 that
East Kalimantan less than 30 kilometres to the east of the
prudence dictated that the 45,000 hectare target be
REA Kaltim areas.
abandoned and that, until the world financial outlook
became clearer, no material new funds should be
At present, access to the REA Kaltim, SYB, KKS, CDM
committed to extension planting. Consequently, no new
and KMS areas can be obtained only by river and by air
oil palm areas have been developed in the period from
although the completion in 2005 of a road bridge over the
October 2008 to date.
Mahakam should eventually permit road access as well.
The PBJ area is already accessible by road. The CDM and
Land allocated to the group only becomes available for
KMS areas can be accessed from the REA Kaltim area by
development when the titling process has proceeded to a
way of abandoned logging roads.
point at which the group has been granted development
and land clearing licences in respect of the land. During
Subject to current financial constraints, the group
2007, delays in releasing allocated land areas for
continues to look at acquiring further areas suitable for
development forced the group to suspend extension
planting with oil palms within the general vicinity of its
planting and this situation continued into 2008. Good
existing land allocations. In July 2008, the group did
progress in resolving titling problems permitted the
agree, in principle, to purchase, subject to certain
resumption of development around the mid year but
conditions, the whole of the issued share capital of PT
efforts to recover the backlog of planned new
Prasetia Utama, a company holding a full hgu title over
development were then forestalled by the decision to stop
some 9,000 hectares of land almost contiguous with the
development. As a result, the area developed in 2008
11,000 hectares land allocation held by SYB. With the
amounted only to 1,892 hectares against the original
subsequent international financial crisis, the group has
target of 6,500 hectares.
not to date proceeded with this purchase. Given the
crisis, the directors believe that for the immediate future it
As discussed under "Revenues and markets" below, the
is likely to be easier to acquire land suitable for oil palm
early months of 2009 have seen some recovery in CPO
development than has been the case in the recent past.
prices. Given this and the development of a seemingly
Land development
better tone to the CPO market, the directors have recently
decided that extension planting should be resumed but,
with the continuing economic uncertainties, have not yet
Areas planted and in course of development as at 31
set a target for 2009 development. When a target is set,
December 2008 amounted in total to 28,300 hectares.
the directors will wish to see this at a level such that the
20
prospective costs of development can reasonably be
immediate availability of such seedlings will ensure that if,
expected to leave the group with an appropriate cash
as is intended, extension planting is resumed during
reserve against further weakness in CPO prices.
2009, the group will have the necessary planting material
immediately available and that the normal lead time
Achievement of the development target set for 2009 and
required for the development of new areas of one year in
of the development targets for future years will continue
which to procure seed and to develop seedlings for
to be dependent upon land becoming available for
planting out will be avoided. The immediate availability of
development as needed. Currently, there is sufficient land
planting material will also facilitate rapid development of
available to the group for immediate planting to meet the
the planned smallholder cooperative plantings described
group's short term development needs. Efforts are
under "Smallholders" below. Seedlings not utilised for the
continuing to advance titling of other land allocated to the
group's own 2009 development programme or for the
group with a view to adding to the immediately available
smallholder cooperative plantings will be pruned and
hectarage as rapidly as possible. Moreover, the group
retained for future use.
intends that large annual development programmes
should in future be split over two or more separate areas
Processing
so that, if titling setbacks occur in one area, these can
hopefully be compensated
for by accelerating
The group now operates two oil mills in which the FFB
development elsewhere.
crops harvested from the mature oil palm areas are
processed into CPO and palm kernels. The first mill
Although recent years have seen significant inflation in
began operating in 1998 with an initial capacity of 30
development costs, inflationary pressures have eased
tonnes of FFB per hour. This has since been expanded
since the general economic downturn. At current cost
to a present capacity of 80 tonnes per hour. The second
levels and CPO prices, extension planting in areas
mill was brought into production in 2006 with an initial
adjacent to the existing developed areas still offers the
capacity of 40 tonnes per hour. This was expanded to 60
prospect of attractive returns. Accordingly, it remains the
tonnes per hour during 2008 and further expansion to 80
policy of the directors that, subject to financial and
tonnes per hour is now planned for 2010. The additional
logistical constraints, the group should continue its
capacity provided by such expansion should be sufficient
expansion and should aim over time to plant with oil palms
to process the expected increases in FFB crops over the
all suitable undeveloped land available to the group (other
next few years. The group previously indicated that it
than areas set aside by the group for conservation). Such
expected to commence construction of a third oil mill in
expansion will, however, involve a series of discrete
2010 but, with extension planting proceeding more slowly
annual decisions as to the area to be planted in each
than had been hoped, it is now likely that construction will
forthcoming year and the rate of planting may be
be delayed until 2011.
accelerated or scaled back in the light of prevailing
circumstances.
The group's second oil mill incorporates, within the overall
facility, a palm kernel crushing plant in which palm kernels
The group currently holds substantial stocks of seedlings
can be further processed to extract the crude palm kernel
in its nurseries. These were grown from seed in
oil (“CPKO”) that the palm kernels contain. The kernel
anticipation of the planting programmes that were
crushing plant was brought into full scale production at
previously planned and have now been cancelled. The
the start of 2007 and now processes all kernel output
21
Review of the group continued
from both of the group’s oil mills. Capacity was increased
Because of the relatively short distance involved, this is
during 2008 from 100 to 150 tonnes of kernels per day
proving very efficient in minimising transportation costs.
to cater for projected crop increases from existing
plantings in 2009 and subsequent years. The kernel
A trial made in 2005 established that it is both feasible
crushing plant is economic to run because it operates on
and economic to use the barge fleet to transfer CPO from
power generated by the second oil mill from the
the Samarinda transhipment terminal to ships anchored
combustion of waste products from the CPO and palm
offshore outside the port of Samarinda. This potentially
kernel extraction processes and such power is surplus to
provides access to vessels of much greater tonnage than
the power requirement for those processes. Moreover,
the vessels that can be loaded within the port of
processing kernels into CPKO avoids the material
Samarinda (which are effectively limited to 6,000 tonnes)
logistical difficulties and cost associated with the
and would permit the group to ship palm products to
transport and sale of kernels.
Europe when differentials between European and South
East Asian prices for CPO and CPKO make it worthwhile
The group operates its own fleet of barges for transport
to do so (although this is not currently the case).
of CPO and CPKO. The fleet is used in conjunction with
tank storage adjacent to the oil mills and a transhipment
During periods of lower rainfall (which normally occur for
terminal owned by the group downstream of the port of
short periods during the drier months of May to August of
Samarinda. The fleet comprises one barge of 3,000
each year), river levels on the upper part of the Belayan
tonnes, which the group time charters, and a number of
become volatile and palm product outputs at times have
smaller barges, each of 2,000 tonnes or less, which are
to be transferred by road from the mills to a point some
owned by the group. The smaller barges are used for
70 kilometres downstream where year round loading of
transporting palm products from the upriver operations to
barges of up to 2,000 tonnes is possible. To reduce the
the transhipment terminal for collection from that terminal
extra cost that this involves, in 2003 the group acquired a
by buyers. The 3,000 tonne barge can be used for sea
downstream riverside site on which to establish a
voyages to Malaysia and other parts of Indonesia. This
permanent loading point for use during dry periods. The
permits the group to deliver CPO and CPKO to
necessary loading facilities will be developed following
customers' nominated destinations in Malaysia and
completion of a government road that will provide access
Indonesia.
to the site. Recent progress on the government road has
The directors believe that flexibility of delivery options is
helpful to the group in its efforts to optimise the net
Crops and extraction rates
prices, FOB port of Samarinda, that it is able to realise for
been slow.
its produce. Moreover the group’s ability itself to deliver
FFB crops and yields per hectare for the years from 2004
CPO and CPKO allows the group to make sales without
to 2008 are shown in the “Key statistics” section of this
the collection delays sometimes experienced with FOB
annual report. The crop out-turn for 2008 amounted to
buyers. Currently, a significant proportion of the group's
450,906 tonnes, 7.1 per cent ahead of the budgeted
CPO is sold for delivery to ports in Sabah in East Malaysia.
crop of 421,000 tonnes and an increase of 14.7 per cent
As a result, the 3,000 tonne barge is employed almost
on the FFB crop for 2007 of 393,217 tonnes. Yield per
exclusively in sailing between Sabah and Samarinda.
hectare for 2008 was 27.3 tonnes compared with 29.6
22
tonnes in 2007. The reduction reflects the fact that
extraction rates for the year amounted to, respectively,
3,189 hectares of previously immature areas were
23.1 per cent and 4.6 per cent (2007: 23.5 per cent and
brought into harvesting in 2008 and initially yielded 17.6
4.0 per cent).
tonnes per hectare as compared with the average yield
for fully mature areas of 28.9 tonnes per hectare.
The decline in the CPO extraction rate is attributed by the
directors to a combination of overcast conditions during
Rainfall for 2008 averaged 3,504 mm across the group's
part of the year (reducing the photosynthesis upon which
operations, down on the 4,413 mm of the previous year
oil formation partly depends) and pressure on harvesting
but nevertheless wholly satisfactory for oil palm
standards. The group is implementing measures designed
cultivation, particularly as the rainfall was well distributed.
to reduce harvester turnover and make it easier to recruit
additional harvesters. It is hoped that these measures will
There is a considerable volume of data available on the
restore the CPO extraction rate to levels closer to the
FFB yields that are achieved from modern hybrid material
group's target CPO extraction rate (which is being
planted on estates with soil and climatic conditions similar
retained) of 24 per cent.
to those prevailing on the group's estates. Yields per
hectare climb rapidly during the first four years of
The improvement in the palm kernel extraction rate
production to a peak level that on average is around 24
(which is measured as the percentage by weight of palm
tonnes per hectare. Production then remains at or close
kernels extracted from the FFB crop for the year)
to this peak level for ten years or more, declining gradually
reflected successful modification of the palm kernel
over the last six to eight years of the oil palm's 25 year
extraction process to improve nut cracking efficiency.
economic life. The group has achieved yields in excess of
The result achieved was comfortably ahead of the target
30 tonnes per hectare from fully mature plantings
palm kernel extraction rate of 4.0 per cent set by the
indicating that, in years when cropping is not materially
group.
affected by abnormal weather conditions, an average
peak yield across all plantings will materially exceed 24
CPKO production for 2008 (again based on the
tonnes per hectare.
combination of the group's own FFB production and
externally purchased FFB) amounted to 8,190 tonnes
The FFB crop for 2009 has been budgeted at 486,000
(2007: 6,414 tonnes). This reflected a CPKO extraction
tonnes with a normal budgetary assumption of average
rate for the year (being measured as the percentage by
rainfall (both as to quantum and distribution). This crop is
weight of CPKO extracted from the palm kernels
a little below the level that would result if palms of an
processed by the palm kernel crushing plant during the
equivalent age achieved similar yields per hectare in
year) of 39.3 per cent (2007: 41.0 per cent).
2009 to those of 2008. Crops to end March 2009 were
Modifications to the kernel crushing plant are currently
in line with budget.
being made and it is hoped that these will increase the
CPKO extraction rates towards the group’s target of 42.0
External purchases of FFB from smallholders in 2008
per cent.
totalled 6,460 tonnes (2007: 2,767 tonnes). Based on
the combination of the group's own FFB production and
externally purchased FFB, the CPO and palm kernel
23
Review of the group continued
Revenues and markets
adjusted in response to market surpluses or shortfalls
within the vegetable oils and fats complex.
Around 85 per cent by weight of oil palm product output
is represented by CPO and the balance by palm kernels.
The directors believe that levels of annual oilseed
Accordingly, the group's revenues are critically dependent
production will ultimately be driven by fundamental
on CPO prices.
market factors. It is however possible that normal market
mechanisms may, for a time at least, be affected by
The outlook for CPO prices must be considered against
government intervention. It has long been the case that
the background of consumption of vegetable and animal
some areas (such as the EU) have provided subsidies to
oils and fats. According to Oil World, worldwide
encourage the growing of oilseeds and that such
consumption of vegetable and animal oils and fats
subsidies have distorted the natural economics of
increased by 3.9 per cent to 158.1 million tonnes in the
producing oilseed crops. More recently there has been
year to 30 September 2008. The annual increase of 5.9
action by governments attempting to reduce dependence
million tonnes that this represented was only marginally
on fossil fuels. This included steps to enforce mandatory
below the average annual growth in consumption of some
blending of bio-fuel as a fixed minimum percentage of all
7.0 million tonnes in the preceding three year period,
fuels and subsidies to support the cultivation of crops
despite the historically high prices for oils and fats during
capable of being used to produce bio-fuel. Such action
the period.
increased returns for farmers from growing crops such as
corn and meant that land, which, absent government
Major uses of vegetable and animal oils and fats have
intervention, might have been expected to be used for
conventionally been for the production of cooking oil,
growing annual oilseed crops has been used for other
margarine and soap. Consumption of these basic
purposes. With surfacing concerns as to security of
commodities correlates with population growth and, in
future food supplies and recent declines in the price of
less developed areas, with per capita incomes and thus
petroleum oil, government policies in relation to bio-fuel
economic growth. Vegetable oils can also be used to
are now being modified and the distortions that this has
provide bio-fuels; bio-diesel use, in particular, has
caused are already reducing.
accounted for the significantly higher year on year
increase in consumption of vegetable oils that has been
A graph of CIF Rotterdam spot CPO prices for the last ten
seen in each of the last four years.
years, as derived from prices published by Oil World, is
shown in the “Key statistics” section of this annual report.
According to Oil World, CPO production in the year to 30
The monthly average price over the ten years has moved
September 2008
totalled 42.4 million
tonnes,
between a high of $1,249 per tonne and a low of $234
representing some 26.7 per cent of the total world
per tonne. The monthly average price over the ten years
production of the 17 major vegetable and animal oils and
as a whole has been $497 per tonne.
fats for the same period of 158.9 million tonnes. The
principal competitors of CPO are the oils from the annual
During 2008, the CPO price, spot CIF Rotterdam, rose
oilseed crops, the most significant of which are soybean,
from an opening level of some $950 per tonne to a high
oilseed rape and sunflower. As annual crops, the
in early March of just under $1,400. It then declined
production from these three oilseed crops can be rapidly
steadily to $705 per tonne at the end of September, fell
24
sharply during October to a low of $435 per tonne and
replanting of older areas which are becoming
then recovered slightly to a closing level at the end of the
uneconomic to harvest at current CPO prices and for
year of $525 per tonne. The average price for the year
which the Malaysian government is currently providing
was $939 per tonne (2007: $780 per tonne). The early
financial incentives. Reports indicate that US farmers are
months of 2009 have seen the recovery in prices
switching land from corn to soybean so that US soybean
continue and the CPO price, CIF Rotterdam, currently
plantings for the current season are expected to be at a
stands at $780 per tonne.
slightly higher level than for the 2008 season. This
increase may be fully offset by the effects of drought on
The directors have previously recorded their belief that
South American soybean crops which are expected to
the prices of all commodities are inherently cyclical and
show a decline.
they have no reason to modify that view. High prices have
led to lower prices and the directors are confident that the
In short, the supply demand balance for the vegetable oil
converse will also be the case. Whilst it appears likely that
complex going forward is moderately encouraging,
bio-fuels will prove a less significant component of future
particularly as slower growth in demand for meat may
vegetable oil consumption than was at one time expected,
adversely impact the economics of future soybean
the fundamentals underlying demand for vegetable oils
plantings given that revenues from soybean cultivation
for conventional uses have not changed. World
depend as much on sales of soya meal to the animal feed
population continues to grow and, in the key markets of
market as they do on sales of the oil component of the
India and China, lower prices are likely to stimulate
soybeans harvested. Within the CPO component of the
demand which will also continue to increase with
complex, less readily available credit and reduced
economic growth. Ultimately, lower vegetable oil prices
revenues are likely to lead to some slowdown in extension
may be expected to lead to reduced plantings of the
planting and, particularly as respects less efficient
annual oilseed crops of soybean, oilseed rape and
growers, reduction in fertiliser applications. This should
sunflower, the rate of growth in world vegetable oil
result in some scaling back in the rate of future growth in
production will then reduce and the supply demand
CPO supply. In the very short term, CPO must expect to
balance will tighten.
lose some market share to soya oil as a recent reduction
in Indian import duties applicable to soya oil is likely to
For the moment, vegetable oil prices appear to have
encourage some substitution of soya oil for CPO in the
decoupled from the price of petroleum oil and the modest
Indian market.
recovery in the vegetable oil complex of recent months is
being driven by good demand for conventional uses of
Looking further forward, even if conversion of vegetable
vegetable oil assisted by restocking in the major
oil to bio-fuel does not after all become a growing
consuming countries which had reduced stocks in the
component of vegetable oil consumption, the ability of the
immediate aftermath of the international financial crisis.
energy markets rapidly to absorb significant volumes of
An effect of this has been a significant reduction in CPO
vegetable oil over a short period should limit the negative
stocks at origin in Malaysia and Indonesia from the levels
price impact of periodic future surpluses in vegetable oil
reached in the final quarter of 2008. Industry forecasters
supply. If, as seems probable, petroleum oil prices in due
are predicting some slowdown in the rate of growth in
course return to higher levels, these are again likely to
CPO supply in 2009 in part reflecting increased
provide a floor for the vegetable oil markets. Within those
25
Review of the group continued
markets, CPO should continue to benefit from health
2009 were cancelled prior to commencement of
concerns in relation to trans-fatty acids. Such acids are
deliveries by mutual agreement with the counterparty
formed when vegetable oils are artificially hardened by
owing to a problem of certain terms of the contracts
hydrogenation. Poly-unsaturated oils, such as soybean
conflicting with Indonesian regulations. The forward
oil, rape oil and sunflower oil, require hydrogenation
sales that were delivered and, more materially, the sliding
before they can be used for shortening or other solid fat
scale of duty applicable during most of 2008 to exports of
applications but CPO does not.
CPO from Indonesia together had the effect that the
average US dollar price per tonne realised by the group in
In 2008, approximately 58 per cent of the group's CPO
respect of 2008 sales of CPO, adjusted to FOB,
production was sold in the local Indonesian market and
Samarinda, was $664, not a great deal higher than the
the balance of 42 per cent was exported. FOB prices
average price of the preceding year of $624.
realised for CPO in the local market during 2008 were for
the most part broadly in line with those available in the
The group currently has no forward sales of CPO. The
export market but, with production volumes increasing
Indonesian regulations imposing a sliding scale of export
and current trading uncertainties, the group wishes to
duty remain in place although the scale itself has been
ensure that it can access the larger CPO markets
modified so that currently the rate of duty payable rises
available internationally when necessary. Export sales
from nil per cent on sales at prices of up to the equivalent
continued to be concentrated within the South East Asian
of $700 per tonne, CIF Rotterdam, to 25 per cent on
region. A major component of exports goes to refineries
sales at prices above the equivalent of $1,300 per tonne.
in East Malaysia owned by one customer (a company of
international standing) while local sales are restricted to a
Sales of CPKO during 2008 were made entirely in the
small number of regional buyers. All sales are made on
local Indonesian market and achieved an average
contract terms that are comprehensive and standard for
premium of some $156 per tonne over the FOB price per
each of the markets into which the group sells. The group
tonne for CPO (2007: $115).
therefore has no need to develop its own policies for
product quality and terms of dealing with customers.
Cost base
As a general rule, all CPO produced by the group is sold
The group's revenue costs principally comprise: direct
for immediate delivery but on occasions, when market
costs of harvesting, processing and despatch; direct costs
conditions appear favourable, the group makes forward
of upkeep of mature areas; estate and central overheads
sales. When making such sales, the group would not
in Indonesia; the overheads of the UK head office; and
normally commit a volume equivalent to more than 60 per
financing costs. Whilst direct costs vary to an extent with
cent of its projected CPO production for a forthcoming
crops harvested and the area under cultivation, the crop
period of twelve months.
related component of costs is not a high proportion of the
total. Therefore, for any given total area under cultivation,
During 2008, the group delivered 12,000 tonnes of CPO
costs are for the most part fixed. The directors believe
under forward sale contracts dating from 2006 at the
that the group's senior management team has the
equivalent of a CIF Rotterdam price of $620 per tonne.
capacity to manage a larger area than is currently under
Other forward sale contracts made in 2007 for the
cultivation and do not therefore expect that when
eighteen month period from July 2008 to December
extension planting is resumed fixed costs will increase
proportionately to the area under cultivation.
