R.E.A. HOLDINGS PLC - ANNUAL REPORT
2 0 1 2
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
Summary of results
Key statistics
Chairman’s statement
Review of the group
Directors
Directors’ report
Corporate governance
Directors’ remuneration report
Directors’ responsibilities
Directors’ confirmation
Auditor’s report (group)
Consolidated income statement
Consolidated balance sheet
Consolidated statement of comprehensive income
Consolidated statement of changes in equity
Consolidated cash flow statement
Accounting policies (group)
Notes to the consolidated financial statements
Auditor’s report (company)
Company balance sheet
Movement in total shareholders’ funds
Accounting policies (company)
Notes to the company financial statements
Notice of annual general meeting
2
3
4
5
7
16
59
60
67
74
79
80
81
83
84
85
85
86
87
94
122
124
125
126
127
134
1
Officers and professional advisers
Directors
R M Robinow
J C Oakley
M A Parry
D J Blackett
I Chia
D H R Killick
Secretary and registered office
R.E.A. Services Limited
First Floor
32-36 Great Portland Street
London W1W 8QX
Stockbrokers
Mirabaud Securities LLP
33 Grosvenor Place
London SW1X 7HY
Solicitors
Ashurst LLP
Broadwalk House
5 Appold Street
London EC2A 2HA
Auditor
Deloitte LLP
2 New Street Square
London EC4A 3BZ
Registrars and transfer office
Capita Registrars
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
2
Maps
as at 31 December 2012
T
T
abangg
Tabang
(cid:122)
(cid:122)
(cid:122)
(cid:122)
EAST
EAST
KALIMANTAN
AN
ALIMK
ANTTAN
AN
Sentekan R i
ii
iRR inaketneS
r
r
r
e
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v
v
v
M
M
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i
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R
R
RR
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i
ii
v
v
v
e
ee
r
r
r
(cid:122)
(cid:122)
Kembang Janggut
K
anggut
embang J
B
B
e
ee
l
l
l
a
aa
y
y
y
a
aa
n
n
nn
R
RR
R
R
i
i
ii
v
v
vv
e
e
ee
r
r
r
ncalong
Muara Ancalong
Muar
ncalong
a A
K
K
e
e
d
d
a
a
n
n
g
g
K
KK
e
e
e
p
p
a
aa
l
l
l
a
a
R
RR
i
ii
v
v
v
e
e
r
r
onB
tang
Bontang
(cid:122)
(cid:122)
(cid:122)
Mah
MMa
MMa
aah
haah
hh
a
a
aa
k
k
kk
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Mahakam River
RmakahaMMa
revveiR
m
m
mm
R
R
RR
R
i
i
iii
v
v
v
v
e
ee
r
r
r
(cid:122)
(cid:122)
ota B
Kota Bangun
K
angun
ong(cid:122)
(cid:122)
Tenggarong
ong
TTenggar
enggar
S
Samarinda
amarinda
(cid:87)
(cid:87)
10 20 30 40 50 k
0 10 20 30 40 50 km
m
00 10 20 30 40 50 k
10 20 30 40 50 k
Balikpapan
alikB
papan
apan
AKMn
ASSAR STR
MAKASSAR STRAIT
AIT
ASSAR STR
SIA
MAL
SIAYAAY
MALAYSIA
Singapore
e
ingapor
SingSin
S
amarinda
amarin
(cid:122) amarin
Samarinda
(cid:122)
Kalimantan
aliman
Kaliman
Kaliman
ntann
KK
aliman
ntan
n
KK
Suma
atr
Sumatra
Jakarta
ta
Jak
taar
INDONESIA
INDONESIA
vaaJ
J
Java
PHILIPPINES
PHILIPPINES
PHILIPPINES
M
M
(cid:87)
(cid:87)
methane captur
e plan
t
methane captur
methane capture plant
oil mill
oil mill
oil mill
one quar
yr
st
one quar
stone quarry
anshipmen
minal
tr
anshipmen
transhipment terminal
t t
er
(cid:81)
(cid:81)
(cid:81)
(cid:81)
(cid:81)
(cid:81)
(cid:81)
(cid:81)
(cid:81)
(cid:81)
(cid:81)
(cid:81)
(cid:81)
(cid:81)
(cid:81)
via M
PT C
andir
i
ipta Da
PT Cipta Davia Mandiri
CDM
CDM
ar
PT K
tanegar
a K
umalasakti
PT Kartanegara Kumalasakti
KSKKKS
KKS
KMS
KMS
PT K
utai M
itr
a S
ejah
aert
PT Kutai Mitra Sejahtera
ongan Ja
PT P
utr
ay
a B
PT Putra Bongan Jaya
BJP
PBJ
BJ2P
PBJ2
ersada Bangun Ja
PT P
ay
PT Persada Bangun Jaya
REAK
REAK
PT REA K
altim P
lan
ta
tions
PT REA Kaltim Plantations
YBS
SYB
PT S
asana
Y
udha Bhakti
PT Sasana Yudha Bhakti
3
Summary of results
for the year ended 31 December 2012
Revenue
2012
$’000
2011
$’000
Change
%
124,600
147,758
- 16
Earnings before interest, tax, depreciation, amortisation and biological gain 1
38,083
70,818
- 46
Profit before tax
Profit for the year
30,558
64,173
- 52
17,703
45,614
- 61
Profit attributable to ordinary shareholders
11,342
40,453
- 72
Cash generated by operations 2
55,110
59,854
- 8
Earnings per ordinary share (diluted) in US cents
33.9
121.0
- 72
Dividend per ordinary share in pence 3
7.0
6.5
+ 8
Average exchange rates
2012
2011
2010
2009
2008
Indonesian rupiah to US dollar
US dollar to pound sterling
9,392
1.59
8,790
1.61
9,078
1.55
10,356
1.56
9,757
1.84
1. See note 5 to consolidated financial statements
2. See note 36 to consolidated financial statements
3. Paid in respect of the year
4
Key statistics
for the year ended 31 December 2012
Allocated area - Hectares
Mature oil palm
Immature oil palm (prior years)
Oil palm development (current year)
Reserve area 2
Total
20121
20111
2010
2009
2008
26,688
25,415
21,984
18,736
16,487
2,051
8,055
36,794
65,391
102,185
3,318
8,351
37,084
60,614
97,698
8,850
1,249
32,083
62,680
94,763
8,171
4,083
30,990
83,828
9,032
2,781
28,300
86,541
114,818
114,841
Production - Tonnes
Oil palm fresh fruit bunch crop - group
597,722
607,335
518,742
490,178
450,906
Oil palm fresh fruit bunch crop - external
64,014
34,146
20,089
13,248
6,460
661,736
641,481
538,831
503,426
457,366
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
151,516
147,455
127,256
118,357
105,597
30,734
28,822
24,614
23,740
20,846
182,250
176,277
151,870
142,097
126,443
22.9%
4.6%
23.0%
4.5%
23.6%
4.6%
23.5%
4.7%
23.1%
4.6%
22.4
23.9
23.6
26.2
27.3
5.2
1.0
6.2
5.5
1.1
6.6
5.6
1.1
6.7
6.2
1.2
7.4
6.3
1.2
7.5
1. Before implementation of proposed exchange of land areas subject to overlapping mineral rights.
2. Includes conservation areas, roads and other infrastructure and areas available for planting and under negotiation. For the reasons stated on page 28 of the
“Review of the group” section of this annual report, planned oil palm development is no longer disclosed separately but is included within the reserve area.
5
Crude palm oil monthly average price
e
n
n
o
t
/
$
S
U
1400
1200
1000
800
600
400
200
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Share performance graph
REA Ordinary
FT All Share
2008
2009
2010
2011
2012
200
x
e
d
n
I
100
0
6
Chairman’s statement
Introduction
Revenue for 2012 at $124.6 million was less than in
2011 ($147.8 million) with the reduction reflecting lower
The “Review of the group” section of this annual report
revenue from both the agricultural operations ($122.1
gives detailed information intended to assist shareholders
million against $129.5 million) and the coal operations
in understanding the group's business and strategic
($2.5 million against $18.2 million). In the agricultural
objectives. Because the review is designed to provide a
operations, this was the result of the trading factors
reasonably complete and self-contained description of
referred to above while, in the coal operations, it was the
the group, it does, in many places, repeat what has been
direct consequence of the suspension of the coal trading
said in the reviews of the group contained in previous
activities.
annual reports. This “Chairman's statement” endeavours
to be less repetitive and to provide a synopsis of the more
Excluding movements on agricultural inventory, cost of
significant matters noted in the review, with particular
sales attributable to the agricultural operations amounted
emphasis on developments that occurred during 2012 or
to $59.5 million against $51.3 million. The increase
are in prospect.
Results
reflected continuing cost inflation and cropping on a
larger area. Under normal circumstances, it could have
been expected that the increased cost of sales would
have been offset by increased crop volumes but the
Group profit before tax for 2012 at $30.6 million was
combination of weather factors and village issues resulted
some 52 per cent lower than the $64.2 million reported
in the 2012 crop falling significantly short of budget and,
for 2011.
with most components of cost of sales being fixed costs,
there was no commensurate reduction in cost of sales. In
The significant fall in profits as compared with 2012
the coal operation, cost of sales reduced from the prior
reflected the weather impact on crops in the first half and
year $16.7 million to $4.0 million in line with the reduction
the effect of lower CPO and CPKO prices during the year,
in trading activity.
combined with what will hopefully prove to be non-
recurring losses arising from the decisions taken in
IFRS fair value adjustments, aggregating $0.3 million in
relation to the coal operations and from the village issues
2012, were significantly below
the aggregate
described under “Community relations” below. The
adjustments of $11.4 million reported in the preceding
following table provides estimates of the effect on profit
year. The net gain from changes in the fair value of
before taxation as respects each of the items concerned:
biological assets ($6.0 million against $7.4 million in
Agricultural operations
Trading items:
Value impact of lower prices on crop harvested
Value impact of reduced crop due to weather
Village disruptions:
Value impact of reduced crop
$’m
(12.6)
(5.6)
(5.7)
Value impact of reduced prices due to high FFA oil
(6.6)
2011) reflected the further development of the group’s
plantations while the loss arising from changes in the fair
value of agricultural produce inventory ($5.7 million
against a profit of $4.0 million in 2011) was the product
of a small reduction in inventory volume over 2012 and
the fall in CPO and CPKO prices during the year
exacerbated by the need to allow for a discount on the
closing inventory to reflect the high FFA content of that
inventory.
Coal operations
Losses
Provision against concessions
(4.1)
(3.0)
(37.6)
Administrative expenses for 2012 amounted to $18.9
million against $17.0 million in 2011. The increase was in
7
Chairman’s statement continued
part the result of inflation, but also reflected costs of
64,014 tonnes of FFB from smallholders and other third
management transition, costs incurred in connection with
parties (2011: 34,146 tonnes).
the resolution of village issues and a further provision of
$1.0 million for additional funding of the group’s UK
Rainfall across the estates averaged 3,241 mm for 2012,
pension scheme following a recent triennial actuarial
similar to the level of 3,414 mm for the previous year. A
valuation of the scheme.
widely predicted El Nino weather phenomenon did not
Losses on the coal trading operations reflected provisions
materialise.
made against outstanding trading items following the
Processing of the group’s own FFB production and the
decision to suspend trading. In addition, a provision of $3
externally purchased FFB, together totalling 661,736
million has been made against the coal concessions.
tonnes (2011: 641,481 tonnes) produced 151,516
tonnes of CPO (2011: 147,455 tonnes), 30,734 tonnes
At the after tax level, profit fell to $17.7 million (2011:
of palm kernels (2011: 28,822 tonnes) and 11,549
$45.6 million) while profit attributable to ordinary
tonnes (2011: 10,815 tonnes) of CPKO reflecting
shareholders was $11.3 million against $40.5 million.
extraction rates of, respectively, 22.9 per cent for CPO
Earnings per share amounted to US 33.9 cents (2011:
(2011: 23.0 per cent), 4.6 per cent for kernels (2011: 4.5
US 121.0 cents).
per cent) and 37.7 per cent for CPKO (2011: 38.4 per
Adjustments for the non-cash components of operating
cent).
profit and for movements in working capital meant that
Most of the crop shortfall against budget arose in the first
cash generated by operations for 2012 amounted to
half of 2012 and was attributable to a combination of
$55.1 million, as compared with $59.9 million reported for
delayed ripening of crops in the early part of the year
2011. The positive overall movement on working capital
(reflecting the particular weather patterns of the latter
was principally attributable to an increase in payables, a
months of 2011) and crop losses resulting from
significant proportion of which represented deferred
harvesting disruptions generated by disputes with certain
payments due in respect of the group’s development
surrounding villages. It had been hoped that the second
programme. Tax and interest payments remained at much
half of the year would see at least a partial recovery of the
the same levels as in the preceding year with the result
crop shortfall of the first half but further disruptions by
that net cash from operating activities for 2012 amounted
villages meant that this recovery did not materialise.
to $32.5 million against $33.8 million for 2011.
Further information regarding disputes with villages is
Agricultural operations
Operational matters
provided under “Community relations” below.
Upgrading and expansion of the group’s oil mills is now
substantially complete and has ensured that the group
has, for the immediate future, sufficient processing
The crop out-turn for 2012 amounted to 597,722 tonnes
capacity to handle all crop from its own estates and from
of oil palm fresh fruit bunches. This was a little below the
the growing number of maturing smallholder plantings in
FFB crop of 607,335 tonnes for the corresponding period
the vicinity. The third, newest mill, which commenced
in 2011 but some 12 per cent below the budgeted crop
operation in September 2012 and incorporates a second
for the year of 682,000 tonnes. The group purchased
kernel crushing plant, has been designed to permit the
8
installation of a second processing line so as to double its
generating capacity, which it will dedicate to PLN and
capacity and thereby provide the ability to cope with
which PLN will use to supply power to the villages
further processing demands in the future.
surrounding the group’s estates by way of a local grid to
be constructed by PLN. Payment for the power so
In February 2013 the company published its first carbon
utilised will be made by PLN at a fixed rate determined by
footprint report providing an assessment of the
Indonesian state regulations. This equates to about $1
greenhouse gas emissions associated with the group’s
million per megawatt year but it is not yet known what
agricultural operations in 2011. The report identifies and
utilisation PLN will make of the available capacity. PLN
quantifies greenhouse gas emissions in the production of
will also consider linking the national grid to the new local
CPO and CPKO at the group's palm oil mills and related
grid and may in that event be able to increase its power
estate supply base and, going forward, will facilitate the
capacity requirement to six megawatts.
design and implementation of effective strategies for
reducing the group’s greenhouse gas emissions as well
There have recently been substantial increases in
as providing a baseline against which progress in
government directed minimum wage levels. A reasonable
achieving such reductions can be monitored and reported.
proportion of the group's employees are paid at a level
The report is available for downloading from the
above the minimum wage but the need to maintain
company’s website at www.rea.co.uk. Following on from
differentials makes it inevitable that the new minimum
the carbon footprint report, the company is currently in the
wage levels will result in a significant increase in the
process of compiling its first standalone sustainability
group's employment costs. In 2012, these represented
report which is due to be published later in 2013.
about one third of the cost of sales attributable to the
The group’s two new methane capture plants were
2013 will therefore have a particular focus on labour
commissioned in April and October 2012 respectively
efficiency and, specifically, on reducing overtime working.
group’s agricultural operations. Cost saving efforts in
with methane from each plant currently driving two
generators (each of one megawatt capacity). The
Land allocations and development
electricity generated from the captured methane now
supplies electricity to a significant proportion of the
The overall area of the group’s fully titled agricultural land
group’s mills, offices and housing, thereby having a
remained at 70,584 hectares with further land allocations
substantial impact on the group’s consumption of diesel
subject to the completion of titling totalling some 35,000
oil for power generation with material consequential
hectares. Of the land not yet titled, some 15,000
savings in energy costs and in greenhouse gas emissions.
hectares are conditional not only upon satisfaction of the
normal titling requirements but also upon completion of a
Current methane production has exceeded expectations
necessary rezoning of the area concerned.
and is averaging about four times that needed to drive the
installed generators and this offers opportunities for
Work is continuing to complete a conditional agreement
generating additional returns from the investment made in
between a group subsidiary and an Indonesian third party
the plants. In furtherance of such returns, the group has
company relating to overlapping mineral rights on certain
recently reached an outline agreement with the
land areas held by the group subsidiary. This would
Indonesian state electricity company (“PLN”) under which
increase the fully titled agricultural land held by the group
the group will install an additional three megawatts of
to 76,124 hectares. The delay in completing this
9
Chairman’s statement continued
agreement has been caused by the need to obtain
That situation changed during 2012 with disputes
confirmation of the continuing validity of the land titles
concentrated into two waves, the first in the second
held by the company to be acquired pursuant to the
quarter of the year running into early July and the second
agreement.
in the final weeks of the year and continuing into 2013.
These disputes were more serious than those previously
The directors believe that, of the prospective 76,124
experienced because of actions by villagers to enforce
hectares of fully titled land, between 50,000 and 55,000
their position by stopping harvesting access to certain
hectares will ultimately be plantable with oil palms. The
areas of the group’s estates and blockading group oil
remaining land allocations may in due course provide a
mills to prevent processing of FFB.
further 10,000 plantable hectares.
The 2012 village dissatisfaction with the group covered a
Areas planted and in the course of development as at 31
number of issues and different villages had different
December 2012 amounted in total to some 37,000
claims. However, a common theme was a demand that
hectares. Of this total, mature plantings comprised
the group procure the land necessary to establish
26,688 hectares having a weighted average age of 10
additional cooperative smallholder oil palm plantings in
years. A further 621 hectares planted in 2009 was
each village. The acquisition of PT Persada Bangun Jaya
scheduled to come to maturity at the start of 2013. The
in July 2012 provided the group with sufficient land to
total of 37,000 hectares includes 2,164 hectares (of
satisfy, appropriately and in aggregate, outstanding village
which 272 hectares were planted in 2008) to be
demands for oil palm cooperative developments but did
relinquished upon completion of the land settlement
not, of itself, immediately resolve such demands and other
arrangement described above.
village claims. That was because resolution was
complicated, as respects land allocations for cooperatives,
Negotiations with villages
in
the next planned
by the need for complete and accurate government
development area of the subsidiary company PT Putra
mapping of all village boundaries to provide a consistent
Bongan Jaya are substantially complete and clearing of a
basis for allocation between villages and, as respects
substantial component of the 11,602 plantable hectares
other claims, by past fraud by certain third party
is expected to commence shortly.
intermediaries who were legally appointed by villagers
and entrusted with distributing land compensation to
Community relations and smallholder schemes
individual villagers.
The group has always seen the maintenance of
Substantial progress has been made since the beginning
harmonious relations with, and the encouragement of
of 2013 and settlement agreements in respect of most
development within, the local communities in its areas of
material issues were reached in late January or early
operation as an essential component of its agricultural
February with all of the larger villages that had land rights
business. Inevitably in the period of over twenty years
historically overlapping REA Kaltim and SYB land.
since the group’s East Kalimantan operations were first
Settlement discussions are continuing in respect of
established, there have been occasional disagreements
outstanding disputes. To date, agreements concluded
between the group and the local communities but, until
with villages have been adhered to but there have been
recently, such disagreements have been minor, rapidly
some subsequent disruptions by individual villagers. One
resolved and without significant impact on the group.
such disruption caused a harvesting blockage in one area
10
of the REA Kaltim estates for a period of nearly four
a camera trap photograph of a baby sun-bear, as well as
weeks during March and April 2013 but otherwise these
the first record of an orang-utan in one of the northern
later disruptions have been limited as to duration and
estates, are encouraging signs of the ability of the group’s
scale. All three mills have been operating normally since
conservation reserves to support healthy populations of
early February.
these species.
The current improved position has been reached at a
A member of the Roundtable on Sustainable Palm Oil
significant cost but that cost should not be without benefit
(“RSPO”), the group has now achieved accreditation
given that the funds committed to procuring additional
under RSPO of its two older oil mills, and most of the
cooperative oil palm developments will, in due course,
group’s mature estates, as well as some of the
provide a return to the group from further increases in
smallholder oil palm plantings. It is planned to obtain
group revenues from processing cooperative FFB.
accreditation of the newly constructed oil mill by 2015.
Moreover, the stronger relationships forged with the East
As a further step in the process of RSPO accreditation,
Kalimantan authorities during
the period of
the
the group achieved certification of its supply chain under
disruptions and the better mutual understanding achieved
the RSPO Supply Chain Certification System (“SCCS”)
between the group and its local communities should
during 2012. This accreditation provides buyers of CPO
enhance the group’s ability to continue the development
and CPKO with the ability to identify oil purchased as
of its East Kalimantan operations.
coming from RSPO certified sources. Separately in 2012,
the group also obtained International Sustainability and
Plans for further expansion of the smallholder plasma
Carbon Certification (“ISCC”), which allows the CPO
schemes during 2012 were held up by the delays in
produced from the estates of the group’s mature estates
identifying and agreeing allocations of additional land
and mills to be used to produce biofuel that meets the
areas suitable for smallholder development. The plasma
requirements of the European Union Renewable Energy
scheme areas planted at 31 December 2012 amounted
Directive.
to some 2,900 hectares. With the further allocations of
land now substantially agreed, the group expects a useful
Coal and stone operations
increase in the plasma areas during 2013.
Conservation and accreditation
The directors took the decision in mid 2012 that, for the
time being, coal trading activities should be suspended
and further capital committed to the coal operations
The group continues
to manage a network of
should be limited and concentrated on maximising returns
conservation reserves within its titled land areas with the
from the concessions in which the group had already
aim of conserving the natural biodiversity and ecosystem
invested.
functions of the landscapes in which the group operates.
To date, over 20,000 hectares have been set aside as
The group is in discussions with two third parties that
conservation reserves.
have coal mining interests adjacent to one of the coal
concessions. A successful outcome to these discussions
Camera trapping and other biodiversity surveys continue
would result in one of the parties mining the concession
to record the presence of orang-utans within the
on a basis that would limit the group’s downside and
conservation reserves. Sighting of a baby orang-utan and
provide a return to the group that, at current coal prices
11
Chairman’s statement continued
(which have risen to an extent from their lows of June
existing 7.5 per cent dollar notes 2012/14 (“2012/14
2012), could reasonably be expected to recover the
dollar notes”) and as to the balance by way of a placing.
group’s investment and, if coal prices improve further,
could yield a reasonable profit. A similar arrangement
Following these transactions, group indebtedness and
may be possible in relation to the other two coal
related engagements at 31 December 2012 amounted to
concessions and this could provide a better outcome than
$163.5 million, made up of $15.9 million nominal of
an outright sale of these concessions. On the coal trading
2012/14 dollar notes (carrying value: $15.5 million),
side, steps are being taken to close out contractual
$34.0 million nominal of 2017 dollar notes (carrying
commitments made prior to the suspension of trading and
value: $33.2 million), £34.5 million nominal of 9.5 per
no new trades have been initiated.
cent guaranteed sterling notes 2015/17 (“sterling
notes”) (carrying value: $54.3 million), $8.4 million in
The group remains confident of the economic viability of
respect of the hedge of the principal amount of the
its stone concession and work is continuing on plans to
sterling notes, a term loan from an Indonesian bank of
quarry the concession to provide stone for building and
$36.1 million and other indebtedness comprising
maintenance of infrastructure in the group’s agricultural
drawings under working capital lines of $16.0 million.
operations and for sale to users of stone in the area of
Against this indebtedness, at 31 December 2012 the
those operations.
group held cash and cash equivalents of $26.4 million.
In view of
the uncertainties affecting
the coal
Recent years have seen substantial investment by the
concessions, the group has made a provision of $3.0
group in FFB milling capacity. Final payments will fall due
million against its investment in the concessions at 31
in 2013 for the newly completed third oil mill but current
December 2012.
Finance
crop projections suggest that, apart from expanding the
capacity of this third mill from 40 to 80 tonnes of FFB per
hour, no further expenditure on milling capacity will be
required until work commences on the construction of a
In September 2012, 3.9 million new preference shares
fourth mill to be brought into production in 2017 at the
were issued for cash at a price of 105p per share by way
earliest.
of a placing to raise £4.0 million net of expenses. The
proceeds of the placing of new preference shares were
Significant expenditure was also incurred during 2012 on
retained within the group to fund continuing development
the provision of land to meet the cooperative smallholder
of the agricultural operations. This issue was followed in
development aspirations of the group’s local communities
September 2012 by the issue of a further 2,004,872 new
(as discussed under “Community relations” above). The
preference shares by way of capitalisation of share
directors do not believe that there will be a recurring
premium account pursuant to the capitalisation issue to
requirement for material expenditure on the provision of
ordinary shareholders referred to under “Dividends”
cooperative land (although there may be a requirement
below.
for the group to make short term advances to meet
cooperative planting expenditure pending the refinancing
In November 2012, $34.0 million of 7.5 per cent dollar
of such expenditure by the banks funding the cooperative
notes 2017 (“2017 dollar notes”) were issued as to some
developments).