26
Cost inflation has been a characteristic of the group's
workforce and their dependants are housed in group
operations in recent years, but cost pressures in 2008
housing in a network of villages across the group estates.
were very pronounced. In particular, the cost of diesel
continued to increase in line with the price of petroleum
The group places considerable emphasis on welfare and
oil while salary and wage costs grew significantly and
remuneration structures and aims to promote a
fertiliser prices rose to new highs. Recent months have
productive and stable workforce. All villages are equipped
seen some reversals of these trends. Diesel prices have
with potable water and electricity and provided with a
fallen with petroleum oil prices and there have been
range of amenity buildings including mosques, churches,
significant reductions in the costs of all fertilisers,
shops, schools and creches. A trust funded by the group
although the cost of potash has fallen somewhat less
operates a network of primary schools across the group's
than the costs of fertilisers providing nitrogen and
estates and the group provides financial assistance to
phosphate. In addition, the weaker Indonesian rupiah,
state secondary schools serving the children of the
(currently standing at Rp10,650 against the US dollar as
group's employees. The group runs its own health service
compared with Rp9,419 at 1 January 2008) is helping to
with medical facilities in each estate village and a central
offset the cost in US dollar terms of Indonesian wage
hospital. The clinics and hospital are open not only to the
increases and inflation in other rupiah denominated costs.
group's employees and their dependents but also to
members of the local communities. The group actively
With the moderating inflation position and increasing
supports measures to control endemic diseases and to
production volumes, unit costs remain at levels that permit
further the education of its workforce in hygiene and
the group, at current CPO prices to achieve margins that,
similar health matters.
although below the very high margins of the early months
of 2008 are still satisfactorily remunerative. Furthermore,
The group has health and safety policies that are clearly
the temporary scaling back of the extension planting
communicated to all employees and are managed
programme is providing an opportunity for management
through regular meetings of each operating unit attended
to reconsider the efficiency of various aspects of the
by management and employee representatives. The
group's day to day operations. In particular, the group is
minutes from all such meetings are reviewed by senior
currently reviewing the scope for savings, in FFB
management ultimately accountable to the group
collection and transport arrangements, from greater
managing director and appropriate action is taken to
mechanisation, and
in
road maintenance,
from
remedy any deficiencies identified. The group promotes a
centralising maintenance responsibilities. A significant
policy for the creation of equal and ethnically diverse
investment is also being made in the development of a
employment opportunities and encourages
the
new management information and accounting data base.
establishment of forums in which employees or their
It is expected that this will become operational in phases
representatives can have free and open dialogue with the
during 2010 and be fully operational for 2011.
group’s management.
Employees
Training is an important focus for the group in its efforts
to establish best practice in all aspects of the group's
With crops continuing to increase, the group is steadily
activities. Regular training programmes are run as part of
expanding its workforce. At the end of 2008, this
the human resource development function. Particular
numbered some 6,000. Almost all members of the
27
Review of the group continued
emphasis
is placed on health and safety and
in establishing their own smallholdings of oil palm. The
sustainability.
model for this support is that each individual smallholder
cultivates oil palm on his own two hectare plot with the
The group’s continuing expansion brings with it the need
group providing technical advice through a management
regularly to enlarge the operational management team
team dedicated
to
the smallholder development
and a recruitment programme for graduates with
programme. Fertilisers and chemicals are supplied by the
agricultural qualifications is conducted each year. These
group to individual smallholders on deferred terms but on
graduates join a twelve month cadet training programme.
the basis that when smallholder oil palm plantings reach
Those successfully completing this programme, which
maturity, all FFB produced will be sold to the group for
provides a grounding in all aspects of oil palm estate
processing and the group will, on an agreed basis, recover
management, are offered positions as assistant
from the amounts payable for the FFB, the deferred
managers. The recruitment programme for cadets is
amounts owed to the group. At 31 December 2008, some
sized each year to reflect the future management needs
1,370 hectares of smallholder plantings had been
of the group and to allow for staff turnover.
established following this model across 12 local villages.
Courses constructed and operated out of the group's own
Although interest from the local village communities in the
training school are targeted primarily at lower and middle
cultivation of oil palm as a secure long term livelihood
management
levels.
The group recognises
the
increases year by year, it has become clear that the
importance of developing management skills at all levels
logistical constraints of dealing with a large number
and the scope of the group’s ongoing training programme
individuals, each of whom operates on a relatively small
includes
the external provision of management
area, will inevitably limit the rate at which the group can
development courses for the group's senior Indonesian
expand the smallholdings that it supports on the model
management.
just described. Moreover, the ethnic background of the
communities living in the vicinity of the group’s operations
Action was taken during 2008 to provide remuneration
varies materially from village to village, and the lifestyle
incentives to employees to discourage them from
and culture of some villages are not conducive to
switching to other employers. The response to this has
development of oil palm by way of small individual
been positive and with competition for competent estate
holdings.
management and experienced workers reducing as plans
for new oil palm development are scaled back to reflect
The group is committed to a material expansion of the oil
current financing realities, the group hopes that it can
palm areas cultivated by the local village communities and
continue successfully to protect its significant investment
is keen to provide mechanisms by which all such
in its employees and their skills.
Sustainability
Smallholder programmes
communities can benefit from the economic opportunities
afforded by oil palm development. To this end, the group,
in addition to its support for the individual smallholder
model, will now also support local village cooperatives in
developing oil palm on larger areas ranging from 100 to
1,000 hectares or more. Under this new model, the land
The group continues to support individuals in the local
areas for development will be provided by
the
communities in areas adjacent to the group's operations
cooperatives but the development will be managed by the
28
group for a fee. The costs of development will be borne
component of its plantation operations. To this end, the
by the cooperatives but with funding from external
group has established a separate department to liaise
sources provided on terms that FFB produced by the
with the local communities and to formulate and manage
cooperatives will be sold to the group and that the group
the group's community development initiatives. The
will ensure that, out of the proceeds of such sale, the
department is headquartered in the group's offices in
cooperatives will meet their debt service obligations in
Samarinda but maintains specialist management teams
respect of the external funding.
resident on the sites upon which the group operates.
These teams are the primary interface between the group
To date, the group has developed slightly in excess of 300
and the local communities and, in addition to their general
hectares of oil palm for local village cooperatives but it is
duty of liaison, have several specific functions.
now actively negotiating schemes to increase this
hectarage very materially. The areas developed so far
When new areas are allocated to the group, the
have been funded by the group under compensation
community development teams have an important role in
agreements reached with villages in connection with the
the titling process. They oversee the production by
titling of land allocations held by the group. It is intended
external consultants of the community needs assessment
that the further schemes for cooperative developments
that the group now commissions in all new areas prior to
now being pursued should be funded with local bank
any development of such areas. They explain to the local
finance provided pursuant to an Indonesian government
communities the implications of oil palm development and
scheme designed to encourage the expansion of oil palm
seek to identify and meet local concerns so that the free,
plantings under
village cooperative ownership.
prior and informed consent of local people is obtained for
Negotiations with the East Kalimantan development bank
new developments.
for the provision of funding on this basis are currently in
hand.
The community development teams also engage in
regular discussion with government at local and central
Whilst the group views its support for smallholder oil palm
level in order to identify and develop areas where the local
plantings in the local communities adjacent to its
communities can obtain government assistance and
operations as part of its social obligations to those
funding for community development projects. It is hoped
communities, the discharge of those obligations will be
that, with the group’s help, local communities can be
mutually beneficial to the communities and the group.
made fully aware of the range of government rural
The communities will benefit from the economic
assistance programmes available to them and that the
development generated as a result of the plantings while
group can act as a catalyst in helping local communities
the group will benefit from the additional throughput in its
to avail themselves of the benefits that such programmes
oil mills that will result from the processing of FFB from
can bring.
the plantings.
Community development
Finally, each community development team, through its
day to day presence on the ground and regular visits to
the local communities, encourages the establishment of
The group believes that maintenance of good relations
small scale self-help projects by individual groups of
with, and encouraging the development of,
local
villagers. The proximity of the sizable workforce resident
communities in its areas of operation is an essential
on the group’s estates provides a readily accessible local
29
Review of the group continued
market for produce arising from such projects and
(cid:129)
to seek conservation outcomes that accrue long term
permits the group, when appropriate, to support projects
benefit to local communities.
with offtake guarantees. When needed, the group also
provides financing assistance. To date the group has
been involved with over 50 self-help projects, most of
which are continuing. Project activities have included
chicken and duck rearing, fish farming and fruit, vegetable
and rice cultivation.
Conservation
From the outset, the group has planned the development
of its East Kalimantan operations on the basis of
environmental impact assessments and advice provided
by independent experts. It continues to do so. Within the
areas already developed, over 6,000 hectares have been
retained as conservation reserves with the aim of
preserving or enhancing landscape level bio-diversity.
Areas identified as requiring conservation and set aside
as part of the planning process for each new development
area will be added to the conservation reserves as the
group expands.
As with community development, the group has
established a separate department under the leadership
of an internationally recognised conservation expert to
implement the group’s conservation objectives, which are:
The conservation department augments its effectiveness
through partnerships with local bodies and international
non governmental organisations. The department was
active during 2008 in identifying and cataloguing flora
and fauna within the existing conservation reserves and in
advising on the delineation of conservation reserves
within the new land areas allocated to the group. In
particular the department was able to identify a riverine
zone within the CDM areas that is home to two
endangered species of crocodile, the Tomistoma
schlegelii and Crocodylus siamensis, that it is important to
protect. A joint study of aquatic fauna conducted with the
Indonesian Institute for Sciences was successful in
indentifying three new varieties of previously unknown
fish (Leiocassis new sp, Pangio new sp and Rasbora new
sp).
The directors believe that there is scope to extend the
activities of the conservation department beyond the
immediate areas of the group's operations into the wider
Belayan river basin and that to do so would extend the
conservation gains that the department can hope to
deliver. To this end the group is currently considering the
conversion of the conservation department into a
charitable foundation which the group would support but
(cid:129)
within the group's areas of operations to compile a
which would also be in a position to accept donations
detailed record of the physical attributes of the
from, and work with, third parties.
landscape, its bio-diversity resources and the status
and value of each to both international and local
Sustainable practices
communities;
to minimise or eliminate adverse impacts from the
group’s plantations upon soil, water and biological
communities;
to achieve bio-diversity conservation
through
education of local communities, protection and
sustainable use; and
The group recognises its social obligations in relation to
pollution and energy efficiency. The group operates a
zero burning policy in relation to land development and, in
dry periods, maintains active fire patrols in an effort to limit
the risks of accidental fires. Corridors are used to
separate all plantings from water courses and the latter
are regularly monitored to ensure that they are not
contaminated by leaching of fertilisers and chemicals.
(cid:129)
(cid:129)
30
The group actively promotes
integrated pest
are carefully reviewed by senior operating management
management throughout its operations. Wherever
and the group’s managing director and appropriate
possible, natural predators are preferred to pesticides for
responsive action is taken.
pest control. Selective varieties of flowering plants have
been planted throughout the group’s estates to promote
Accreditation
the population of wasps, the natural predators of
bagworm and caterpillars.
REA Kaltim has recently been awarded ISO 14001
certification in respect of its two mills and kernel crushing
All processing waste is recycled. Oil mill effluent is
plant and expects to receive certification for its six estate
treated in effluent ponds and after treatment is distributed
units in the second half of 2009.
within the oil palm areas as a substitute for inorganic
fertiliser. Empty fruit bunches are similarly distributed.
The group is a member of the Roundtable on Sustainable
Fibre extracted during the milling of oil palm fruit is used
Palm Oil (“RSPO”) which has produced a set of eight
to fuel oil mill boilers from which steam is generated. This
principles and 39 criteria for the sustainable production of
steam is then used to drive steam turbines for generating
palm oil. During 2008, work was completed by RSPO on
electricity.
establishing national interpretations of these principles
and criteria for each of the major CPO producer countries
The group is giving continuing attention to identifying
to ensure consistency with each country’s legal system.
ways of reducing its carbon footprint. Measures already
Accordingly, individual companies can now obtain RSPO
taken include improvements to the distribution of surplus
accreditation and the group is working towards doing so.
electric power generated in the group's oil mills reducing
the need to run diesel generators to supply power to
Whilst the directors believe that the group's operational
estate villages. The group is currently evaluating a
practices already meet the requirements of RSPO,
possible project to increase the surplus power available
accreditation will require that such operational practices
from the milling process by passing mill effluent through
are embedded in formal systems and are subject to
an anaerobic digestion process, capturing the methane
controls that are auditable. The group, with assistance
released during digestion and utilising such methane to
from external consultants, has been actively engaged in
drive gas powered generators. This would not only further
formalising such systems and controls and expects to be
reduce the group's use of diesel for power generation but
in a position to seek RSPO accreditation in 2010, after
would also substantially eliminate current methane
the current ISO 14001 certification process has been
emissions from effluent ponds. The group hopes that the
completed.
project may be eligible for carbon credits under the Clean
Development Mechanism which may make it easier to
As a substantial Indonesian plantation operator, REA
justify the capital commitment that would be involved.
Kaltim is subject to periodic environmental appraisal
pursuant to a programme managed by the Ministry of
In line with its policy of continuous improvement, the
Environment and known as "PROPER". Results of
group employs an international firm of consultants to
PROPER evaluations are marked by the presentation of
perform an annual management performance review
coloured flags ranging from black for the poorest
covering production and environmental practices and
assessment to gold for the best. During 2008, REA
social sustainability. Conclusions and recommendations
Kaltim was one of only two plantation companies
31
Review of the group continued
throughout Indonesia to be presented with a green flag,
facilities, coal can be loaded into 5,500 tonne barges for
the highest level of flag so far awarded under the
transhipment over a short distance to a sea anchorage
PROPER programme.
capable of accommodating cape size vessels.
New initiative
The Liburdinding area has Pamaluan coal formations with
typical gross calorific values between 5,600 and 6,000
Against the background that it is well established that the
kcal/kg and the Muser area has Tanjung coal formations
province of East Kalimantan has vast coal deposits and
with typical gross calorific values between 6,000 and
that certain of the local investors in the group's East
7,000 kcal/kg. Surveys using the 2D resistivity method
Kalimantan operations were encouraging the group to
have been conducted by an independent firm of
consider joining them in developing coal concessions
geologists in Jakarta on both Liburdinding and Muser
available to such local investors, the directors concluded,
areas and these indicate coal reserves of 14.7 million and
in late 2007, that the group should explore opportunities
17.6 million tonnes respectively. Drilling work has been
in coal mining. Accordingly, in March 2008 the group
undertaken to assess further the characteristics of the
opened an office in Jakarta to pursue such opportunities
coal deposits and these have indicated gross calorific
and, the directors having decided that such pursuit should
values of between 5,800 and 6,200 kcal/kg in the case
be kept quite separate from the group's plantation
of the Liburdinding deposits and between 7,000 and
operations, recruited a small team of staff to manage the
7,200 kcal/kg in the case of the Muser deposits. The
office and evaluate available opportunities.
group is commissioning a further assessment of coal
reserves in accordance with the rules of the Australasian
With the office in place and with a view to obtaining a
Joint Ore Reserves Committee.
better understanding of the Indonesian coal market and
defraying start up overheads, the group then took its first
Regulations governing coal mining in Indonesia currently
steps into the coal sector by entering into an arrangement
restrict the mining activities in which foreign investors
for a limited period (now expired) to source coal from
may be involved and are complicated by the recent
Kalimantan and supply it to a power station in Sumatra.
enactment of new mining legislation in respect of which
With the experience gained from this initial activity, and
implementing regulations have still to be published.
with assistance from
the group's
long standing
connections in East Kalimantan, the group then felt more
As currently structured,
the group's
interest
in
comfortable in progressing from coal trading to direct
Liburdinding and Muser will be held through PT KCC
investment in open cast coal mining.
Mining Services Indonesia ("KCCMSI") an Indonesian
foreign investment company of which the establishment
This led to the completion by the group in the second half
has been approved by the Indonesian investment co-
of 2008 of the acquisition of rights in respect of two
ordinating board and of which the incorporation is
adjoining coal concessions, the first, Liburdinding,
currently in process. KCCMSI will be owned as to 95 per
covering an area of some 1,000 hectares and the second,
cent by the group and 5 per cent by a local investor who,
Muser, some 2,000 hectares. The concessions are
with members of his family, has already acquired or
located in the southern part of East Kalimantan, close to
established the two local Indonesian companies (the
an existing major coal mining operation and some 40
"licence companies") holding the mining licences in
kilometres from existing river port facilities. From these
respect of the Liburdinding and Muser concessions.
32
Pursuant to arrangements agreed between the group and
granted for Liburdinding and will be processed for Muser
the local investor, the group has provided or will provide
once the exploitation licence has been granted.
loan funding to meet substantially all of the costs of
obtaining and developing the concessions upon terms
Necessary work on upgrading roads from the concession
that all coal produced by the licence companies will be
areas to the port facility has been slightly delayed by
sold to KCCMSI on a basis that reflects the group's
heavy rains but has now been completed and contractors
funding commitments, the costs to the licence companies
appointed
to commence mining operations on
of that funding and the group's involvement in the
Liburdinding are now on site. It is hoped that production
development and operation of the concessions. It has
from this concession will start within the second quarter
also been agreed that the group will have the right to
of 2009 and will be followed within a short period by
require the combination of the licence companies and
production from Muser. A small team of experienced
KCCMSI on appropriate terms should
Indonesian
managers has been recruited to oversee the mining
regulations in future permit this and, further, that all of the
operations.
existing arrangements between the group and the local
investor may be revised on a basis consistent with their
The group is giving careful attention to the potential
present economic intent should the implementing
environmental consequences of the coal operations and
regulations in respect of the new mining legislation, when
intends that the operations should be conducted in
published, make such revision expedient.
accordance with international standards of best practice.
In particular, the group will seek to establish health and
Having acquired its rights in respect of the Liburdinding
safety procedures to protect and safeguard the welfare of
concession, the group held discussions with two different
all persons involved with the mining operations, to engage
parties who indicated interest in acquiring the coal from
positively with employees, contractors and
local
that concession upon terms that would have effectively
communities, to ensure the proper management of waste
relieved the group of any further material capital
and to reinstate, in so far as reasonably practicable, land
commitment or operating risk in exchange for a cash
areas affected by mining to their original condition upon
royalty. However, such discussions proved abortive.
completion of mining operations.
Accordingly, the group has concluded that the licence
companies should
themselves operate both
the
It is expected that coal production will be sold into both
Liburdinding and Muser concessions and they are
local and export markets. Local demand for coal is
seeking to bring both concessions into production as
expected to increase significantly in the coming months
soon as possible.
as a result of the commissioning of a number of new coal
fired power stations in Indonesia.
Detailed mining designs for the Liburdinding concession
have now been completed and work has started on
Pending validation of theoretical plans by actual operating
mining designs for the Muser area. The exploration
experience, the directors remain cautious as to the
licence held in respect of Liburdinding has been
returns achievable from the group's new coal interests,
converted to an exploitation licence and the conversion of
particularly given that coal prices have fallen significantly
the exploration licence in respect of Muser is at an
over the past six months. Nevertheless, the group's
advanced stage. A transport and selling licence has been
internal projections continue to indicate that margins
achievable even at current coal prices will justify the
33
Review of the group continued
investment made which amounted at 31 December 2008
Indonesian export duty, to 31 December 2008 amounted
to $5.4 million.