$19 million by way of an exchange offer to holders of
12
As a result, group capital expenditure can, for the
Strategic direction
immediate future, be concentrated on extension planting
and on the provision of the additional estate buildings and
Early in 2012, the directors concluded that, given the
general plant and equipment that become needed
significant enlargement of the group’s operations over the
following any expansion of the group’s planted hectarage.
past decade, the continuing growth of the Indonesian
This will
involve the group
in continuing capital
economy and the progressive maturing of South East
expenditure for several years to come but the directors
Asian capital markets, there would be significant
will set the extension planting programme at a level that
advantages to the company and its shareholders in
they reasonably expect that the cash resources available
increasing local Indonesian participation in the ownership
to the group can support.
of the group’s agricultural operations. Accordingly, the
directors have been proceeding with their previously
The directors intend that further cash advances to the
announced plans for the amalgamation of all of the
coal and quarry operations should be limited and
company’s Indonesian plantation subsidiaries into a single
concentrated on realising value from the three existing
sub-group headed by the company’s principal operating
coal concessions and on bringing the stone quarry into
subsidiary, PT REA Kaltim Plantations (“REA Kaltim”),
economic production.
Dividends
with the aim that this be followed in due course by a
public offering of a minority shareholding in REA Kaltim
(probably 20 per cent) combined with a listing of REA
Kaltim’s shares on the Indonesia Stock Exchange in
The fixed semi-annual dividends on the 9 per cent
Jakarta.
cumulative preference shares that fell due on 30 June
and 31 December 2012 were duly paid. An interim
It had been hoped to complete the planned restructuring
dividend in respect of 2012 of 3½p per ordinary share
in Indonesia by 31 December 2012 but this did not prove
was paid in January 2013 and the directors recommend
possible because of delays in obtaining the necessary
the payment of a final dividend in respect of 2012 of 3½p
regulatory approvals from the Indonesian Investment
per ordinary share to be paid on 26 July 2013 to ordinary
Coordinating Board. Such approvals were required for
shareholders on the register of members on 28 June
the intra-group transfer of ownership to REA Kaltim of
2013. The total dividend payable per ordinary share
five other existing subsidiaries of the company and, whilst
during 2013 in respect of 2012 will thus amount to 7p.
consents for three of these five transfers had been
This compares with the total paid during 2012 in respect
obtained by 31 December 2012, consents for the
of 2011 of 6½p.
remaining two were only received after that date. With all
required consents now obtained, it should be possible to
In addition, the company made a capitalisation issue of
complete the restructuring in the near future.
2,004,872 new preference shares
to ordinary
shareholders on 28 September 2012 on the basis of 3
With the restructuring completed, there should be no
new preference shares for every 50 ordinary shares held
further technical hurdles to proceeding with the planned
(2011: 2,004,872 new preference shares on the basis of
public offering and listing of shares in REA Kaltim other
3 new preference share for every 50 ordinary shares
than compliance with normal regulatory formalities and, in
held). The directors will consider a further such issue
particular, provision of audited financial statements for the
during 2013 if they feel that this is merited by the group’s
restructured REA Kaltim sub-group as of a date not more
performance.
13
Chairman’s statement continued
than six months earlier than the date of the public
the marketability of the ordinary shares but, as mentioned
offering. However, the recent village issues detailed under
above, the directors are currently reviewing their strategic
“Community relations” in “Agricultural operations” above
plans including in respect of the listing. Therefore, in an
have unfortunately had a negative impact on the crops
effort to address in the short term what they see as a
and profits of 2012 and the early months of 2013 (with
mismatch between demand for and availability of ordinary
the impact on 2013 greater in the local Indonesian
shares, the directors are considering seeking shareholder
accounts of REA Kaltim than in the consolidated
approval for the company itself to buy back into treasury
accounts of the group because the different accounting
limited numbers of ordinary shares with the intention that,
standards applied mean that the group has recognised in
whenever a holding of a reasonable size has been
2012 the effect that the sale of high FFA oil held in
accumulated, such holding be placed with one or more
inventory at 31 December 2012 will have on 2013 sales
new investors.
proceeds whereas REA Kaltim has not). This may affect
the pricing of an early public offering of shares in REA
Board changes
Kaltim.
The directors do not believe that factors that should exist
Singapore and Indonesia with overall local responsibility
only in the short term and have now been largely resolved
for the Indonesian operations, was appointed president
should be allowed materially to compromise shareholder
director of REA Kaltim during 2012 and a director of the
Mark Parry, the group’s regional director based in
value. They remain of the view that it remains desirable
company on 1 January 2013.
for the group to list REA Kaltim on the Indonesia stock
exchange and are now reviewing their options for
As previously announced,
the four
long serving
pursuing this strategy, given the probable need to
independent non-executive directors, Messrs Green-
postpone its implementation until sufficient time has
Armytage, Keatley, Letts and Lim, retired from the board
elapsed for the proposed REA Kaltim group to have
of the company at the end of 2012, and Ms Irene Chia
reported figures that reflect normal cropping levels.
was appointed as a new non-executive director in
conjunction with Mr Parry’s appointment as executive
The directors are aware that the market in the company's
director. This has reduced the number of board members
ordinary shares is at times limited, that purchases and
from eight to six. Along with my remaining fellow
sales of small numbers of shares can have a
directors, I would like to record my appreciation of the
disproportionate effect on the ordinary share price and
significant contribution made to the group by the four
that the spread between the bid and offer prices of the
retiring directors and for their invaluable support over a
ordinary shares is often large. The directors believe that
number of years.
there is potential demand for the company's ordinary
shares but that this demand comes mainly from investors
Corporate governance
who wish to have holdings of a certain size and are
generally not prepared to spend time accumulating such
At the performance evaluation conducted in 2012, the
holdings from the trickle of small offerings that are
board as then constituted concluded that it was for the
normally available. Should the Indonesian listing of REA
time being continuing to perform effectively but that,
Kaltim proceed, the directors hope that better analyst
having decided to restructure the group’s Indonesian
coverage of the company following the listing will improve
plantation subsidiaries into a single sub-group headed by
14
REA Kaltim and to move towards a listing REA Kaltim on
2012), there is a concern that the discount will narrow as
the Indonesia stock exchange, it would be appropriate, in
a result of reducing soya oil prices rather than rising CPO
due course, to make certain changes to the board. Those
prices. Against this, there is now evidence of falling
changes were implemented at the end of 2012 as
stocks and past experience suggests that lower price
described above and the directors consider that the new
levels will lead to increased Indian and Chinese
composition of the board is appropriate and effective for
consumption.
the current strategic direction of the company.
Prospects
East Kalimantan is a recently democratised and rapidly
developing society and this has added a social dimension
to the challenges of infrastructure and remote location
Against the background of the continuing village issues in
that the group has always faced. Nevertheless, East
January and early February and the subsequent more
Kalimantan does offer excellent conditions for the
limited harvesting blockages, the FFB crop to the end of
cultivation of oil palm and provides opportunity for further
March 2013 amounted to 137,576 tonnes, against
expansion of established oil palm estates. The directors
136,702 tonnes for the same period in 2012. The limited
believe that the challenges are being surmounted, that
harvesting blockages will also have some impact on the
the group will be successful in taking advantage of the
crops reported for April but, thereafter, if as is hoped the
expansion opportunities and that there will be further
agreements now reached in relation to village issues
scope for enhancing returns through the now proven
continue to be respected, the directors expect the group’s
methane capture initiatives. This should ensure that the
own FFB crops to return to more normal levels. The
group will continue to accrue value from its oil palm
effect of the disruptions to harvesting in 2012 is likely to
operations which already represent a high quality large
have affected the normal fruiting cycle so that it must be
scale agricultural business.
expected that monthly cropping levels may be below
average for the next few months and above average for
the closing months of 2013.
A significant feature of 2012 was the increasing
RICHARD M ROBINOW
throughput of third party FFB. This provides the group
with a valuable additional revenue stream, the benefit of
Chairman
25 April 2013
which more than outweighs a slight negative impact on
extraction rates. With the continuing expansion of
smallholder plantings in the vicinity of the group's estates,
further increases in third party FFB throughput can be
expected going forward
The CPO price currently stands at $830 per tonne. At
this level, the price is at an unusually large discount to the
soya oil price but, with reports of large current season
plantings of soybean in both the United States and South
America (spurred no doubt by the high soybean prices of
15
Review of the group
Introduction
Overview
This review has been prepared to provide holders of the
Nature of business and resources
company’s shares with information that complements the
accompanying financial statements. Such information is
The group is principally engaged in the cultivation of oil
intended to help shareholders in understanding the
palms in the province of East Kalimantan in Indonesia and
group’s business and strategic objectives and thereby
in the production of crude palm oil (“CPO”) and crude
assist them in assessing how the directors have
palm kernel oil (“CPKO”). A detailed description of the
performed their duty of promoting the success of the
group's oil palm activities is provided under “Agricultural
company.
operations” below.
This review should not be relied upon by any persons
During 2008, the directors decided to augment the
other than shareholders or for any purposes other than
traditional agricultural operations of the group by
those stated. The review contains forward-looking
developing a modest coal operation in Indonesia.
statements, which have been included by the directors in
Following this decision, the group acquired rights in
good faith based on the information available to them up
respect of three coal concessions in East Kalimantan and
to the time of their approval of this review. Such
in 2010 started to develop an open cast coal mining
statements should be treated with caution given the
operation and coal trading activity based on these
uncertainties inherent in any prognosis regarding the
concessions. Subsequent events have shown that coal
future and the economic and business risks to which the
mining and trading activities have specific complexities
group's operations are exposed.
that are not shared by the group’s agricultural operations.
The directors have therefore decided that, for the time
In preparing this review, the directors have complied with
being, further capital committed to the coal operations
section 417 of the Companies Act 2006. They have also
should be limited. Further information concerning the
sought to follow best practice as recommended by the
coal activities as well as a prospective stone quarry
reporting statement on operating and financial reviews
operation is provided under “Coal and stone operations”
published by the Accounting Standards Board but this
below.
review may not comply with that reporting standard in all
respects.
The group and predecessor businesses have been
involved for over one hundred years in the operation of
This review has been prepared for the group as a whole
agricultural estates growing a variety of crops in
and therefore gives emphasis to those matters that are
developing countries in South East Asia and elsewhere.
significant to the company and its subsidiaries when
Today, the group sees itself as marrying developed world
taken together. The review is divided into five sections:
capital and Indonesian opportunity by offering investors
overview; agricultural operations; coal and stone
in, and lenders to, the company the transparency of a
operations; finances; and risks and uncertainties.
company listed on a stock exchange of international
standing and then using capital raised by the company (or
with the company’s support) to develop natural resource
based operations in Indonesia from which the group
believes that it can achieve good returns. In this
endeavour, the group’s inheritance from its past and its
16
recent track record represent significant intangible
a view to utilising the group’s existing agricultural
resources because they underpin the group’s credibility.
management capacity to manage a larger business.
This assists materially in sourcing capital, in negotiating
Secondly, the group strives to manage its established
with the Indonesian authorities in relation to project
agricultural operations as productively as possible.
development and in recruiting management of a high
Ancillary to the first component of this approach, the
calibre.
group seeks to add to its land bank when circumstances
are conducive to its doing so. To the extent that the coal
Other resources important to the group are its established
mining and stone quarry operations develop, the directors
base of operations, an experienced management team
intend that the group would similarly seek production cost
familiar with Indonesian regulatory processes and social
efficiencies in those operations by increasing volumes
customs, a trained workforce and the group’s land and
and focusing on productivity.
concession rights.
Objectives
As a financial strategy, the group aims to enhance returns
to equity investors in the company by procuring that a
prudent proportion of the group’s funding requirements is
The group’s objectives are to provide attractive overall
met with prior ranking capital in the form of fixed return
returns to investors in the shares and other securities of
permanent preferred capital and debt with a maturity
the company from the operation and expansion of the
profile appropriate to the group's projected future cash
group’s existing businesses and to foster economic
flows.
progress in the localities of the group's activities, while
maintaining high standards of sustainability. Achievement
Sustainability
of these objectives is dependent upon, among other
things, the group’s ability to generate the operating profits
The group is committed to responsible management of
that are needed to finance such achievement.
the environmental and social consequences of its
activities. As part of this commitment, in February 2013
CPO is a primary commodity and as such must be sold at
the company published its first carbon footprint report
a price that is determined by world supply and demand.
providing an assessment of the greenhouse gas
Such price fluctuates in ways that are difficult to predict
emissions associated with the group’s agricultural
and that the group cannot control. The group’s
operations in 2011. The report identifies and quantifies
operational strategy is therefore to concentrate on
greenhouse gas emissions in the production of CPO and
minimising unit production costs, without compromising
CPKO at the group's palm oil mills and related estate
on quality or its objectives as respects sustainable
supply base and, going forward, will facilitate the design
practices, with the expectation that, as a lower cost
and implementation of effective strategies for reducing
producer of a primary commodity, the group has greater
the group’s greenhouse gas emissions as well as
resilience to any downturn in price.
providing a baseline against which progress in achieving
such reductions can be monitored and reported. The
In the agricultural operations, the group adopts a two
report is available for downloading from the company’s
pronged approach in seeking production cost efficiencies.
website at www.rea.co.uk.
First, the group aims to capitalise on its available
resources by developing its land bank as rapidly as
Following on from the carbon footprint report, the
logistical, financial and regulatory constraints permit with
company is currently in the process of compiling its first
17
Review of the group continued
standalone sustainability report. This is due to be
Kaltim’s shares on the Indonesia Stock Exchange in
published later in 2013 and it is intended that it should
Jakarta.
establish a baseline against which both internal and
external stakeholders can monitor
the group’s
The directors believe that establishing a more local profile
sustainability performance.
Diversification
for the group and facilitating local Indonesian investment
in the group’s plantation operations is likely to become an
increasingly important factor in relation to land matters
affecting the group. A listing of REA Kaltim in Indonesia
The group recognises that its agricultural operations, of
can be expected to encourage coverage of the group by
which the total assets at 31 December 2012 represented
South East Asian investment analysts and, as a listed
some 90 per cent of the group’s total assets and which, in
company, REA Kaltim should be treated as a local rather
2012, contributed all of the group’s profits, lie within a
than foreign company for Indonesian regulatory purposes.
single locality and rely on a single crop. This permits
significant economies of scale but brings with it some
It had been hoped to complete the planned restructuring
risks. The coal and stone activities provide only a small
in Indonesia by 31 December 2012 but this did not prove
diversification and whilst further diversification would
possible because of delays in obtaining the necessary
provide the group with some offset against such risks, the
regulatory approvals from the Indonesian Investment
directors believe that, for the foreseeable future, the
Coordinating Board. Such approvals were required for the
interests of the group and its shareholders will be best
intra-group transfer of ownership to REA Kaltim of five
served by growing the existing operations. They therefore
other existing subsidiaries of the company and, whilst
have no plans for further diversification.
consents for three of these five transfers had been
Strategic direction
obtained by 31 December 2012, consents for the
remaining two were only received after that date. This will
permit the restructuring to be completed in the near
Early in 2012, the directors concluded that, given the
future.
significant enlargement of the group’s operations over the
past decade, the continuing growth of the Indonesian
With the restructuring completed, there should be no
economy and the progressive maturing of South East
further technical hurdles to proceeding with the planned
Asian capital markets, there would be significant
public offering and listing of shares in REA Kaltim other
advantages to the company and its shareholders in
than compliance with normal regulatory formalities and, in
increasing local Indonesian participation in the ownership
particular, provision of audited financial statements for the
of the group’s agricultural operations. Accordingly, the
restructured REA Kaltim sub-group as of a date not more
directors have been proceeding with their previously
than six months earlier than the date of the public
announced plans for the amalgamation of all of the
offering. However, the recent village issues detailed under
company’s Indonesian plantation subsidiaries into a single
“Community relations” in “Agricultural operations” above
sub-group headed by the company’s principal operating
have unfortunately had a negative impact on the crops
subsidiary, PT REA Kaltim Plantations (“REA Kaltim”) with
and profits of 2012 and the early months of 2013 (with
the aim that this be followed in due course by a public
the impact on 2013 greater in the local Indonesian
offering of a minority shareholding in REA Kaltim
accounts of REA Kaltim than in the consolidated
(probably 20 per cent) combined with a listing of REA
accounts of the group because the different accounting
18
standards applied mean that the group has recognised in
whenever a holding of a reasonable size has been
2012 the effect that the sale of high FFA oil held in
accumulated, such holding be placed with one or more
inventory at 31 December 2012 will have on 2013 sales
new investors
proceeds whereas REA Kaltim has not). This may affect
the pricing of an early public offering of shares in REA
Management development
Kaltim.
Mark Parry, the group’s regional director based in
The directors do not believe that factors that should only
Singapore and Indonesia with overall local responsibility
exist in the short term and have now been largely resolved
for the Indonesian operations, was appointed president
should be allowed materially to compromise shareholder
director of REA Kaltim during 2012 and a director of the
value. They remain of the view that it remains desirable
company on 1 January 2013. The senior executive
for the group to list REA Kaltim on the Indonesia stock
management of REA Kaltim has been further expanded
exchange and are now reviewing their options for
during 2013 to date with the appointment of the
pursuing this strategy, given the probable need to
incumbent head of human resources to the board of REA
postpone its implementation until sufficient time has
Kaltim and the extension of his responsibilities to include
elapsed for the proposed REA Kaltim group to have
government and village relations, security, safety and
reported figures that reflect normal cropping levels.
conservation. The appointee not only brings particular
expertise to the board but is an Indonesian national and
The directors are aware that the market in the company's
as such, together with the president commissioner who is
ordinary shares is at times limited, that purchases and
also an Indonesian national, complements the established
sales of small numbers of shares can have a
expatriate leadership of the president director and the
disproportionate effect on the ordinary share price and
chief operating and financial officers.
that the spread between the bid and offer prices of the
ordinary shares is often large. The directors believe that
As a foreign investor in Indonesia, the group needs to
there is potential demand for the company's ordinary
remain aware that it is in essence a guest in Indonesia
shares but that this demand comes mainly from investors
and an understanding of local customs and sensitivities is
who wish to have holdings of a certain size and are
important. The group’s ability to rely on senior Indonesian
generally not prepared to spend time accumulating such
staff to handle its local interface is therefore a significant
holdings from the trickle of small offerings that are
asset upon which the group continues to build. This asset
normally available. Should the Indonesian listing of REA
is augmented by the local support and advice that the
Kaltim proceed, the directors hope that better analyst
group obtains from local advisers and from the local non-
coverage of the company following the listing will improve
controlling investors in, and local non-executive directors
the marketability of the ordinary shares but, as mentioned
of, the company's Indonesian subsidiaries.
above, the directors are currently reviewing their strategic
plans including in respect of the listing. Therefore, in an
The directors believe that basing senior management in
effort to address in the short term what they see as a
the same time zone as the group’s operations facilitates
mismatch between demand for and availability of ordinary
management oversight and improves its effectiveness.
shares, the directors are considering seeking shareholder
They intend that, over time, overall executive responsibility
approval for the company itself to buy back into treasury
for the management of the group will progressively be
limited numbers of ordinary shares with the intention that,
transferred from the UK to Singapore and Indonesia and
19
Review of the group continued
that following the eventual retirement of the company’s
Following the weakening of the Indonesian rupiah against
current managing director and chairman, the group’s
the US dollar in the second half of 2011, which saw the
London office will be reduced to a secretariat managing
rupiah fall from Rp 8,500 = $1 at the end of the second
the company’s London listing and liaising with its
quarter to Rp 9,046 = $1 at 31 December 2011, the
European shareholders. In the interim, the current
currency declined further during 2012 to close the year at
managing director and chairman will remain UK based
Rp 9,670 = $1. Indonesian inflation over 2012
and have indicated their willingness to remain in office for
amounted to 4.3 per cent as compared with 3.8 per cent
a period sufficient to ensure continuity.
over 2011.
As previously announced,
the four
long serving
New policies to increase local value-added were
independent non-executive directors, Messrs Green-
introduced by the Indonesian government during 2012.
Armytage, Keatley, Letts and Lim, retired from the board
These included a decrease in the export tax on refined
of the company at the end of 2012, and Ms Irene Chia
palm oil products and a ban, after a certain date, on the
was appointed as a new non-executive director in
export of certain mineral ores, both measures being
conjunction with Mr Parry’s appointment as executive
aimed at increasing downstream processing within
director. This has reduced the number of board members
Indonesia. The dissolution of oil and gas regulator,
from eight to six.
The Indonesian context
BPMigas, is also seen as a move designed to enhance
local control of natural resource assets.
The Jakarta mayoral elections saw the replacement of the
Domestic consumption accounts for 65 per cent of gross
incumbent mayor by Joke Widodo, the former mayor of
domestic product in Indonesia, a nation of some 240
Solo, whose candidacy was supported by the opposition
million people. Whilst the global economic slowdown
Gerinada Party led by Probowo Subianto, a prospective
placed commodity prices under pressure, buoyant
presidential candidate. A key component of the incoming
consumer demand provided a buffer against the global
mayor’s campaign was a commitment to infrastructural
malaise and permitted Indonesia to record growth of 6.2
improvement. Jakarta is home to over 10 million people
per cent for 2012, only slightly below the figure of 6.3 per
and accounts for one sixth of Indonesia’s gross domestic
cent reported in 2011. With the ratio of debt to gross
product. As such, it is an important barometer of both
domestic product remaining under good control and
political
sentiment
and
economic
confidence.
foreign currency reserves reported as $112 billion at 31
Presidential elections are due in mid 2014 while
December 2012, the outlook for the economy remains
gubernatorial elections in East Kalimantan will be held in
positive. The World Bank Quarterly Report has its
September 2013.
baseline outlook at 6.4 per cent growth for 2013.
According to this report, a worsening of global conditions
Decisions during 2012 to proceed with several major new
with a freezing of international financial markets
infrastructural projects in East Kalimantan, including a
contributing to a drop in trading partner growth and a
container port in Balikpapan and an airport in the Berau
further slowdown in exports could mean reduction in the
district, should encourage continuing growth within the
forecast to 4.7 per cent. A prolonged global downturn
province. Less welcome has been the announcement of
encompassing the major emerging economies could see
a dramatic increase in the local minimum wage. Minimum
a further reduction to 3.8 per cent.
wage rates are published annually in each province (the
“UMP” rate) and subsequently in each provincial regency
20
(the “UMK” rate). These rates vary markedly across
Indonesian ports) above which a tariff of 7½ per cent
Indonesia. The UMP and UMK increases for East
applies plus an additional 1½ per cent for every $50
Kalimantan and for the Kutai Kartenegara regency (in
increase over this base threshold up to a maximum 22½
which most of the group’s operations are located) were
per cent at prices above $1,250 per tonne CIF Rotterdam.
respectively 49 per cent and 52 per cent. These were at
There have been calls in the Indonesian Parliament and
the top end of increases announced across Indonesia.
by the Indonesian palm oil producers’ association
(“GAPKI”) for reductions in the Indonesian tariffs to match
Indonesian production of CPO continues to grow with
the tariff levels of Malaysia but there is as yet no
2012 production now estimated at around 28 million
indication that such calls will result in any changes.
tonnes, significantly ahead of Malaysia with an estimated
2012 production of 19 million tonnes. There is anecdotal
Evaluation of performance
evidence that increasing restrictions on expansion of oil
palm plantations are having an impact and that this will
In seeking to meet its expansion, efficiency and
lead to a curtailment in the rate of growth of Indonesian
sustainability objectives, the group sets operating
CPO production over the coming few years.
standards and targets for most aspects of its activities
and regularly monitors performance against those
Export duty differentials between refined palm oil
standards and targets. For many aspects of the group's
products and crude palm oil have been a key tool in
activities, there is no single standard or target that, in
promoting domestic refining in both Indonesia and
isolation from other standards and targets, can be taken
Malaysia. Since these duties also impact international
as providing an accurate continuing indicator of progress.
competitiveness, both Indonesia and Malaysia monitor
In these cases, a collection of measures has to be
their tariff rates closely in an attempt to ensure that they
evaluated and a qualitative conclusion reached.
retain competitiveness against each other and against
competing vegetable oils in the world market. During
The directors do, however, rely in the agricultural
2012, as international prices for CPO dropped and
operations on
regular
reporting of certain key
domestic stock levels increased significantly, Malaysia
performance indicators that are comparable from one
reviewed its long standing flat rate tariff on CPO exports
year to the next. These indicators for any given period
and in October 2012 announced a new CPO export tariff
comprise:
structure ranging from 4½ per cent, when the
international price is at or above the equivalent of $725
per tonne (FOB Malaysian ports), to 8½ per cent, when
the international price is at or above the equivalent of
$1,125 per tonne (FOB Malaysian ports). These new
tariffs were introduced with effect from 1 January 2013
and meant that there was no charge to export duty in
January and February 2013, when the price fell below the
$725 minimum.
Indonesia has so far retained its established CPO export
tariff scale with a base threshold of $750 per tonne CIF
Rotterdam (equivalent to about $680 per tonne FOB
•
the new extension planting area developed; this is
measured as the area in hectares of land cleared and
planted out or cleared and prepared for planting out
during the applicable period;
•
the crop of fresh fruit bunches (“FFB”) harvested; this
is measured as the weight in tonnes of FFB delivered
to the group's oil mills from the group’s estates during
the applicable period; and
•
the CPO, palm kernel and CPKO extraction rates
achieved; the first two of these are measured as the
percentage by weight of CPO or palm kernels
21
Review of the group continued
extracted from FFB processed and the third is
Because of the group's material dependence on CPO
measured as the percentage by weight of CPKO
prices, which have a direct impact on revenues and on
extracted from palm kernels crushed.
periodic revaluations of biological assets, in targeting
return on total equity the directors set a norm that they
Of these indicators, the first provides a measure of the
hope will represent an average of the annual returns
group's performance against its expansion objective. The
achieved over a period of seven years.
second and third indicators are measures of field and mill
efficiency and, as such, provide a basis for assessing the
Percentages for the above two indicators for 2012 and
extent to which the group is achieving its objective of
comparable figures for 2011 (derived from figures
maximising output from its operations. Quantifications of
extracted from the audited consolidated financial
the above
indicators for 2012 and comparable
statements of the company) are provided under “Group
quantifications for 2011 (in both cases as sourced from
results” and “Financing policies” in “Finances” below. As
the group's internal management reports) are provided
with key performance indicators for the agricultural
under “Land development” and “Crops and extraction
operations and for the same reason, the directors have
rates” in “Agricultural operations” below. In the past, the
concluded that no targets for key performance indicators
group has published future targets for the key indicators
of financial performance should be published in future.
but, in view of the regulatory restrictions on forward
looking statements that are expected to apply to the
Pending finalisation of the indicators to be covered in the
group if there is a public offering of securities in REA
sustainability report referred to under “Sustainability”
Kaltim, the directors have concluded that no such targets
above, the directors continue to rely principally on
should be published in future.
qualitative rather than quantitative assessments in relation
to environmental and social performance. The qualitative
While the former coal trading operations remain
commentary under “Employees” and “Responsible
suspended and stone quarry operations have not yet
agricultural practice” in “Agricultural operations” below
started, the directors do not consider it appropriate to
does however include quantitative data on examination
maintain any key performance indicators for those
results in the group’s primary schools, incidence of vector
operations.
borne diseases, serious accidents sustained, pollution of
water courses and substitution of organic for inorganic
Key indicators used by the directors in evaluating the
fertiliser. Specific quantitative data on diesel and petrol
group's financial performance for any given period
consumption per tonne of CPO produced is no longer
comprise:
included as information provided in the carbon footprint
reports, the first of which was published in February 2013
•
return on adjusted equity, which is measured as profit
as noted under “Sustainability” above, is considered to
before tax for the period less amounts attributable to
offer a more meaningful assessment of the company’s
preferred capital expressed as a percentage of
greenhouse gas emissions.
average total equity (less preferred capital) for the
period; and
•
net debt to total equity, which is measured as
borrowings and other indebtedness (other than intra
group indebtedness) less cash and cash equivalents
expressed as a percentage of total equity.
Identification, assessment, management and mitigation of
the risks associated with environmental, social and
governance matters forms part of the group’s system of
internal control for which the board of the company has
ultimate responsibility. The board discharges that
22
responsibility as described in the “Corporate governance”
cent by Indonesian local investors. Pursuant to the group
section of this annual report. Material risks and related
restructuring referred to under “Strategic direction” in
policies regarding environmental, social and governance
“Overview” above, the 95 per cent ownership of each of
matters are described under “Risks and uncertainties”
these subsidiaries is being transferred to REA Kaltim, with
below and under “Employees”, “Community relations”,
each of the local investors retaining their respective 5 per
“Community development”, “Conservation”, “Smallholder
cent ownership.
schemes”, “Responsible agricultural practice” and “Carbon
footprint” in “Agricultural operations” below. The latter
It was agreed during 2012 to acquire a further Indonesian
sections also detail the group’s successes and failures in
company, PT Persada Bangun Jaya (“PBJ2”), with
environmental, social and governance areas and the
additional land allocations. Upon completion of necessary
measures taken in response to failures. Independent
legal formalities, it is intended that PBJ2 should be owned
verification of the group’s performance in these areas is
as to at least 95 per cent by KKS and as to the balance
provided as described under
“Accreditation”
in
by a local investor.
“Agricultural operations” below.
Agricultural operations
Structure
Land areas
The operations of REA Kaltim are located some 140
kilometres north west of Samarinda, the capital of East
Kalimantan, and lie either side of the Belayan river, a
All of the group's agricultural operations are located in
tributary of the Mahakam, one of the major river systems
East Kalimantan and have been established pursuant to
of South East Asia. The KKS and SYB areas are
an understanding dating from 1991 whereby the East
contiguous with the REA Kaltim areas so that the three
Kalimantan authorities undertook to support the group in
areas together form a single site. All of these areas fall
acquiring, for its own account and in co-operation with
within the Kutai Kartanegara district of East Kalimantan.
local interests, substantial areas of land in East
The PBJ area sits some 70 kilometres to the south of the
Kalimantan for planting with oil palms.
REA Kaltim areas in the West Kutai district of East
Kalimantan while the CDM and KMS areas are located in
The oldest planted areas, which represent the core of the
close proximity of each other in the East Kutai district of
group’s operations, are owned through REA Kaltim in
East Kalimantan less than 30 kilometres to the east of the
which a group company holds a 100 per cent economic
REA Kaltim areas. There are three strips of land
interest. With the REA Kaltim land areas approaching full
pertaining to PBJ2, two of these lie adjacent to the land
utilisation, over the four year period from 2005 to 2008
areas held by REA Kaltim and KKS, while the third
the company established or acquired several additional
borders the PBJ land area.
Indonesian subsidiaries, each potentially bringing with it a
substantial allocation of land in the vicinity of the REA
At present, the REA Kaltim, SYB, KKS, CDM and KMS
Kaltim estates. These additional subsidiaries comprise
areas are most readily accessed by river but a road bridge
PT Cipta Davia Mandiri (“CDM”), PT Kartanegara
over the Mahakam at Kota Bangun, completed in 2005,
Kumalasakti (“KKS”), PT Kutai Mitra Sejahtera (“KMS”),
may eventually be linked up to provide road access. The
PT Putra Bongan Jaya (“PBJ”) and PT Sasana Yudha
PBJ area is easily accessible by road. In order to improve
Bhakti (“SYB”). Each of these subsidiaries is currently
the road link between REA Kaltim and the KMS and CDM
owned as to 95 per cent by group companies and 5 per
areas, a new bridge across the Senyiur River was
23
Review of the group continued
constructed during 2012. Unfortunately the bridge was
A particular complication since the end of 2009 has been
subsequently washed away and a replacement bridge is
a requirement to meet new Ministry of Forestry
now being built further downstream.
regulations so that any company proposing to clear land,
in respect of which HGU certificates have not already
Although the 1991 understanding established a basis for
been obtained, must first obtain a timber cutting permit
the provision of land for development by or in cooperation
(“izin pemanfaatan kayu” or “IPK”). As pre-requisites to
with the group, all applications to develop previously
the issue of an IPK, the zoning of the land to be covered
undeveloped land areas have to be agreed by the
by the IPK has to be checked to confirm that it has been
Indonesian Ministry of Forestry and to go through a titling
earmarked for plantation development and the land
and permit process. This process begins with the grant of
concerned then has to be surveyed by representatives of
an allocation of Indonesian state land by the Indonesian
the Ministry of Forestry to establish the stand of
local authority responsible for administering the land area
commercial timber (if any). For areas in respect of which
to which the allocation relates (an “izin lokasi”).
HGU certificates have already been obtained, a timber
Allocations are normally valid for periods of between one
utilisation permit (“surat keterangan syah kayu bulat” or
and three years but may be extended if steps have been
“SKSKB”) is needed, the issue of which involves a shorter
taken to obtain full titles.
process than the issue of an IPK.
After a land allocation has been obtained (either by direct
During 2012, the overall area of the group’s fully titled
grant from the applicable local authority or by acquisition
agricultural land remained at 70,584 hectares (pending
from the original recipient of the allocation or a previous
implementation of the SYB conditional land settlement
assignee),
the progression
to
full
title
involves
arrangements agreed in 2011 and as referred to below),
environmental and other assessments to delineate those
comprising 9,784 hectares held by CDM, 7,321 hectares
areas within the allocation that are suitable for
held by KMS, 11,602 hectares held by PBJ, 30,106
development, settlement of compensation claims from
hectares held by REA Kaltim and 11,771 hectares held
local communities and other necessary legal procedures
by SYB.
that vary from case to case. The titling process is then
completed by a cadastral survey (during which boundary
In addition, at 31 December 2012, the group held land
markers are inserted) and the issue of a formal registered
allocations subject to completion of titling totalling
land title certificate (an “hak guna usaha” or “HGU”).
31,601 hectares, comprising 3,061 hectares in CDM,
Once full title has been obtained, central government and
12,050 hectares in KKS, 2,212 hectares in SYB and
local authority permits are required for the development of
7,537 hectares in PBJ2. It is intended that application will
fully titled land. These permits are often issued in stages.
be made for a renewed allocation in respect of a further
6,741 hectares at CDM, where the existing allocation
In the group’s experience, the land titling and permit
recently lapsed. A substantial proportion of the PBJ2
process, which was never straightforward, has become
land allocation will be transferred to smallholder
more complicated in recent years. This has followed the
cooperatives as discussed under “Community relations”
devolution of significant authority in relation to land
below. The KKS allocation is conditional not only upon
matters from the Indonesian central government to
satisfaction of the normal titling requirements but also
Indonesian provincial and district authorities. This has
upon completion of a necessary rezoning of the area
resulted in an increase in the number of official bodies
concerned.
involved in the titling process.
24
Work is continuing with a view to completing the
general vicinity of its existing land allocations and is
conditional settlement agreement between SYB and an
currently negotiating to acquire an area of approximately
Indonesian third party company relating to overlapping
800 hectares close to KMS. With land prices rising and
mineral rights on certain land areas held by SYB. Under
increasing interest in plantation development, land is
the agreement, SYB would swap 3,557 hectares of fully
much less available than was the case in 1991 when the
titled land, the subject of the claims, for 9,097 hectares of
group was first established in East Kalimantan. Moreover,
fully titled land held by another company, PT Prasetia
the Indonesian government is now applying a “use it or
Utama (“PU”), the whole of the issued share capital of
lose it” policy to land. Pursuant to this policy, land
which would be transferred to SYB, and would also
allocations and titles may be rescinded if the land
relinquish its 2,212 hectares land allocation that is still
concerned is not utilised within a reasonable period for
subject to completion of titling. The PU land is located on
the purposes for which it was allocated. The group must
the southern side of the Belayan River opposite the
therefore be careful in expanding its land bank to ensure
retained SYB northern areas and is linked by a
that it can demonstrate clear plans for the development of
government road to the southern REA Kaltim areas. The
all of its undeveloped land holdings.
continuing delay in completing these arrangements has
been caused by the need to obtain comfort as to the
Land development
continuing validity of the land titles held by PU.
Areas planted and in the course of development as at 31
Subject to completion of the agreed SYB settlement
December 2012 amounted in total to some 37,000
arrangements, the fully titled land areas held by the group
hectares. Of this total, mature plantings comprised
would increase to 76,124 hectares, while the land
26,688 hectares having a weighted average age of 10
allocations still subject to titling would reduce to 25,562
years. A further 621 hectares planted in 2009 was
hectares. Titling of the remaining land allocations may be
scheduled to come to maturity at the start of 2013. The
expected to result in full titles being granted to only part
total of 37,000 hectares includes 2,164 hectares (of
of the allocated areas as land the subject of conflicting
which 272 hectares was planted in 2008) to be
claims or deemed unsuitable for oil palm cultivation may
relinquished by SYB upon completion of the SYB land
be excluded. Moreover, not all of the areas in respect of
swap arrangement described under “Land areas” above.
which full HGU titles are issued can be planted with oil
palms. Some fully titled land may be unsuitable for
Reserve land held by the group only becomes available
planting, a proportion will be set aside for conservation
for development when the titling process has proceeded
and a further proportion is required for roads, buildings
to a point at which the group has been granted
and other infrastructural facilities. The directors believe
development and necessary land clearing licences, and
that of the prospective 76,124 hectares of fully titled land
compensation agreements have been reached with those
between 50,000 and 55,000 hectares will ultimately be
local villagers who have claims in respect of their previous
plantable with oil palms. The remaining land allocations
use of the land. The group’s target for new development
may in due course provide a further 10,000 plantable
during 2012 was delayed because a decision was taken
hectares.
against the background of the issues that the group had
been experiencing with villages surrounding the REA
In addition to actively pursuing the titling of its land
Kaltim and SYB estates that development in new areas,
allocations, the group continues to look at acquiring
such as those held by PBJ and CDM, should not start until
further areas suitable for planting with oil palms within the
the group had ensured that, to the maximum extent
25
Review of the group continued
reasonably practicable, compensation due to affected
processed into CPO and palm kernels. The oldest mill
villagers had been settled and registered with the
dates from 1998 and a major overhaul initiated in 2010,
appropriate Indonesian authorities. Issues with villages
involving the upgrading of machinery and the installation
are discussed in detail under “Community relations”
of a new boiler to restore the effective mill capacity to 80
below.
tonnes per hour, is now substantially complete. The
second oil mill, which was brought into production in
Negotiations with villages adjacent
to PBJ are
2006, was expanded during 2010 to increase capacity
substantially complete and clearing for further expansion
from 60 to 80 tonnes per hour. The newest mill, which
in the substantial plantable areas held by PBJ is expected
commenced operation in September 2012, has a current
to commence shortly. Negotiations are continuing with
capacity of 40 tonnes per hour. With this new mill and the
villages adjacent to CDM with a view to achieving
recent upgrading of the other two mills, the group should,
sufficient agreement regarding village compensation to
for the immediate future, have sufficient processing
permit resumption of land clearing on the CDM areas in
capacity to handle all crop from its own estate and from
the near future. It is intended to complete the planting out
the growing number of maturing smallholder plantings in
of some 5,000 hectares of KMS (being areas already
the vicinity. The newest mill has been designed to permit
prepared for planting during 2011) by mid 2013,
the installation of a second processing line which would
although a minor proportion of this area is likely to be
double the mill’s capacity to 80 tonnes per hour and
transferred to a village cooperative as explained under
thereby provide the ability to cope with further processing
“Community relations” below.
demands.
Although costs are rising, at current cost levels and CPO
Once the plantings currently underway at KMS and
prices, extension planting in areas adjacent to the existing
planned for CDM reach a certain level of maturity, a
developed areas still offers the prospect of good returns.
further oil mill is likely to be needed to process the
Accordingly, it remains the policy of the directors that,
additional FFB production from these new areas.
subject to financial and logistical constraints, the group
Because the PBJ areas are some distance away from the
should continue its expansion and should aim over time to
group’s other planted areas, it will not be possible to
plant with oil palms all suitable undeveloped land available
process fruit from PBJ in any of the group’s three existing
to the group (other than areas set aside by the group for
mills or prospective fourth mill. It is planned that early fruit
conservation). Such expansion will, however, involve a
from PBJ will be sold to neighbouring mills but as FFB
series of discrete annual decisions as to the area to be
production from PBJ grows, it is likely that PBJ will need
planted in each forthcoming year and the rate of planting
its own oil mill. The directors do not currently foresee
may be accelerated or scaled back in the light of
either of the two further oil mills that may eventually be
prevailing circumstances. Moreover, the group’s capacity
needed being required before 2017.
for extension development is likely to remain dependent
upon the rate at which the group can make additional land
Each of the group's two newer oil mills incorporates,
areas available for planting.
Processing and transport facilities
within the overall facility, a palm kernel crushing plant in
which palm kernels are further processed to extract the
CPKO that the palm kernels contain. The processing of
kernels
into CPKO avoids the material
logistical
The group currently operates three oil mills in which the
difficulties and cost associated with the transport and sale
FFB crops harvested from the mature oil palm areas are
of kernels. Each kernel crushing plant has a final design
26
capacity of 150 tonnes of kernels per day which is
allow onshore transhipment of palm products to ocean
sufficient to process kernel output from the group’s three
going vessels. This facilitates palm product shipments to
oil mills. Total installed capacity is presently 250 tonnes
Europe when differentials between European and South
per day.
East Asian prices for CPO and CPKO make such
shipments worthwhile, as for example may be the case
The group maintains a fleet of barges for transport of
when oil has been segregated and certified by
CPO and CPKO. The fleet is used in conjunction with
internationally
recognised bodies as sustainably
tank storage adjacent to the oil mills and a transhipment
produced. The Balikpapan facilities are to be enhanced
terminal owned by the group downstream of the port of
by the construction during 2013 of a CPO refinery under
Samarinda. The fleet now comprises one barge of 4,000
a
joint venture arrangement between two major
tonnes, which the group time charters, and a number of
international oil traders and this will provide a further
smaller barges, ranging between 750 and 2,000 tonnes,
option for sale of CPO delivered to Balikpapan. The
which are owned by the group. The smaller barges can
group can transport oil by barge direct to Balikpapan from
be used for transporting CPO and CPKO from the upriver
its upstream oil storage tanks and the voyage time is
operations to points downstream for transfer either to the
significantly shorter than the voyage time to Sabah.
transhipment terminal for subsequent collection by buyers
Delivery to Balikpapan rather than Sabah therefore
or directly to buyers’ own vessels. The 4,000 tonne barge
means that more efficient use can be made of the group’s
is equipped for sea voyages and can be used to make
larger barge and the costs of transhipping in Samarinda
deliveries to customers in other parts of Indonesia and
can be reduced.
overseas. On occasions, the group also time charters
barges for additional shipments and to provide temporary
During periods of lower rainfall (which normally occur for
storage if required.
short periods during the drier months of May to August of
each year), river levels on the upper part of the Belayan
The directors believe that flexibility of delivery options is
become volatile and CPO and CPKO at times have to be
helpful to the group in its efforts to optimise the net
transferred by road from the mills to a point some 70
prices, FOB port of Samarinda, that it is able to realise for
kilometres downstream where year round loading of
its produce. Moreover, the group’s ability itself to deliver
barges of up to 2,000 tonnes is possible. The group owns
CPO and CPKO allows the group to make sales without
a riverside site in this downstream location and intends to
the collection delays sometimes experienced with FOB
develop its own permanent loading facilities on the site for
buyers. Typically, in recent years, over half of the group's
use during dry periods once the local government has
CPO production has been sold for delivery to ports in East
completed the construction of suitable access roads. The
Malaysia employing the group’s largest barge almost
group is also investigating the possibility of using
exclusively in sailing between Samarinda and Sabah.
alternative routes (by obtaining licences to access third
However, the pattern of the group’s sales is changing
party owned roads) for the transfer of palm products to
following the recent construction of bulking facilities in
downstream loading points so that, as volumes increase,
the major sea port of Balikpapan and the group is now
the group can continue to evacuate all palm product
selling increasing volumes of CPO for delivery to
output promptly during drier periods.
Balikpapan.
The new Balikpapan facilities provide better access to the
currently follows the Belayan River to Kota Bangun
local CPO market than is available from Samarinda and
(where the Belayan joins the Mahakam River), and then
The river route downstream from the mature estates
27
Review of the group continued
the Mahakam through Tenggarong, the capital of the
months of 2011) and crop losses resulting from
Kutai Kartanegara regency, Samarinda,
the East
harvesting disruptions generated by disputes with certain
Kalimantan provincial capital, and ultimately through the
surrounding villages. It had been hoped that the second
Mahakam’s mouth into the Makassar Straits. An
half of the year would see at least a partial recovery of the
alternative route for evacuating CPO and CPKO, which
crop shortfall of the first half but further disruptions by
will also be used for the newer estates in KMS and CDM,
villages meant that this recovery did not materialise.
is via the Senyiur River which joins the Mahakam between
Further information regarding disputes with villages is
Kota Bangun and Tenggarong.
provided under “Community relations” below.
Crops and extraction rates
A significant feature of 2012 was the increasing
throughput of third party FFB. This provides the group
FFB crops for the years from 2008 to 2012 are shown in
with a valuable additional revenue stream, the benefit of
the “Key statistics” section of this annual report. The crop
which more than outweighs a slight negative impact on
out-turn for 2012 amounted to 597,722 tonnes of FFB .
extraction rates. With the continuing expansion of
This was a little below the FFB crop of 607,335 tonnes
smallholder plantings in the vicinity of the group's estates,
for the corresponding period in 2011 but some 12 per
further increases in third party FFB throughput can be
cent below the budgeted crop for the year of 682,000
expected going forward.
tonnes. The group purchased 64,014 tonnes of FFB
from smallholders and other third parties (2011: 34,146
Against the background of the continuing village issues in
tonnes).
January and early February and the subsequent more
limited harvesting blockages (all as referred to under
Rainfall across the estates averaged 3,241 mm for 2012,
“Community relations” below), the FFB crop to the end of
similar to the level of 3,414 mm for the previous year. The
March 2013 amounted to 137,576 tonnes, against
widely predicted El Nino weather phenomenon did not
136,702 tonnes for the same period in 2012. The limited
materialise.
harvesting blockages will also have some impact on the
crops reported for April but, thereafter, if as is hoped the
Processing of the group’s own FFB production and the
agreements now reached in relation to village issues
externally purchased FFB, together totalling 661,736
continue to be respected, the directors expect the group’s
tonnes (2011: 641,481 tonnes) produced 151,516
own FFB crops to return to more normal levels. The
tonnes of CPO (2011: 147,455 tonnes), 30,734 tonnes
effect of the disruptions to harvesting in 2012 is likely to
of palm kernels (2011: 28,822 tonnes) and 11,549
have affected the normal fruiting cycle so that it must be
tonnes (2011: 10,815 tonnes) of CPKO reflecting
expected that monthly cropping levels may be below
extraction rates of, respectively, 22.9 per cent for CPO
average for the next few months and above average for
(2011: 23.0 per cent), 4.6 per cent for kernels (2011: 4.5
the closing months of 2013. In view of the regulatory
per cent) and 37.7 per cent for CPKO (2011: 38.4 per
restrictions on forward looking statements that would be
cent).
expected to apply to the group if certain of the strategic
options referred to under “Strategic direction” in
Most of the crop shortfall against budget arose in the first
“Overview” above were to be pursued, the directors have
half of 2012 and was attributable to a combination of
concluded that no forecast of crops for the year or target
delayed ripening of crops in the early part of the year
extraction rates should be published.
(reflecting the particular weather patterns of the latter
28
Markets
competitive advantage within the vegetable oil and animal
fat complex. Within vegetable oil markets, CPO should
According to Oil World, worldwide consumption of the 17
also continue to benefit from health concerns in relation
major vegetable and animal oils and fats increased by
to trans-fatty acids. Such acids are formed when
3.75 per cent to 182.7 million tonnes in the year to 30
vegetable oils are artificially hardened by partial
September 2012. The increased consumption was
hydrogenation. Poly-unsaturated oils, such as soybean
reflected in increased world production during the same
oil, rape oil and sunflower oil, require partial hydrogenation
period of 182.9 million tonnes with CPO accounting for
before they can be used for shortening or other solid fat
51.5 million tonnes of this (28.2 per cent of the total).
applications but CPO does not.