Finances
Accounting policies
to $431 per tonne as compared with the 20 year average
to 31 December 2007 of $414 per tonne. This implies
an increase in the estimated unit value of FFB for transfer
to mill from 2007 to 2008 that is less than the increase
in unit current costs from 2007 to 2008. However, the
unit profit margin per tonne of FFB harvested that is
The group continues to report in accordance with
currently being achieved is greater than the estimated
International Financial Reporting Standards (“IFRS”).
unit profit margin applied in valuing the biological assets
Following a decision taken in 2007 that the group should
as at 31 December 2007. Accordingly, the same unit
adopt the US dollar (which is regarded as the functional
profit margin as that assumed as at 31 December 2007
currency of the group) as its presentational currency, the
(namely $50 per tonne of FFB) has been applied in
accompanying consolidated financial statements for the
valuing the biological assets as at 31 December 2008.
year ended 31 December 2008 are presented in US
dollars (as were the consolidated financial statements for
The discount rates used for the purposes of the biological
the preceding year).
asset revaluation at 31 December 2008 were 16 per cent
in the case of REA Kaltim and 19 per cent in the case of
The accounting policies applied under IFRS are set out in
all other group companies (31 December 2007:
the “Accounting policies (group)” section of this annual
respectively, 17.5 per cent and 19 per cent). The
report. The accounting policy relating to biological assets
directors believe that the risks of successfully harvesting
(comprising oil palm plantings and nurseries) is of
FFB projected to be produced from newly developed
particular importance. Such assets are not depreciated
areas are significantly greater than those of harvesting
but are instead restated at fair value at each reporting
the projected FFB crops from established estates. They
date and the movement on valuation over the reporting
consider it appropriate to reflect this risk differential by
period, after adjustment for additions and disposals, is
applying a discount rate of 19 per cent to newly
taken to income. Deferred tax is provided or credited as
established areas, reducing this to 17.5 per cent as an
appropriate in respect of each such movement.
area becomes well established and then further to 16 per
cent when plantings in an established area become
As in previous years, the fair value of the biological assets
predominantly mature. The discount rates used at 31
at 31 December 2008 has been derived by the directors
December 2008 and 31 December 2007 were derived
on a discounted cash flow basis by reference to the FFB
accordingly.
expected to be harvested from the group's oil palms over
the full remaining productive life of the palms and to an
The directors recognise that the IFRS accounting policy in
estimated profit margin per tonne of FFB so harvested.
relation to biological assets does have theoretical merits
This estimated unit profit margin is based on current costs
in charging each year to income a proper measure of
and an estimated produce value for transfer to mill
capital consumed (so that, for example, a fair distinction is
derived from a twenty year average of historic CPO prices
drawn each year between the cost of the shortening life
but is buffered to restrict any implied change in margin in
expectancy of younger plantings still capable of many
contradiction of the trend in current margins. The 20 year
years of cropping and that of older plantings nearing the
average CPO price, FOB port of Samarinda and net of
end of their productive lives). It does, however, concern
34
the directors that no estimate of fair value can ever be
2007 and 2008 of $20.5 million with net losses on
completely accurate (particularly in a business in which
revaluation of biological assets and agricultural produce
selling prices and costs are subject to very material
inventory of, respectively, $2.7 million and $4.2 million
fluctuations). Moreover, in the case of the group’s
against net gains of $8.0 million and $5.6 million in the
biological assets, small differences
in valuation
prior year. Significant other differences between the two
assumptions can have a quite disproportionate effect on
years were a $22.0 million increase in revenue ($79.6
results. The biological assets are recorded in the group
million against $57.6 million) and a $12.8 million increase
balance sheet at 31 December 2008 at $180 million. An
in cost of sales.
increase or reduction of $5 per tonne in the estimated
profit margin used for the purpose of the valuation of $50
The net loss on the revaluation of the biological assets at
per tonne of FFB would increase or reduce the valuation
31 December 2008 was principally caused by the
by approximately $19 million. Other sensitivities to
decision taken in October 2008, as referred to under
assumptions are disclosed in note 13 to the consolidated
"Land development" in "Operations" above, to suspend
financial statements.
Accounting reference date
extension planting. This meant that the hectarage
developed or in course of development at 31 December
2008 was lower than it would otherwise have been and
that the FFB crops projected for the purposes of the
It was noted in the company's 2007 annual report that the
revaluation had to be reduced commensurately. The
directors were contemplating a change in the company's
revaluation benefited from two factors: first, a reduction
accounting reference date from 31 December to 28
in the discount rate applied in respect of the REA Kaltim
February. A pre-requisite of such a change was the
biological assets (from 17.5 per cent to 16 per cent),
consent of the holders of the 9.5 per cent guaranteed
designed to reflect the reduced risk, as REA Kaltim
sterling notes 2015/17 issued by REA Finance B.V. and
plantings mature, of failing to harvest projected REA
this was duly obtained in August 2008. Subsequent
Kaltim crops; and, secondly, an increase as compared with
discussions with the group's Indonesian professional
2007 in the per hectare yields projected for newly mature
advisers have indicated that negative Indonesian fiscal
areas reflecting the group's actual yield experience of
consequences would be
likely
if the company's
recent years. However, the positive impact of these two
Indonesian subsidiaries were to change their reporting
factors did not fully offset the negative impact of the
periods so that these remained co-terminous with those
planting suspension.
of the company following a change in the latter’s
accounting reference date. Accordingly, the directors
There was little change in the volume of the group's
have decided that the company should retain its existing
agricultural produce inventory over 2008 but the IFRS
accounting reference date of 31 December.
requirement to value this inventory at fair market value
Group results
meant that the movement between opening and closing
valuations showed a loss as a result of the fall in CPO
prices over 2008. This contrasted with the preceding
Group operating profit for 2008 amounted to $40.6
year when an increase in the volume of produce inventory
million against $49.4 million in 2007. The result reflected
combined with a rise in CPO prices to produce a
a negative swing in IFRS fair value adjustments between
significant gain under the same caption.
35
Review of the group continued
The reported increases in revenue and cost of sales for
disputed and a material recovery of the amounts paid on
2008 were the result of the higher production achieved
account is expected. The net result is still a reduced rate
combined, as respects revenue, with higher selling prices
of tax charge in 2008 as compared with 2007.
and, as respects cost of sales, with inflation in most
operating input costs. In particular, prices for diesel and
At the after tax level, profit for the year for 2008 was
fertiliser moved to new highs while labour costs rose in
$25.8 million against $32.0 million in 2007 while profit
line with increases in the general cost of living in
attributable to ordinary shareholders was $23.8 million
Indonesia. The increase in cost of sales also reflected the
against $29.5 million. Fully diluted earnings per share
costs of upkeeping an additional 3,189 hectares of
amounted to US 71.5 cents (2007: US 89.6 cents).
plantings that were classified as mature from the start of
2008.
The group's target long term average annual return on
adjusted equity is 20 per cent. The return achieved for
Group profit before tax for 2008 amounted to $36.3
2008 was 26.0 per cent against 42.5 per cent for 2007.
million against $47.0 million in 2007. The movement
substantially mirrored that in operating profit but also
Dividends
reflected higher finance costs and lower investment
revenues. The former was principally caused by a higher
The fixed semi-annual dividends on the 9 per cent
average level of group indebtedness during the year (the
cumulative preference shares that fell due on 30 June
result of the further issue of sterling notes in August
and 31 December 2008 were duly paid. Absent an
2008) and the latter by the lower rates of interest
unforeseen material adverse change in the group's
available during the year on cash deposits.
circumstances, the directors intend that all future semi-
annual dividends on the preference shares should be paid
Before deduction of the interest component added to
as they fall due. Dividends totalling 3p per ordinary share
biological assets, interest and similar charges payable in
have been paid in respect of 2008 (2007: 2p per ordinary
2008 amounted to $10.0 million (2007: $9.2 million).
share). These comprised a first interim dividend of 1.5p
Interest cover for 2008 (measured as the ratio of
per ordinary share paid on 26 September 2008 and a
earnings before
interest,
tax, depreciation and
second interim dividend in lieu of final of 1.5p per ordinary
amortisation, and biological gain to interest and similar
share paid on 30 January 2009. In addition, the company
charges payable) was 4.7 (2007: 5.1).
made a capitalisation issue to ordinary shareholders of
1,302,954 new preference shares on the basis of one
During 2008, reductions were announced in future rates
new preference share for every 25 ordinary shares held
of Indonesian corporation tax. This has permitted a
on 24 September 2008.
reduction in the provision for deferred tax at 31
December 2008 with a consequential credit to income
The group retains ambitious plans for continued
account. Offsetting this, the amount previously provided
extension planting of oil palms. This will require
for tax has been increased to provide in full for an
substantial investment. Moreover, the uncertainties of the
Indonesian assessment of tax on REA Kaltim's 2006
current world economic situation and the possibility that
profits at a higher level than was originally expected
CPO prices may fall back from current levels dictate that
although significant elements of the assessment are
the group should be careful to husband its cash
36
resources. While this remains the case, the directors will
During the year, a further £28,000,000 nominal of 9.5 per
inevitably feel constrained as to the rate at which they can
cent guaranteed sterling notes 2015/17 (“sterling
prudently declare, or recommend the payment of, future
notes”) were created of which £15,000,000 nominal
ordinary dividends.
were issued for cash at a subscription price of 99.8682
per cent of par by REA Finance B.V. (“REA Finance”), a
The directors do appreciate that many shareholders
wholly owned subsidiary of the company. The effect of
invest not only for capital growth but also for income and
this issue was to increase the nominal amount of sterling
that the payment of dividends is important. The directors
notes in issue to £37,000,000 and the prospective total
have previously stated their intention that any new level of
size of the eventual sterling note issue to £50,000,000
ordinary dividend set in respect of any given year should
although under current market conditions an early issue
be sustainable in subsequent years and they expect that
of the unissued balance of £13,000,000 nominal of
this will prove the case with the level of total ordinary
sterling notes appears unlikely.
dividend set in respect of 2008. Under normal
circumstances, the directors would hope that the
Following the latest issue of sterling notes, group
prospective crop increases of coming years wll permit a
indebtedness at 31 December 2008 amounted to
progressive ordinary dividend policy albeit that the rate of
$108.3 million, made up of US dollar denominated bank
progression is likely to be steady rather than dramatic.
indebtedness under an Indonesian consortium loan
facility of $12.9 million, £37 million nominal of sterling
Whilst the directors continue to believe that capitalisation
notes (carrying value: $50.2 million), $15.4 million in
issues of new preference shares to ordinary shareholders,
respect of the hedge of the principal amount of the
such as were made in both 2007 and 2008, provide a
sterling notes as described below, $30 million nominal of
useful mechanism for augmenting returns to ordinary
7.5 per cent dollar notes 2012/14 (“dollar notes”)
shareholders in periods in which good profits are
(carrying value: $29.6 million) and other short term
achieved but demands on cash resources limit the scope
indebtedness (including obligations under finance leases)
for payment of cash dividends, the current state of
of $0.2 million. Against this indebtedness, at 31
markets for fixed return securities of smaller listed
December 2008 the group held cash and cash
companies may make it impractical to make another such
equivalents of $30.3 million.
issue in 2009.
Capital structure
The sterling notes are secured principally on unsecured
loans made by REA Finance to REA Kaltim and SYB, are
guaranteed by the company and are repayable by three
The group is financed by a combination of debt and equity
equal annual instalments commencing 31 December
(which under IFRS includes minority interests and the
2015. The dollar notes are unsecured obligations of the
company's preference capital). Total equity less minority
company and are repayable by three equal annual
interests at 31 December 2008 amounted to $162.0
instalments commencing 31 December 2012.
million as compared with $147.8 million at 31 December
2007. Minority interests amounted at those dates to,
Borrowings under the Indonesian consortium loan facility
respectively, $580,000 and $877,000.
are secured on the assets of REA Kaltim and are
guaranteed by the company. The outstanding balance
37
Review of the group continued
under the facility at 31 December 2008 was repayable as
capital amounted to $50.2 million in 2008 against $38.0
follows: 2009 - $10.7 million and 2010 - $2.2 million.
million in the preceding year. A release of working capital
Following recent discussions with the banks providing the
of $0.7 million in 2008 against an absorption of $3.2
facility, it has been agreed that the terms of the facility will
million in 2007 meant that cash generated from
be reconstituted so as to provide the group going forward
operations in 2008 at $50.9 million was significantly
with an $11.75 million term loan repayable over five years
ahead of the $34.8 million generated in 2007. However,
and a revolving working capital facility, renewable
a higher interest cost ($5.5 million against $3.5 million)
annually, of $4.75 million.
coupled with a very material increase in tax paid ($13.1
million against $3.2 million) following the exhaustion
The group has entered into long term sterling US dollar
during 2007 of tax losses brought forward from earlier
debt swaps to hedge against US dollars the sterling
years, reduced the difference between the two years so
liability for principal and interest payable in respect of the
that net cash from operating activities for 2008 was $4.1
entire issue of the sterling notes (but, in the case of
million ahead of 2007 at $32.3 million against $28.2
interest only, as respects interest payments falling due up
million.
to 31 December 2015). The net liability at 31 December
2008 on restatement of these hedging swaps at fair value
Overall, during the two year period to 31 December 2008,
was $26.5 million reflecting the fall in sterling against the
there was an increase in working capital of $3.9 million.
US dollar since the swaps were contracted and
This was principally due to the increase in the size of the
substantially matching the benefit enjoyed by the group
group's operational activities. The reported higher
from the reduction in the dollar liability in respect of the
increase of $8.8 million reported for 2007 and
sterling notes over the same period as a result of the
subsequent release of $4.9 million for 2008 may be
same fall.
attributed to the timing of payments and receipts over
year ends and, in particular, to timing in relation to
As referred to under "Dividends" above, 1,302,954 new
produce shipments and payments for such shipments.
preference shares were issued in September 2008 by
way of capitalisation of share premium account pursuant
Investing activities for 2008 involved a net outflow of
to a capitalisation issue to ordinary shareholders.
$48.3 million (2007: $31.8 million). This represented
Group cash flow
new investment totalling $49.6 million (2007: $33.6
million), offset by inflows from interest and other items of
$1.3 million (2007: $1.8 million). The new investment
Group cash inflows and outflows are analysed in the
comprised expenditure on further development of the
consolidated cash flow statement. Cash and cash
group's plantations of $39.8 million (2007: $29.8 million),
equivalents reduced slightly over 2008 from $34.2 million
expenditure on acquisition of land rights and the purchase
to $30.3 million.
of PBJ of $4.4 million (2007: acquisition of land rights -
$3.8 million) and expenditure on the new coal initiative
Although operating profit for 2008 at $40.6 million was
(including the acquisition of coal concession rights) of
lower than the $49.4 million reported for 2007, adjusting
$5.4 million (2007: $nil).
for the non cash components of operating profit (and in
particular the movements on revaluation of biological
The net outflow in respect of investing activities was
assets) operating cash flow before movements in working
principally financed by a combination of net cash flow
38
from operating activities and net cash flow from financing
The group may seek further debt funding to permit the
activities. The latter produced a net inflow of $19.9
group to proceed with a higher level of extension planting
million (2007: negligible effect). This was made up of an
than the group could otherwise afford. However, the
inflow from the issue of further sterling notes of $26.9
directors will require that any such additional debt funding
million (2007: issue of sterling notes and equity - $28.6
is provided predominantly by way of medium term loans
million), net repayments of bank debt and finance lease
and will limit additional borrowings to levels that the
obligations of $3.1 million (2007: $26.1 million) and an
directors are confident that the group’s equity base can
outflow in respect of dividend payments of $3.9 million
comfortably sustain.
(2007: $3.5 million).
Liquidity and financing adequacy
The group's financing is materially dependent upon the
contracts governing the sterling and dollar notes. There
are no restrictions under those contracts, or otherwise, on
As noted under “Group cash flows” above, the group held
the use of group cash resources or existing borrowings
cash and cash equivalents at 31 December 2008 of
and facilities that the directors would expect materially to
$30.3 million. In addition, the group had at that date an
impact the planned development of the group. Under the
undrawn balance of $4 million under the Indonesian
terms of the Indonesian consortium loan facility, REA
consortium loan facility available for drawing until 7
Kaltim is restricted to an extent in the payment of interest
September 2009 and, to the extent drawn, repayable in
on borrowings from, and on the payment of dividends to,
2010. The recent agreement to reconstitute the
other group companies but the directors do not believe
Indonesian consortium loan facility, as referred to under
that the applicable covenants will affect the ability of the
"Capital structure" above, will replace the existing $4
company to meet its cash obligations.
million undrawn balance under the facility with a working
capital line of $4.8 million that will be subject to annual
The group's oil palms fruit continuously throughout the
renewal.
year and there is therefore no material seasonality to the
group's funding requirement.
At current CPO prices and with the agreement to
reconstitute the Indonesian consortium loan facility, the
Financing policies
group could expect that, excluding expenditure on new
extension planting (but allowing for upkeep of existing
The directors believe that, in order to maximise returns to
immature areas), cash flows from operations for 2009
holders of the company's ordinary shares, it is essential
would comfortably exceed the amounts required to fund
that a proportion of the group's funding needs are met
planned capital and development expenditure and debt
with prior charge capital. Although the company's
service. As indicated under "Land allocations and
preference capital is expensive to service, in that the
development" above, the directors have recently decided
preference shares entitle the holders of those shares to a
that extension planting should be resumed but on the
cumulative annual dividend at the rate of 9 per cent of the
basis that such resumption will be at a level such that the
nominal value of the shares (being £1 per share), the
prospective costs of development can reasonably be
directors consider that the preference capital is a valuable
expected to leave the group with an appropriate cash
component of the group's prior charge capital in that it
reserve against further weakness in CPO prices.
provides relatively low risk permanent capital. They also
believe that the company can now comfortably support
39
Review of the group continued
preference capital at the level at which the issued
Other treasury policies
preference capital currently stands and
that,
if
circumstances permit, the company should increase that
The sterling notes and the dollar notes carry interest at
preference capital in line with growth in the group's equity
fixed rates of, respectively, 9.5 and 7.5 per cent per
base.
annum. Interest at 31 December 2008 was payable on
drawings under the Indonesian consortium loan facility at
As respects borrowings, the directors believe that the
a floating rate equal to 2.75 per cent per annum over
group's interests are best served if the group's
Singapore Inter Bank Offered Rate ("SIBOR"). After
borrowings are structured to fit the maturity profile of the
reconstitution of the facility, interest on amounts
assets that the borrowings are financing. Since oil palm
borrowed under the facility will continue to be payable at
plantings take nearly four years from nursery planting to
a floating rate equal to SIBOR plus a margin but, for so
maturity and then a further period of three to four years to
long as inter-bank markets remain disrupted, the margin
full yield, the directors aim to structure the group's
will include a liquidity premium reflecting the differences
borrowings so that shorter term bank debt is used only to
between SIBOR and the lending banks' costs of funds.
finance working capital requirements, while debt funding
The margin (including liquidity premium) that would
for the group's development programme is sourced from
currently be applicable is 6.6 per cent per annum on the
issues of medium term listed debt securities and
basis of full utilisation of the facility.
borrowings from development institutions.
As a policy, the group does not hedge its exposure to
The directors believe that the group’s existing capital
floating rates but, where possible, borrows at fixed rates.
structure is consistent with this policy objective but
A one per cent increase in the floating rate of interest
recognise that planned further investment in extension
payable on the drawings under the Indonesian consortium
planting and the inevitable shortening of the maturity
loan facility at 31 December 2008 would have resulted in
profile of the group’s current indebtedness that will result
an annual cost to the group of approximately $130,000.
from the passage of time will mean that action will be
required to ensure that the group’s capital structure
The group regards the US dollar as the functional
continues to meet the objective. Given current conditions
currency of most of its operations and seeks to ensure
in markets for listed debt securities, the directors expect
that, as respects that proportion of its investment in the
that any additional debt funding obtained by the group in
operations that is met by borrowings, it has no material
the near term is likely to be in the form of medium term
currency exposure against the US dollar. Accordingly,
loans provided by development institutions.
where borrowings are incurred in a currency other than
the US dollar, the group endeavours to cover the resultant
Whilst the directors believe that it is important that the
currency exposure by way of a debt swap or other
group retains flexibility as to the percentage of the
appropriate currency hedge. The group does not cover
group's overall funding that is represented by net debt, as
the currency exposure in respect of the component of the
a general indication they believe that, at the present stage
investment in its operations that is financed with sterling
of the group's development, net debt should not exceed
denominated equity. The group's policy is to maintain a
100 per cent of total equity. Net debt represented 48 per
cash balance in sterling sufficient to meet its projected
cent of total equity at 31 December 2008 against a target
sterling expenditure for a period of between six and
of 60 per cent and a level of 35 per cent at 31 December
twelve months and a cash balance in Indonesian rupiahs
2007. The target for 31 December 2009 is 60 per cent.
sufficient
for
its
immediate
Indonesian
rupiah
40
requirements but, otherwise, to keep all cash balances in
After harvesting, FFB crops become rotten if not
US dollars.