Vegetable and animal oils and fats have conventionally
In recent years, bio-fuel has become an important factor
been used principally for the production of cooking oil,
in the vegetable oil and animal fat markets, not so much
margarine and soap. Consumption of these basic
because of the oil and fats that it currently consumes,
commodities correlates with population growth and, in
although this is not insignificant, but because the size of
less developed areas, with per capita incomes and thus
the energy market means that bio-fuel can provide a
economic growth. Demand is therefore driven by the
ready outlet for large volumes of oils and fats over a short
increasing world population and economic growth in the
period when surpluses in supply depress prices to levels
key markets of India and China. Vegetable and animal oils
at which bio-fuel can be produced at a cost that is
and fats can also be used to provide bio-fuels and, in
competitive with prevailing petroleum oil prices. There is
particular, bio-diesel. According to Oil World, bio-fuel
a growing body of evidence that, in recent years,
production during the year to 31 December 2012 is
vegetable oil and petroleum oil prices have moved in
estimated to have accounted for some 13 per cent of all
tandem and that petroleum oil prices create a floor for
vegetable and animal oil and fat produced.
vegetable and animal oil and fat prices at the level at
which such oils and fats can be converted to bio-fuel at an
The principal competitors of CPO are the oils from the
overall cost (net of any available subsidies) that is
annual oilseed crops, the most significant of which are
competitive with the prevailing price of petroleum oil.
soybean, oilseed rape and sunflower. Because these
oilseeds are sown annually, their production can be rapidly
The directors believe that demand for, supply of and
adjusted to meet prevailing economic circumstances with
consequent pricing of, vegetable and animal oils and fats
high vegetable oil prices encouraging increased planting
will ultimately be driven by fundamental market factors.
and low prices producing a converse effect. Accordingly,
However, they also recognise that normal market
in the absence of special factors, pricing within the
mechanisms can be affected by government intervention.
vegetable oil and fat complex can be expected to oscillate
It has long been the case that some areas (such as the
about a mean at which adequate returns are obtained
EU) have provided subsidies to encourage the growing of
from growing the annual oilseed crops.
oilseeds and that such subsidies have distorted the
natural economics of producing oilseed crops. More
Since the oil yield per hectare from oil palms (at between
recently there have been actions by governments
four and seven tonnes) is much greater than that of the
attempting to reduce dependence on fossil fuels. These
principal annual oilseeds (less than one tonne), CPO can
have included steps to enforce mandatory blending of
be produced more economically than the principal
bio-fuel as a fixed minimum percentage of all fuels and
competitor oils and this provides CPO with a natural
subsidies to support the cultivation of crops capable of
29
Review of the group continued
being used to produce bio-fuel. Concerns as to the side
the balance of 35 per cent was exported. The proportion
effects of such actions in reducing food availability and in
of local sales was higher than for 2011 and partly reflects
encouraging deforestation may limit further measures to
the development of the local market and modifications to
encourage the production of bio-fuel but the directors
the tariff structure of the Malaysian market, hitherto the
consider it likely that measures already in place will
group’s principal export market, where as noted under
remain in force for some time to come.
“The Indonesian context” in “Overview” above, duties have
been brought into line with those in Indonesia. As a
A graph of CIF Rotterdam spot CPO prices for the last ten
consequence, the differential between FOB prices
years, as derived from prices published by Oil World, is
realisable for CPO in the local and international markets
shown in the “Key statistics” section of this annual report.
has narrowed. With production volumes increasing, the
The monthly average price over the ten years has moved
group is broadening its customer base to ensure that it
between a high of $1,292 per tonne and a low of $330
can access both domestic and export markets.
per tonne. The monthly average price over the ten years
as a whole has been $725 per tonne.
A complicating factor in 2012, was the impact of the
delays to harvesting caused by the village disruptions
After opening 2012 at $1,065 per tonne, CIF Rotterdam,
referred to under “Crops and extraction rates” above.
the CPO price weakened during the second half of the
These meant that significant volumes of FFB were
year to a low of $745 per tonne but then recovered
harvested late with a negative impact both on extraction
slightly to end the year at $810 per tonne. Prices have
rates and on the free fatty acid (“FFA”) content of CPO
appreciated a little from this level in 2013 to-date and
production. The sales volumes and prices achievable for
currently stand at $830 per tonne. The weaker price
high FFA oil produced during the closing months of 2012
levels now being seen may be attributed to a combination
were materially lower than the prices that might otherwise
of higher stock levels at origin, and concern that the
have been expected to be realised for the CPO
current world economic situation may
reduce
production of that period.
consumption of CPO and other vegetable oils in industrial
applications such as bio-diesel. The current CPO price is
In past years, the CPKO price has almost always been at
at an unusually large discount to the soya oil price but,
a premium to the CPO price and CPKO has been an
with reports of large current season plantings of soybean
important second product for the group. Over the course
in both the United States and South America (spurred no
of 2012, the CPKO premium disappeared and, in recent
doubt by the high soybean prices of 2012), there is a
months, CPKO has been at a discount to the CPO price.
concern that the discount will narrow as a result of
CPKO is similar to coconut oil and the anomalous recent
reducing soya oil prices rather than rising CPO prices.
pricing of CPKO is attributed to unusually good harvests
Against this, there is now evidence of falling stocks and
of coconuts in the Philippines and other coconut
past experience suggests that lower price levels will lead
producing areas. Exports of CPKO represented 31 per
to increased Indian and Chinese consumption.
cent of CPKO sales by volume in 2012 against 38 per
cent in 2011.
Revenues
In 2012, approximately 65 per cent by volume of group
are comprehensive and standard for each of the markets
CPO sales was made to the local Indonesian market and
into which the group sells. The group therefore has no
CPO and CPKO sales are made on contract terms that
30
current need to develop its own terms of dealing with
sold further Greenpalm certificates in respect of some
customers.
19,000 tonnes of 2012 production of CPO.
During 2012, the group completed the RSPO supply
As noted under “The Indonesian context” in “Overview”
chain certification (“SCCS”) and obtained International
above, Indonesia continues to impose a sliding scale of
Sustainability and Carbon Certification (“ISCC”) referred
duty on exports of CPO The progressive nature of the
to under “Accreditation” below, enabling it to sell some of
duty means that the
Indonesian state takes an
its production as certified sustainable oil. There are four
increasingly large part of the benefit of prices above
models established by RSPO for the marketing of oil from
$750 per tonne CIF Rotterdam. Although local sales do
RSPO
certified
sources:
“identity
preserved”,
not attract export duty, arbitrage between the local and
“segregated”, “mass balance” and “book and claim”.
international markets ensures that the price differential
These differ in the extent to which buyers of CPO and
between the markets is normally an almost exact
CPKO obtain delivery of identifiable sustainable oil.
reflection of the additional imposts incurred on exports.
Under the identity preserved and segregated models, oil
delivered is fully identified as sustainable (with the identity
As a general rule, all CPO and CPKO produced by the
preserved model further requiring that the delivered oil is
group is sold on the basis of prices prevailing immediately
identified as coming from a specific mill). Under the mass
ahead of delivery but, on occasions when market
balance model, certified and uncertified oil can be mixed
conditions appear favourable, the group may make
and the proportion of the mix representing certified oil can
forward sales at fixed prices. The fact that export duty is
be delivered as sustainable oil. With the book and claim
levied on prices prevailing at date of delivery, not on prices
model, RSPO certified producers do not deliver
realised, does act as a disincentive to making forward
sustainable oil to buyers but “book” the volume of their
fixed price sales since a rise in CPO prices prior to
CPO and CPKO production and are awarded “Greenpalm
delivery of such sales will mean that the group will not
certificates” in exchange. These certificates can then be
only forego the benefit of a higher price but may also pay
sold to end users of CPO and CPKO who wish to support
export tax on, and at a rate calculated by reference to, a
RSPO but do not wish to complicate their supply chains
higher price than it has obtained. When making forward
by sourcing oil only from RSPO certified producers.
fixed price sales, the group would not normally commit a
volume equivalent to more than 60 per cent of its
Existing logistics for storage and transportation make it
projected CPO or CPKO production for a forthcoming
difficult for the group to sell its output under the RSPO
period of twelve months. No deliveries were made
identity preserved and segregated models but sales may
against forward fixed price sales of CPO or CPKO during
now be made under the mass balance model. The group
2012 and the group currently has no sales outstanding
made its first sales of ISCC certified oil during the last few
on this basis.
months of 2012 comprising 44,000 tonnes of CPO and
also sold Greenpalm certificates in respect of 56,051
The average prices per tonne realised by the group in
tonnes of CPO and 9,250 tonnes of CPKO. Sales of
respect of 2012 sales of CPO and CPKO, adjusted to
certified sustainable CPO and CPKO can command
FOB, Samarinda, and net of export duty were,
premium prices as well as broadening the potential
respectively, $800 (2011: $861) and $862 (2011:
market for the group’s oil production in both the local and
$1,194).
export markets. In the first quarter of 2013, the group
31
Review of the group continued
Costs
electricity company (“PLN”) under which the group will
install an additional three megawatts of generating
The group's revenue costs principally comprise: direct
capacity, which it will dedicate to PLN and which PLN will
costs of harvesting, processing and despatch; direct costs
use to supply power to the villages surrounding the
of upkeep of mature areas; estate and central overheads
group’s estates by way of a local grid to be constructed by
in Indonesia; the overheads of the UK head office; and
PLN. Payment for the power so utilised will be made by
financing costs. The group’s strategy, in seeking to
PLN at a fixed rate determined by Indonesian state
minimise unit costs of production, is to maximise yields
regulations. This equates to about $1 million per
per hectare, to seek efficiencies in overall costs and to
megawatt year but it is not yet known what utilisation PLN
spread central overheads over as large a cultivated
will make of the available capacity. PLN will also consider
hectarage as possible.
linking the national grid to the new local grid and may in
that event be able to increase its power capacity
The level of rainfall in the areas of the agricultural
requirement to six megawatts.
operations provides the group with some natural
advantage in relation to crop yields. The group
Whilst the transaction agreed with PLN offers immediate
endeavours to capitalise on this advantage by constantly
returns for limited further investment (estimated at $1
striving to achieve economic efficiencies and best
million per megawatt of installed capacity), the group is
agricultural practice. In particular, careful attention is
also considering a project to use methane as an
given to ensuring that new oil palm areas are planted with
alternative fuel source for vehicles and other diesel or
high quality seed from proven seed gardens and that all
petrol powered equipment.
Preliminary research
oil palm areas receive the upkeep and fertiliser that they
indicates that such a project would be feasible using
need.
existing well established technology and would offer the
prospect of attractive returns. It would, however, require
The group’s two new methane capture plants (described
initial capital investment of approaching $10 million. If
under “Carbon footprint” below) were commissioned in
the group is successful in securing further profitable uses
April and October 2012 respectively. Methane from each
for methane, methane production could be increased by
plant is currently driving two generators (each of one
installing a further methane capture plant in the third,
megawatt capacity). The power from these generators is
recently commissioned, mill.
having a substantial impact on the group’s consumption
of diesel oil for power generation with material
Other cost saving initiatives that have been implemented
consequential savings in energy costs. In addition, the
by the group in recent years include measures to reduce
group is accruing carbon credits amounting to some
the use of pesticides, partial substitution of inorganic
31,057 for 2012 which are expected to be realised later
fertiliser with natural fertiliser, increased mechanical
in 2013 at a price agreed at the outset of the methane
handling of FFB collection and transport, and the
plant project. Current methane production is averaging
establishment of an “in house” road maintenance
about four times that needed to drive the installed
capability. Development of the stone quarry concession,
generators and this offers opportunities for generating
described under “Coal and stone operations” below,
additional returns from the investment made in the plants.
should permit further economies in respect of building
and maintenance of the group’s infrastructure.
In furtherance of such returns, the group has recently
reached an outline agreement with the Indonesian state
32
As noted under “The Indonesian context” in “Overview”
The group has established a number of new initiatives for
above, there have recently been substantial increases in
2013. These include a review of salary structures to
government directed minimum wage levels. A reasonable
ensure consistency against
industry benchmarks
proportion of the group's employees are paid at a level
throughout the group hierarchy, formal processes for
above the minimum wage but the need to maintain
performance evaluation (including employee feedback)
differentials makes it inevitable that the new minimum
and individual development programmes to facilitate
wage levels will result in a significant increase in the
effective succession planning and promotion, and an
group's employment costs. In 2012, these represented
employee satisfaction survey in order to make continuing
about one third of the cost of sales attributable to the
improvements to the working environment.
group’s agricultural operations. Cost saving efforts in
2013 will therefore have a particular focus on labour
Having available staff in the numbers and with the skills
efficiency and, specifically, on reducing overtime working.
and commitment that are required is vital to the group in
Employees
its efforts to establish best practice in all aspects of its
agricultural activities. In most years, graduates from
Indonesian universities are recruited to join a twelve
By the end of 2012, the workforce numbered over 7,000.
month training programme organised by the group's
training school that provides grounding in the technical
Following the reorganisation of the human resources
aspects of oil palm estate management. Those
department (completed in 2011) and the appointment of
successfully completing the programme are offered
new management, the process of developing a more
management positions.
consistent and formal approach to the management of
human resources continued throughout 2012. Work
Wherever possible, the group fills available staff positions
commenced on establishing a comprehensive employee
by internal promotion. The continuing expansion of the
database, incorporating, in addition to personal data and
agricultural operations gives the group the ability to offer
salaries, information on the allocation of benefits and
graduates the prospect of an attractive career path.
facilities, such as housing, training and development,
Hitherto, graduate intake has focused on those holding
productivity, performance and absenteeism. A dedicated
agricultural and engineering qualifications but, as the
manager is now responsible for human resource matters
group’s
requirements
for more
sophisticated
within each subsidiary company helping to enhance
administrative data and financial systems develop,
operational practices and to improve productivity.
recruitment is broadening to include a wider spectrum of
graduates, with qualifications in finance, accounting and
Phasing in of a performance management system linked
office administration.
to key performance indicators and a competitive
remuneration structure continued during 2012 and the
Continued general and competency based training is
system should be applicable to all staff levels by 2014.
provided for staff at all levels to support the requirements
There are formal processes for recruitment, particularly
associated with external accreditations, which are integral
for key managerial positions, where psychometric testing
to the daily operations of group, as well as for practical
is used to support the selection and hiring decisions. Exit
purposes. Regular programmes are constructed by, and
interviews are also conducted with departing staff to
operated out of, the group's own training school. These
ensure that management can address any significant
are supplemented by external management development
issues.
33
Review of the group continued
courses and attendance at industry conferences. A wide
open not only to the group's employees and their
variety of topics is covered including work ethics and
dependants but also
to members of
the
local
company values, health and safety, sustainability,
communities. The group actively supports measures to
communication skills and English language courses. The
control endemic diseases and to further the education of
group continues to take total quality management
its workforce in hygiene and similar health matters. No
initiatives with the aim of further
improving the
incidents of vector borne diseases (such as dengue fever
effectiveness of the group’s operations.
and malaria) in which infection occurred on the group’s
estates were reported during 2012.
Almost all members of the workforce and their
dependants are housed in group housing in a network of
The group has health and safety policies that are clearly
villages across the group estates. Group housing is
communicated to all employees and are managed
extended as the workforce expands. Villages are
through regular training as well as meetings on each
equipped with potable water and electricity and provided
operating unit attended by management and employee
with a range of amenity buildings including mosques,
representatives. Senior management
is ultimately
churches, shops, schools and crèches.
accountable to the group managing director for all health
and safety matters and appropriate action is taken to
A trust funded by the group operates a network of primary
remedy any deficiencies identified. There were no serious
schools and crèches across the group's estates for over
accidents during 2012.
2,000 children. The group also provides support to state
secondary schools serving the children of the group's
During 2012, the group committed to strengthening, and
employees. In 2012, 158 pupils from the group’s primary
investing further in, its occupational health and safety
schools sat examinations for entry to state secondary
practices. Following an independent review of the
schools and a 100 per cent pass rate was achieved
existing occupational health and safety management
(2011: 143 pupils and 100 per cent). As the workforce
system, improvements have been, and continue to be,
expands and the number of children graduating from
made to align existing procedures with international
primary schools grows, the group is exploring the
standards of best practice, guided by the requirements of
possibility of providing estate secondary schools, where
the internationally recognised occupational health and
local state secondary schools may be insufficient. Initially,
safety standard OSHAS 18001. The group aims to be
use would be made of existing classrooms within the
certified to be in full compliance with this standard by
estate primary schools but in due course there may be a
2015.
requirement for additional estate school facilities. The
availability of suitable schooling is essential for attracting
The group promotes a policy for the creation of equal and
and retaining staff in the remote locations of the group’s
ethnically diverse employment opportunities, including
operations.
with
respect
to gender, and encourages
the
establishment of forums in which employees or their
The group runs its own health service with a resident
representatives can have free and open dialogue with the
doctor, medical clinics on each established estate and a
group’s management. In 2012, the group established a
central clinic as well as, from 2013, a resident dentist. It
gender committee to ensure that the gender policy is
also has partnership links with larger hospitals in
properly implemented. For a second year, in 2012 one of
Samarinda and Jakarta. The estate and central clinics are
the group subsidiaries received an award for the provision
34
of equal opportunities for female workers from the local
experienced because of actions by villagers to enforce
government.
their position by stopping harvesting access to certain
areas of the group’s estates and blockading group oil
Community relations
mills to prevent processing of FFB.
The group’s estate areas are surrounded by a network of
The 2012 village dissatisfaction with the group covered a
villages and sub-villages (with the latter administered
number of issues and different villages had different
through the villages).
claims. However, a common theme was a demand that
the group procure the land necessary to establish
The group has always seen the maintenance of
additional cooperative smallholder oil palm plantings in
harmonious relations with, and the encouragement of
each village. This demand was based on 2007
development within, the local communities in its areas of
Indonesian legislation (the “2007 legislation”) that
operation as an essential component of its agricultural
requires that any company receiving a land allocation for
business. As explained under “Land areas” above, all new
oil palm development after the date on which the
plantation development by the group involves payment of
applicable legislation became effective must provide land
compensation to affected local villages as well as
for, and develop, smallholder oil palm plantings equal to
consultation with the surrounding communities to identify
20 per cent of the area to be planted with oil palm by the
overlapping land use rights and ensure that these are
company, such plantings to be owned and paid for (from
transferred to the group in a way that meets legal
funding organised by the company) by co-operatives from
requirements
(and
in
recent years, since
the
the villages whose land use rights overlap with the
establishment of RSPO, the requirements of RSPO).
company’s land titles.
Thereafter the group provides assistance with community
development projects and supports the local communities
Substantially all the REA Kaltim and SYB plantings are on
in establishing smallholder plantings of oil palms. A
land allocated prior to the 2007 legislation and, whilst the
significant proportion of the group’s workforce is drawn
group has to-date successfully supported smallholder
from the local communities and there is regular
development, such developments have been almost
interaction at a social level between the group’s staff and
entirely on land provided by villagers and, the group has
employees and members of the local communities.
not hitherto, as a general rule, itself provided land for
smallholder plantings by villages surrounding the REA
Inevitably in the period of over twenty years since the
Kaltim and SYB estate areas. Legal advice has confirmed
group’s East Kalimantan operations were
first
that the group is under no obligation to do so.
established, there have been occasional disagreements
Nevertheless, the group has for some time recognised
between the group and the local communities but until
that it should endeavour to meet the expectations of
recently, such disagreements have been minor, rapidly
villagers who have difficulty understanding why villages
resolved and without significant impact on the group.
adjacent to newer oil palm developments are entitled to
That situation changed during 2012 with disputes
be given land while they are not. It did, however, take time
concentrated into two waves, the first in the second
to identify and acquire suitable land for cooperative
quarter of the year running into early July and the second
development and the resultant delay has certainly
in the final weeks of the year and continuing into 2013.
exacerbated and may well have provoked the village
These disputes were more serious than those previously
problems experienced by the group.
35
Review of the group continued
The acquisition of PBJ2 in July 2012 provided the group
early February. Maintenance of this much improved
with sufficient land to meet the smallholder development
situation will be subject to continued adherence by
obligations to which the group would have been subject
villages to the terms of the agreements reached with
had the REA Kaltim and SYB estates been developed
them and satisfactory resolution of the few remaining
after the 2007 legislation was enacted but did not, of
unresolved issues and of any new issues that may
itself, immediately resolve outstanding village demands
surface.
for oil palm cooperative developments and other village
claims. That was because such resolution was
The current improved position has been reached at a
complicated, as respects land allocations for cooperatives,
significant cost but that cost should not be without benefit
by the need for complete and accurate government
given that the funds committed to procuring additional
mapping of all village boundaries to provide a consistent
cooperative oil palm developments will, in due course,
basis for allocation between villages and, as respects
provide a return to the group from further increases in
other claims, by past fraud by certain intermediaries who
group revenues from processing cooperative FFB.
were legally appointed by villagers and entrusted with
Moreover, the stronger relationships forged with the East
distributing land compensation to individual villagers.
Kalimantan authorities during
the period of
the
disruptions and the better mutual understanding achieved
Fortunately, the group received excellent support from the
between the group and its local communities should
local authorities who assisted with mediation and, where
enhance the group’s ability to continue the development
necessary, police intervention. It is clear that village
of its East Kalimantan operations.
actions interfering with the normal running of the group’s
estates are illegal but both the police and the group were
It is clear that the group and the villages around its
concerned to achieve resolutions of outstanding issues by
estates are interdependent. The group requires the
dialogue rather than force and to retain a situation in
acceptance of its operations by the villages while the
which, notwithstanding the issues, discussion remained
villages are reliant upon the group as an employer, as a
possible between the group and the various villages
market for services and produce, and as a purchaser of
without mutual antipathy.
smallholder grown FFB. Villages will benefit further from
the group’s activities once the recent agreement to supply
Substantial progress has been made since the beginning
power to PLN, as described under “Costs” above, has
of 2013 and settlement agreements in respect of most
been implemented as this will provide the villages with
material issues were reached in late January or early
access to electricity generated by the group’s methane
February with all of the larger villages that had land rights
capture plants. Whilst it is probably inevitable that there
historically overlapping REA Kaltim and SYB land.
will on occasions in the future be issues between the
Settlement discussions are continuing in respect of
group and surrounding villages, the directors hope that
outstanding disputes. To-date agreements concluded
with a better appreciation of the symbiotic relationship
with villages have been adhered to but there have been
between the group and the villages, such issues will be
some subsequent disruptions by individual villagers. One
more readily resolved than was the case with the issues
such disruption caused a harvesting blockage in one area
that arose during 2012.
of the REA Kaltim estates for a period of nearly four
weeks during March and April 2013 but otherwise these
Against the background of the 2012 issues, the group
later disruptions have been limited as to duration and
reviewed the organisational structure and responsibilities
scale. All three mills have been operating normally since
of the departments dealing with the local communities
36
and increased the allocation of resources to this area of
“Program Pemberdayaan Masyarakyat Desa” or “PPMD”.
the group’s business. The head of corporate affairs has
Under this scheme, individual smallholders cultivate oil
now been appointed to the board of REA Kaltim and has
palm on their own plot of, typically, two hectares. The
extended his
responsibilities
to
include overall
group provides technical advice and supplies the
responsibility
for
smallholder
schemes,
land
smallholders with seedlings, fertilisers and herbicides on
compensation,
village
liaison
and
community
deferred terms on the basis that when a smallholder’s oil
development. In addition, a new head of village affairs,
palm plantings reach maturity, all FFB produced will be
based on the plantations, is being appointed with
sold to the group for processing and the group will, on an
responsibility for coordinating the daily activities of these
agreed basis, recover from the amounts payable for the
departments and ensuring their close interaction with the
FFB, the deferred amounts owed to the group. Some
local communities.
Community development
1,561 hectares of smallholder plantings across 13 local
villages have been established following this model. In
addition, the group now treats as if they were PPMD
plantings a further 795 hectares of smallholder plantings
Community development assistance provided by the
originally developed under a government scheme for
group comprises infrastructural and other general
which the group has effectively assumed responsibility.
assistance to the local communities.
While continuing to support established smallholdings
Infrastructural assistance includes the provision of access
developed under the PPMD scheme, since 2009 the
to electric power, assistance with repairs of village roads
group’s efforts
to procure
further smallholder
and bridges, schools and community buildings and the
development have been concentrated on encouraging the
provision of water for daily domestic use. Other forms of
formation of local village cooperatives to develop oil palm
general assistance include donations to support the
on larger areas pursuant to what are known as “plasma
celebration of religious festivals and regular fogging for
schemes”. Under the plasma scheme model, the land
mosquitoes in areas of the surrounding communities to
areas for development are provided by or allocated to
reduce the incidence of vector borne diseases in those
village cooperatives but the development is managed by
communities.