Risks and uncertainties
processed within a short period. Any hiatus in FFB
collection or processing may therefore lead to a loss of
crop. The group endeavours to maintain resilience in its
palm oil mills with two mills operating separately and
Because the group's new coal mining initiative is still at an
some ability within each factory to switch from steam
embryonic stage, the risks and uncertainties of that
based to diesel based electricity generation but such
initiative are considered by the directors to be material to
resilience would be inadequate to compensate for any
the group only as respects the risk that the initiative may
material loss of processing capacity for anything other
fail in which event, in a worst case, the capital so far
than a short time period.
invested in the initiative of some $5 million may be lost.
All other risks and uncertainties relating to the group's
The group has bulk storage facilities within its main area
activities that the directors' consider are, or may be,
of agricultural operations and at its transhipment terminal
material relate to the group's established East Kalimantan
downstream of the port of Samarinda. Such facilities and
agricultural operations. These are as follows:
the further storage facilities afforded by the group’s fleet
Climatic factors
of barges have hitherto always proved adequate to meet
the group’s requirements for CPO and CPKO storage.
Nevertheless, disruptions to river transport between the
Although the group's estate operations are located in an
main areas of operations and the port of Samarinda, or
area of high rainfall with sunlight hours well suited to the
delays in collection of CPO and CPKO from the
cultivation of oil palm, climatic conditions vary from year to
transhipment terminal, could result in a group requirement
year and setbacks are possible. Unusually high levels of
for CPO and CPKO storage exceeding the available
rainfall can disrupt estate operations. Unusually low levels
capacity. This would be likely to force a temporary
of rainfall that lead to a water availability below the
cessation in FFB processing with a resultant loss of crop.
minimum required for the normal development of the oil
palm may lead to a reduction in subsequent crop levels.
Operational factors
Such reduction is likely to be broadly proportional to the
size of the cumulative water deficit. Over a long period,
The group’s agricultural productivity is dependent upon
crop levels should be reasonably predictable but there
necessary inputs, including, in particular, fertiliser and fuel.
can be material variations from the norm in individual
Whilst the directors have no reason to expect shortages
years.
Agricultural factors
in the availability of such inputs, should such shortages
occur over any extended period the group’s operations
could be materially disrupted. Equally, increases in input
costs would be likely to reduce profit margins.
As in any agricultural business, there are risks that crops
from the group's estate operations may be affected by
Many of the group’s operational and financial controls rely,
pests and diseases. Agricultural best practice can to
in part, on the group’s management systems. These
some extent mitigate these risks but they cannot be
include computerised systems. Any damage or failure of
entirely eliminated.
such computerised systems could have a deleterious
effect on the group.
41
Review of the group continued
The group maintains insurance to cover those risks
and the early months of 2008 did not lead to a re-
against which the directors consider that it is economic to
imposition of such restrictions or imposts. Instead, the
insure. Certain risks (including the risk of fire in planted
Indonesian government continued to allow the free export
areas on the group's estate), for which insurance cover is
of CPO and CPKO but introduced a sliding scale of duties
either not available or would, in the opinion of the
on CPO and CPKO exports. Furthermore, the starting
directors, be disproportionately expensive, are not insured.
point for this sliding scale was set at a level such that
Occurrence of an adverse uninsured event could result in
when CPO and CPKO prices fell back in the last quarter
the group sustaining material losses.
of 2008, the rate of export duty payable was reduced to
Produce prices
nil.
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 are
imposed and the substitution outside that area of CPO
affected by levels of world economic activity and factors
and CPKO for other vegetable oils. Should such arbitrage
affecting the world economy, including levels of inflation
fail to occur or prove insufficient to compensate for the
and interest rates. This may lead to significant price
market distortion created by the applicable import
swings although, as noted under “Revenues and markets”
controls or taxes, selling prices for the group’s CPO and
in “Operations” above, the directors believe that such
CPKO could be depressed.
swings should be moderated by the fact that the annual
oilseed crops account for the major proportion of world
Expansion
vegetable oil production and producers of such crops can
reduce or increase their production within a relatively
The group is planning further extension planting of oil
short time frame.
palm. The directors hope that land allocations obtained by
the group will become available for planting ahead of the
In the past, in times of very high CPO prices, the
land becoming needed for development and that the
Indonesian authorities have for short periods imposed
development programme can be funded from available
either restrictions on the export of CPO and CPKO or very
group cash resources and future operational cash flows,
high duties on export sales of such oil. The directors
appropriately supplemented with further debt funding.
believe that such measures are damaging not only to
Should, however, land or cash availability fall short of
large plantation groups but also to the large number of
expectations and the group be unable to secure
smallholder farmers growing oil palm in Indonesia and to
alternative land or funding (as was the case in 2007 as
the Indonesian economy as a whole (because CPO is an
respects land), the extension planting programme, upon
important component of Indonesia's US dollar earning
which the group's continued growth will in part depend,
exports). The directors are thus hopeful that such
may be delayed or curtailed.
measures will not be repeated and were encouraged that
the significant rise in CPO and CPKO prices during 2007
42
Any shortfall in achieving planned extensions of the
fauna. As such, the group, in common with other oil palm
group's planted areas would be likely to impact negatively
growers in Kalimantan, must expect scrutiny from
the annual revaluation of the group's biological assets the
conservation groups and could suffer adverse
movements upon which are taken to the group's income
consequences if its environmental policies were to be
statement. Whilst this would not affect the group's
singled out for criticism by such groups.
underlying cash flow, it could adversely affect market
perceptions as to the value of the company's securities.
The group is committed to sustainable oil palm
Currency
development and takes great care to follow best practice
on environmental issues. An environmental master plan
was constructed at the start of the project using
CPO and CPKO are essentially US dollar based
independent environmental experts and this plan is
commodities. Accordingly, the group's revenues and the
updated regularly with further advice from independent
underlying value of the group's oil palm operations are
experts to reflect modern practice and to take account of
effectively US dollar denominated. All of the group's
changes in circumstances (including planned extensions
borrowings other than the sterling notes are also US
to the areas to be developed by the group). Substantial
dollar denominated and the group has entered into a
conservation reserves have been established in areas
sterling US dollar debt swap to hedge the sterling notes.
already developed by the group and further reserves will
A substantial component of the group's costs (including
be added as new areas are developed. The group
fertiliser and machinery inputs) is US dollar denominated
supports the principles and criteria established by RSPO
or linked. Accordingly, the principal currency risk faced by
and is working towards obtaining RSPO accreditation.
the group is that those components of group costs that
arise in Indonesian rupiah and sterling may, if such
Regulatory exposure
currencies strengthen against the US dollar, negatively
impact margins in US dollar terms. The directors consider
Changes in existing, and adoption of new, laws and
that this risk is inherent in the group's business and
regulations affecting the group (including, in particular,
capital structure and the group does not therefore
laws and regulations relating to land tenure, work permits
normally hedge against such risk.
Environmental practices
for expatriate staff and taxation) could have a negative
impact on the group’s activities. Many of the licences,
permits and approvals held by the group are subject to
periodic renewal. Renewals are often subject to delays
The group's existing East Kalimantan agricultural
and there is always a risk that a renewal may be refused
operations and the planned expansion of those
or made subject to new conditions.
operations are based on land areas that have been
previously logged and zoned by the Indonesian authorities
Land in East Kalimantan held by the group is held subject
as appropriate for agricultural development on the basis
to the satisfaction by the group of various continuing
that, regrettable as it may be from an environmental
conditions, including conditions requiring the group to
viewpoint, the logging has been so extensive that primary
promote smallholder developments of oil palm.
forest is unlikely to regenerate. Such land areas fall within
a region that elsewhere includes substantial areas of
unspoilt primary rain forest inhabited by diverse flora and
43
Review of the group continued
Country exposure
such residents also act as suppliers to the group and its
employees. The directors believe that, as a result, the
All of the group's operations are located in Indonesia and
group's operations have been a source of increased
the group is therefore significantly dependent on
prosperity to the surrounding villages and that the group
economic and political conditions in Indonesia. In the late
has reasonable relations with those villages. The group
1990’s, in common with other parts of South East Asia,
has made progress in recent years in assisting the
Indonesia experienced severe economic turbulence. In
surrounding
villages
in establishing
their own
recent years, there have been occasional instances of civil
smallholdings of oil palm and it is hoped that this, together
unrest, often attributed to ethnic tensions, in certain parts
with the other initiatives described under "Community
of Indonesia. However, as noted under “The Indonesian
development" in "Sustainability" above, will assist in
context”
in “Overview” above, during 2008 Indonesia
developing the group's relationships with the local
remained stable and the Indonesian economy continued
population.
to grow.
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 kept
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
Although there can never be certainty as to such matters,
the most part unoccupied prior to the group's arrival.
under current political conditions, the directors have no
However, some small areas of land were previously used
reason to believe that any government authority would
by local villagers for the cultivation of crops and,
revoke the registered land titles granted to the group,
accordingly, when taking over such areas, the group
impose exchange controls or otherwise seek to restrict
negotiates with, and pays compensation to, the affected
the group's freedom to manage its operations.
parties.
Local relations
The negotiation of compensation payments can involve a
considerable number of local individuals with differing
The operations of the group could be seriously disrupted
views and this can cause difficulties in reaching
if there were to be a material breakdown in relations
agreement with all affected parties. There is also a risk
between the group and the host population in its area of
that, after an agreement has been completed, a party to
operations in East Kalimantan.
the agreement may become disaffected with the terms
agreed and may seek to repudiate the agreement. Such
Whilst the group does have employees in Indonesia from
difficulties and risk have in the past caused, and are likely
outside East Kalimantan, care has always been taken to
to continue periodically to cause, delays to the extension
give priority to applications for employment from
planting programme and other disruption. The group has
members of the local population. Moreover, local
to-date been successful in managing such periodic delays
contractors used by the group provide employment
and disruption so that they have not, in overall terms,
opportunities for residents of surrounding villages and
materially disrupted the group's extension planting
44
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
27 April 2009
45
Directors
Richard Robinow
Chairman (63)
John Keatley
Senior independent non-executive director (75)
Was appointed a director in 1978 and has been chairman
since 1984. After early investment banking experience, has
been involved for over 25 years in the plantation industry.
Non-executive but devotes a significant proportion of his
working time to the affairs of the group, dealing principally
with matters of strategy and finance. Chairman of M P
Evans Group plc and a director of SA Sipef NV (a Belgian
listed plantation company).
John Oakley
Managing director (60)
After early experience in investment banking and general
management, joined the group in 1983 as divisional
managing director of the group's then horticultural
operations. Appointed to the main board in 1985, he
oversaw group businesses involved in tea, bananas,
pineapples and merchanting, transferring in the early
1990s to take charge of the day to day management of the
group's then embryonic East Kalimantan oil palm
operations. Appointed as managing director in January
2002. As the sole executive director, has overall
responsibility for operational control of the group.
David Blackett
Independent non-executive director (58)
Appointed to the board in July 2008 and subsequently
appointed chairman of the audit and remuneration
committees. A qualified chartered accountant with over 25
years experience working in South East Asia, culminating,
after a career in international merchant banking, in the
chairmanship of AT&T Capital Inc. A director of South China
Holdings Limited, listed on the Hong Kong Stock Exchange.
John Green-Armytage
Independent non-executive director (63)
Was a non-executive director from 1984 to 1994 and
rejoined the board in a non-executive capacity in 1997.
Formerly chairman of the audit and remuneration
committees. After a career in investment banking, moved
to become managing director of a UK listed company with
South East Asian involvement. Has subsequently held
directorships of a number of companies in both executive
and non-executive capacities. These currently include the
chairmanship of AMEC PLC.
46
Was a non-executive director from 1975 to 1983 and
chairman from 1978 to 1983. Rejoined the board in a non-
executive capacity in 1985 and is chairman of the
nomination committee. After a background in the fertiliser
industry, is now involved in a family business investing in
property in the UK and elsewhere.
David Killick, FCIS
Independent non-executive director (71)
Was appointed a director in September 2006 and is a
member of the audit and remuneration committees.
Qualified as a barrister and is a Fellow of the Institute of
Chartered Secretaries and Administrators. Worked for over
28 years for the Commonwealth Development Corporation,
serving as a member of its management board from 1980
to 1994. Currently a director of Reallyenglish.com Limited
and a member of the management council of Slough
Council for Voluntary Service.
Charles Letts
Independent non-executive director (90)
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 Jardine
Matheson & Co. Limited for 15 years and then set up his
own business. Thereafter, for over 40 years, has held
directorships and advisory posts in companies covering a
wide range of activities in various countries, with particular
emphasis on the plantation industry. Present directorships
include The China Club Limited and China Investment Fund.
Chan Lok Lim
Independent non-executive director (67)
Was appointed a director in August 2002. Has been
involved for over 30 years in companies in South East Asia
engaged in power generation and distribution, water 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, and a director of
Agusan Plantations Inc, Philippines, Agumil Philippines Inc
and Pan Abrasives (Private) Limited, Singapore.
Directors’ report
The directors present their annual report on the affairs of
Going concern basis
the group, together with the financial statements and
auditors’ reports, for the year ended 31 December 2008.
The group's business activities, together with the factors
Principal activities and business review
position are described in the "Review of the group"
likely to affect its future development, performance and
section of this annual report which also provides (under
The principal activity of the group is the cultivation of oil
the heading "Finance") a description of the group's cash
palms in the Indonesian province of East Kalimantan. A
flow, liquidity and financing adequacy, and treasury
review of the activities and planned future development of
policies. In addition, note 21 to the consolidated financial
the group together with the principal risks and
statements includes information as to the group's policy,
uncertainties facing the group is provided in the
objectives, and processes for managing its capital; its
accompanying “Chairman’s statement” and “Review of the
financial risk management objectives; details of its
group” sections of this annual report which are
financial instruments and hedging activities; and its
incorporated by reference in this Directors’ report. In
exposures to credit risk and liquidity risk.
particular, that review includes information as to group
policy and objectives regarding the use of financial
Although the group has indebtedness, that indebtedness
instruments. Information as to such policy and objectives
is medium term and the group is not materially reliant on
and the risk exposures arising is also included in note 21
short term borrowing facilities. Moreover, the group has
to the consolidated financial statements.
considerable cash resources. As a consequence, the
directors believe that the group is well placed to manage
The group does not undertake significant research and
its business risks successfully despite the current
development activities.
uncertain economic outlook.
Details of significant events since 31 December 2008
After making enquiries, the directors have a reasonable
are contained in note 40 to the consolidated financial
expectation that the company and the group have
statements.
Results and dividends
adequate resources to continue in operational existence
for the foreseeable future. Accordingly, they continue to
adopt the going concern basis in preparing the annual
report and accounts.
The results are presented in the consolidated income
statement and notes thereto.
Charitable and political donations
The fixed annual dividends on the 9 per cent cumulative
During the year the group made no charitable or political
preference shares that fell due on 30 June and 31
donations.
December 2008 were duly paid. A first interim dividend
in respect of 2008 of 1.5p per share was paid on the
Supplier payment policy
ordinary shares on 26 September 2008 and a second
interim dividend in lieu of final of a further 1.5p per share
It is the company’s policy to establish appropriate
was paid on those shares on 30 January 2009. The
payment terms and conditions for dealings with suppliers
directors do not recommend the payment of any further
and to comply with such terms and conditions. The
ordinary dividends in respect of 2008.
holding company itself does not have trade creditors.
47
Directors’ report continued
Directors
Directors’ interests
The directors are listed in the “Directors” section of this
At 31 December 2008, the interests of directors
annual report. All the directors served throughout 2008,
(including interests of connected persons as defined in
save for Mr Blackett who was appointed during the year.
section 96B (2) of the Financial Services and Markets Act
In compliance with the company’s articles of association
2000 of which the company is, or ought upon reasonable
providing for the appointment of additional directors, Mr
enquiry to become, aware) in the 9 per cent cumulative
Blackett holds office until the forthcoming annual general
preference shares of £1 each and the ordinary shares of
meeting and, being eligible, offers himself for re-election.
25p each of the company were as follows:
Messrs Lim and Oakley retire at the forthcoming annual
general meeting and, being eligible, offer themselves for
re-election, such retirements being in compliance with the
company’s articles of association providing for rotation of
directors. Messrs Robinow, Green-Armytage, Keatley and
Letts retire at the forthcoming annual general meeting
and, being eligible, offer themselves for re-election, such
retirements being in compliance with the provisions of the
Combined Code on Corporate Governance requiring the
annual re-election of non-executive directors who have
served as such for more than nine years.
R M Robinow
D J Blackett
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
474,718 10,030,000
-
8,447
51,669
-
-
80,704
680,878
20,000
12,224
108,008
-
513
-
1,804
The directors believe that, in the present circumstances of
the company, continuity and familiarity with the issues
Details of an option held by Mr Oakley to subscribe for
ordinary shares of 25p each of the company are provided
in the “Directors’ remuneration report” section of this
immediately facing the company are important and that
annual report.
the variety of backgrounds and skills possessed by the
longer serving non-executive directors usefully
complement those of the other directors, provide
perspective and facilitate balanced and effective decision
making. The board therefore recommends (each affected
director abstaining from such conclusion as it applies to
There have been no changes in the interests of the
directors detailed above between 31 December 2008
and the date of this report save that Mr Robinow is now
interested in 424,718 preference shares.
himself) the re-election of all of the directors offering
Directors’ indemnities
themselves for re-election. The senior independent non-
executive director and the chairman have confirmed as
regards, respectively, the chairman and the other non-
executive directors offering themselves for re-election
that, following formal performance evaluations, each such
Qualifying third party indemnity provisions (as defined in
section 234 of the Companies Act 2006) were in force
for the benefit of directors of the company and of other
members of the group throughout 2008 and remain in
individual's performance continues to be effective and to
force at the date of this report.
demonstrate commitment to the role assumed, including
commitment of time for board and committee meetings
and, where applicable, other assigned duties.
48
Substantial shareholders
of association and prevailing legislation. Rights to income
and capital are summarised in note 30 to the consolidated
As at the date of this report, the company has received
financial statements.
notifications required by The Disclosure Rules and
Transparency Rules of the Financial Services Authority
On a show of hands at a general meeting of the company,
from the following persons of voting rights held by them
every holder of shares and every duly appointed proxy of
as shareholders through the holdings of ordinary shares
a holder of shares, in each case being a holder entitled to
indicated:
vote on the resolution before the meeting, shall have one
Number
%
vote. On a poll, every holder of shares present in person
Emba Holdings Limited
9,957,500
30.57
or by proxy and entitled to vote on the resolution the
Alcatel Bell Pensioenfonds VZW
4,007,049
12.30
subject of the poll shall have one vote for each share held.
Prudential plc and certain subsidiaries
3,937,297
12.09
Holders of preference shares are not entitled to vote on a
Artemis UK Smaller Companies
1,919,400
5.89
resolution proposed at a general meeting unless, at the
date of notice of the meeting, the dividend on the
In addition, the company has been notified that the above
preference shares is more than six months in arrears or
interest of Prudential plc and certain subsidiaries includes
the resolution is for the winding up of the company or is a
3,447,792 ordinary shares (10.58 per cent) in which
resolution directly and adversely affecting any of the
M&G Investment Funds 3 is also interested.
rights and privileges attaching to the preference shares.