Smallholder schemes
the group for a fee, with the advantage that development
and production standards similar to those of the group
can be established in the plasma areas. The costs of
development are borne by the cooperatives but with
The availability of the group’s oil mills to process FFB
funding from local external sources, supplemented if
harvested from plantings in the vicinity of the group’s
necessary by the group and provided on terms that FFB
estates provides an opportunity for the local communities
produced by the cooperatives will be sold to the group
to further their economic progress by developing
and that the group will ensure that, out of the proceeds of
smallholdings of oil palms in areas surrounding the
such sale, the cooperatives meet their debt service
group's estates. The group established its first
obligations in respect of the external funding.
smallholder scheme in 2000 and continues to support
and invest in the development of smallholder plantings.
Plans for further expansion of the plasma schemes during
2012 were held up by delays in identifying and agreeing
Prior to 2009, the group’s smallholder support was
allocations of additional
land areas suitable for
provided to individuals pursuant to a scheme known as
smallholder development (as further discussed under
37
Review of the group continued
“Community relations” above). The plasma scheme areas
the group will benefit from the additional throughput in its
planted at 31 December 2012 amounted to some 2,900
oil mills that will result from the processing of FFB from
hectares. With the further allocations of land that have
the plantings.
now been substantially agreed, the group expects a
useful increase in the plasma areas during 2013.
Conservation
It was originally planned that cooperative members would
The group continues
to manage a network of
form the core labour force for the plasma scheme
conservation reserves within its titled land areas with the
developments but, with urban migration reducing village
aim of conserving the natural biodiversity and ecosystem
numbers, the cooperative members available to work on
functions of the landscapes in which the group operates.
the plasma schemes have proved insufficient to provide
Conservation reserves are designated on the basis of
more than a minor proportion of the workforce needed to
environmental impact and high conservation value
maintain and harvest the scheme plantings. The balance
assessments, which are conducted by both the group’s
of the required workforce is therefore being supplied by
conservation department (known as “REA Kon”) and
the group from its own labour force. Whilst the group
external experts prior
to each new agricultural
levies an appropriate charge for this service, it means that
development undertaken by the group. To date, over
the group now sizes its labour force at a level sufficient to
20,000 hectares have been set aside as conservation
operate not only its own estates but also the plasma
reserves.
schemes. The group will be expanding the estate worker
housing and facilities to accommodate the additional
The activities of REA Kon cover three distinct areas as
permanent workers.
follows:
Financing for the group supported plasma schemes
•
a biodiversity programme, which aims to compile
initiated
to-date has been agreed with a
local
comprehensive species inventories and implement
development bank in the form of fifteen year loans
long-term species monitoring programmes to inform
secured on the land and assets of the schemes and
the management actions necessary to maintain and
guaranteed by the group. These facilities are designed to
enhance the natural biodiversity of the landscape;
finance most of the initial development costs of the
schemes but will be supplemented to the extent
necessary by funds advanced by the group. There are
currently three facilities in place for the current schemes.
Whilst the group views its support for smallholder oil palm
plantings in the local communities adjacent to its
operations as part of its social responsibility to those
communities, the expansion of smallholder plantings in
the vicinity of the group’s mills will be mutually beneficial
to the communities and the group. The communities will
benefit from the significant economic development
generated as a result of the smallholder plantings while
•
a community programme, which aims to engage with
and educate the communities living in and around the
group’s oil palm concessions to reduce the negative
environmental impacts of the oil palm activities and to
promote the sustainable use of natural resources;
and
•
a plantation programme to monitor and reduce the
environmental impact of the group’s operations and
of the people living in and around the plantation in
order to maintain the integrity of the conservation
reserves and the quality of the human and natural
environment.
38
Surveys conducted by REA Kon,
together with
The water quality of rivers which flow through the
assessments undertaken by visiting scientists and
conservation reserves, as well as other key environmental
students, have to date confirmed the presence in the
parameters which indicate the health of these habitats,
conservation reserves of a total of 495 species (66
are monitored on a monthly basis. A key component of
species of mammals, 185 species of birds, 53 species of
REA Kon’s efforts to reduce the negative environmental
reptiles, 32 species of amphibians, 84 species of fish and
impacts of the people living within and around the group’s
75 species of invertebrates). These species include 76
plantations is the provision of weekend long conservation
that are listed on the International Union for the
education camps for children from estate and local village
Conservation of Nature’s (“IUCN”) Red List of Threatened
schools. These camps aim to educate and enthuse the
Species as being in the categories of “Near Threatened”,
local population about the importance of protecting the
“Vulnerable”, “Endangered” and “Critically Endangered”.
conservation reserves and the species that inhabit them.
In 2012, REA Kon’s community team held five
Camera trapping and other biodiversity surveys continue
conservation education camps, and visited a number of
to record the presence of orang-utans within the
village schools in the vicinity of the group’s new
conservation reserves. Sighting of a baby orang-utan and
developments.
a camera trap photograph of a baby sun-bear, as well as
the first record of an orang-utan in SYB northern estate,
In 2009, the group established Yayasan Ulin (“YU”)
are encouraging signs of the ability of the group’s
(meaning the Ironwood Foundation) as an Indonesian
conservation reserves to support healthy populations of
charitable foundation, with a feeder charity registered in
these species. REA Kon maintains a nursery of native
the UK. The aim of the YU is to promote and facilitate the
timber and fruiting tree species, which it uses to enrich
protection of certain habitats of
importance for
both the natural habitat within the conservation reserves
biodiversity conservation. The majority of YU’s activities
and the estate villages. In 2012, some 650 seedlings
have to date focused on the Mesangat wetlands in Kutai
from REA Kon’s nursery were distributed for enrichment
Timur district, East Kalimantan. This valuable wetland
planting.
ecosystem, which is known to support a number of
Critically Endangered and Endangered species, overlaps
REA Kon continues to provide small grants and field
with and extends into the landscape surrounding the
assistance to enable undergraduate students from local
CDM land areas. Research by both local and international
universities to conduct final year research projects within
scientists has concentrated on identifying and developing
the group’s conservation reserves in an effort to
an understanding of the population status and ecology of
encourage young Indonesian scientists to study the
the rare, threatened and endangered species that inhabit
relationship between oil palm and biodiversity. In 2012, six
these wetlands, monitoring the harvesting of fish and
undergraduate students and one postgraduate student
reptiles by the local community and implementing
from universities in Samarinda, Jakarta and Yogykarta
schemes to encourage sustainable use of these natural
participated in this programme. In addition, REA Kon
resources.
assisted two postgraduate students from Utrecht
University in the Netherlands in conducting biomass
Responsible agricultural practice
assessments within the conservation reserves as part of
their postgraduate research projects.
The group operates a zero burning policy in relation to
land development and, in dry periods, maintains active fire
39
Review of the group continued
patrols in an effort to limit the risks of accidental fires.
inorganic fertiliser amounted to 9,654 hectares in 2012
Corridors are used to separate all plantings from water
(2011: 9,636 hectares) and is projected to amount to
courses and the latter are regularly monitored to ensure
close to 11,000 hectares in 2013.
that they are not contaminated by leaching of fertilisers
and chemicals. The group actively promotes integrated
Handling arrangements are designed to ensure that no
pest management throughout its operations. Wherever
CPO, CPKO or oil mill effluent passes into water courses.
possible, natural predators are preferred to pesticides for
On one occasion in 2012, during very heavy rains, an
pest control. Selective varieties of flowering plants have
effluent pond within one composting area overflowed but
been planted throughout the group’s estates to promote
the overflow was contained within the perimeter drains
the population of wasps, the natural predators of
around the composting area. There were no reported
bagworm and caterpillars.
incidents of accidental spillage into water courses during
2012. Steps are being taken to educate and incentivise
As noted under
“Costs” above,
the group has
the group’s resident workforce and its dependants to
endeavoured in recent years to reduce its dependence on
segregate domestic waste so as to permit recycling of
inorganic fertiliser by developing organic fertilisers. Two
organic and plastic waste. During 2011, the group
consequences have been the extensive planting of
Macuna bracteata as a cover crop in the oil palm areas
and the composting of residues of the CPO production
process. Macuna bracteata (of which the group was an
early user in Indonesia) not only keeps down noxious
weeds and fixes nitrogen but is also a prolific generator of
acquired a heavy duty plastic macerating unit. This is
used for shredding larger clean plastic containers into
flakes for onward sale and the resultant proceeds are
used to sponsor special events for the workforce and its
dependants.
vegetative matter that acts as a soil improver. This
Fibre extracted during the milling of oil palm fruit is used
promotes oil palm growth, particularly in the immature
to fuel oil mill boilers from which steam is generated. The
phase. Composting of processing waste produces a
steam is then used to drive steam turbines for generating
nutrient rich compost that can be applied in the oil palm
electricity. This electricity is sufficient to power not only
areas in substitution for inorganic fertiliser.
the group’s oil mills and the kernel crushing plants but
also to provide power to several estate villages.
Composting is effected by delivering all empty fruit
bunches and oil mill effluent (in the latter case after
Carbon footprint
treatment in methane recovery lagoons and/or mill
effluent ponds) to a composting contractor at sites
The company published its first carbon footprint report in
adjacent to the group’s oil mills. The contractor takes title
February 2013. This report identifies and quantifies the
to these residues and manages the composting process.
greenhouse gas emissions associated with the longer
This takes 45 days and involves seeding the residues with
established component of the group’s agricultural
an accelerant of micro-organisms (supplied by the
operations. The carbon footprint report will facilitate the
contractor), mixing the residues and macerating the mix
design and implementation of strategies for further
to encourage biodegradation. The contractor then sells
reducing emissions in the future, as well as providing a
the resultant compost back to the group at an agreed
baseline against which progress in reducing greenhouse
price with a guaranteed minimum nutrient content. The
gas emissions can be monitored and reported.
area in respect of which compost substituted for
40
Although steam generated electricity from the oil mills is
Accreditation
effective in meeting a proportion of the group’s energy
needs, the available power is not sufficient for all villages
The group seeks to follow international and industry
and power can anyway only be provided by this means
standards of best practice throughout its operations. The
when the mills are running. Accordingly, in an effort
group is a member of the Roundtable on Sustainable
significantly to reduce the group’s greenhouse gas
Palm Oil (“RSPO”), which has produced a set of eight
emissions and thereby reduce its carbon footprint, the
principles and 39 criteria for the sustainable production of
group has constructed two methane capture plants which
palm oil, defined as production which
is “legal,
were commissioned in, respectively, April and October
economically viable, environmentally appropriate and
2012. The plants lead to a reduction in greenhouse gas
socially beneficial”. To obtain RSPO certification,
in two ways: first, methane emissions from anaerobic
members are required to comply with RSPO principles
digestion in the open mill effluent ponds are lower and,
and criteria and to have their operations audited by RSPO
secondly, less diesel oil is required to generate power.
approved independent auditors. The directors believe
that the group's operational practices have always been
Each methane capture plant is adjacent to an existing oil
of a high standard but the RSPO certification process
mill and is based around a lagoon sealed by a cover
requires that such operational practices are embedded in
fabricated from high density polyethylene sheeting. After
formal systems and are subject to controls that are
initial cooling, mill effluent passes to the lagoon, which is
auditable.
equipped with a liquid agitation system designed to
accelerate the anaerobic digestion of the effluent. The
The group has now achieved RSPO certification of the
methane released during the digestion process is
two REA Kaltim oil mills, all of the REA Kaltim estates and
captured under the lagoon cover, passed through a
the SYB Tepian estate, as well as some of the smallholder
biological scrubber and used to fuel biogas powered
oil palm plantings. It is planned to obtain certification of
generators. Methane that is surplus to the current
the newly constructed SYB oil mill by 2015. Development
requirements for electricity generation is flared off. The
of KMS has been carried out in accordance with the
digested effluent is discharged from the lagoon to the
RSPO New Plantings Procedures. As a further step in the
existing mill effluent ponds and subsequently passed to
process of RSPO certification of its operations, the group
the composting process. The electricity generated from
achieved certification of its supply chain under the RSPO
the captured methane supplies a significant proportion of
Supply Chain Certification System (“SCCS”) during 2012.
the group’s mills, offices and housing, thereby eliminating
This certification provides buyers of CPO and CPKO with
the requirement for diesel generated electricity in these
the ability to identify oil purchased as coming from RSPO
areas.
certified sources, thereby permitting the group to sell it
production as certified under the RSPO “mass balance”
Performance of the methane capture plants has
model. The “mass balance model” is one of the four
exceeded expectations and, as discussed under “Costs”
mechanisms established by RSPO for the marketing of oil
above, measures are being taken to make more
from RSPO certified sources as described under
productive use of surplus methane.
“Revenues” above.
Separately in 2012, the group also obtained International
Sustainability and Carbon Certification (“ISCC”), which
41
Review of the group continued
allows the CPO produced from the REA Kaltim estates
original cost. In the meanwhile, the concession holding
and mills to be used to produce biofuel that meets the
companies are financed by loan funding from the group
requirements of the European Union Renewable Energy
on terms such that no dividends or other distributions or
Directive. In addition to verifying that biofuel feed stocks
payments may be paid or made by the concession holding
have been produced, processed and transported in
companies to the local partners without the prior
accordance with a series of sustainability criteria, this
agreement of KCC.
certification scheme requires members of the supply
chain to demonstrate that the net greenhouse gas
Operating activities
emissions associated with the production and use of this
biofuel will be lower than if the equivalent amount of
During 2010 and 2011, the group started to develop an
energy was generated by fossil fuels. ISCC certified CPO
open cast coal mining operation and coal trading activity
generally commands a small price premium in Europe
based on the three coal concessions. Subsequent events
over CPO that has not been ISCC certified.
showed that coal mining and trading have specific
complexities that are not shared by the group’s
All of the operations of REA Kaltim and the northern
agricultural operations. Moreover, coal prices fell
estates of SYB have been certified or recertified, as
significantly between early 2011 and mid 2012. The
appropriate, as ISO 14001 compliant.
directors therefore decided in mid 2012 that, for the time
Coal and stone operations
Concessions and structure
being, coal trading activities should be suspended and
further capital committed to the coal operations should be
limited and concentrated on maximising returns from the
concessions in which the group had already invested.
The group holds rights in respect of three coal mining
The group is in discussions with two third parties in
concessions and a stone deposit, all of which are located
relation to the coal concession at Kota Bangun. Both
in East Kalimantan in Indonesia. Stone quarrying is
such parties have coal mining interests adjacent to the
classified as a mining activity for Indonesian licensing
group’s concession. A successful conclusion to the
purposes and is therefore subject to the same regulatory
discussions would result in one of the parties mining the
regime as coal mining.
concession on a basis that would limit the group’s
downside and provide a return to the group that, at
A UK subsidiary company, KCC Resources Limited
current coal prices (which have risen to an extent from
(“KCC”) acts as the co-ordinating company for the coal
their lows of June 2012), could reasonably be expected
and stone interests via a 95 per cent owned Indonesian
to recover the group’s investment and, if coal prices
subsidiary company, PT KCC Resources Indonesia
improve further, could yield a reasonable profit. A similar
(“KCCI”), which is five per cent owned by local partners.
arrangement may be possible in relation to the other two
The mining concessions and stone deposit are held by
coal concessions, which are in the southern part of East
Indonesian concession holding companies, which are
Kalimantan. The group had previously thought that an
currently wholly owned by the group's local partners but
outright sale of these two concessions might be
with the group having the right, subject to satisfaction of
preferable to such an arrangement but is now inclining to
certain conditions, to acquire 95 per cent of each of the
the view that retention of the concessions with a third
concession holding companies at the local partners’
party mining arrangement may provide a better final
outcome.
42
In view of
the uncertainties affecting
the coal
financial statements in US dollars. The company
concessions, the group has made a provision of $3 million
continues to prepare its individual financial statements in
against its investment in the concessions at 31 December
sterling and in accordance with UK Generally Accepted
2012.
Accounting Practice. Accordingly, the company’s
individual financial statements are presented separately
On the coal trading side, steps are being taken to close
from the consolidated financial statements.
out contractual commitments made prior to the
suspension of trading and no new trades are being
The accounting policies applied under IFRS are set out in
initiated. Prior to the suspension, the group had made
the “Accounting policies (group)” section of this annual
one significant shipment of traded coal. As noted in the
report. The accounting policy relating to biological assets
half yearly report for 2012, the buyer for this shipment
(comprising oil palm plantings and nurseries) is of
repudiated its contractual obligations and this meant that
particular importance. Such assets are not depreciated
the group had to sell the shipment elsewhere at a loss.
but are instead restated at fair value at each reporting
The group is pursuing recovery of this loss but has
date and the movement on valuation over the reporting
provided against it to the extent of $0.8 million in the
period, after adjustment for additions and disposals, is
results to 31 December 2012.
taken to income. Deferred tax is provided or credited as
appropriate in respect of each such movement.
The group remains confident of the economic viability of
its stone concession and work is continuing on plans to
As in previous years, the fair value of the biological assets
quarry the concession to provide stone for the group’s
at 31 December 2012 has been derived by the directors
agricultural operations and for sale to users of stone in
on a discounted cash flow basis by reference to the FFB
the area of those operations.
Sustainable practices
projected to be harvested from the group's oil palms over
the full remaining productive lives of the palms and an
estimated profit margin per tonne of FFB so harvested.
Such estimated unit margin is based on an average of
The group remains committed to observing international
historic FFB profit margins for the 20 years to 2012
standards of environmental and corporate social practice
buffered to restrict the implied annual movement in such
in its coal mining and stone quarry activities. Health and
estimated unit margin to 5 per cent and to prevent any
safety procedures have been established to protect and
change in estimated unit margin that runs contrary to the
safeguard the welfare of all persons involved and, upon
trend in current margins. For this purpose, the historic
resumption of existing, or commencement of any new,
profit margin for each applicable year has been derived
activities, suitable measures would be designed to ensure
either from the budgeted unit cost of FFB production and
the proper management of waste water and land areas
the actual historic average of CPO prices (FOB Port of
affected by these activities.
Finances
Accounting policies
Samarinda and net of export duties) for such year or, for
earlier years for which such detailed information is not
available, an appropriate estimate of the historic profit
margin for the year.
The discount rates used for the purposes of the biological
The group reports in accordance with International
asset revaluation at 31 December 2012 were 15 per cent
Financial Reporting Standards (“IFRS”) and presents its
for the estates owned by the company’s two principal
43
Review of the group continued
subsidiaries, REA Kaltim and SYB, and 18 per cent for all
Correction of previous accounting error
other group companies (2011: 16 per cent and 17½ per
cent for, respectively, REA Kaltim and SYB, and 19 per
After discussion with the Financial Reporting Council’s
cent for all other group companies). The reduction in
Conduct Committee, the group has concluded that it has
discount rates is designed to reflect appropriately the
been incorrectly applying cash flow hedge accounting to
improved credit rating now accorded to Indonesian
certain cross-currency interest rate swaps.
sovereign exposures as well as a perceived reduction in
the risks of achieving future harvests of fresh fruit
The background to this error is that during 2007 and
bunches (“FFB”) on the SYB estates following the
2008 the company’s subsidiary, REA Finance B.V.
completion of the group’s third oil mill which is owned by
(“REAF”) issued £37 million nominal of guaranteed
SYB.
sterling notes 2015/17 (“sterling notes”) and lent the
resultant proceeds to REA Kaltim and SYB on terms that
The directors recognise that the IFRS accounting policy in
were substantively back to back with the terms of the
relation to biological assets does have theoretical merits
sterling notes. The latter companies entered into cross-
in charging each year to income a proper measure of
currency interest rate swaps to hedge against US dollars
capital consumed (so that, for example, a fair distinction is
their sterling interest and principal exposure in respect of
drawn each year between the cost of the shortening life
their borrowings from REAF. Later these arrangements
expectancy of younger plantings still capable of many
were restructured in some respects but in a way that did
years of cropping and that of older plantings nearing the
not materially affect the commercial substance of the
end of their productive lives). It does, nevertheless,
arrangements.
concern the directors that no estimate of fair value can
ever be completely accurate (particularly in a business in
The group considered that the underlying commercial
which selling prices and costs are subject to very material
reality of these arrangements was that the sterling notes
fluctuations). Moreover, in the case of the group’s
had been issued to finance its US dollar denominated
biological assets, small differences
in valuation
plantation business in Indonesia and that, in group terms,
assumptions can have a quite disproportionate effect on
the cross currency interest rate swaps in the Indonesian
results. The directors therefore welcome the forthcoming
subsidiaries were hedging a group exchange rate
issue by the International Accounting Standards Board of
exposure between a sterling liability (in the form of the
an exposure draft outlining possible amendments to IAS
sterling notes) and US dollar assets in the Indonesian
41 (the standard that imposes the current policy on
subsidiaries. On this basis, the directors designated the
biological assets) and hope that this will result in an
cross-currency interest rate swaps as hedges of the
eventual reversion to the accounting policies that were
sterling notes and treated them for accounting purposes
widely applied by plantation companies prior to the
as hedges eligible for cash flow hedge accounting.
introduction of IAS 41.
Interpretations of IAS 39 published during 2008 in IFRIC
The biological assets in the group balance sheet at 31
16 concluded that a group could not have a functional
December 2012 amounted to $266 million. An increase
currency and that cash flow hedge accounting could not
or reduction of $5 per tonne in the estimated profit
be applied to a hedge of a group’s presentational
margin used for the purpose of the valuation (namely
currency. The functional currency of REAF is sterling
$55.2 per tonne of FFB) would increase or reduce the
while the functional currency of both REA Kaltim and SYB
valuation by approximately $26 million.
44
is US dollars. This means that, whilst the cross-currency
interest rate swaps can be treated within REA Kaltim and
SYB as fully effective cash flow hedges of those
companies’ sterling borrowings, at the group level the
swaps represented hedges of the group’s presentational
currency. The group‘s application of cash flow hedge
accounting in respect of the swaps was therefore
incorrect.
Agricultural operations
Trading items:
Value impact of lower prices on crop harvested
Value impact of reduced crop due to weather
Village disruptions:
Value impact of reduced crop
$’m
(12.6)
(5.6)
(5.7)
Value impact of reduced prices due to high FFA oil
(6.6)
The consequential corrections needed have been booked
Coal operations
Losses
in the accompanying financial statements for 2012 and
Provision against concessions
(4.1)
(3.0)
(37.6)
the differences in profit before tax, tax, profit for the
period and the component of that profit attributable to
non-controlling interests that would have been reported
for the years 2009 to 2011 had the correct accounting
treatment been applied are detailed in note 33 to the
accompanying financial statements. The adjustments
detailed in note 33 have no implications for the cash flows
reported from 2009 to 2011 because the adjustments
relate to exchange translation and mark to market
differences that do not impact cash.
Group results
Group operating profit for 2012 amounted to $37.8
million and profit before tax to $30.6 million. The
comparable figures for the preceding year were,
respectively, $72.7 million and $64.2 million.
The significant fall in profits as compared with 2012
reflected the weather impact on crops in the first half and
the effect of lower CPO and CPKO prices during the year,
combined with what will hopefully prove to be non-
recurring losses arising from the decisions taken in
relation to the coal operations and from the village issues
described under “Community relations” in “Agricultural
operations” above. The following table provides estimates
of the effect on profit before taxation as respects each of
Revenue for 2012 at $124.6 million was less than in
2011 ($147.8 million) with the reduction reflecting lower
revenue from both the agricultural operations ($122.1
million against $129.5 million) and the coal operations
($2.5 million against $18.2 million). In the agricultural
operations, this was the result of trading factors referred
to above while, in the coal operations, it was the direct
consequence of the suspension of the coal trading
activities as discussed under “Operating activities” in
“Coal operations” above.
Excluding movements on agricultural inventory, cost of
sales attributable to the agricultural operations amounted
to $59.5 million against $51.3 million. The increase
reflected continuing cost inflation and cropping on a
larger area. Under normal circumstances, it could have
been expected that the increased cost of sales would
have been offset by increased crop volumes but, as
already noted, the combination of weather factors and
village
issues resulted
in the 2012 crop falling
significantly short of budget and, with most components
of cost of sales being fixed costs, there was no
commensurate reduction in cost of sales. In the coal
operation, cost of sales reduced from the prior year $16.7
million to $4.0 million in line with the reduction in trading
the items concerned:
activity.