Deadlines for the exercise of voting rights and for the
The shares held by Emba Holdings Limited are included
appointment of a proxy or proxies to vote in relation to any
as part of the interest of Mr R M Robinow shown under
resolution to be proposed at a general meeting are
“Directors’
interests” above. By deeds dated 24
governed by the company’s articles of association and
November 1998 and 10 April 2001, Emba Holdings
prevailing legislation and will normally be as detailed in
Limited has agreed that it will not undertake activities in
the notes accompanying the notice of the meeting at
conflict with those of the group and that it will deal with
which the resolution is to be proposed.
the group only on a basis that is appropriate between a
listed company and its subsidiaries and a significant
There are no restrictions on the size of any holding of
shareholder.
Control and structure of capital
Details of the company’s share capital and changes in
share capital during 2008 are detailed in note 30 to the
consolidated financial statements. At 31 December 2008,
the preference share capital and the ordinary share
capital represented, respectively, 64.7 and 35.3 per cent
of the total issued share capital.
The rights and obligations attaching to the ordinary and
preference shares are governed by the company’s articles
shares in the company. Shares may be transferred either
through the CREST system (being the relevant system as
defined in the Uncertificated Securities Regulations 2001
of which CRESTCo Limited is the operator) where held in
uncertificated form or by instrument of transfer in any
usual or common form duly executed and stamped,
subject to provisions of the company’s articles of
association empowering the directors under certain
circumstances to refuse to register any transfer of shares,
such circumstances being principally where the shares
are not fully paid, the shares are to be transferred into a
joint holding of more than four persons, the transfer is not
appropriately supported by evidence of the right of the
49
Directors’ report continued
transferor to make the transfer or the transferor is in
(which are guaranteed by the company) are transferable
default in compliance with a notice served pursuant to
either through the CREST system where held in
section 793 of the Companies Act 2006. The directors
uncertificated form or by instrument of transfer in any
are not aware of any agreements between shareholders
usual or common form duly executed in amounts and
that may result in restrictions on the transfer of securities
multiples, in the former case, of $1 and, in the latter case,
or on voting rights.
of £1,000. There is no maximum limit on the size of any
holding in either case.
No person holds securities carrying special rights with
regard to control of the company and there are no
Significant holdings of preference shares, dollar notes
arrangements in which the company co-operates by
and sterling notes shown by the register of members and
which financial rights carried by shares are held by a
registers of dollar and sterling noteholders at 31
person other than the holder of the shares.
December 2008 were as follows:
The appointment and replacement of directors is
governed by the company’s articles of association and
prevailing legislation, augmented by the principles laid
down in the Combined Code on Corporate Governance
which the company seeks to apply in a manner
proportionate to its size as further detailed in the
“Corporate governance report” section of this annual
report.
The articles of association provide that the business of
the company is to be managed by the directors and
empower the directors to exercise all powers of the
company, subject to the provisions of such articles (which
include a provision specifically limiting the borrowing
BNY Mellon Nominees
Limited BSDTABN Account
HSBC Global Custody Nominee
(UK) Limited 641898 Account
HSBC Global Custody Nominee
(UK) Limited 993791 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
Sterling
notes
‘000
$’000
£’000
–
–
1,813
2,463
–
–
–
–
–
–
–
–
–
5,231
4,000
–
–
16,300
3,315
9,500
9,500
–
–
–
powers of the group) and prevailing legislation and
A change of control of the company would entitle holders
subject to such directions as may be given by the
of the sterling notes and certain holders of the dollar
company in general meeting by special resolution. The
notes to require repayment of the notes held by them as
articles of association may be amended only by a special
detailed in notes 23 and 24 to the consolidated financial
resolution of the company in general meeting and, where
statements.
such amendment would modify, abrogate or vary the class
rights of any class of shares, with the consent of that
The option held by Mr J C Oakley to subscribe for ordinary
class given in accordance with the company’s articles of
shares of 25p each of the company as referred to under
association and prevailing legislation.
“Directors’ interests” above may be exercised within six
The 7.5 per cent dollar notes 2012/14 of the company
executives under the company’s long term incentive plan
(“dollar notes”) and the 9.5 per cent guaranteed sterling
will vest and may be encashed within one month of a
notes 2015/17 of REA Finance B.V. (“sterling notes”)
change of control as detailed under “Long term incentive
months of a change of control. Awards to senior group
50
plan” in the “Directors’ remuneration report” section of this
The new ordinary shares and new preference shares the
annual report. The directors are not aware of any
subject of the new authorities will represent, respectively,
agreements between the company and its directors or
25.9 per cent and 17.4 per cent of the ordinary shares
between any member of the group and a group employee
and preference shares in issue at the date of this report.
that provides for compensation for loss of office or
The new authorities will lapse on the date of the annual
employment that occurs because of a takeover bid.
general meeting to be held in 2010 or on 31 August
2010 (whichever is the earlier). The directors have no
Treasury shares and power to repurchase shares
present intention of exercising these authorities.
No shares of the company are at present held in treasury.
A fresh authority is also being sought under the provisions
of section 95 of the Companies Act 1985 to enable the
The company’s articles of association permit the purchase
board to make a rights issue or open offer of ordinary
by the company of its own shares subject to prevailing
shares to existing ordinary shareholders without being
legislation which requires that any such purchase, if a
obliged to comply with certain technical requirements of
market purchase, has been previously authorised by the
the Companies Act 1985, which create problems with
company in general meeting and, if not, is made pursuant
regard to fractions and overseas shareholders. In
to a contract of which the terms have been authorised by
addition, the authority will give the board power to make
a special resolution of the company in general meeting.
issues of ordinary shares for cash other than by way of a
There is no authority extant for the purchase by the
rights issue or open offer up to a maximum nominal
company of its own shares.
Power to issue share capital
At the annual general meeting held on 6 June 2008,
shareholders authorised the board under the provisions of
section 80 of the Companies Act 1985 to allot relevant
securities within specified limits. Replacements of the
applicable authorities are being sought at the forthcoming
annual general meeting when the existing authorities will
expire. The replacement authorities will provide for the
allotment of (i) ordinary share capital up to an aggregate
nominal amount of £2,106,536, (comprising 8,426,144
ordinary shares) equating to the unissued ordinary share
capital at the date of this report and (ii) preference share
capital up to an aggregate nominal amount of
£2,597,046 (comprising 2,597,046 preference shares)
representing the unissued preference share capital at the
date of this report.
amount of £407,173 representing 5 per cent of the
ordinary share capital in issue at the date of this report.
The section 95 authority will terminate on the date of the
annual general meeting to be held in 2010 or on 31
August 2010 (whichever is the earlier).
General meeting notice period
The notice of the forthcoming annual general meeting
includes a resolution (set out as resolution 15 in the
notice) to approve the convening of general meetings on
14 clear days' notice. This resolution is being proposed in
anticipation of implementation of the Shareholder Rights
Directive (expected in August 2009) which, absent
specific shareholder approval of shorter notice and
compliance with requirements for electronic voting, will
increase the notice period for general meetings of the
company to 21 days. The company is currently able to
call general meetings (other than an annual general
meeting) on 14 clear days' notice and would like to
preserve this ability. Resolution 15, if passed, would
51
Directors’ report continued
provide the requisite shareholder approval. This would
remain effective until the company's next annual general
meeting, when it is intended that a similar resolution will
be proposed.
Recommendation
The board considers that granting the directors
authorities and power as detailed under “Power to issue
share capital” and “General meeting notice period” above
is in the best interests of the company and shareholders
as a whole and recommends that ordinary shareholders
vote in favour of the resolutions to provide the authorities
and power as set out in the notice of the forthcoming
annual general meeting.
Auditors
Each director of the company at the date of approval of
this report has confirmed that, so far as he is aware, there
is no relevant audit information of which the company's
auditors are unaware; and that he has taken all the steps
that he ought to have taken as a director in order to make
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 LLP have expressed their willingness to continue
in office as auditors and resolutions 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
27 April 2009
52
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 issued in
2006 by the Financial Reporting Council (“the Code”) and
revised in June 2008 (for accounting periods beginning
on or after 29 June 2008) 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.
Throughout the year ended 31 December 2008, the
company was in compliance with the provisions set out in
section 1 of the Code. In making this statement, the
directors have reflected their view detailed below as to the
independence of long serving non-executive directors.
Board of directors
The board currently comprises one executive director and
seven 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 (being the chief
executive) have defined separate responsibilities: the
chairman has responsibility for matters of strategy and
finance; the managing director has responsibility for
operational matters. 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 and
that, on this basis, three such non-executive directors
should not be treated as independent. In fact what the
Code states is that service by a director for more than
nine years is to be taken into account by the board in
assessing his independence but it is not, under the Code,
determinative of independence. All of the long serving
non-executive directors of the company are 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 continues to be satisfied
that the independence of the long serving independent
non-executive directors is not affected by their length of
service.
Three independent non-executive directors have served
on the board for less than nine years and the company,
therefore, complies 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 are treated as not independent. 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 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. Accordingly, during 2008
the directors concluded that the time was appropriate to
seek the appointment of an additional non-executive
director to refresh and strengthen the composition of the
board. Following a recommendation by the nomination
committee, Mr D J Blackett, who has a relevant financial
background as well as considerable experience and
expertise in the commercial and geographical areas in
53
Corporate governance continued
which the group operates, was duly appointed to the
board on 1 July 2008 and has now taken over the
chairmanship of the audit and remuneration committees.
Under the company’s articles of association, any director
who has not been appointed or re-appointed at each of
the preceding two annual general meetings shall retire by
rotation and may submit himself 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. Further, any
director appointed during the year holds office until the
next annual general meeting and may then submit himself
for re-election.
Directors’ conflicts of interest
In connection with the statutory duty to avoid any situation
which conflicts or may conflict with the interests of the
company, the board has approved the continuance of
potential conflicts notified by Messrs Robinow and Green-
Armytage, each of the two directors absenting himself
from the discussion in respect of himself. Such
notifications relate to each of the directors’ interests as
shareholders in and/or directors of companies the
interests of which might conflict with those of the group
but are not at present considered to conflict. No other
conflicts or potential conflicts have been notified by
directors.
executive directors and the company secretary. In
addition, the board is responsible for ensuring that
resources are adequate to meet objectives and for
reviewing performance, financial controls and risk.
The company carries appropriate insurance against legal
action against its directors. The current policy which
became effective on 1 January 2007 was in place
throughout 2008
the Code
requirement to carry such insurance.
in compliance with
Board committees
The board has appointed audit, nomination and
remuneration committees to undertake certain of the
board’s functions, with written terms of reference which
are available for inspection on the company’s website.
Information concerning 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.
Performance evaluation
A formal evaluation of the performance of the board, the
committees and individual directors is undertaken
annually. Balance of powers, contribution to strategy,
monitoring and accountability to stakeholders are
reviewed by the board as a whole and the performance of
the chairman is appraised by independent non-executive
directors led by the senior independent director.
Board responsibilities
Professional development
The board is responsible for the proper management of
the company. Full quarterly operational and financial
reports are issued to all directors following the end of
each quarter for their review and comment. These reports
are augmented by annual budgets and positional papers
on matters of a non routine nature. The board has a
schedule of matters reserved for its decision. Such
matters include strategy, material investments and
financing decisions and the appointment or removal of
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 the group’s activities. Directors 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. Whilst there are no
formal training programmes, the board regularly reviews
its own competences, receives periodic briefings on legal
54
and regulatory developments affecting the group and may
arrange training on specific matters where it is thought to
be required. Directors 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.
committee. A meeting of the remuneration committee
was held in January 2008 and a meeting of the
nomination committee was held in June 2008.
All committee meetings were attended by all committee
members.
Steps are taken to ensure that newly appointed directors
become fully informed as to the group’s activities.
Nomination committee
Board proceedings
A minimum of four meetings of the full board are held
each year. Other board meetings are held as required to
consider corporate and operational matters with all
directors consulted in advance regarding significant
matters for consideration. 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 required.
The attendance of individual directors at the full and “ad
hoc” board meetings held during 2008 were as follows:
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
D J Blackett (appointed 1 July 2008)
Full Ad hoc
meeting meeting
8
7
7
8
7
5
8
2
12
12
-
1
-
-
-
-
In addition, during 2008, there were three meetings of the
audit committee; the third of these was held following the
change in the composition of the committee upon the
appointment of Mr D J Blackett as chairman of the
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 approval by the full board.
During the year, the committee, in response to an
invitation from the board to make a recommendation for
the appointment of an additional non-executive director,
recommended the appointment of Mr D J Blackett. In
establishing the specification for this appointment, the
committee concurred with the view of the board that the
appointee must have had the necessary financial
experience to qualify him or her to serve on the audit
committee but also decided that the appointee should
have a background in South East Asia, a knowledge of
matters affecting UK listed companies and experience
relevant to the group's activities. In view of the
specialised character of these combined requirements, it
was not considered appropriate to employ consultants or
to advertise. Instead, a short list of candidates considered
to have the necessary skills and qualifications was
assembled and Mr Blackett was selected from this short
list.
Audit committee
The audit committee currently comprises Mr D J Blackett
(chairman) and Mr D H R Killick both of whom are
considered by the directors to have the relevant financial
experience. Mr J M Green-Armytage stepped down on
11 November 2008, following the appointment of Mr
Blackett to the committee on 28 October 2008.
55
Corporate governance continued
The audit committee is responsible for:
(cid:129) monitoring the integrity of the financial statements
and the significant reporting issues and judgements
that they contain;
(cid:129)
reviewing the effectiveness of the internal control
functions (including the internal audit function and
raised staff
arrangements whereby
concerns as to financial reporting and other relevant
matters are considered);
internally
(cid:129) making recommendations to the board in relation to
the appointment, reappointment and removal of the
external auditors, their remuneration and terms of
engagement; and
(cid:129)
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 2008, the
only non-audit work undertaken by the auditors was
routine compliance reporting in connection with 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
the external auditors and
themselves and with
management, by consideration of
reports by
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 and in the
auditors’ report.
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
operational activities and financial affairs of the group. In
addition, within the limits imposed by considerations of
confidentiality, the company has regular meetings and
other contact with
institutional and other major
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. 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 therefore not always feasible,
for all directors to attend general meetings, but those
directors who are present are available to talk on an
informal basis to shareholders after the meeting’s
conclusion. 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 is given 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
56
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.
failings or weaknesses in internal control which it deemed
to be significant.
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 established a management hierarchy
which is designed to delegate the day to day 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.
Internal control
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 process, which accords with the
revised guidance on internal control published in October
2005, was in place throughout 2008 and has remained in
place up to the date of approval of this report. Such a
process 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 12 November 2008 (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 of internal control
arising during the period covered by the report. The
review resulted in the board querying aspects of the
established system for approving variations to budgetary
approvals. An independent report was commissioned
and, following its receipt, the budgetary variation system
has been modified. During the course of the review, the
board did not otherwise identify or become aware of any
57
Directors’ remuneration report
Introduction
currently the only executive director but the committee
would set the remuneration and benefits of any other
This report has been prepared in accordance with
executive directors who might in future be appointed. In
Schedule 7A to the Companies Act 1985 (the “Act”). The
setting remuneration and benefits, it considers the
report also meets the relevant requirements of the Listing
achievement of each individual in attaining the objectives
Rules of the Financial Services Authority and describes
set for that individual (including objectives relating to
how the board has applied the principles relating to
corporate performance on environmental and social
directors’ remuneration set out in the Combined Code on
matters and corporate governance), the responsibilities
Corporate Governance (the “Code”). As required by the
assumed by the individual and, where the role is part time,
Act, a resolution to approve the report will be proposed at
the time commitment involved. It draws on data of the
the annual general meeting at which the accompanying
remuneration of others performing similar functions in
financial statements are laid before the company’s
similarly sized organisations but does not use
members.
independent consultants.
The Act requires the auditors to report to the company’s
The key objective of the remuneration policy (which
members on certain parts of the directors’ remuneration
applies for 2009 and subsequent years) is to attract,
report and to state whether in their opinion those parts of
motivate, retain and fairly reward executive directors of a
the report have been properly prepared in accordance
high calibre, while ensuring that the remuneration of each
with the Companies Act 1985. The report has therefore
individual executive director is consistent with the best
been divided into separate sections for audited and
interests of the company and its shareholders. In framing
unaudited information.
Unaudited information
The remuneration committee
its policy on performance related remuneration (which is
payable only to executive directors) the committee follows
the provisions of schedule A to the Code.
The committee considers all proposals for executive
directors to hold outside directorships. Such directorships
The company has established a remuneration committee.
are normally permitted only if considered to be of value to
The members of the remuneration committee during
the group and on terms that any remuneration payable will
2008 and, in particular, when directors’ remuneration for
be accounted for to the group.
2008 was considered, were Mr J M Green-Armytage
(chairman), Mr D H R Killick and Mr R M Robinow. The
Basis of remuneration
membership of the committee was changed on 23 April
2009 and now comprises Mr D J Blackett (chairman) and
The policy on remuneration of executive directors is that
Mr D H R Killick. While Mr Robinow was a member of the
basic remuneration of each executive director should
committee, any matter concerning Mr Robinow was
comprise an annual salary, part of which is pensionable,
discussed without Mr Robinow being present.
and certain benefits-in-kind, principally a company car. In
Remuneration policy
addition an executive director should be paid non-
pensionable performance related bonuses. These are to
be awarded annually in arrears on a discretionary basis
The committee sets the remuneration and benefits of the
taking into account the performance of the group during
chairman and the managing director. The latter is
the relevant year and the contribution to performance that
58
each director is assessed by the committee to have made.
2008. This index has been selected as there is no index
Bonuses should not normally exceed 50 per cent of
available that is specific to the activities of the company.
salary and are paid in cash. There is no separate pension
scheme for executive directors and the only current
Long term incentive plan
executive director (the managing director) is a member of
the R.E.A. Pension Scheme.
Service contracts
A long term incentive plan (the "plan") was introduced in
2007. It is designed to provide incentives, linked to the
increase in value of ordinary shares in the company, to a
small number of key senior executives in Indonesia with a
The company’s current policy on service contracts is that
view to their participating over the long term in value
contracts should have a notice period of not more than
created for the group. No director may participate. The
one year and a maximum termination payment not
plan period commenced on 1 January 2007 and ends on
exceeding one year’s salary. No director has a service
31 December 2010 (the "performance period").
contract that is not fully compliant with this policy.
Under the plan, participants are awarded potential
The group entered into a service contract with Mr J C
entitlements over notional ordinary shares of the
Oakley on 16 December 1988 initially for a period of two
company. These potential entitlements then vest to an
years, thereafter determinable by either party by giving
extent that is dependent upon the achievement of targets.
notice to the other party of not less than six months. At 31
A vested entitlement may be exercised in whole or part at
December 2008 the unexpired term remained as six
any time from 1 January 2011 until 31 December 2016.
months. There are no provisions for compensation for
On exercising a vested entitlement, a participant will
early termination save that Mr Oakley would be entitled to
receive a cash amount for each ordinary share over which
a payment in lieu of notice if due notice had not been
the entitlement is exercised, equal to the excess (if any)
given.
of the market price of an ordinary share on the date of
exercise over 433.5p, being the market price of an
Non-executive directors
ordinary share on 1 January 2007.
The remuneration of non-executive directors other than
The extent to which a participant’s potential entitlement to
the chairman is determined by the board within the limits
notional ordinary shares will vest will be determined by
set by the articles of association, no director taking part in
three key performance targets. These three targets relate
the determination of his own remuneration. The level of
to total shareholder return, cost per tonne of crude palm
remuneration is determined having regard to that paid by
oil produced and annual planting rate achieved, in each
comparable organisations.
Performance graph
case measured on a cumulative basis over the
performance period. Each performance target governs
the vesting of one third of each potential entitlement and
for each performance target there are threshold, target
A performance graph is shown in the “Key statistics”
and maximum levels of performance which determine the
section of this annual report. This compares the
exact number of notional ordinary shares that vest in
performance of the company’s ordinary shares (measured
relation to that target. The remuneration committee has
by total shareholder return) with that of the FTSE all share
discretion to adjust targets if it considers that actual
index for the period from January 2004 to December
performance warrants this.