45
Review of the group continued
IFRS fair value adjustments, aggregating $0.3 million in
dividends between the Indonesian subsidiaries and the
2012, were significantly below
the aggregate
UK parent group and, secondly, the group elected not to
adjustments of $11.4 million reported in the preceding
take credit for deferred tax on losses of the coal
year. The net gain from changes in the fair value of
operations (being losses that could not be offset against
biological assets ($6.0 million against $7.4 million in
the profits of the agricultural operations).
2011) reflected the further development of the group’s
plantations while the loss arising from changes in the fair
At the after tax level, profit fell to $17.7 million (2011:
value of agricultural produce inventory ($5.7 million
$45.6 million) while profit attributable to ordinary
against a profit of $4.0 million in 2011) was the product
shareholders was $11.3 million against $40.5 million.
of a small reduction in inventory volume over 2012 and
Earnings per share amounted to US 33.9 cents (2011:
the fall in CPO and CPKO prices during the year
US 121.0 cents).
exacerbated by the need to allow for a discount on the
closing inventory to reflect the high FFA content of that
The group’s target long term average annual return on
inventory.
adjusted equity is 20 per cent. The return achieved for
2012 was 11 per cent (2011: 28 per cent).
Administrative expenses for 2012 amounted to $18.9
million against $17.0 million in 2011. The increase was in
During the first half of 2012, the Indonesian Tax Court
part the result of inflation, but also reflected costs of
handed down judgements on the remaining elements of
management transition, costs incurred in connection with
the 2006 Indonesian assessment of tax which had been
the resolution of village issues and a further provision of
disputed by REA Kaltim. The Tax Court found in favour of
$1.0 million for additional funding of the group’s UK
REA Kaltim on certain elements and against it on others.
pension scheme following a recent triennial actuarial
A repayment of tax amounting to some $1.2 million was
valuation of the scheme. Before deduction of the interest
made to REA Kaltim. Later in 2012 both parties lodged
component added to biological assets, interest payable in
appeals to the Indonesian Supreme Court with each party
2012 amounted to $12.5 million (2011: $14.1 million).
appealing against certain of the Tax Court’s findings
Interest cover for 2012 (measured as the ratio of
against it.
earnings before
interest,
tax, depreciation and
amortisation, biological gain and provision against coal
REA Kaltim’s appeal against an Indonesian assessment
concessions to interest payable) was 3.1 (2011: 5.2).
of tax on its 2008 profits continues. The 2008
assessment seeks to deny tax relief claimed in respect of
Losses on the coal trading operations reflected provisions
mark to market losses on cross currency interest rate
made against outstanding trading items following the
swaps entered into by REA Kaltim to hedge, against US
decision to suspend trading. In addition, a provision of $3
dollars, the group’s sterling liability in respect of part of
million has been made against the coal concessions.
the group’s outstanding 9.5 per cent sterling notes
2015/17. Hearing of the appeal was completed in
Taxation for 2012 was lower than in the preceding year
October 2012. An early judgement is thought to be
($12.9 million against $18.6 million in 2011), as a result
unlikely.
of the reduced profit before tax, but the group tax rate
rose from 28.9 per cent to 42.1 per cent mainly for two
The 2006 and 2008 disputed tax assessments were both
reasons: first, there was no reduction in the amount of
paid in full ahead of the appeals. The group has
Indonesian withholding tax incurred on intra-group
previously provided in full against the 2006 assessment
46
and as to $5.5 million (representing at the time
need to fund this expenditure constrains the rates at
approximately half of the tax demanded) against the
which the directors feel that they can prudently declare, or
2008 assessment. The aggregate amount provided has
recommend the payment of, ordinary dividends. They
been retained but has been reallocated to provide a full
believe that capitalisation issues of new preference
provision against those components of the 2006
shares to ordinary shareholders provide a useful
assessment as respects which REA Kaltim is appealing
mechanism
for augmenting
returns
to ordinary
findings against it by the Tax Court and a provision of
shareholders in periods in which good profits are
approximately 75 per cent against the 2008 assessment.
achieved but demands on cash resources limit the scope
Some $600,000, representing components of the 2006
for payment of cash dividends. The directors will consider
assessment as respects which REA Kaltim is not
a further such issue during 2013 if they feel that this is
appealing findings against it by the Tax Court, has been
merited by the group’s performance.
written off by the group within the 2012 tax charge. No
credit has been taken for interest due REA Kaltim on tax
Looking forward, if as is planned REA Kaltim becomes
repayments already received in relation to the 2006
listed on the Indonesia Stock Exchange, it is expected
assessment as such interest will only become payable
that the future planned expansion of the agricultural
after receipt by REA Kaltim of final judgement from the
operations will permit REA Kaltim to distribute each year
Supreme Court confirming the repayments concerned.
around one third of its after tax profits. The directors then
Dividends
intend that the company should adopt a policy of
distributing to its ordinary and preference shareholders a
large proportion of its share of the REA Kaltim dividends.
The fixed semi-annual dividends on the 9 per cent
cumulative preference shares that fell due on 30 June
Capital structure
and 31 December 2012 were duly paid. An interim
dividend in respect of 2012 of 3½p per ordinary share
The group is financed by a combination of debt and
was paid in January 2013 and the directors recommend
shareholder funds. Total shareholder funds less non-
the payment of a final dividend in respect of 2012 of 3½p
controlling interests at 31 December 2012 amounted to
per ordinary share to be paid on 26 July 2013 to ordinary
$313.0 million as compared with $300.7 million at 31
shareholders on the register of members on 28 June
December 2011. Non-controlling interests at 31
2013. The total dividend payable per ordinary share
December 2012 amounted to $2.0 million (2011: $2.2
during 2013 in respect of 2012 will thus amount to 7p.
million).
This compares with the total paid during 2012 in respect
of 2011 of 6½p. In addition, the company made a
In September 2012, 3.9 million new preference shares
capitalisation issue of 2,004,872 new preference shares
were issued for cash at a price of 105p per share by way
to ordinary shareholders on 28 September 2012 on the
of a placing to raise £4 million net of expenses. The
basis of 3 new preference shares for every 50 ordinary
proceeds of the placing of new preference shares were
shares held (2011: 2,004,872 new preference shares on
retained within the group to fund continuing development
the basis of 3 new preference share for every 50 ordinary
of the agricultural operations. This issue was followed in
shares held).
September 2012 by the issue of a further 2,004,872 new
preference shares by way of capitalisation of share
The continuing development of the group’s agricultural
premium account pursuant to the capitalisation issue to
operations requires major capital expenditure and the
ordinary shareholders referred to under “Dividends”
above.
47
Review of the group continued
In November 2012, $34.0 million of 7.5 per cent dollar
2017). As a result, and subject to any further purchases
notes 2017 (“2017 dollar notes”) were issued as to some
and cancellations, slightly under $1 million of the
$19 million by way of an exchange offer to holders of
outstanding 2012/14 dollar notes will fall due for
existing 7.5 per cent dollar notes 2012/14 (“2012/14
repayment at the end of 2013 and the balance at the end
dollar notes”) and as to the balance by way of a placing.
of 2014. The 2017 dollar notes are repayable on 30
Following these transactions, group indebtedness and
June 2017.
related engagements at 31 December 2012 amounted to
The sterling notes are issued by REA Finance B.V., a
$163.5 million, made up of $15.9 million nominal of
wholly owned subsidiary of the company, are guaranteed
2012/14 dollar notes (carrying value: $15.5 million),
by the company and another wholly owned subsidiary of
$34.0 million nominal of 2017 dollar notes (carrying
the company, R.E.A. Services Limited (“REAS”), are
value: $33.2 million), £34.5 million nominal of 9.5 per
secured principally on unsecured loans made by REAS to
cent guaranteed sterling notes 2015/17 (“sterling
Indonesian plantation operating subsidiaries of the
notes”) (carrying value: $54.3 million), $8.4 million in
company and, save to the extent previously redeemed or
respect of the hedge of the principal amount of the
cancelled, are repayable by
three equal annual
sterling notes as described below, a term loan from an
instalments commencing 31 December 2015.
Indonesian bank of $36.1 million and other short term
indebtedness comprising drawings under working capital
The group has entered into a long term sterling US dollar
lines of $16.0 million. Against this indebtedness, at 31
debt swap to hedge against US dollars the sterling liability
December 2012, the group held cash and cash
for principal and interest payable in respect of the entire
equivalents of $26.4 million.
original issue of the sterling notes (but in the case of
interest only as respects interest payments falling due up
The group has no material contingent indebtedness save
to 31 December 2015).
that, in connection with the development of oil palm
plantings owned by village cooperatives and managed by
The term loan from an Indonesian bank comprises the
the group, the group has, as noted under “Smallholder
equivalent of $36.0 million drawn by SYB from PT Bank
schemes” in “Agricultural operations” above, guaranteed
DBS Indonesia (“DBS”) under an Indonesian rupiah
the bank borrowings of the cooperatives concerned, the
denominated amortising loan facility of Rp 350 billion
outstanding balance of which at 31 December 2012 was
($38.6 million) agreed with DBS during 2011. The loan
equivalent to $10.5 million.
is secured on the assets of SYB and is guaranteed by the
company and REA Kaltim. The aggregate outstanding
The 2012/14 and 2017 dollar notes are unsecured
balance of the loan at 31 December 2012 is repayable as
obligations of the company. The 2012/14 dollar notes
follows: 2014: $2.7 million; 2015: $6.3 million; and 2016
are repayable by three instalments commencing 31
and thereafter: $27.0 million.
December 2012 but repayment obligations are reduced
to the extent that notes have been previously redeemed
Group cash flow
or cancelled. A substantial nominal amount of the original
issue of 2012/14 dollar notes has now been purchased
Group cash inflows and outflows are analysed in the
and cancelled (including the $19.0 million nominal of the
consolidated cash flow statement. Cash and cash
notes acquired under the exchange offer for dollar notes
equivalents reduced over 2012 from $30.6 million to
48
$26.4 million. The reduction of $4.0 million (excluding the
and titling related to land added through the acquisition of
negative impact of $0.2 million from the effect of
PT Persada Bangun Jaya (see note 12 to the financial
exchange rate movements) represented that component
statements) and expenditure in connection with the titling
of the net outflow on investing activities that was not
of this land and its allocation to smallholder cooperatives.
covered by the combination of net cash from operating
activities and net cash from financing activities.
The net cash inflow on financing activities of $36.2 million
(2011: $11.6 million) was made up of net inflows of $6.5
As noted under “Group results” above, operating profit for
million (2011: $24.3 million) from issue of new
2012 amounted to $37.8 million as compared with $72.7
preference shares and $33.6 million from the issue of
million in the preceding year. Adjustments for the non-
new dollar notes (after deduction of the aggregate net
cash components of operating profit and for movements
costs incurred in the purchase and sale and the purchase
in working capital meant that cash generated by
and cancellation of existing dollar notes), net additions to
operations for 2012 amounted to $55.1 million, a small
bank debt of $25.4 million (2011: $9.2 million) and
decrease from the $59.9 million reported for 2011. The
outflows in respect of dividend payments and US dollar
positive overall movement on working capital was
redemptions of $10.1 million and $19.0 million
principally attributable to an increase in payables, a
respectively (2011, outflows in respect of dividend
significant proportion of which represented deferred
payments and redemptions of sterling and dollar notes of
payments due in respect of the group’s development
respectively: $7.9 million and $13.9 million).
programme. Tax and interest payments remained at
much the same levels as in the preceding year with the
Liquidity and financing adequacy
result that net cash from operating activities for 2012
amounted to $32.5 million against $33.8 million for 2011.
As noted above, at 31 December 2012, the group held
cash and cash equivalents of $26.4 million. The group’s
Investing activities for 2012 involved a net outflow of
agricultural operations continue to generate substantial
$72.6 million (2011: $51.0 million). This represented
positive cash flows. During 2013, the group has arranged
new investment totalling $73.0 million (2011: $53.9
an increase in the working capital line with DBS by the
million), offset by inflows from interest and minor items of
equivalent of $15 million.
$0.4 million (2011: $2.9 million). The new investment
comprised expenditure of $65.3 million (2011: $37.5
Recent years have seen substantial investment by the
million) on further development of the group's agricultural
group in FFB milling capacity. Final payments will fall due
operations, $2.2 million (2011: $6.7 million) on land rights
in 2013 for the newly completed third oil mill but current
and titling, $1.6 million on the acquisition of a new
crop projections suggest that, apart from expanding the
subsidiary and $3.9 million (2011: $9.7 million) on the
capacity of this third mill from 40 to 80 tonnes of FFB per
coal and stone operations, with activity in respect of coal
hour, no further expenditure on milling capacity will be
operations halted during the year.
required until work commences on the construction of a
fourth mill to be brought into production in 2017 at the
The increased level of expenditure on the agricultural
earliest.
operations reflected the payments made during the year
for work on construction of the group’s new oil mill and
Significant expenditure was also incurred during 2012 on
methane capture plants. The expenditure on land rights
the provision of land to meet the cooperative smallholder
49
Review of the group continued
development aspirations of the group’s local communities
The group's oil palms fruit continuously throughout the
(as discussed under “Community relations” in “Agricultural
year and there is therefore no material seasonality in the
operations” above). The directors do not believe that
funding requirements of the agricultural operations in
there will be a recurring requirement for material
their ordinary course of business. It is not expected that
expenditure on the provision of cooperative land
the coal and stone operations will cause any material
(although there may be a requirement for the group to
swings in the group’s utilisation of cash for the funding of
make short term advances to meet cooperative planting
its routine activities.
expenditure pending the refinancing of such expenditure
by the banks funding the cooperative developments).
Financing policies
As a result, group capital expenditure can, for the
The directors believe that, in order to maximise returns to
immediate future, be concentrated on extension planting
holders of the company's ordinary shares, a proportion of
and on the provision of the additional estate buildings and
the group's funding needs should be met with prior
general plant and equipment that become needed
ranking capital, namely borrowings and preference share
following any expansion of the group’s planted hectarage.
capital. The latter has the particular advantage that it
This will
involve the group
in continuing capital
represents relatively low risk permanent capital and to the
expenditure for several years to come but the directors
extent that such capital is available, the directors believe
will set the extension planting programme at a level that
that it is to be preferred to debt.
they reasonably expect that the cash resources available
to the group can support. This should ensure that cash
Insofar as the group does have borrowings, the directors
availability remains adequate to meet the group’s
believe that the group’s interests are best served if the
commitments.
borrowings are structured to fit the maturity profile of the
assets that the borrowings are financing. Since oil palm
The directors intend that further cash advances to the
plantings take nearly four years from nursery planting to
coal and stone operations should be limited and
maturity and then a further period of three to four years to
concentrated on realising value from the three existing
full yield, the directors aim to structure borrowings for the
coal concessions and on bringing the stone quarry into
group’s agricultural operations so that shorter term bank
economic production.
debt is used only to finance working capital requirements,
while debt funding for the group's extension planting
The group's financing is materially dependent upon the
programme is sourced from issues of medium term listed
contracts governing the sterling and dollar notes. There
debt securities and borrowings from development
are no restrictions under those contracts, or otherwise, on
institutions.
the use of group cash resources or existing borrowings
and facilities that the directors would expect materially to
The directors believe that the group’s existing capital
impact the planned development of the group. Under the
structure is consistent with these policy objectives but
terms of the DBS working capital line and amortising loan
recognise that the planned further development of the
facility, REA Kaltim and SYB are restricted to an extent in
group, and the inevitable shortening of the maturity profile
the payment of interest on borrowings from, and on the
of the group’s current indebtedness caused by the
payment of dividends to, other group companies but the
passage of time, mean that further action will be required
directors do not believe that the applicable covenants will
to ensure that the group’s capital structure continues to
affect the ability of the company to meet its cash
meet the objectives. Specifically, the directors consider
obligations.
50
that it will be prudent, when market conditions permit, to
The group regards the US dollar as the functional
retire existing shorter dated debt and to replace it with
currency of most of its operations and has, until recently,
preference share capital or debt of a longer tenor.
sought to ensure that, as respects that proportion of its
investment in the group's operations that is met by
Whilst the group’s extension planting programme can
borrowings, it has no material currency exposure against
always be scaled back, once areas have been planted
the US dollar. Accordingly, where borrowings were
with oil palms, some or all of the benefits of the
incurred in a currency other than the dollar, the group
investment made in such areas will be lost if the areas are
endeavoured to cover the resultant currency exposure by
not maintained. Commodity markets are inherently
way of a debt swap or other appropriate currency hedge.
volatile and the directors believe that it is prudent for the
The receipt by REA Kaltim during 2011 of an Indonesian
group to have available some cash cushion to ensure that
tax assessment seeking to disallow for tax purposes
when new areas are planted, those areas can be brought
losses on currency hedges (as referred to in “Group
to maturity even if CPO and CPKO prices fall.
results” above) has called into question the wisdom of this
policy and, for the moment at least, the group has decided
Net debt at 31 December 2012 was 43.5 per cent of
not to hedge its rupiah borrowings. The group has never
total shareholder funds against a level of 32 per cent at
covered, and does not intend in future to cover, the
31 December 2011. The directors intend at least to
currency exposure in respect of the component of the
maintain the overall amount of the group’s prior ranking
investment in its operations that is financed with sterling
capital (other than short term borrowings under working
denominated shareholder capital.
capital lines) but would expect that, with growth in the net
assets attributable to ordinary shareholders, prior ranking
The group's policy is to maintain a cash balance in sterling
capital will, over time, fall as a percentage of equity (used
sufficient to meet its projected sterling expenditure for a
in this context to refer to funds attributable to ordinary
period of between six and twelve months and a cash
shareholders). If debt continues over time to be replaced
balance in Indonesian rupiahs of up to the amount of its
by preference capital, net debt as a percentage of
Indonesian rupiah borrowings but, otherwise, to keep all
shareholder funds may be expected to fall to an even
cash balances in US dollars.
greater extent.
Principal risks and uncertainties
The sterling notes and the two series of dollar notes carry
interest at fixed rates of, respectively, 9.5 and 7.5 per cent
The group’s business involves risks and uncertainties.
per annum. Interest is payable by SYB under the DBS
Those risks and uncertainties that the directors currently
amortising term loan at a floating rate equal to Jakarta
consider to be material are described below. There are or
Inter Bank Offered Rate plus a margin.
may be other risks and uncertainties faced by the group
As a policy, the group does not hedge its exposure to
they are unaware, that may have a material adverse
that the directors currently deem immaterial, or of which
floating rates but, insofar as is commercially sensible,
impact on the group.
borrows at fixed rates. A one per cent increase in the
floating rates of interest payable on the group’s floating
Where risks are reasonably capable of mitigation, the
rate borrowings at 31 December 2012 would have
group seeks to mitigate them. Beyond that, the directors
resulted in an annual cost to the group of approximately
endeavour to manage the group’s finances on a basis that
$522,000 (2011: $290,000).
leaves the group with some capacity to withstand adverse
51
Review of the group continued
impacts from
identified areas of risk but such
diseases with a consequential negative impact on crop.
management cannot provide insurance against every
Agricultural best practice can to some extent mitigate this
possible eventuality.
risk but it cannot be entirely eliminated.
Agricultural operations
Other operational factors
Certain of the risks identified below in relation to the
The group’s agricultural productivity is dependent upon
agricultural operations are described as risks affecting
necessary inputs, including, in particular, fertiliser and fuel.
crop. Any loss of crop or reduction in the quality of
Whilst the directors have no reason to anticipate
harvest will reduce revenues and thus negatively impact
shortages in the availability of such inputs, should such
cash flow and profitability.
Climatic factors
shortages occur over any extended period, the group’s
operations could be materially disrupted. Equally,
increases in input costs are likely to reduce profit margins.
Although the group's agricultural operations are located
After harvesting, FFB crops become rotten if not
in an area of high rainfall with sunlight hours well suited to
processed within a short period. Processing of over-ripe
the cultivation of oil palm, climatic conditions vary from
FFB usually results in the production of CPO that has an
year to year and setbacks are possible.
above average free fatty acid content and is saleable only
at a discount to normal market prices. Any hiatus in FFB
Unusually high levels of rainfall can disrupt estate
collection or processing may therefore lead to a loss of
operations and result in harvesting delays with loss of oil
crop and/or a reduction in the quality and value of the
palm fruit or deterioration in fruit quality. Unusually low
resultant CPO. The group endeavours to maintain
levels of rainfall that lead to a water availability below the
resilience in its palm oil mills with each of the mills
minimum required for the normal development of the oil
operating separately and some ability within each mill to
palm may lead to a reduction in subsequent crop levels.
switch from steam based to biogas or diesel based
Such reduction is likely to be broadly proportional to the
electricity generation but such resilience would be
size of the cumulative water deficit. Over a long period,
inadequate to compensate for any material loss of
crop levels should be reasonably predictable but there
processing capacity for anything other than a short time
can be material variations from the norm in individual
period.
years.
The group has bulk storage facilities within its main area
Low levels of rainfall can also disrupt and, in an extreme
of agricultural operations and at its transhipment terminal
situation (not to date experienced by the group) could
downstream of the port of Samarinda. Such facilities and
bring to a standstill the river transport upon which the
the further storage facilities afforded by the group’s fleet
group is critically dependent for estate supplies and the
of barges have hitherto always proved adequate to meet
evacuation of CPO and CPKO. In that event, harvesting
the group’s requirements for CPO and CPKO storage.
may have to be suspended and crop may be lost.
Nevertheless, disruptions to river transport between the
Cultivation risks
main area of operations and the port of Samarinda (such
as occurred in 2011 when a bridge over the Mahakam
river at Tenggarong collapsed), or delays in collection of
As in any agricultural business, there is a risk that the
CPO and CPKO from the transhipment terminal, could
group's estate operations may be affected by pests and
result in a group requirement for CPO and CPKO storage
52
exceeding the available capacity. This would be likely to
either restrictions on the export of CPO and CPKO or very
force a temporary cessation in FFB processing with a
high duties on export sales of such oil. The directors
resultant loss of crop.
believe that when such measures materially reduce the
profitability of oil palm cultivation, they are damaging not
The group maintains insurance for the agricultural
only to large plantation groups but also to the large
operations to cover those risks against which the
number of smallholder farmers growing oil palm in
directors consider that it is economic to insure. However,
Indonesia and to the Indonesian economy as a whole
no assurance can be given that such insurance is in fact
(because CPO is an important component of Indonesia's
adequate, will continue to be available or that it will be
US dollar earning exports). The directors are thus hopeful
available at economically reasonable premia. Certain
that future measures affecting sales of CPO and CPKO
risks (including the risk of crop loss through fire and other
will not result in uneconomic profit margins.
perils potentially affecting the planted areas on the
group's estates), for which insurance cover is either not
Above average CPO and CPKO prices during 2007 and
available or would in the opinion of the directors be
the early months of 2008 and again more recently from
disproportionately expensive, are not insured. These risks
2010 to 2012 did not lead to a re-imposition of export
are mitigated to the extent reasonably feasible by
restrictions.
Instead, the
Indonesian government
management practices but an occurrence of an adverse
continues to allow the free export of CPO and CPKO but
uninsured event could result in the group sustaining
has introduced a sliding scale of duties on exports.
material losses with a consequential negative impact on
cash flows and profitability.
Produce prices
World markets for CPO and CPKO may be distorted by
the imposition of import controls or taxes in consuming
countries. The directors believe that the imposition of
such controls or taxes on CPO or CPKO will normally
The profitability and cash flow of the agricultural
result in greater consumption of alternative vegetable oils
operations depend upon world prices of CPO and CPKO
within the area in which the controls or taxes have been
and upon the group's ability to sell these products at price
imposed and the substitution outside that area of CPO
levels comparable with such world prices.
and CPKO for other vegetable oils. Should such arbitrage
fail to occur or prove insufficient to compensate for the
CPO and CPKO are primary commodities and as such are
market distortion created by the applicable import
affected by levels of world economic activity and factors
controls or taxes, selling prices for the group’s CPO and
affecting the world economy, including levels of inflation
CPKO could be depressed.
and interest rates. This may lead to significant price
swings although, as noted under “Markets” in “Agricultural
Expansion
operations” above, the directors believe that such swings
should be moderated by the fact that the annual oilseed
The group is planning further extension planting of oil
crops account for the major proportion of world vegetable
palm. The directors hope that unplanted land held by or
oil production and producers of such crops can reduce or
allocated to the group will become available for planting
increase their production within a relatively short time
ahead of the land becoming needed for development and
frame.
that the development programme can be funded from
available group cash resources and future operational
In the past, in times of very high CPO prices, the
cash flows, appropriately supplemented with further debt
Indonesian authorities have for short periods imposed
funding or capital raised from further issues of preference
53
Review of the group continued
shares and the planned issue of shares in REA Kaltim to
includes substantial areas of unspoilt primary rain forest
local Indonesian investors. Should, however, land or cash
inhabited by diverse flora and fauna. As such, the group,
availability fall short of expectations and the group be
in common with other oil palm growers in Kalimantan,
unable to secure alternative land or funding, the extension
must expect scrutiny from conservation groups and could
planting programme, upon which the continued growth of
suffer adverse consequences if its environmental policies
the group’s agricultural operations will in part depend,
were to be singled out for criticism by such groups.
may be delayed or curtailed.
An environmental impact assessment and master plan
Any shortfall in achieving planned extensions of the
was constructed using independent environmental
group's planted areas would be likely to impact negatively
experts when the group first commenced agricultural
the annual revaluation of the group's biological assets, the
operations in East Kalimantan and this plan is updated
movements arising from which are dealt with in the
regularly to reflect modern practice and to take account of
group's income statement. Whilst this would not affect
changes in circumstances (including planned additions to
the group's underlying cash flow, it could adversely affect
the areas to be developed by the group). Substantial
market perceptions as to the value of the company's
conservation reserves have been established in areas
securities.
already developed by the group and further reserves will
be added as new areas are developed. The group actively
Environmental, social and governance practices
manages these reserves and endeavours to use them to
conserve landscape level biodiversity as detailed under
The group recognises that the agricultural operations are
“Conservation” in “Agricultural operations” above.
both a large employer and have significant economic
importance for local communities in the areas of the
The group is committed to sustainable development of oil
group’s operations. This imposes environmental, social
palm and adopts the measures described under
and governance obligations which bring with them risks
“Responsible agricultural practice”
in
“Agricultural
that any failure by the group to meet the standards
operations” above to mitigate the risk of its operations
expected of it may result in reputational and financial
causing damage to the environment or to its neighbours.
damage. The group seeks to mitigate such risks by
The group supports the principles and criteria established
establishing standard procedures to ensure that it meets
by RSPO and has obtained RSPO certification for most of
its obligations, monitoring performance against those
its current operations.
standards and investigating thoroughly and taking action
to prevent recurrence in respect of any failures identified.
Community relations
The group's existing agricultural operations and the
The agricultural operations of the group can be seriously
planned expansion of those operations are based on land
disrupted by any material breakdown in relations between
areas that have been previously logged and zoned by the
the group and the host population in the area of the
Indonesian authorities as appropriate for agricultural
operations. The group endeavours to mitigate this risk by
development on the basis that, regrettable as it may be
liaising regularly with representatives of surrounding
from an environmental viewpoint, the logging has been so
villages and by seeking to improve local living standards
extensive that primary forest is unlikely to regenerate.
through mutually beneficial economic and social
Such land areas fall within a region that elsewhere
interaction between the local villages and the agricultural
54
operations. In particular, the group, when possible, gives
Should there be a recurrence of disruptions at the level
priority to applications for employment from members of
and of the intensity sustained during 2012, the group
the local population and supports specific initiatives to
could again suffer material negative impacts.
encourage local farmers and tradesmen to act as
suppliers to the group,
its employees and their
Coal and stone operations
dependents and (as described under “Smallholder
schemes” in “Agricultural operations” above) to promote
Following the directors’ decision to suspend the group’s
smallholder development of oil palm plantings.
coal trading activities, to limit, for the time being, further
capital committed to the coal mining operations and to
The group's agricultural operations are established in a
maximise returns from the concessions in which the
relatively remote and sparsely populated area, which was
group has already invested, the directors believe that the
for the most part unoccupied prior to the establishment of
most material risk attaching to the group’s coal and stone
the group's first operations. However, some areas of land
operations is the risk that those operations prove not to
were previously used by local villagers for the cultivation
be fully viable and that a proportion of the capital invested
of crops. Accordingly, when acquiring such areas, the
in the operations is lost. To the extent that the operations
group negotiates with, and pays compensation to, the
continue and the concessions are brought, or brought
affected parties and, as respects developments initiated
back, into production, the more material risks specific to
since 2007 (in compliance with Indonesian legislation
such operations that the directors currently foresee are as
enacted in that year) procures land for the establishment
described below.
of cooperative smallholder schemes for such parties.
Operational risks
The negotiation of compensation payments can involve a
considerable number of local individuals with differing
Delivery volumes from the group’s concessions will be
views and this can cause difficulties in reaching
dependent upon efficiency of production and this can be
agreement with all affected parties. There is also a risk
disrupted by external factors outside the group’s control
that, after an agreement has been completed, a party to
such as the heavy rains that are common in East
the agreement may become disaffected with the terms
Kalimantan. Heavy seas can cause delays to the barging
agreed or the manner in which the agreement has been
of coal and stone to point of sale. Failure to achieve
implemented and may seek to repudiate the agreement.
budgeted delivery volumes increases unit costs and may
result in operations becoming unprofitable. Whilst
As explained under “Community relations” in “Agricultural
weather related impacts cannot be avoided, the group will
operations” above, prior to 2012 such difficulties and risk
seek to mitigate such risks by using experienced
periodically caused disruptions but the group had been
contractors, supervising them closely and taking care to
successful in managing such periodic disruptions so as to
ensure that they have equipment of capacity appropriate
limit their negative impact. This situation changed during
for the planned delivery volumes.
2012 and the disruptions sustained during 2012 and
January 2013 had a material negative impact on the
Traded coal delivery volumes are dependent upon
group. Negotiations concluded in January and early
supplier and customer performance of contract
February 2013 should have resolved the material known
obligations. The group endeavours to ensure such
issues but only the passage of time will confirm this.
performance by exercising care in the selection of
55
Review of the group continued
suppliers and customers and direct supervision of
operations. Nevertheless, the group could sustain
deliveries but such efforts may not always be sufficient to
reputational damage as a result of environmental
avoid material contractual disputes such as has occurred
criticisms of the mining industry in Indonesia as a whole.
in relation to one shipment made in 2012.
Mining plans are based on geological assessments and
the group seeks to ensure the accuracy of those
Currency
assessments by drilling ahead of any implementation of
General
the plans. Nevertheless, geological assessments are
CPO and CPKO are essentially dollar based commodities.
extrapolations based on statistical sampling and may
As a result, the group's revenues and the underlying value
prove inaccurate to an extent. In that event, unforeseen
of the group's operations are principally US dollar
extraction complications can occur and may cause cost
denominated. Moreover, substantial proportions of the
overruns and delays.
Price risk
group’s borrowings and costs are US dollar denominated
or hedged against or linked to the US dollar.
Accordingly, the principal currency risk faced by the group
The profitability and cash flow of any future coal
is that those components of group costs and funding that
production is likely to depend upon world prices of coal
arise in, or are denominated in, in Indonesian rupiah and
and the group's ability to sell its coal at price levels
sterling and, as respects group funding, are not hedged
comparable with such world prices. Coal is a primary
against the US dollar, may, if such currencies strengthen
commodity and as such is affected by levels of world
against the US dollar, negatively impact the group’s
economic activity and factors affecting the world
financial position in US dollar terms.
economy, including levels of inflation and interest rates.
This may lead to significant price swings.
As respects costs and share capital, the directors
consider that this risk is inherent in the group's business
Coal is sold on the basis of its calorific value and other
and structure and the group does not therefore normally
aspects of its chemical composition. Supply and demand
hedge against such risk. As respects borrowings,
for specific grades of coal and consequent pricing may
hedging may itself give rise to risks given the contention
not necessarily reflect overall coal market trends and the
of the Indonesian tax authorities (as referred to under
group may be adversely affected if it is unable to supply
“Group results” in “Finances” above) that mark to market
coal within the specifications that are at any particular
losses in Indonesia on hedging derivatives may not be
time in demand.
deducted from chargeable profits for Indonesian tax
purposes. The directors believe that, pending clarification
Environmental, social and governance practices
of this issue, it is better for the group to accept some
currency risks in respect of borrowings than to constrain
The areas that the group proposes to mine or quarry are
the group either to borrow only in US dollars (which may
not large and the group is committed to international
limit the group’s ability to borrow or require it to borrow on
standards of best environmental and social practice and,
terms that are in the directors’ opinion sub-optimal as
in particular, to proper management of waste water and
respects tenor, covenants or cost) or to hedge all non US
reinstatement of mined areas on completion of mining
dollar borrowings against the US dollar.
56
Counterparty risk
the terms of the licences, that it holds, licensing rules
change frequently and boundaries of large land areas are
Export sales of CPO and CPKO are made either against
not always clearly demarcated. There is therefore always
letters of credit or on the basis of cash against
a risk that the group may inadvertently, and to a limited
documents. However, domestic sales of CPO and CPKO
extent, conduct operations for which it does not hold all
may require the group to provide some credit to buyers.
necessary licences or operate on land as respects which
The position as respects future sales of coal will be
it does not have all necessary permits.
similar. Purchase contracts for coal concluded prior to
suspension of the coal trading activities have required the
The UK Bribery Act 2010, which applies worldwide to
group to part pay ahead of delivery. The group seeks to
interests of UK companies, has created an offence of
limit the counterparty risk that credit to buyers and
failure by a commercial organisation to prevent a bribe
prepayments entail by effective credit controls. Such
being paid on its behalf. Such failure may be defended if
controls include regular reviews of buyer creditworthiness
the organisation has “adequate procedures” in place to
and limits on the term and amount of credit that may be
combat bribery and the group has established appropriate
extended to any one buyer and in total.
procedures. The group has traditionally had strong
Regulatory exposure
controls in this area because the group operates
predominantly in Indonesia, which has been classified as
relatively high risk by the International Transparency
Changes in existing, and adoption of new, laws and
Corruption Perceptions Index.
regulations affecting the group (including, in particular,
laws and regulations relating to land tenure and mining
Country exposure
concessions, work permits for expatriate staff and
taxation) could have a negative impact on the group’s
All of the group's operations are located in Indonesia. The
activities. The directors are not currently aware of any
group is therefore significantly dependent on economic
specific changes that would adversely affect the group to
and political conditions in Indonesia. In the late 1990’s, in
a material extent.
common with other parts of South East Asia, Indonesia
experienced severe economic turbulence and there have
Many of the licences, permits and approvals held by the
been subsequent occasional instances of civil unrest,
group are subject to periodic renewal. Renewals are
often attributed to ethnic tensions, in certain parts of
often subject to delays and there is always a risk that a
Indonesia. In the recent past, Indonesia has been stable
renewal may be refused or made subject to new
and the Indonesian economy has continued to grow.
conditions. Agricultural land and mining rights and
interests held by the group are subject to the satisfaction
Freedom to operate in a stable and secure environment is
of various continuing conditions, including conditions
critical to the group and the existence of security risks in
requiring utilisation of the rights and, as respects
Indonesia should never be ignored. However, the group
agricultural land, conditions requiring the group to
has always sought to mitigate those risks and has never,
promote smallholder developments of oil palm.
since the inception of its East Kalimantan operations in
1989, been adversely affected by regional security
Although the group endeavours to ensure that its
problems.
activities are conducted only on the land areas, and within
57
Review of the group continued
Although there can be no certainty as to such matters, the
Eurozone
directors are not aware of any circumstances that would
lead them to believe that, under current political
The directors are conscious of the possibly heightened
conditions, any government authority would impose
financial risks currently prevailing in relation to the
exchange controls or otherwise seek to restrict the
Eurozone and to banks. The group has no direct
group's freedom to manage its operations. The
exposures to the Eurozone but would clearly be affected
Indonesian government has recently introduced a “use it
by any consequential impact on demand for CPO and
or lose it” policy in respect of registered titles to
CPKO that could follow a financial collapse in the
undeveloped land. This could result in registered titles to
Eurozone or other major economic area. The group is
the group’s undeveloped land areas being revoked
careful in its commitments and is ready to scale these
although the directors do not believe that this will happen
back rapidly should the need arise. With regard to banks,
if development of such areas proceeds as planned.
the board endeavours to ensure that the group’s liquid
Miscellaneous relationships
funds are deposited in a manner likely to minimise the risk
of loss. A significant proportion of the group’s deposits
are placed with banks that are majority owned by
The group is materially dependent upon its staff and
sovereign governments.
By order of the board
R.E.A. SERVICES LIMITED
Secretary
25 April 2013
employees and endeavours to manage this dependence
as detailed under “Employees” in “Agricultural operations”
above.
Relationships with shareholders in Indonesian group
companies are also important to the group. The group
endeavours to maintain cordial relations with its local
investors by seeking their support for decisions affecting
their interests and responding constructively to any
concerns that they may have. Should such efforts fail and
a breakdown in relations result, the group would be
obliged to fall back on enforcing, in the Indonesian courts,
the agreements governing its arrangements with its local
partners with the uncertainties that any juridical process
involves. Failure to enforce the agreements relating to
the mining concessions in which the group holds interests
could have a material negative impact on the value of the
coal and stone operations because the concessions are
at the moment legally owned by the group's local partners
and, if the arrangements with those partners were
successfully to be repudiated (an eventuality that the
directors consider highly unlikely), the group could lose its
entire interest in the concessions.
58
Directors
Richard Robinow
Chairman (67)
David Blackett
Senior independent non-executive director (62)
Mr Robinow was appointed a director in 1978 and has been
chairman since 1984. After early investment banking
experience, he has been involved for nearly 40 years in the
plantation industry. He is non-executive but devotes a
significant proportion of his working time to the affairs of
the group. He is a non-executive director of M. P. Evans
Group plc, a UK plantation company of which the shares are
admitted to trading on the Alternative Investment Market of
the London Stock Exchange, and of two overseas listed
plantations companies: Sipef NV, Belgium, and REA Vipingo
Plantations Limited, Kenya.
John Oakley
Managing director (64)
After early experience in investment banking and general
management, Mr Oakley joined the group in 1983 as
divisional managing director of the group's then horticultural
operations. He was appointed to the main board in 1985
and subsequently 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 agricultural operations. He was appointed
managing director in January 2002. As the sole executive
director, he has overall responsibility for the operations of
the group.
Mark Parry
Executive director (52)
Mr Parry was appointed an executive director on 1 January
2013. Mr Parry joined the group in May 2011, as the
group’s regional director based in Singapore, and was
appointed president director of REA Kaltim in July 2012.
He worked for 10 years as a surveyor and engineer in the
mining and oil and gas industries and, following completion
of an MBA at the London Business School, spent 15 years
with an international bank, ultimately as managing director,
project finance. He established and ran a private
consultancy business for two years prior to joining the
group.
Mr Blackett was appointed a non-executive director in July
2008 and was subsequently appointed chairman of the
audit and remuneration committees and, more recently, as a
member of the nomination committee. After qualifying as a
chartered accountant in Scotland, he worked for over 25
years in South East Asia, where he concluded his career as
chairman of AT&T Capital Inc. Prior to joining that company,
he was a director of an international investment bank with
responsibility for the bank’s South East Asian operations.
He is a non-executive director of South China Holdings
Limited, a company listed on the Hong Kong Stock
Exchange.
Irene Chia
Independent non-executive director (72)
Ms Chia was appointed a non-executive director on 1
January 2013. Ms Chia has extensive corporate,
investment and entrepreneurial experience in Asia, the USA
and the UK. A graduate in economics and formerly a
director of one of the Jardine Matheson Group companies,
Ms Chia now lives in Singapore and is currently self-
employed with Far Eastern interests in consulting, property
and financial investment as well as in the charitable sector.
David Killick, FCIS
Independent non-executive director (75)
Mr Killick was appointed a non-executive director in 2006.
He is chairman of the nomination committee and a member
of the audit and remuneration committees. After qualifying
as a barrister, he became a Fellow of the Institute of
Chartered Secretaries and Administrators. He worked for
over 28 years for the Commonwealth Development
Corporation, serving as a member of its management board
from 1980 to 1994. Thereafter, he has held a number of
directorships.
is currently a director of
Reallyenglish.com Limited.
He
59
Directors’ report
The directors present their annual report on the affairs of
ordinary shares on 25 January 2013 and the board
the group, together with the financial statements and
recommends that a final dividend in respect of the year of
auditor’s reports, for the year ended 31 December 2012.
3½p per share be paid on 26 July 2013 to ordinary
Principal activities and business review
2013. Resolution 3 in the company’s notice of 2013
shareholders on the register of members on 28 June
annual general meeting (the “Notice”) set out at the end
The group is principally engaged in the cultivation of oil
of this document, which will be proposed as an ordinary
palms in the province of East Kalimantan in Indonesia and
resolution, deals with the payment of this dividend.
in the production of crude palm oil (“CPO”) and crude palm
kernel oil (“CPKO”). In addition, the group holds rights in
Going concern basis
respect of three coal mining concessions and a stone
deposit located in East Kalimantan.
The group's business activities, together with the factors
likely to affect its future development, performance and
A review of the activities and planned future development of
position are described in the “Review of the group”
the group, together with the principal risks and uncertainties
section of this annual report which also provides (under
facing the group, is provided in the accompanying
the heading “Finances”) a description of the group's cash
“Chairman’s statement” and “Review of the group” sections
flow, liquidity and financing adequacy, and treasury
of this annual report which are incorporated by reference in
policies. In particular, the review highlights the risks
this “Directors’ report”. In particular, the “Review of the
associated with village disruptions. In addition, note 22 to
group” includes information as to group policy and
the consolidated
financial
statements
includes
objectives regarding the use of financial instruments.
information as to the group's policy, objectives and
Information as to such policy and objectives and the risk
processes for managing its capital; its financial risk
exposures arising is also included in note 22 to the
management objectives; details of
its
financial
consolidated financial statements.
instruments and hedging activities; and its exposures to
credit and liquidity risks.
The group does not undertake significant research and
development activities.
Details of significant events since 31 December 2012 are
contained in note 41 to the consolidated financial
statements.
Results and dividends
The results are presented in the consolidated income
statement and notes thereto.
The fixed annual dividends on the 9 per cent cumulative
preference shares that fell due on 30 June and 31
December 2012 were duly paid. A first interim dividend
in respect of 2012 of 3½p per share was paid on the
Although the group has indebtedness, the vast majority of
that indebtedness is medium term and the group is reliant
on short term borrowing facilities to only a limited extent.
The directors fully expect such short term facilities to be
renewed.
Moreover, the group’s operations are
generating significant positive cash flows and, whilst it is
planned to utilise those cash flows to fund capital
expenditure, a
large proportion of such capital
expenditure is discretionary and could be cancelled
should the need arise. As a consequence, the directors
believe that the group is well placed to manage its
business risks successfully.
After making enquiries, the directors have a reasonable
expectation that the company and the group have
adequate resources to continue in operational existence
60
for the foreseeable future. Accordingly, they continue to
adopt the going concern basis in preparing the financial
statements.
proposed as ordinary resolutions, deal with the re-election
of the above named directors.
Charitable and political donations
The directors consider that, following the changes to the
board at the end of 2012, the composition of the board is
appropriate and effective for the current strategic
During the year the group made no charitable donations
direction of the company.
The board therefore
to persons ordinarily resident in the United Kingdom and
recommends (each affected director abstaining from
no political donations. The group provided support for
such conclusion as it applies to himself) the re-election of
conservation activities in East Kalimantan.
Supplier payment policy
all of the directors offering themselves for re-election.
The senior independent non-executive director and the
chairman have confirmed as regards, respectively, the
chairman and the non-executive directors offering
It is the company’s policy to establish appropriate
themselves for re-election
that, following formal
payment terms and conditions for dealings with suppliers
performance evaluations, each such
individual's
and to comply with such terms and conditions. The
performance continues
to be effective and
to
holding company itself does not have trade creditors.
demonstrate commitment to the role assumed, including
Directors
commitment of time for board and committee meetings
and, where applicable, other assigned duties.
The directors are listed in the “Directors” section of this
Directors’ interests
annual report which is incorporated by reference in this
“Directors’ report”. All the directors served throughout
At 31 December 2012, the interests of directors
2012, save for Mr Parry and Ms Chia who were appointed
(including interests of connected persons as defined in
respectively as an executive director and a non-executive
section 96B (2) of the Financial Services and Markets Act
director with effect from 1 January 2013. Four long-
2000 of which the company is, or ought upon reasonable
serving non-executive directors, Messrs Green-Armytage,
enquiry to become, aware) in the 9 per cent cumulative
Keatley, Letts and Lim, who served throughout 2012,
preference shares of £1 each and the ordinary shares of
retired on 31 December 2012. Mr Parry and Ms Chia
25p each of the company were as follows:
hold office until the forthcoming annual general meeting
and, being eligible, offer themselves for re-election. Mr
Killick retires at the forthcoming annual general meeting
and, being eligible, offers himself for re-election, such
retirement being in compliance with the company’s
articles of association providing for the rotation of
directors. Mr Robinow retires at the forthcoming annual
general meeting and, being eligible, offers himself for re-
election, such retirement being in compliance with the
provisions of the UK Corporate Governance Code
requiring the annual re-election of non-executive
R M Robinow
D J Blackett
I Chia
J M Green-Armytage *
J R M Keatley *
D H R Killick
L E C Letts *
C L Lim *
J C Oakley
M A Parry
directors who have served as such for more than nine
* retired 31 December 2012
years. Resolutions 4 to 7 in the Notice, which will be
Preference
shares
Ordinary
shares
- 10,005,833
250,000
-
13,288
92,519
-
-
-
90,704
680,878
30,000
21,480
108,008
-
-
41,457
-
442,493
5,088
61
Directors’ report continued
There have been no changes in the interests of the
Control and structure of capital
directors between 31 December 2012 and the date of
this report.
Directors’ indemnities
Details of the company’s share capital and changes in
share capital during 2012 are set out in note 31 to the
company’s financial statements. At 31 December 2012,
the preference share capital and the ordinary share
Qualifying third party indemnity provisions (as defined in
capital represented, respectively, 85.7 and 14.3 per cent
section 234 of the Companies Act 2006) were in force
of the total issued share capital.
for the benefit of directors of the company and of other
members of the group throughout 2012 and remain in
The rights and obligations attaching to the ordinary and
force at the date of this report.
Substantial shareholders
preference shares are governed by the company’s articles
of association and prevailing legislation. A copy of the
articles of association is available on the company’s
website at www.rea.co.uk. Rights to income and capital
As at the date of this report, the company had received
are summarised in note 31 to the company’s financial
notifications required by The Disclosure Rules and
statements.
Transparency Rules of the Financial Services Authority
from the following persons of voting rights held by them
On a show of hands at a general meeting of the company,
as shareholders through the holdings of ordinary shares
every holder of shares and every duly appointed proxy of
indicated:
Number
%
the resolution before the meeting, shall have one vote. On
a holder of shares, in each case being entitled to vote on
Emba Holdings Limited
9,957,500
29.80
a poll, every holder of shares present in person or by proxy
Prudential plc and certain subsidiaries
6,043,129
18.09
and entitled to vote on the resolution the subject of the
Alcatel Bell Pensioenfonds VZW
4,167,049
12.47
poll shall have one vote for each share held. Holders of
Artemis UK Smaller Companies
1,919,400
5.74
preference shares are not entitled to vote on a resolution
In addition, the company had been notified that the above
notice of the meeting, the dividend on the preference
interest of Prudential plc group of companies includes
shares is more than six months in arrears or the resolution
6,021,116 ordinary shares (18.02 per cent) in which
is for the winding up of the company or is a resolution
M&G Investment Funds 3 is also interested.
directly and adversely affecting any of the rights and
proposed at a general meeting unless, at the date of
The shares held by Emba Holdings Limited (“Emba”) are
for the exercise of voting rights and for the appointment
included as part of the interest of Mr R M Robinow shown
of a proxy or proxies to vote in relation to any resolution
privileges attaching to the preference shares. Deadlines
under “Directors’ interests” above. By deeds dated 24
November 1998 and 10 April 2001, Emba has agreed
that it will not undertake activities in conflict with those of
the group and that it will deal with the group only on a
basis that is appropriate between a listed company and its
subsidiaries, on the one hand, and a significant
shareholder in a listed company, on the other hand.
to be proposed at a general meeting are governed by the
company’s articles of association and prevailing
legislation and will normally be as detailed in the notes
accompanying the notice of the meeting at which the
resolution is to be proposed.