59
Directors’ remuneration report continued
The vesting of potential entitlements and the exercise of
participants in respect of the potential entitlements
vested entitlements
is dependent on continued
awarded would, if such entitlements had vested in full,
employment with the group. If a participant ceases
have been £nil.
employment with the group before the end of the
performance period, his potential entitlement will lapse
Audited information
unless he leaves by reason of death, injury, disability,
redundancy or retirement or the remuneration committee
Directors’ remuneration
exercises a discretion to decide that his potential
entitlement should not lapse. Where the potential
The following table shows details of the remuneration of
entitlement does not lapse, it will vest on a basis that
individual directors holding office during the year ended
reflects achievement of performance targets up to the
31 December 2008 (with comparative totals for 2007):
end of the financial year last ended before the date (the
“cessation date”) that the affected participant ceases
employment with the group (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. The resultant vested entitlement will
be exercisable for a period of twelve months from the
cessation date. If a participant leaves after the end of the
performance period, the participant may exercise a vested
entitlement within six months of leaving.
In the event of a change in control of the company as a
result of a takeover offer or similar corporate event,
potential entitlements will vest on a basis that reflects
achievement of performance targets up to the date (the
“applicable date”) of change of control or other relevant
event (as determined by the remuneration committee)
and time apportioned for the elapsed portion of the
performance period up to the applicable date expressed
as a fraction of the full performance period. The resultant
vested entitlements will be exercisable for a period of one
month following the applicable date.
At 31 December 2008, the total number of notional
ordinary shares over which awards of potential
entitlements had been made amounted to 195,000. On
the basis of the market price of the ordinary shares on 31
December 2008 of 202.5p per share, the total gain to
Salary
and fees Other*
2008
Total
£’000 £’000 £’000
168
205
9
17
17
17
17
17
8
34
176
239
-
-
-
-
-
-
9
17
17
17
17
17
2007
Total
£’000
174
300
-
13
13
13
13
13
467
42
509
539
R M Robinow (chairman)
J C Oakley
D J Blackett**
J M Green-Armytage
J R M Keatley
D H R Killick
L E C Letts
C L Lim
* comprises benefits.
** appointed 1 July 2008.
The above table includes amounts payable in respect of
service arrangements with companies in which Mr
Robinow, Mr Green-Armytage, Mr Letts and Mr Lim were
interested.
In addition to the benefits shown under “Other” above, in
2006 Mr Oakley received a benefit in kind relating to the
tax liability arising on a gain on exercise of share options
estimated at £163,000. It was agreed with Mr Oakley
that he would effectively refund this amount by
commensurate reduction in future non pensionable
remuneration to which he would otherwise become
entitled after 1 January 2008. In 2008, the non-
pensionable salary ordinarily payable was reduced by
£42,500 and the bonus that would normally have been
paid by £50,000.
60
Director’s pension entitlement - Mr J C Oakley
was granted. As a result, at the beginning of the year the
number of ordinary shares the subject of the option was
Mr Oakley (who was aged 60 at 31 December 2008) is
828,113 and the exercise price was 44.8289p per share
an ordinary member of the R.E.A. Pension Scheme which
and, at the end of the year and at the date of this report,
is a defined benefit scheme of which details are shown in
the number of ordinary shares so subject was 840,689
note 37 to the consolidated financial statements.
and the exercise price was 43.753p per share. The
Pensionable earnings are calculated on part of the annual
option expires on 21 May 2012.
salary only. Details of the accrued pension are set out
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
£
81,756
6,669
88,425
1,706,745
10,275
216,794
1,933,814
The increase during the year in excess of inflation in
accrued annual pension was £5,894 and in pension
transfer value was £200,609.
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 impose any
conditions and the option was based on the full market
value of the ordinary shares at the date of the grant. The
grant of the option to Mr Oakley on this basis was
approved by special resolution of the company prior to
execution of the option agreement.
The number of shares the subject of the option and the
option subscription price have been amended from time
to time to take account of share issues since the option
The market price of the ordinary shares at 31 December
2008 was 202.5p and the range during the year was
190p to 727p.
No other options have been granted by the company.
Approved by the board on 27 April 2009
RICHARD M ROBINOW
Chairman
61
Directors’ responsibilities
The directors are responsible for preparing the annual
law). The parent company financial statements are
report including the directors’
report, the directors'
required by law to give a true and fair view of the state of
remuneration report and the financial statements in
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
(cid:129)
select suitable accounting policies and then apply
statements for each financial year. The directors are
them consistently;
(cid:129) make judgements and estimates that are reasonable
and prudent;
(cid:129)
state whether applicable UK Accounting Standards
have been followed, subject to any material
departures disclosed and explained in the financial
statements; and
(cid:129)
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
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 should 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
(cid:129)
(cid:129)
(cid:129)
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 applicable
62
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.
Directors’ confirmation
The directors are responsible for the preparation of this
annual report.
To the best of the knowledge of each of the directors:
(cid:129)
the accompanying financial statements prepared in
accordance with
the applicable accounting
standards, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the
company and the undertakings included in the
consolidation taken as a whole; and
(cid:129)
the accompanying "Directors' report" section of this
annual report including the "Review of the group"
section of this annual report which the Directors'
report incorporates by reference provides a fair
review of the development and performance of the
business and the position of the company and the
undertakings included in the consolidation taken as a
whole together with a description of the principal
risks and uncertainties that they face.
The current directors of the company and their respective
functions are set out in the "Directors" section of this
annual report.
By order of the board
R.E.A. SERVICES LIMITED
Secretary
27 April 2009
63
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 2008
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 consolidated
group financial statements have been properly prepared in
statement of changes in equity, the consolidated cash
accordance with the Companies Act 1985 and Article 4 of
flow statement, the accounting policies and the related
the IAS Regulation and whether the part of the directors'
notes 1 to 41. These group financial statements have
remuneration report described as having been audited has
been prepared under the accounting policies set out
been properly prepared in accordance with the Companies
therein. We have also audited the information in the
Act 1985. We also report to you whether in our opinion the
directors' remuneration report that is described as having
information given in the Directors' Report is consistent with
been 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 2008.
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 the
opinions we have formed.
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
64
statement, the unaudited part of the directors' remuneration
Opinion
report, the review of the group and the corporate
governance statement. We consider the implications for our
In our opinion:
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
(cid:129)
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 2008 and of its profit for the year
then ended;
(cid:129)
(cid:129)
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
judgements 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.
(cid:129)
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 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, United Kingdom
27 April 2009
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.
65
Consolidated income statement
for the year ended 31 December 2008
Note
2008
$’000
2007
$’000
2
4
13
2
2, 7
8
5
9
10
34
11
79,630
(4,214)
(27,682)
47,734
(2,660)
4
(1,049)
(3,466)
40,563
1,185
(5,439)
57,600
5,578
(14,875)
48,303
8,030
6
(1,028)
(5,925)
49,386
1,641
(4,017)
36,309
(10,536)
47,010
(15,013)
25,773
31,997
23,833
2,360
(420)
25,773
29,453
2,266
278
31,997
73.2 cents
71.5 cents
91.9 cents
89.6 cents
Revenue
Net (loss) / gain arising from changes in fair value of agricultural produce inventory
Cost of sales
Gross profit
Net (loss) / 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.
66
Consolidated balance sheet
as at 31 December 2008
Non-current assets
Goodwill
Biological assets
Property, plant and equipment
Prepaid operating lease rentals
Indonesian coal rights
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
Hedging instruments
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
Retained earnings
Minority interests
Total equity
Approved by the board on 27 April 2009 and signed on behalf of the board.
RICHARD M ROBINOW
Chairman
Note
12
13
14
15
16
26
18
19
20
29
27
22
28
22
23
24
25
26
27
28
30
31
32
33
34
2008
$’000
12,578
179,745
63,069
13,088
5,386
2,444
1,917
2007
$’000
12,578
166,347
41,772
8,823
–
5,817
1,376
278,227
236,713
12,795
8,872
30,316
51,983
13,040
3,301
34,216
50,557
330,210
287,270
(12,113)
(904)
(53)
(10,750)
(380)
(24,200)
(2,167)
(50,234)
(29,632)
(26,517)
(31,478)
(61)
(3,310)
(7,070)
(2,935)
(111)
(3,000)
(449)
(13,565)
(12,917)
(41,604)
(29,389)
168
(37,166)
(127)
(4,037)
(143,399)
(125,072)
(167,599)
(138,637)
162,611
148,633
40,714
27,322
(16,388)
110,383
162,031
580
162,611
38,299
29,787
(9,822)
89,492
147,756
877
148,633
67
Consolidated statement of
recognised income and expense
for the year ended 31 December 2008
for the year ended 31 December 2003
Exchange translation differences and loss on fair valuation of hedging instruments
Tax on items taken directly to equity
Net loss recognised directly in equity
Profit for the year
Share based payment - deferred tax (charge) / credit
Total recognised income and expense for the year
Attributable to:
Ordinary shareholders
Preference shareholders
Minority interests
2008
$’000
(14,638)
8,023
(6,615)
25,773
(1,444)
17,714
15,823
2,360
(469)
17,714
2007
$’000
(1,460)
528
(932)
31,997
385
31,450
28,907
2,266
277
31,450
Consolidated statement of changes in equity
for the year ended 31 December 2008
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)
Costs re scrip issue of preference shares
Dividends to preference shareholders
Dividends to ordinary shareholders
Minority interest in subsidiary acquired
Equity at beginning of year
Equity at end of year
2008
$’000
17,714
–
–
(50)
(2,360)
(1,498)
172
2007
$’000
31,450
13,027
2,180
–
(2,266)
(1,279)
–
13,978
148,633
43,112
105,521
162,611
148,633
68
Consolidated cash flow statement
for the year ended 31 December 2008
Net cash from operating activities
35
32,300
28,176
Note
2008
$’000
2007
$’000
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
Acquisition of subsidiary company
Investment in Indonesian coal rights
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 preference share capital less expenses
Proceeds of issue of ordinary share capital less expenses
Issue of sterling notes, net of expenses
New bank borrowings drawn
Net cash from financing activities
Cash and cash equivalents
Net increase / (decrease) in cash and cash equivalents
36
Cash and cash equivalents at beginning of year
Effect of exchange rate changes
Cash and cash equivalents at end of year
1,185
103
(24,665)
(15,126)
(1,205)
(3,158)
(5,386)
1,641
200
(15,010)
(14,820)
(3,787)
–
–
(48,252)
(31,776)
(2,360)
(1,498)
(3,000)
(90)
(50)
–
26,880
–
19,882
(2,266)
(1,279)
(25,833)
(268)
2,180
13,027
13,438
1,000
(1)
3,930
34,216
(7,830)
(3,601)
37,266
551
30,316
34,216
69
Accounting policies (group)
General information
R.E.A. Holdings plc is a company incorporated in the
United Kingdom under the Companies Act 1985. The
company’s registered office is at First Floor, 32-36 Great
Portland Street, London W1X 8QX. Details of the group's
principal activities are provided in the “Directors’ report”.
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 approval 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.
The comparative consolidated balance sheet and related
notes contain some reclassifications of headings and
amounts so as to align the prior year presentation with that
at 31 December 2008. Such reclassifications principally
concern the presentation of amounts relating to derivative
financial instruments and do not affect the prior year
consolidated income statement and consolidated cash
flow statement.
For the reasons given under “Going concern basis” in the
“Directors’ report”, the financial statements have been
prepared on the going concern basis.
Functional and presentational currency
The consolidated financial statements of the group are
presented in 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.
Adoption of new and revised standards
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.
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:
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
(cid:129)
IAS 1 (Revised):
“Presentation of financial
statements”
IFRS 2 (Revised): “Share based payments vesting
conditions and cancellations”
IFRS 3 (Revised): “Business combinations”
IFRS 8 (Revised): “Operating segments”
IAS 23 (Revised): “Borrowing costs”
IAS 27 (Revised): “Consolidated
and
separate
financial statements”
IFRIC 12:
“Service concession arrangements”
IFRIC 13: “Customer loyalty programmes”
IFRIC 16: “Hedges of a net investment in a foreign
operation”
interpretations come
The directors anticipate that when the relevant standards
and
into effect for periods
commencing on or after 1 January 2009 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 (as listed in
note (i) to the company’s individual financial statements)
made up to 31 December of each year.
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 or to the effective date of
70
disposal. 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.
intra-group transactions, balances,
All
expenses are eliminated on consolidation.
income and
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.
For the purpose of impairment testing, goodwill is allocated
to each of the group's cash generating units expected to
benefit from the synergies of the combination. Cash
generating units to which goodwill has been allocated are
tested for impairment annually, or more frequently when
there is an indication that the unit may be impaired.
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
balance sheet date monetary assets and liabilities
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
retranslated. Exchange
foreign currency are not
differences arising on the settlement of monetary items,
71
Accounting policies (group) continued
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.
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.
72
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 actuarial 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
the
consolidated income statement in addition to the adjusted
regular cost for the period.
to
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 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.
The biological process commences with the 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.
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 to maintain the assets to maturity being
deducted from the discounted FFB value.
together with costs (including depreciation) arising from
the use of agricultural buildings, plantation infrastructure
and vehicles.
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, less costs of disposal, 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
excluding goodwill
intangible assets
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 general
charges and the costs of the Indonesian head office
(including in both cases personnel costs and local fees)
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
73
Accounting policies (group) continued
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, with respect to assets other than goodwill, 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-
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.
(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
instruments
financial
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
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.
Inventories
Cash and cash equivalents
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
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 comprise
note issues, bank borrowings, finance leases and trade
payables. The group does not hold any financial liabilities
74
classified as held for trading or designated as held at
FVTPL.
Cash flow hedges
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 less subsequent repayments 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.
Derivative financial instruments
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 21.
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.
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 and as such offset the
exchange fluctuations relating to the principal amount of
the liability or asset being hedged. 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.
Share-based payments
The group has applied the requirements of IFRS 2 “Share-
based payments” which contain transitional provisions
which provide certain exemptions for grants of equity
instruments prior to 7 November 2002.
75
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 21, 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 as well as uncertainty regarding recoverability of tax paid against disputed items in an
assessment of tax on an Indonesian group company.
2. Revenue
Sales of goods
Revenue from services
Other operating income
Investment income
Total revenue
2008
$’000
79,107
523
79,630
4
1,185
80,819
2007
$’000
57,581
19
57,600
6
1,641
59,247
In 2008 four customers accounted for respectively 38 per cent, 12 per cent, 11 per cent and 11 per cent of the group’s sales of goods
(2007: two customers each accounted for 24 per cent).
The crop of oil palm fresh fruit bunches for 2008 amounted to 450,906 tonnes (2007: 393,217 tonnes). The fair value of the crop of
fresh fruit bunches was $51,840,000 (2007: $39,269,000), based on the price formula determined by the Indonesian government for
purchases of fresh fruit bunches from smallholders.
76
3. Segment information
In the table below, the group’s sales of goods 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 had only one operating business segment in 2008.
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
2008
$’m
–
45.8
33.3
79.1
25.3
137.3
162.6
–
24.7
24.7
2007
$’m
–
28.1
29.5
57.6
38.2
110.4
148.6
0.4
14.8
15.2
4. Agricultural produce inventory movement
The net (loss) / gain arising from changes in fair value of agricultural produce inventory represents the movement in the fair value of that
inventory less the amount of the movement in such inventory at historic cost (which is included in cost of sales).
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
2008
$’000
(2,936)
(509)
2,420
57
2007
$’000
(232)
(2,161)
1,846
144
The amount payable to Deloitte LLP for the audit of the company’s financial statements was $100,000 (2007: $137,000). Amounts
payable to Deloitte LLP for the audit of accounts of associates of the company pursuant to legislation were $25,000 (2007: $10,000).
Amounts payable to Deloitte LLP for other services were $2,000 (2007: for services pursuant to legislation - $46,000; for other services
- $2,000). In 2007 the services pursuant to legislation were in respect of corporate finance work, and as such the amounts paid for those
services were added to the capitalised costs of the relevant transactions.
Amounts payable to an associate of Deloitte LLP for the audit of a subsidiary’s financial statements were $9,000 (2007: $nil).
77
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 loss / (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 obligations under finance leases
Other finance charges
Amount included as additions to biological assets
2008
$’000
40,563
2,477
2,660
45,700
2007
$’000
49,386
1,990
(8,030)
43,346
2008
Number
2007
Number
3,418
2,578
7
6,003
3,059
2,488
7
5,554
$’000
$’000
15,095
1,394
922
17,411
2008
$’000
1,185
1,185
2008
$’000
886
2,564
5,349
16
1,149
9,964
(4,525)
5,439
11,869
598
707
13,174
2007
$’000
1,641
1,641
2007
$’000
1,916
2,360
4,443
23
439
9,181
(5,164)
4,017
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 35.5 per cent (2007: 43.7 per cent); there is no directly related tax relief.
78
9. Tax
Current tax:
UK corporation tax
Foreign tax (includes prior years $3,065,000) (2007: $nil)
Total current tax
Deferred tax:
Current year (includes prior years $1,588,000) (2007: $nil)
Attributable to a decrease in the rate of tax
Total deferred tax
Total tax
2008
$’000
28
13,478
13,506
2,825
(5,795)
(2,970)
2007
$’000
–
5,318
5,318
9,466
229
9,695
10,536
15,013
Taxation is provided at the rates prevailing for the relevant jurisdiction. For Indonesia, the current taxation provision is based on a tax rate
of 30 per cent (2007: 30 per cent) and the deferred tax provision reflects the proposed reduction in the corporate taxation rate from 30
per cent to 25 per cent, the effect of which is also disclosed below and in note 26. For the United Kingdom, the taxation provision reflects
the 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 26. Prior year adjustments of $3,065,000 in respect of foreign tax and $1,588,000 in respect of deferred tax arise as a result
of an Indonesian assessment of tax on a group company’s 2006 profits at a higher level than was originally expected. Full provision has
been made for this assessment although significant elements are disputed.
The tax charge for the year can be reconciled to the profit per the consolidated income statement as follows:
Profit before tax
Notional tax at the UK standard rate of 28.5 per cent (2007: 30 per cent)
Tax effect of the following items:
Expenses not deductible in determining taxable profit
Deferred tax asset not recognised
Non taxable income
Overseas tax rates in excess of UK standard rate
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 (liability)/asset
Tax effect of change in rate on Indonesian deferred tax liabilities
Additional tax provisions
Other
2008
$’000
36,309
2007
$’000
47,010
10,348
14,103
673
(61)
(349)
531
625
22
(23)
(5,773)
4,543
–
161
–
(10)
–
541
6
229
–
–
(17)
Tax expense at effective tax rate for the year
10,536
15,013
79
Notes to the consolidated financial
statements continued
10. Dividends
Amounts recognised as distributions to equity holders:
Preference dividends of 9p per share
Ordinary dividends
2008
$’000
2,360
1,498
3,858
2007
$’000
2,266
1,279
3,545
An interim dividend of 1.5p per ordinary share in lieu of final in respect of the year ended 31 December 2008 was paid on 30 January
2009. In accordance with IAS10 “Events after the reporting period”, this dividend has not been included in the 2008 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 and acquisition of subsidiary
Beginning of year
End of year
Goodwill
2008
$’000
23,833
‘000
32,574
761
33,335
2008
$’000
12,578
12,578
2007
$’000
29,453
‘000
32,044
837
32,881
2007
$’000
12,578
12,578
The goodwill arose from the acquisition by the company in 2006 of a minority interest in the issued ordinary share capital of Makassar
Investments Limited, the parent company of PT REA Kaltim Plantations, for a consideration of $19 million. The goodwill of $12.6 million
at the balance sheet date is considered by the directors to be supported fully by the assessment of the value in use for the oil palm
business in Indonesia, which is regarded by the directors to be the cash generating unit to which the goodwill applies.
Acquisition of subsidiary
On 11 July 2008 the group acquired 95 per cent of the issued share capital of PT Putra Bongan Jaya (“PBJ”) for a cash consideration
of $3,295,000. At the date of acquisition PBJ held a land permit (izin locasi) in respect of 19,837 hectares in the West Kutai district of
East Kalimantan, Indonesia. The transaction has been accounted for by the purchase method of accounting. The book values of the net
assets acquired were:
Prepaid operating lease rentals
Cash and cash equivalents
End of year
Satisfied by:
Cash payment by group
Subscription by Indonesian investor
80
$’000
3,330
137
3,467
3,295
172
3,467
12. Goodwill and acquisition of subsidiary - continued
Net cash outflow arising on acquisition:
Cash consideration
Cash and cash equivalents acquired
$’000
3,467
(137)
3,330
The directors consider that the fair value of the assets acquired equalled their book value.
Since the date of acquisition, PBJ has not contributed any revenues to the group, and has recorded a loss before tax of approximately
$15,000.
13. Biological assets
Beginning of year
Additions to planted area and costs to maturity including finance costs (see note 8)
Transfers from property, plant and equipment (see note 14)
Transfers to non-current receivables
Net biological (loss) / gain
End of year
Net biological (loss) / gain comprises:
Gain arising from movement in fair value attributable to physical changes
Gain arising from movement in fair value attributable to price changes
2008
$’000
166,347
15,763
339
(44)
(2,660)
179,745
2007
$’000
143,496
14,821
–
–
8,030
166,347
(2,660)
–
(2,660)
8,030
–
8,030
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 16 per cent in the case of REA Kaltim and 19 per cent in the
case of all other group companies (2007: 17.5 per cent in the case of REA Kaltim and 19 per cent in the case of all other group
companies) and a twenty year average CPO price of $431 per tonne, net of Indonesian export duties, FOB Samarinda (2007: twenty year
average of $414 per tonne). The effect of the accounting policy on biological assets was that there was no change in the unit profit
margin assumed.
The valuation of the group’s biological assets would have been reduced by $9,505,000 (2007: $10,310,000) if the crops projected for
the purposes of the valuation had been reduced by 5 per cent; by $8,887,000 (2007: $10,915,000) if the discount rates assumed had
been increased by 1 per cent and by $18,987,000 (2007: $20,595,000) 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 31 December 2007, the group had outstanding forward sales
of crude palm oil (“CPO”) 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). During 2008, the group delivered 12,000 tonnes
of CPO against forward sale contracts at the equivalent of a CIF Rotterdam price of $620 per tonne; the remaining forward sales were
cancelled by mutual agreement with the counterparty.
81
Notes to the consolidated financial
statements continued
13. Biological assets - continued
At the balance sheet date, biological assets of $161,452,000 (2007: $141,571,000) had been charged as security for bank loans (see
note 22) but there were otherwise no restrictions on titles to the biological assets (2007: none). Expenditure approved by the directors
for the development of immature areas in 2009 amounts to $13,000,000 (prior year - $28,000,000).
14. Property, plant and equipment
Buildings
and structures
Plant, Construction
in progress
Total
Cost:
At 1 January 2007
Additions
Exchange differences
Disposals
Transfers (see note 13)
At 31 December 2007
Additions
Exchange differences
Disposals
Transfers (see note 13)
At 31 December 2008
Accumulated depreciation:
At 1 January 2007
Charge for year
Exchange differences
Eliminated on disposals
At 31 December 2007
Charge for year
Exchange differences
Eliminated on disposals
At 31 December 2008
Carrying amount:
End of year
Beginning of year
equipment
and vehicles
$’000
$’000
5,707
8,123
–
(6)
4,178
18,002
10,227
–
–
7,064
35,293
874
295
–
(2)
1,167
637
–
–
1,804
$‘000
$‘000
17,226
1,392
2
(460)
11,430
29,590
3,135
(183)
(268)
30
32,304
6,573
1,551
3
(258)
7,869
2,206
(102)
(163)
9,810
13,159
5,665
–
–
(15,608)
3,216
11,303
–
–
(7,433)
7,086
–
–
–
–
–
–
–
–
–
36,092
15,180
2
(466)
–
50,808
24,665
(183)
(268)
(339)
74,683
7,447
1,846
3
(260)
9,036
2,843
(102)
(163)
11,614
33,489
16,835
22,494
21,721
7,086
3,216
63,069
41,772
The depreciation charge for the year includes $423,000 (2007: $nil) which has been capitalised as part of the additions to biological
assets.
At the balance sheet date, the book value of finance leases included in property, plant and equipment was $174,000 (2007: $413,000).
At the balance sheet date, the group had entered into contractual commitments for the acquisition of property, plant and equipment
amounting to $2,394,000 (2007: $4,093,000).
82
15. Prepaid operating lease rentals
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
2008
$‘000
9,188
4,535
13,723
365
270
635
13,088
8,823
2007
$‘000
5,401
3,787
9,188
221
144
365
8,823
5,180
The depreciation charge for the year includes $212,000 (2007: $nil) which has been capitalised as part of the additions to biological
assets.
Additions in the year include $3,330,000 (2007: $nil) in respect of a subsidiary acquired during the year.
Land title certificates have been obtained in respect of areas covering 46,841 hectares (2007: 35,216 hectares).
16. Indonesian coal rights
The balance of $5,386,000 (2007: $nil) comprises interest bearing loans made to two Indonesian companies which own rights in respect
of certain coal concessions in East Kalimantan, Indonesia. Arrangements are in place for a substantial part of the economic benefit from
exploiting these concessions to accrue to the group, after the cost of servicing the loans. The loans are repayable as and when the cash
resources of the debtor companies permit, but in any event on 31 December 2020.
17. 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.
18. Inventories
Agricultural produce
Engineering and other operating inventory
2008
$’000
4,879
7,916
2007
$’000
8,603
4,437
12,795
13,040
The fair value of the agricultural produce as at 31 December 2007 took into account certain outstanding forward sales contracts for
delivery in 2008 at a CIF Rotterdam price of $620 per tonne of crude palm oil as disclosed in note 13. At 31 December 2008 there were
no outstanding forward sales contracts of crude palm oil.
83
Notes to the consolidated financial
statements continued
19. Trade and other receivables
Due from sale of goods
Prepayments and advance payments
Advance payment of taxation
Deposits and other receivables
2008
$’000
712
1,200
6,199
761
8,872
2007
$’000
444
853
1,149
855
3,301
Sales of goods are normally made on a cash against documents basis with an average credit period (which takes account of customer
deposits as disclosed in note 29) of nil days (2007: 6 days). The directors consider that the carrying amount of trade and other
receivables approximates their fair value.
20. 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.
21. Financial instruments
Capital risk management
The group manages as capital its debt, which includes the borrowings disclosed in notes 22 to 24, 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 30 to 33. 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 2009 is 60 per cent (2008: 60 per cent). Net debt, equity and the net
debt to equity ratio at the balance sheet date were as follows:
Debt *
Cash and cash equivalents
Net debt
* being the book value of long and short term borrowings as detailed in the table below under “Fair value of financial instruments”.
Equity (including minority interests)
Net debt to equity ratio
2008
$’000
108,264
(30,316)
77,948
2007
$’000
86,257
(34,216)
52,041
162,611
47.9%
148,633
35.0%
84
21. Financial instruments - continued
Significant accounting policies
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 2008 comprised loans and receivables and cash and cash equivalents amounting to
$32,448,000 (2007: $35,953,000).
Non-derivative financial liabilities as at 31 December 2008 comprised liabilities at amortised cost amounting to $102,920,000 (2007:
$93,032,000).
Derivative financial instruments at 31 December 2008 comprised instruments in designated hedge accounting relationships at fair value
amounting to a liability of $26,517,000 (2007: an asset of $168,000).
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.
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”) (2007: 2.75 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 2008 (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 $174,000 (2007: pre-tax profit (and
equity) increase of $183,000).
85
Notes to the consolidated financial
statements continued
21. Financial instruments - continued
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 pounds sterling denominated equity. The group's policy is to maintain limited balances in pounds 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 $100,000 on the net sterling denominated non-derivative monetary items (excluding the sterling notes which
are hedged) (2007: gain of $400,000). A 5 per cent strengthening of the Indonesian rupiah against the US dollar would have resulted
in a loss dealt with in the consolidated income statement and equity of $125,000 on the net Indonesian rupiah denominated, non-
derivative monetary items (2007: negligible effect).
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. At 31 December 2008, 71 per cent of bank
deposits were held with banks with a Moody’s prime rating of P1 and the balance with a bank with a Moody’s prime rating of P3.
Substantially all sales of goods are made on the basis of cash against documents or letters of credit. At the balance sheet date, no trade
receivables were past their due dates, nor were any impaired; accordingly no bad debt provisions were required. The maximum credit
risk exposures in respect of the group’s financial assets at 31 December 2008 and 2007 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 22.
The board reviews the cash forecasting models for the operation 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.
Non-derivative financial instruments
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.
86
21. Financial instruments - continued
2008
Bank loans
US dollar notes
Sterling notes
Trade and other payables, and customer deposits
Obligations under finance leases
2007
Bank loans
US dollar notes
Sterling notes
Trade and other payables
Obligations under finance leases
Weighted
average
interest
rate
5.8%
8.0%
10.4%
10.0%
Weighted
average
interest
rate
8.4%
8.0%
10.4%
10.0%
Under
1 year
$’000
11,119
2,250
5,035
8,332
62
26,798
Under
1 year
$’000
4,167
2,250
4,096
3,989
127
Between
1 and 2
years
$’000
2,180
2,250
4,944
–
65
Over 2
years
$’000
–
36,750
77,983
–
–
Total
$’000
13,299
41,250
87,962
8,332
127
9,439
114,733
150,970
Between
1 and 2
years
$’000
11,344
2,250
4,034
–
143
Over 2
years
$’000
2,181
39,000
69,908
–
–
Total
$’000
17,692
43,500
78,038
3,989
270
14,629
17,771
111,089
143,489
At 31 December 2008, the group’s non-derivative financial assets (other than receivables) comprised cash and deposits of $30,316,000
(2007: $34,216,000) carrying a weighted average interest rate of 3.1 per cent (2007: 4.5 per cent) all having a maturity of under one
year.
Derivative financial instruments
The following table details the amounts due in respect of the group’s derivative financial instruments. These arise under the cross
currency interest rate swaps (“CCIRS”) described in note 25. The cash flows are settled gross and, therefore, the table takes no account
of sterling receipts under the CCIRS.
At 31 December 2008
At 31 December 2007
Fair value of financial instruments
Under
1 year
$’000
7,197
4,570
Between
1 and 2
years
$’000
7,197
Over 2
years
$’000
104,607
Total
$’000
119,001
4,596
70,474
79,640
The table below provides an analysis of the book values and fair values of financial instruments, excluding receivables and trade payables,
as at the balance sheet date.
87
Notes to the consolidated financial
statements continued
21. Financial instruments - continued
Cash and deposits +
Debt - within one year +
Debt - after more than one year +
Finance leases o
US dollar notes o
Sterling notes o
Cross currency interest rate swap - hedge against principal liabilities
Net debt
Cross currency interest rate swap - hedge against interest liabilities
+bearing interest at floating rates
o bearing interest at fixed rates
2008
Book value
$’000
30,316
(10,750)
(2,167)
(114)
(29,632)
(50,234)
(15,367)
(77,948)
(11,150)
2008
Fair value
$’000
30,316
(10,750)
(2,167)
(114)
(21,382)
(44,906)
(15,367)
(64,370)
(11,150)
2007
Book value
$’000
34,216
(3,000)
(12,917)
(238)
(29,389)
(41,604)
891
(52,041)
(723)
2007
Fair value
$’000
34,216
(3,000)
(12,917)
(238)
(28,050)
(42,248)
891
(51,346)
(723)
(89,098)
(75,520)
(52,764)
(52,069)
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 and sterling 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 at 31 December 2007 was estimated by the directors, based on a yield comparision with
UK government debt issues.
The fair value of the cross currency interest rate swaps (“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 2008 at fair value resulted in a loss of $26,517,000 (2007: gain of $168,000) which
has been taken directly to equity, net of related tax relief. 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 $2,783,000.
22. 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
Amount due for settlement within 12 months (shown under current liabilities)
Amount due for settlement after 12 months
2008
$‘000
12,917
10,750
2,167
–
12,917
10,750
2,167
12,917
2007
$‘000
15,917
3,000
10,750
2,167
15,917
3,000
12,917
15,917
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 2008 was 5.8 per cent (2007: 8.4 per cent). Bank loans of $12,917,000 (2007: $15,417,000) are secured on
substantially the whole of the assets and undertaking of PT REA Kaltim Plantations (“REA Kaltim”), amounting to $265 million (2007:
$215 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.
88
22. Bank loans - continued
At the balance sheet date, the group had undrawn US dollar denominated bank facilities of $4.0 million (2007: $7.0 million).
On 23 April 2009, REA Kaltim concluded a new agreement with its bankers which will increase its bank facilities to $15.5 million and
significantly extend the average maturity of drawings under the facility. In addition, the interest rate formula now includes an allowance
for the bankers’ cost of funds.
23. Sterling notes
The sterling notes comprise £37 million nominal of 9.5 per cent guaranteed sterling notes 2015/17 issued by the company’s subsidiary,
REA Finance B.V.. Of these, £15 million nominal were issued during 2008 for cash at a subscription price of 99.8682 per cent of par.
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 £37 million ($53.3 million) is hedged by a forward foreign exchange contract
for the purchase of £37 million and for the sale of $68.6 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.
24. 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.
25. Hedging instruments
At 31 December 2008 the group had outstanding three contracts for the forward purchase of £37 million and sale of $68.6 million
maturing in 2015 (2007: the group had outstanding a contract for the forward purchase of £22 million and sale of $42.9 million maturing
in 2015) pursuant to the cross currency interest rate swaps (“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”). Either party to the CCIRS has the option to terminate the contracts on the fifth anniversary of the initial trade date. During the
year, the hedges were effective in hedging the related sterling interest payment obligations on the sterling notes up to and including 31
December 2015 and in providing the £37 million required to meet the principal repayment obligations. The fair value of the CCIRS has
been described in note 21.
89
Notes to the consolidated financial
statements continued
26. Deferred tax
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 assets / (liabilities)
At 1 January 2007
(Charge)/credit to income for the year
(Charge)/credit to equity for the year
Exchange differences
Effect of change in tax rate - income statement
Effect of change in tax rate - equity
Transfers
Property, plant
and equipment
$’000
(15,760)
(2,325)
–
496
–
–
(12)
At 31 December 2007
(Charge) / credit to income for the year
(Charge) / credit to equity for the year
Exchange differences
Effect of change in tax rate - income statement
Effect of change in tax rate - equity
Transfers
(17,601)
(3,847)
–
3,209
3,318
–
–
Biological
assets
$’000
(14,960)
(2,409)
–
–
–
–
–
(17,369)
798
–
–
2,913
–
–
At 31 December 2008
(14,921)
(13,658)
Deferred tax assets
Deferred tax liabilities
At 31 December 2008
Deferred tax assets
Deferred tax liabilities
7
(14,928)
–
(13,658)
(14,921)
(13,658)
18
(17,619)
–
(17,369)
Income/ Share based
payments
expenses*
$’000
$’000
1,895
1,488
–
(3,048)
551
–
24
(81)
–
(10)
(166)
–
–
377
(1,274)
291
(1,529)
(348)
(371)
–
1,243
(1,988)
904
(2,892)
(1,988)
904
(2,178)
2,304
–
(1,444)
(322)
–
–
–
538
538
–
538
2,304
–
Tax
losses
$’000
4,765
(1,684)
98
37
(219)
(41)
(365)
2,591
93
(2)
(219)
(225)
–
(1,243)
995
995
–
995
Total
$’000
(22,572)
(9,466)
649
476
(229)
(207)
–
(31,349)
(2,665)
(2,975)
2,320
5,635
–
–
(29,034)
2,444
(31,478)
(29,034)
2,591
–
5,817
(37,166)
At 31 December 2007
* included as income, recognised gains or expenses for reporting purposes, but not yet charged to or allowed for tax, allowed for tax but not yet recognised for
(17,601)
(17,369)
(1,274)
2,304
2,591
(31,349)
reporting purposes.
At the balance sheet date, the group had unused tax losses including a share based payments provision of $5.9 million (2007: $17.4
million) available to be applied against future profits. A deferred tax asset of $1,533,000 (2007: $4,895,000) 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 $3,750,000 (2007: $4,750,000). 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 per cent to 28 per cent (for 2008/2009) has reduced the net amount of UK
deferred tax assets by $nil (2007: $436,000).
90
26. Deferred tax - continued
The proposed reduction in Indonesian corporation tax from 30 per cent to 25 per cent has reduced the net amount of Indonesian deferred
tax liabilities by $5,635,000.
27. 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
2008
$’000
2007
$’000
62
65
127
13
114
53
61
114
53
61
114
127
143
270
32
238
111
127
238
111
127
238
The group leases certain items of plant and equipment under finance leases. The average lease term is one to two years (2007: one to
two years). Interest rates are fixed at the contract rate. The average borrowing rate for the year was 10.0 per cent (2007: 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.
28. Other loans and payables
Retirement benefit obligations (see note 37)
Other
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
2008
$’000
3,078
612
3,690
2007
$’000
3,800
686
4,486
380
449
373
1,159
1,778
3,310
478
1,439
2,120
4,037
3,690
4,486
91
Notes to the consolidated financial
statements continued
28. Other loans and payables - continued
Amounts of liabilities by currency:
Sterling
US dollar
Indonesian rupiah
2008
$’000
2,117
509
1,064
3,690
2007
$’000
3,219
544
723
4,486
Further details of the retirement benefit obligations which relate to the R.E.A. Pension Scheme (the “Scheme”) are set out in note 37.
The directors estimate that the fair value of retirement benefit obligations (being the retirement benefit funding obligations agreed with
the trustees of the Scheme following the 2005 actuarial valuation referred to in note 37) and of other loans and payables approximates
their carrying value.
29. Trade and other payables
Trade purchases and ongoing costs
Customer deposits
Other tax and social security
Accruals
Other payables
The average credit period taken on trade payables is 37 days (2007: 29 days).
The directors estimate that the fair value of trade payables approximates their carrying value.
30. Share capital
Authorised (in pounds sterling):
17,500,000 - 9 per cent cumulative preference shares of £1 each (2007: 14,500,000)
41,000,000 - ordinary shares of 25p each (2007: 41,000,000)
Issued and fully paid (in US dollars):
14,902,954 - 9 per cent cumulative preference shares of £1 each (2007: 13,600,000)
32,573,856 - ordinary shares of 25p each (2007 – 32,573,856)
2008
$’000
6,071
2,021
282
3,499
240
12,113
2008
£’000
17,500
10,250
27,750
$’000
26,484
14,230
40,714
2007
$’000
3,331
–
230
2,851
658
7,070
2007
£’000
14,500
10,250
24,750
$’000
24,069
14,230
38,299
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.
92
30. Share capital - continued
Changes in share capital:
(cid:129)
(cid:129)
on 6 June 2008, the authorised share capital was increased from £24,750,000 to £27,750,000 by the creation of an additional
3,000,000 9 per cent cumulative preference shares.
on 24 September 2008, 1,302,954 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”.
31. Capital reserves
At 1 January 2007
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
Capitalisation issue of new preference shares
Expenses of issue
At 31 December 2008
Share
premium
account
$’000
19,506
12,731
108
(2,016)
(542)
–
29,787
(2,415)
(50)
27,322
Special
reserve
$’000
3,254
–
–
–
–
(3,254)
–
–
–
–
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. The company issued fresh capital in
2006 and 2007 of more than £6,000,000 and, as permitted under the terms of the undertaking given to the High Court, transferred in
2006 and 2007 sums of an equivalent amount from special reserve to the company’s profit and loss account.
32. Translation reserve
At 1 January 2007
Exchange translation differences arising during the year
Fair value loss on cash flow hedge
At 31 December 2007
Reclassification of balances brought forward
Exchange translation differences arising during the year
Fair value loss on cash flow hedge
At 31 December 2008
Hedging
reserve
$’000
–
–
(506)
(506)
624
-
(18,757)
(18,639)
Other
reserve
$’000
(8,890)
(426)
–
(9,316)
(624)
12,191
–
2,251
Total
$’000
(8,890)
(426)
(506)
(9,822)
–
12,191
(18,757)
(16,388)
93
Notes to the consolidated financial
statements continued
33. Retained earnings
Beginning of year
Profit for the year
Ordinary dividend paid
Transfer from special reserve
Share based payment - deferred tax (charge) / credit
End of year
34. Minority interest
Beginning of year
Share of (loss) / profit after taxation
Share of items taken directly to equity
Exchange translation differences
Acquisition of PT Putra Bongan Jaya (5 per cent minority)
End of year
35. Reconciliation of operating profit to operating cash flows
Operating profit
Depreciation of property, plant and equipment
Decrease / (increase) in fair value of agricultural produce inventory
Amortisation of prepaid operating lease rentals
Amortisation of sterling and US dollar note issue expenses
Biological loss / (gain)
Loss on disposal of property, plant and equipment
Operating cash flows before movements in working capital
Increase in inventories (excluding fair value movements)
(Increase) / decrease in receivables
Increase / (decrease) in payables
Exchange translation differences
Cash generated by operations
Taxes paid
Interest paid
Net cash from operating activities
2008
$’000
89,492
23,833
(1,498)
–
(1,444)
110,383
2008
$’000
877
(420)
(89)
40
172
580
2008
$’000
40,563
2,420
4,214
57
287
2,660
2
50,203
(5,091)
(581)
5,329
1,036
50,896
(13,122)
(5,474)
32,300
2007
$’000
57,679
29,453
(1,279)
3,254
385
89,492
2007
$’000
600
278
–
(1)
–
877
2007
$’000
49,386
1,846
(5,578)
144
242
(8,030)
6
38,016
(2,555)
1,283
(583)
(1,330)
34,831
(3,165)
(3,490)
28,176
Additions to property, plant and equipment during the year amounting to $nil (2007: $171,000) were financed by new finance leases.
94
36. Movement in net borrowings
Change in net borrowings resulting from cash flows:
Increase / (decrease) in cash and cash equivalents
Net decrease in borrowings
Amortisation of US dollar notes issue expenses
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
37. Pensions
2008
$’000
3,930
3,000
6,930
(94)
(27,073)
90
–
(20,147)
9,607
(52,041)
(62,581)
2007
$’000
(3,601)
24,833
21,232
(94)
(13,587)
268
(171)
7,648
843
(60,532)
(52,041)
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.
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 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 calculated 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.
95
Notes to the consolidated financial
statements continued
37. Pensions - continued
The normal contributions paid by the group in 2008 were £67,000 - $123,000 (2007: £63,000 - $128,000) and represented 24.9 per
cent (2007: 24.9 per cent) of pensionable salaries. For 2009, the contribution rate will remain at 24.9 per cent. The additional
contribution applicable to the group for 2008 was £212,000 - $390,000 (2007: £206,000 - $414,000) and for 2009 the additional
contribution will rise to £218,000 - $314,000. The total additional contributions for the period from 2009 to 2015 are £1,438,000 -
$2,071,000. A liability of £1,399,000 - $2,015,000 (2007: £1,546,000 - $3,077,000) for these additional contributions adjusted for the
time value of money has been recognised under retirement benefit obligations (see note 28) with an equal charge to income.
The next actuarial valuation which is to be made as at 31 December 2008 has not yet been prepared and the assumptions to be applied
to the valuation have yet to be agreed. It is proposed to apply members’ mortality based on PNXA00 and the investment return will be
based on current market rates. Principally as a result of a decline in the value of listed equity investments in the last quarter of 2008,
the market value of the assets held by the Scheme at 31 December 2008 is likely to have fallen short of the value that would have been
expected at that date by the 31 December 2005 valuation to an extent that may increase the deficit to be funded by the group by £1.3
million - $1.9 million but as the outcome of the 31 December 2008 valuation is not known, no further provision has been made for
additional contributions in respect of any increase in the deficit.
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.
38. 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”.
2008
$’000
941
94
–
–
–
1,035
2007
$’000
1,083
98
–
–
–
1,181
2008
Closing
2008
Average
2007
Closing
2007
Average
10,950
1.44
9,757
1.84
9,419
1.99
9,166
2.01
Short term benefits
Post employment benefits
Other long term benefits
Termination benefits
Share based payments
39. Rates of exchange
Indonesia rupiah to US dollar
US dollar to pound sterling
96
40. Events after the reporting period
An interim dividend of 1.5p per ordinary share in lieu of final in respect of the year ended 31 December 2008 was paid on 30 January
2009. In accordance with IAS10 “Events after the reporting period” this dividend has not been included in these financial statements. As
described in note 22, PT REA Kaltim Plantations has concluded a new agreement with its bankers.
41. Contingent liabilities
As disclosed in note 37, the company has a contingent liability for additional contributions payable by other (non-group) employers in the
R.E.A. Pension 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. In addition, as also disclosed in note 37, the company has a
potential exposure to any increase in deficit which may arise as a result of the forthcoming actuarial valuation of the R.E.A. Pension
Scheme as at 31 December 2008 and which the group may be required to fund to an extent.
97
Auditors’ report (company)
Independent auditors’ report to the members of
R.E.A. Holdings plc
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 2008 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 2008 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 we
This report is made solely to the company’s members, as
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 financial
on a test basis, of evidence relevant to the amounts and
statements in accordance with relevant legal and
disclosures in the parent company financial statements. It
98
also includes an assessment of the significant estimates
and judgements 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:
(cid:129)
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
2008;
(cid:129)
(cid:129)
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 LLP
Chartered Accountants and Registered Auditors
London, United Kingdom
27 April 2009
99
Company balance sheet
as at 31 December 2008
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)
2008
£’000
58,932
99
371
59,402
1,118
5,633
6,751
(1,213)
5,538
2007
£’000
47,596
112
2,390
50,098
842
11,419
12,261
(1,084)
11,177
Total assets less current liabilities
64,940
61,275
Creditors: amounts falling due after more than one year
US dollar notes
Provision for liabilities and charges
Net assets
(v)
(vi)
(20,576)
(75)
(14,767)
(670)
44,289
45,838
Capital and reserves
Share capital
Share premium account
Exchange reserve
Profit and loss account
Total shareholders’ funds
(vii)
(viii)
(viii)
(viii)
23,046
14,675
181
6,387
44,289
21,743
16,005
213
7,877
45,838
Approved by the board on 27 April 2009 and signed on behalf of the board.
RICHARD M ROBINOW
Chairman
100
Movement in total shareholders’
funds
for the year ended 31 December 2008
Total recognised gains / (losses) 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 costs of ordinary shares, preference shares and debt securities
Shareholders' funds at beginning of year
Shareholders' funds at end of year
2008
£’000
2007
£’000
575
(1,283)
(814)
–
–
(27)
(1,549)
45,838
44,289
(472)
(1,127)
(637)
6,750
1,118
(266)
5,366
40,472
45,838
Statement of total recognised gains and
losses
for the year ended 31 December 2008
Profit / (loss) for the year
Share based payment - deferred tax (charge) / credit
Currency translation loss taken direct to reserves
2008
£’000
1,392
(785)
(32)
575
2007
£’000
(340)
191
(323)
(472)
101
Accounting policies (company)
Accounting convention
Taxation
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”.
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.
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.
Investments
Tangible fixed assets
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.
Dividends declared by subsidiaries are credited to the
company's profit and loss account.
Foreign exchange
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.
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.
102
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
2008
£’000
27,876
31,056
58,932
2007
£’000
24,139
23,457
47,596
£’000
47,596
7,689
3,647
58,932
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)
PT Cipta Davia Mandiri (Indonesia)
PT Kartanegara Kumala Sakti (Indonesia)
PT Putra Bongan Jaya (Indonesia)
PT REA Kaltim Plantations (Indonesia)
PT Sasana Yudha Bhakti (Indonesia)
REA Finance B.V. (Netherlands)
R.E.A. Services Limited (England and Wales)
Sub holding company
Plantation agriculture
Plantation agriculture
Plantation agriculture
Plantation agriculture
Plantation agriculture
Group finance
Group services
Class of
shares
Percentage
owned
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
100
95
95
95
100
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
Land and buildings Fixtures and
fittings
£‘000
(short leasehold)
£’000
85
4
89
9
8
17
72
76
45
–
45
9
9
18
27
36
Total
£‘000
130
4
134
18
17
35
99
112
103
Notes to the company financial
statements continued
(iii) Debtors
Trade debtors
Amount owing by group undertakings
Other debtors
Prepayments and accrued income
(iv) Creditors: amounts falling due within one year
Amount owing to group undertakings
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
2008
£’000
11
1,011
35
61
1,118
2008
£’000
810
62
341
1,213
2008
£’000
13,717
6,859
20,576
2007
£’000
5
761
22
54
842
2007
£’000
285
34
765
1,084
2007
£’000
4,917
9,850
14,767
The US dollar notes comprise US$30 million (2007: 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 debited / (credited) to profit and loss account
Net amount debited to reserves
End of year
2008
£’000
(1,720)
652
772
(296)
2007
£’000
(1,580)
(350)
210
(1,720)
104
(vi) Deferred tax asset and provision for liabilities and charges - continued
Included in provisions for liabilities and charges
Included 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) Share capital
Authorised:
17,500,000 - 9 per cent cumulative preference shares of £1 each (2007: 14,500,000)
41,000,000 - ordinary shares of 25p each (2007: 41,000,000)
Called-up and fully paid:
14,902,954 - 9 per cent cumulative preference shares of £1 each (2007: 13,600,000)
32,573,856 - ordinary shares of 25p each (2007: 32,573,856)
2008
£’000
75
(371)
(296)
75
(371)
(296)
2008
£’000
17,500
10,250
27,750
14,903
8,143
23,046
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
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:
(cid:129)
(cid:129)
on 6 June 2008, the authorised share capital was increased from £24,750,000 to £27,750,000 by the creation of an additional
3,000,000 9 per cent cumulative preference shares.
on 24 September 2008, 1,302,954 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”.
105
Notes to the company financial
statements continued
(viii) Movement in reserves
Beginning of year
Dividends to preference shareholders
Dividends to ordinary shareholders
Capitalisation issue of new preference shares
Expenses of issue
Retained profit for the year
End of year
Share
premium
account
£’000
16,005
–
–
(1,303)
(27)
–
14,675
Exchange
reserve
£’000
213
–
–
–
–
(32)
181
Profit
and loss
account
£’000
7,877
(1,283)
(814)
–
–
607
6,387
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 profit before dividends recognised in the company's profit and loss account is £1,392,000 (2007: loss
£340,000).
(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
2008
Book value
£’000
5,633
(20,576)
2008
Fair value
£’000
5,633
(15,104)
2007
Book value
£’000
11,419
(14,767)
2007
Fair value
£’000
11,419
(14,095)
(14,943)
(9,471)
(3,348)
(2,676)
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.
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.
106
(ix) Financial instruments and risks - continued
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 2008, 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 2008
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 £52,000 (2007: £115,000) 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 for 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 2008 (2007: 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 was 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 which is to be made as at 31 December 2008 has not yet been prepared and the assumptions to be applied
to the valuation have yet to be agreed. It is proposed to apply members’ mortality based on PNXA00 and the investment return will be
based on current market rates. Principally as a result of a decline in the value of listed equity investments in the last quarter of 2008, the
market value of the assets held by the Scheme at 31 December 2008 is likely to have fallen short of the value that would have been
expected at that date by the 31 December 2005 valuation to an extent that may increase the scheme deficit by £2.6 million. It is not
known what the overall outcome of the 31 December 2008 valuation will be.
107
Notes to the company financial
statements continued
(xi) Related party transactions
Aggregate directors’ remuneration:
Salaries and fees
Benefits
Annual bonus
Gains on exercise of share options
2008
£’000
2007
£’000
467
42
–
–
509
466
33
40
–
539
During 2008 and 2007, there were service arrangements with companies connected with certain directors as detailed under “Directors’
remuneration” in the “Directors’ remuneration report”, the costs of which are included in the table above.
(xii) Rates of exchange
See note 39 to the consolidated financial statements.
(xiii) Commitments
The company has guaranteed a principal obligation of £8,970,000 (2007: £7,747,000) in respect of bank loans to PT REA Kaltim
Plantations, a principal obligation of £nil (2007: £251,000) in respect of bank loans to PT Sasana Yudha Bhakti and a principal obligation
of £37 million (2007: £22 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 1.5p per ordinary share in lieu of final in respect of the year ended 31 December 2008 was paid on 30 January
2009. In accordance with FRS 21 “Events after the Balance Sheet Date”, this dividend has not been included in these financial
statements.
108
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 an independent professional
adviser authorised under the Financial Services and
Markets Act 2000 if you are resident in the United
Kingdom or, if you are not so resident, another
appropriately authorised independent adviser. If you
have sold or otherwise transferred all your ordinary
shares in R.E.A. Holdings plc, please forward this
document and the accompanying form of proxy to the
person through whom the sale or transfer was effected,
for transmission to the purchaser or transferee.
Notice is hereby given that the forty ninth 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 4 June 2009 at 10.00 am to consider and, if
thought fit, to pass the following resolutions:
As ordinary business (resolutions 1 to 13 (inclusive) of which will
be proposed as ordinary resolutions and resolution 14 of which
will be proposed as a special resolution):
1 To receive the company’s annual accounts for the year
ended 31 December 2008, together with the directors’
report, the directors’ remuneration report and the auditors’
report.
2 To approve the directors’ remuneration report for the year
ended 31 December 2008.
3 To re-elect as a director Mr R M Robinow, who, having been
a non-executive director for more than nine years, retires as
required by the Combined Code on Corporate Governance
and submits himself for re-election.
4 To re-elect as a director Mr J C Oakley, who, having been a
director at each of the two preceding annual general
meetings and who was not re-appointed by the company in
general meeting at or since either of such meetings, retires
in accordance with the articles of association and submits
himself for re-election.
5 To re-elect as a director Mr D J Blackett, who was appointed
as a director since the last annual general meeting and
submits himself for re-election.
6 To re-elect as a director Mr J M Green-Armytage, who,
having been a non-executive director for more than nine
years, retires as required by the Combined Code on
Corporate Governance and submits himself for re-election.
7 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
and submits himself for re-election.
8 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
and submits himself for re-election.
9 To re-elect as a director Mr C L Lim, who, having been a
director at each of the two preceding annual general
meetings and who was not re-appointed by the company in
general meeting at or since either of such meetings, retires
in accordance with the articles of association and submits
himself for re-election.
10 To re-appoint Deloitte LLP, chartered accountants, as
auditors of the company to hold office until the conclusion of
the next general meeting at which accounts are laid before
the company.
11 To authorise the directors to fix the remuneration of the
auditors.
12 That the directors of the company be generally and
unconditionally authorised for the purposes of 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 2010 (or on 31 August 2010, whichever is the
earlier), save that the company may before such expiry make
an offer or agreement which would or might require relevant
securities to be allotted after such expiry.
13 That 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
£2,597,046, such authority to expire at the conclusion of the
annual general meeting to be held in 2010 (or on 31 August
2010, whichever is the earlier), save that the company may
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Notice of annual general meeting continued
before such expiry make an offer or agreement which would
or might require 9 per cent cumulative preference shares to
be allotted after such expiry.
15 That a general meeting other than an annual general
meeting may be called on not less than 14 clear days’ notice.
14 That, subject to the passing of resolution 12 set out in the
notice of annual general meeting of the company convened
for 4 June 2009,
By order of the board
R.E.A. SERVICES LIMITED
Secretary
27 April 2009
(i)
the directors of the company be and are hereby
empowered in accordance with section 95 of the
Companies Act 1985 (I) to allot equity securities (as
defined in sub-section (2) of section 94 of the
Companies Act 1985) and (II) to sell relevant shares (as
defined in sub-section (5) of section 94 of the
Companies Act 1985) held by the company as treasury
shares for cash pursuant to the authority conferred on
them by such resolution 12 as if sub-section (1) of
section 89 of the Companies Act 1985 did not apply to
the allotment or sale, such power to expire at the
conclusion of the annual general meeting of the
company to be held in 2010 (or on 31 August 2010,
whichever is the earlier) provided that this power is
limited to:
(a) the allotment of equity securities in connection with
or pursuant to an offer or invitation by way of a rights
issue in favour of holders of ordinary shares in
proportion (as nearly as practicable) to the
respective number of ordinary shares held by them
on the record date for such allotment but subject to
such exclusions or other arrangements as the
directors may consider necessary or appropriate to
deal with fractional entitlements, treasury shares,
record dates or legal, regulatory or practical
difficulties which may arise under the laws of, 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.
Notes
The sections of the accompanying “Directors’ report”
entitled “Power to issue share capital”, “General meeting
notice period”
and “Recommendation” contain
information regarding, and recommendations by the
board of the company as to voting on, resolutions 12 to 15
set out in the above notice.
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 form of proxy is enclosed
with this notice. A proxy need not be a member of the company.
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.
A member wishing to appoint more than one proxy may photocopy
the accompanying form of proxy. One form must be completed for
each proxy appointed and each such form must show the name of
the proxy appointed, the number of shares the subject of the
appointment and whether multiple appointments are being made.
The aggregate number of shares in relation to which any member
appoints proxies may not exceed the number of shares held by that
member. All forms must be signed and should be returned
together in the same envelope.
In order to be valid, a form of proxy (and any power of attorney, or
other authority under which it is signed, or a notarially certified copy
of such power or authority) must be deposited at the offices of the
company’s registrars, Capita Registrars (Proxies), The Registry, 34
Beckenham Road, Beckenham, Kent BR3 4TU by no later than
10.00 am on 2 June 2009 or in the case of CREST members
lodged electronically in accordance with the procedures set out
below.
As special business (to be proposed as a special resolution):
To appoint a proxy or to give or amend an instruction to a previously
appointed proxy via the CREST system, the appropriate CREST
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message (a “CREST Proxy Instruction”) must be received by the
representatives will give voting directions to that designated
company’s registrars (ID: RA10) by 10.00 am on 2 June 2009. For
corporate representative.
the purpose of this deadline, the time of receipt will be taken to be
the time (as determined by the time stamp applied to the message
The company, pursuant to Regulation 41(1) of the Uncertificated
by the CREST applications host) from which the company’s
Securities Regulations 2001, specifies that in relation to securities
registrars are able to retrieve the message. CREST personal
held in dematerialised form only those holders of shares registered
members or other CREST sponsored members, and those CREST
in the register of members of the company at 6.00 pm on 2 June
members that have appointed voting service provider(s), should
2009 shall be entitled to attend and vote at the meeting in respect
contact their CREST sponsor or voting service provider(s) for
of the number of shares registered in their name at that time.
assistance with appointing proxies via CREST. For further
Changes to entries on the register of members after 6.00 pm on 2
information on CREST procedures, limitations and system timings
June 2009 shall be disregarded in determining the rights of any
referenc should be made to the CREST manual. CREST members,
person to attend and vote at the meeting.
and where applicable their CREST sponsors or voting service
providers, should note that CREST does not make available special
Copies of letters setting out the terms and conditions of
procedures in CREST for a particular message. Normal system
appointment of non-executive directors are available for inspection
timings and limitations will therefore apply in relation to the input of
at the company's registered office during normal business hours
CREST proxy instructions. The company may treat as invalid a
and will be available for inspection at the place of the annual
CREST proxy instruction in the circumstances set out in Regulation
general meeting for at least 15 minutes prior to and during the
35(5) (a) of the Uncertified Securities Regulations 2001.
meeting.
The right to appoint a proxy does not apply to persons whose
As at the date of this notice, the issued share capital of the
shares are held on their behalf by another person and who have
company comprises 32,573,856 ordinary shares and 14,902,954
been nominated to receive communications from the company in
9 per cent cumulative preference shares. Only holders of ordinary
accordance with section 146 of the Companies Act 2006
shares (and their proxies) are entitled to attend and vote at the
(“nominated persons”). Nominated persons may have a right under
annual general meeting. Accordingly, the voting rights attaching to
an agreement with the registered shareholder who holds the
shares of the company exercisable in respect of each of the
shares on their behalf to be appointed (or to have someone else
resolutions to be proposed at the annual general meeting total
appointed) as a proxy. Alternatively, if nominated persons do not
32,573,856 as at the date of this notice.
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
will be nominated, from those corporate representatives who
attend, who will vote on a poll and the other corporate
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