62
There are no restrictions on the size of any holding of
The 7.5 per cent dollar notes 2012/14 (“2012/14 dollar
shares in the company. Shares may be transferred either
notes”) and the 7.5 per cent dollar notes 2017 (“2017
through the CREST system (being the relevant system as
dollar notes”) of the company (together, the “dollar notes”)
defined in the Uncertificated Securities Regulations 2001
and the 9.5 per cent guaranteed sterling notes 2015/17
of which CRESTCo Limited is the operator) where held in
of REA Finance B.V. (“sterling notes”) (which are
uncertificated form or by instrument of transfer in any
guaranteed by the company) are transferable either
usual or common form duly executed and stamped,
through the CREST system where held in uncertificated
subject to provisions of the company’s articles of
form or by instrument of transfer in any usual or common
association empowering the directors to refuse to register
form duly executed in amounts and multiples, in the case
any transfer of shares where the shares are not fully paid,
of the dollar notes, of $1 and, in the case of the sterling
the shares are to be transferred into a joint holding of
notes, of £1,000. There is no maximum limit on the size
more than four persons, the transfer is not appropriately
of any holding in either case.
supported by evidence of the right of the transferor to
make the transfer or the transferor is in default in
Significant holdings of preference shares, dollar notes
compliance with a notice served pursuant to section 793
and sterling notes shown by the register of members and
of the Companies Act 2006. The directors are not aware
registers of dollar and sterling noteholders at 31
of any agreements between shareholders that may result
December 2012 were as follows:
in restrictions on the transfer of securities or on voting
rights.
No person holds securities carrying special rights with
regard to control of the company and there are no
arrangements in which the company co-operates by
which financial rights carried by shares are held by a
person other than the holder of the shares.
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
powers of the group) and prevailing legislation and
subject to such directions as may be given by the
company in general meeting by special resolution. The
articles of association may be amended only by a special
resolution of the company in general meeting and, where
such amendment would modify, abrogate or vary the class
rights of any class of shares, with the consent of that
class given in accordance with the company’s articles of
association and prevailing legislation.
2012/14
2017
Preference Dollar Dollar Sterling
notes
shares
notes
notes
‘000 $’000 $’000
£’000
Bank of New York
(Nominees) Limited
Euroclear Nominees Limited
EOC01 acct
HSBC Global Custody Nominee
(UK) Limited 641898 Account
KBC Securities NV Client Acct
–
–
– 4,477
–
–
–
NCB Trust Limited Bearnet Acct
- 12,145
Rulegale Nominees Limited
JAMSCLT Account
6,873
Securities Services Nominees
Limited 2300001 Account
State Street Nominees Limited
OM04 Account
–
–
–
–
–
–
–
–
9,840
–
4,667
11,169
–
–
–
–
–
–
–
3,495
5,500
A change of control of the company would entitle holders
of the sterling notes and certain holders of the dollar
notes to require repayment of the notes held by them as
detailed in notes 24 and 25 to the consolidated financial
statements.
At the date of this report, there are no outstanding share
options held by directors or employees.
63
Directors’ report continued
Awards to senior group executives under the company’s
(being the maximum amount of shares in the capital of
long term incentive plans will vest and may be encashed
the company that the company may allot) from
within one month of a change of control as detailed under
£60,250,000 to £75,250,000 by the creation of
“Long
term
incentive plans”
in
the
“Directors’
15,000,000 9 per cent cumulative preference shares of
remuneration report” section of this annual report. The
£1 each ranking pari passu in all respects with the
directors are not aware of any agreements between the
existing preference shares and representing 30 per cent
company and its directors or between any member of the
of the existing authorised preference share capital.
group and a group employee that provides for
compensation for loss of office or employment that
As indicated in the “Review of the group” section of this
occurs because of a takeover bid.
annual report, the directors believe that capitalisation
issues of new preference shares to ordinary shareholders
Treasury shares and power to repurchase shares
provide a useful mechanism for augmenting returns to
ordinary shareholders in periods in which good profits are
No shares of the company are at present held in treasury.
achieved but demands on cash resources limit the scope
for payment of cash dividends. The directors also believe
The company’s articles of association permit the purchase
that, when circumstances permit, it is sensible to replace
by the company of its own shares subject to prevailing
legislation which requires that any such purchase, if a
market purchase, has been previously authorised by the
company in general meeting and, if not, is made pursuant
to a contract of which the terms have been authorised by
a special resolution of the company in general meeting.
There is no authority extant for the purchase by the
company of its own shares but as explained under
“Strategic direction” in “Overview” in the “Review of the
group” section of this report, the directors intend to seek
shareholder authority for the company to buy back into
group debt funding with preference capital. The proposed
creation of additional preference shares is designed to
give the company sufficient authorised but unissued
preference capital to permit the directors to issue
preference shares for these purposes without further
approval (other than shareholder authority to allot such
shares, which authority will be sought at the forthcoming
annual general meeting as noted under “Authorities to
allot share capital” below).
If the intended listing of PT REA Kaltim Plantations on the
Indonesia Stock Exchange (as referred to in the “Review
treasury limited numbers of ordinary shares with the
of the group” section of this annual report) proceeds and
intention that, whenever a holding of a reasonable size
it is decided that the listing should be accompanied by a
has been accumulated, such holding will be placed with
scrip issue of preference shares, the directors would
one or more new investors. A circular detailing the
expect to seek specific shareholder authorisation for that
proposals and seeking the requisite authority should be
issue.
despatched to shareholders in the near future.
Increase in share capital
At the forthcoming annual general meeting, a resolution
will be proposed (resolution 10 set out in the Notice) to
increase the authorised share capital of the company
Authorities to allot share capital
At the annual general meeting held on 10 June 2012,
shareholders authorised
the directors under
the
provisions of section 551 of the Companies Act 2006 to
allot ordinary shares or 9 per cent cumulative preference
64
shares within specified limits. Replacement authorities
empower the directors to make issues of ordinary shares
are being sought at the forthcoming annual general
for cash other than by way of a rights issue or open offer
meeting (resolutions 11 and 12 set out in the Notice) to
up to a maximum nominal amount of £417,681
authorise the directors (a) to allot and to grant rights to
(representing 5 per cent of the issued ordinary share
subscribe for, or to convert any security into, shares in the
capital of the company at the date of this report). The
capital of the company (other than 9 per cent cumulative
company has not within the three years preceding the
preference shares) up to an aggregate nominal amount of
date of this report issued any ordinary shares for cash,
£1,896,363.75 (being all of the unissued ordinary share
relying on the annual general disapplication of statutory
capital of the company and representing 22.7 per cent of
pre-emption rights pursuant to section 571 of the
the issued ordinary share capital at the date of this
Companies Act 2006.
report), and (b) subject to the passing of resolution 10 set
out in the Notice, to allot and to grant rights to subscribe
The foregoing powers (if granted) will expire on the date
for, or to convert any security into, 9 per cent cumulative
of the annual general meeting to be held in 2014 or on
preference shares in the capital of the company up to an
30 June 2014 (whichever is the earlier).
aggregate nominal amount of £15,000,000 (being the
additional preference share capital proposed to be
General meeting notice period
created at the forthcoming annual general meeting and
representing 30 per cent of the issued preference share
At the forthcoming annual general meeting, a resolution
capital of the company at the date of this report).
(resolution 14 set out in the Notice) will be proposed to
authorise the directors to convene a general meeting
The new authorities, if provided, will expire on the date of
(other than an annual general meeting) on 14 clear days'
the annual general meeting to be held in 2014 or on 30
notice (subject to due compliance with requirements for
June 2014 (whichever is the earlier). Save in relation to
electronic voting). The authority will be effective until the
the preference shares as indicated under “Increase in
date of the annual general meeting to be held in 2014 or
share capital” above, the directors have no present
on 30 June 2014 (whichever is the earlier). This
intention of exercising these authorities.
resolution is proposed following legislation which,
Authority to disapply pre-emption rights
Fresh powers are also being sought at the forthcoming
annual general meeting under the provisions of sections
571 and 573 of the Companies Act 2006 to enable the
board to make a rights issue or open offer of ordinary
shares to existing ordinary shareholders without being
obliged to comply with certain technical requirements of
the Companies Act 2006 which can create problems with
regard to fractions and overseas shareholders.
In addition, the resolution to provide these powers
(resolution 13 set out in the Notice) will, if passed,
notwithstanding the provisions of the company's articles
of association and in the absence of specific shareholder
approval of shorter notice, has increased the required
notice period for general meetings of the company to 21
clear days. While the directors believe that it is sensible
to have the flexibility that the proposed resolution will
offer, to enable general meetings to be convened on
shorter notice than 21 days, this flexibility will not be used
as a matter of routine for such meetings, but only where
the flexibility is merited by the business of the meeting
and is thought to be to the advantage of shareholders as
a whole.
65
Directors’ report continued
By order of the board
R.E.A. SERVICES LIMITED
Secretary
25 April 2013
Recommendation
The board considers that increasing the authorised share
capital of the company by the creation of the additional
preference shares proposed as detailed under “Increase
in share capital”, granting the directors the authorities and
powers as detailed under “Authorities to allot share
capital” and “Authority to disapply pre-emption rights” and
the proposal to permit general meetings (other than
annual general meetings) to be held on just 14 clear days'
notice as detailed under “General meeting notice periods”
above are all in the best interests of the company and
shareholders as a whole and accordingly the board
recommends that shareholders vote in favour of the
resolutions10 to 14 as set out in the notice of the
forthcoming annual general meeting.
Auditor
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
auditor is 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 auditor is aware of that
information.
This confirmation is given and should be interpreted in
accordance with the provisions of section 418 of the
Companies Act 2006.
Deloitte LLP have expressed their willingness to continue
in office as auditor and resolutions to re-appoint them and
to authorise the directors to fix their remuneration will be
proposed at the forthcoming annual general meeting.
Resolutions 8 and 9 set out in the Notice, each of which
will be proposed as ordinary resolutions, relate to the re-
appointment and remuneration of the auditor.
66
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 UK Corporate Governance Code issued in 2010 by
the Financial Reporting Council (the “Code”) provide a
widely endorsed model for achieving this. The directors
are also mindful of the revised Code issued in 2012 for
reporting periods beginning on or after 1 October 2012.
The Code is available from the Financial Reporting
Council’s website at “www.frc.org.uk”. The directors seek
to apply the Code principles in a manner proportionate to
the group’s size but, as the Code permits, reserving the
individual
is appropriate
right, when
circumstances of the company, not to comply with certain
Code principles and to explain why. Throughout the year
ended 31 December 2012, the company was in
compliance with the provisions set out in the Code.
the
to
it
Board of directors
Four long serving independent non-executive directors,
Messrs Green-Armytage, Keatley, Letts and Lim, retired
from the board of the company at the end of 2012, and,
on 1 January 2013, Ms Irene Chia was appointed as a
new non-executive director and Mr Parry as a new
executive director.
As a result, the board currently comprises two executive
directors and four 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 variety of backgrounds brought to the
board by its members provides perspective and facilitates
balanced and effective strategic planning and decision
making for the long-term success of the company in the
context of the company’s obligations and responsibilities
both as the owner of a business in Indonesia and as a UK
listed entity. In particular, the board believes that the skills
and experience of its different members complement
each other and that their knowledge is of specific
relevance to the nature and geographical location of the
group’s operations.
The chairman and managing director (being the chief
executive) have defined separate responsibilities under
the overall direction of the board. The chairman has
responsibility for leadership and management of the
board in discharging its duties; the managing director has
responsibility for the executive management of the group.
Neither has unfettered powers of decision. All of the non-
executive directors, with the exception of the chairman,
are considered by the board to be independent directors.
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 director is subject to re-election at
least once every three years. In addition, in compliance
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.
It is now the policy of the company that the board should
in future be refreshed on the basis that length of service
by independent non-executive directors will be limited to
nine years.
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 Mr Robinow, who absented
himself from the discussion in this respect. Such
notifications relate to Mr Robinow’s interests as a
shareholder in or a director 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.
67
Corporate governance continued
Board responsibilities
Performance evaluation
The board is responsible for the proper management of
the company. 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 and by prompt provision
of such other information as the board periodically
decides that it should have to facilitate the discharge of its
responsibilities.
The board has a schedule of matters reserved for its
decision which is kept under review. Such matters
include strategy, material investments and financing
decisions and the appointment or removal of executive
directors and the company secretary. In addition, the
board is responsible for ensuring that resources are
adequate to meet the group’s objectives and for reviewing
performance, financial controls, risk and compliance with
the group’s policy and procedures with respect to bribery.
The company carries appropriate insurance against legal
action against its directors. The current policy was in
place throughout 2012 in compliance with the Code
requirement to carry such insurance.
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 and
are updated as necessary. Information concerning the
remuneration of directors is provided in the “Directors’
remuneration report” section of this annual report (which
is
“Corporate
reference
governance” report) together with details of the basis
upon which such remuneration is determined.
incorporated by
this
in
An executive committee of the board comprising Mr R M
Robinow and Mr J C Oakley has been appointed to deal
with various matters of a routine or executory nature.
68
A formal internal evaluation of the performance of the
board, the committees and individual directors is
undertaken annually. Balance of powers, contribution to
strategy, efficacy and accountability to stakeholders are
reviewed by the board as a whole and the performance of
the chairman is appraised by the independent non-
executive directors led by the senior independent director.
The appraisal process includes assessments against a
detailed set of criteria covering a variety of matters from
the commitment and contribution of the board in
developing strategy and enforcing disciplined risk
management, pursuing areas of concern, if any, and
setting appropriate commercial and social responsibility
objectives to the adequacy and timeliness of information
made available to the board.
At the performance evaluation conducted in 2012, the
board as then constituted concluded that it was for the
time being continuing to perform effectively but that,
having decided to restructure the group’s Indonesian
plantation subsidiaries into a single sub-group headed by
the principal operating subsidiary, PT REA Kaltim
Plantations (“REA Kaltim”), and to list REA Kaltim on the
Indonesia stock exchange, it would be appropriate, in due
course, to make certain changes to the board. Those
changes were implemented at the end of 2012 as
described under “Board of directors” above.
Professional development and advice
In view of their previous relevant experience and, in some
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, finances and obligations
(including environmental, social and governance
responsibilities). Whilst there are no formal training
programmes, the board regularly reviews its own
competences, receives periodic briefings on legal,
regulatory, operational and political 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.
Newly appointed directors receive induction on joining the
board and steps are taken to ensure that they become
fully informed as to the group’s activities.
Board proceedings
Four meetings of the board are scheduled 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 directors, unless travelling,
are normally present at full board meetings. 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. All proceedings of committee
meetings are reported to the full board.
The attendance of individual directors, who served during
2012, at the regular and “ad hoc” board meetings held in
2012 was as follows:
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 *
* retired 31 December 2012
Regular Ad hoc
meeting meeting
4
4
4
4
4
4
4
3
1
1
1
1
1
1
0
0
In addition, during 2012, there were three meetings of the
audit committee, one meeting of the remuneration
committee and two meetings of the nomination
committee. All committee meetings were attended by all
of the committee members appointed at the time of each
meeting.
Whilst all formal decisions are taken at board meetings,
the directors have frequent informal discussions between
themselves and with management and most decisions at
board meetings reflect a consensus that has been
reached ahead of the meetings. Some directors reside
permanently, or for part of each year, in the Asia Pacific
region and most of the UK based directors travel
extensively. Since the regular board meetings are fixed to
fit in with the company's budgeting and reporting cycle
and ad hoc meetings normally have to be held at short
notice to discuss specific matters, it is impractical to fix
meeting dates to ensure that all directors are able to
attend each meeting. Instead, when a director is unable
to be at a meeting, the company ensures that he is fully
briefed so that he can make his views known to other
directors ahead of time and his views are reported to, and
taken into account, at the meeting.
Nomination committee
The nomination committee comprises Mr D H R Killick
(chairman) and Mr D J Blackett. The committee is
responsible for submitting recommendations for the
appointment of directors for approval by the full board. In
making such recommendations, the committee pays due
regard to the group’s open policy with respect to diversity,
including gender.
During the year, in response to an invitation from the
board to make a recommendation for the appointment of
a non-executive director, as four long-serving directors
were retiring at the end of 2012, the committee
recommended the appointment of Ms Irene Chia. In
establishing the criteria for this appointment, the
committee concurred with the view of the board that,
69
Corporate governance continued
given the specific nature and location of the group’s
operations and taking into consideration the intention to
reduce the size of the board following the proposed listing
in Jakarta, the prospective director should have skills and
experience relevant to the plantation industry and
Indonesian commerce. The committee also agreed that,
given the specialist nature of the knowledge required, it
was not considered appropriate to advertise the position
widely or to employ consultants. Instead a short list of
prospective was assembled and put forward to the
committee, taking
into consideration the specific
qualifications required as well as recent guidelines for
such appointments. Ms Chia, who has relevant
experience and a good understanding and knowledge of
the business environment in Indonesia, was selected from
this short list.
Audit committee
The audit committee 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.
The audit committee is responsible for:
• monitoring the integrity of the financial statements
and reviewing formal announcements of financial
performance and the significant reporting issues and
judgements
and
such
announcements contain;
statements
that
•
reviewing the effectiveness of the internal control
functions (including the internal financial controls, the
internal audit function and arrangements whereby
internally raised staff concerns as to financial
reporting and other relevant matters are considered);
• making recommendations to the board in relation to
the appointment, reappointment and removal of the
external auditor, their remuneration and terms of
engagement; and
•
reviewing and monitoring the independence of the
external auditor and the effectiveness of the audit
process.
70
The audit committee also monitors the engagement of
the auditor to perform non-audit work. During 2012, the
only non-audit work undertaken by the auditor was, as in
the previous year, routine compliance reporting in
connection with covenant obligations applicable to certain
group loans (as respects which the governing instruments
require that such compliance reporting is carried out by
the auditor). The audit committee considered that the
nature and scope of, and remuneration payable in respect
of, these engagements were such that the independence
and objectivity of the auditor was not impaired.
The members of the audit committee discharge their
responsibilities by
informal discussions between
themselves, by meetings with the external auditor, the
internal auditors in Indonesia and management and by
consideration of reports by management, the Indonesian
internal audit function and the external auditor and by
holding at least three formal meetings in each year.
The audit committee has recommended to the board of
the company that it should seek the approval of the
company's shareholders for the reappointment of the
company's current auditor. That recommendation
reflected an assessment of the qualifications, expertise,
resources and independence of the auditor based upon
reports produced by the auditor, the committee's own
dealings with
from
the auditor and
management. The committee took into account the
likelihood of withdrawal of the auditor from the market
and noted that there were no contractual obligations to
restrict the choice of external auditor. Given the current
level of audit fees and the costs that a change would be
likely to entail, the committee did not recommend that the
company's audit be put out to tender.
feedback
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 auditor in connection
with the financial statements are detailed in the
“Directors’ responsibilities” section of this report and in the
auditor’s 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 informed as to progress in the operational
activities and financial affairs of the group. In addition,
within
imposed by considerations of
confidentiality, the company engages with institutional
and other major shareholders through regular meetings
and other contact 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.
limits
the
All ordinary shareholders may attend the company’s
annual and other general meetings and put questions to
the board. Some directors reside permanently, or for part
of each year, in the Asia Pacific region 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. At least twenty working days'
notice is given of the annual general meeting and related
papers are made available to shareholders at least twenty
working days ahead of the meeting.
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 as soon as
practicable after the meeting.
its commitment
The company maintains a corporate website at
“www.rea.co.uk”. This website has detailed information on,
and photographs illustrating various aspects of, the
to
including
group’s activities,
sustainability, conservation work and managing its carbon
footprint. The website is updated regularly and includes
information on the company’s share price and the price of
crude palm oil. The company’s results and other news
releases issued via the London Stock Exchange’s
Regulatory News Service are published on the “Investors”
section of the website and, together with other relevant
documentation concerning the company, are available for
downloading.
Internal control
The board is responsible for the group’s system of internal
control and for reviewing its effectiveness. The system is
designed to manage, rather than eliminate, the risk of
failure to achieve business objectives and can only
provide reasonable and not absolute assurance against
material misstatement or loss.
The board has established a continuous process for
identifying, evaluating and managing any significant risks
which the group faces (including risks arising from
environmental, social and governance matters). The
board regularly reviews the process, which was in place
throughout 2012 and up to the date of approval of this
report and which is in accordance with the current
guidance on internal control (the Turnbull Guidance) and
is mindful of the proposed update to such guidance.
The board attaches importance not only to the process
established for controlling risks but also to promoting an
internal culture in which all group staff are conscious of
the risks arising in their particular areas of activity, are
open with each other in their disclosure of such risks and
combine together in seeking to mitigate risk. In particular,
the board has always emphasised the importance of
integrity and ethical dealing and continues to do so.
71
Corporate governance continued
Internal audit and reporting
The group’s Indonesian operations have a fully staffed in-
house internal audit function supplemented where
necessary by the use of external consultants. The
function issues a full report on each internal audit topic
and a summary of the report is issued to the audit
committee. In addition, follow-up audits are undertaken to
ensure that the necessary remedial action has been
taken. 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 who report to the head of the Singapore
regional office and the managing director.
budgets
and management
Management reports to the board on a regular basis by
way of the circulation of progress reports, management
reports,
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. Monthly
meetings are held between management in London and
Indonesia by way of conference call, of which minutes are
taken and circulated, to consider operational matters. At
least four supervisory visits are made each year to the
overseas operations by the managing director and other
directors also make periodic visits to these operations.
Such visits are reported on and reviewed by the non-
exective directors at the regular board meetings. In
addition the president director of REA Kaltim visits the
operations in Indonesia on a regular basis and has a
continuing dialogue with the managing director and with
other members of the board.
Policies and procedures in respect of bribery are in place
for all of the group’s operations in Indonesia as well as in
the UK. These include detailed guidelines and reporting
requirements, the development of a comprehensive
continuous training programme for all management and
employees and a process for on-going monitoring and
review. The group also seeks to ensure that its partners
abide by its ethical principles.
The board, assisted by the audit committee, 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 (providing such information as
the board requires) and considering 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 reviewed the systems of internal control and
risk management in November 2012 (including the
group’s internal audit arrangements) and concluded that
these remain effective and sufficient for their purpose.
The board did not identify, nor was it advised of, any
failings or weaknesses which it determined to be
significant. Subsequently, the board was made aware
that, in connection with issues that have arisen between
the group and villages in areas neighbouring the group’s
operations (as detailed under “Community relations” in
“Agricultural operations” in the “Review of the group”
section of this annual report), on certain occasions
unauthorised commitments have been made to villages.
Action has been taken to reconfirm that all such
commitments must be recorded in writing and signed only
with the specific authority of the group’s regional director.
The November 2012 review, as amended by this
subsequent finding and action, has been reconfirmed for
the purpose of this annual report.
72
Control and capital structure
regarding
substantial
Information
shareholders,
significant interests in the securities of the company and
other matters pertaining to the control and rights
attaching to the company’s capital is provided under
“Substantial shareholders” and “Control and structure of
capital” in the “Directors’ report” section of this annual
report.
Approved by the board on
RICHARD M ROBINOW
25 April 2013
Chairman
73
Directors’ remuneration report
Introduction
The committee does not use independent consultants but
takes into account the views of the chairman and
This report has been prepared in accordance with
managing director. Neither the chairman nor the
Schedule 8 to The Large and Medium-sized Companies
managing director plays a part in the discussion of his
and Groups (Accounts and Reports) Regulations 2008
own remuneration.
(the “Accounting Regulations”) made pursuant to the
Companies Act 2006 (the “Act”). The report also meets
Remuneration policy
the relevant requirements of the Listing Rules of the
Financial Services Authority and describes how the board
The committee sets the remuneration and benefits of the
has applied
the principles
relating
to directors’
chairman and the executive directors. The committee is
remuneration set out in the UK Corporate Governance
also responsible for the long term incentive arrangements
Code issued in 2010 by the Financial Reporting Council
for key senior executives in Indonesia.
(the “Code”). The directors are aware of the draft revised
regulations for directors’ remuneration reports published
In setting remuneration and benefits, the committee
by the Department for Business, Innovation and Skills and
considers the achievement of each individual in attaining
will adopt the revised regulations when they have been
the objectives set for that individual (including objectives
finalised and are in force.
relating to sustainability and matters of governance as
well as to overall corporate performance) against the
As required by the Act, a resolution to approve this report
prevailing business environment, the responsibilities
will be proposed at the annual general meeting at which
assumed by the individual and, where the role is part time,
the accompanying financial statements are laid before the
the time commitment involved. The committee draws on
company’s members.
data of the remuneration of others performing similar
functions in similarly sized organisations and in similar
The Act requires the auditor to report to the company’s
business organisations. Account is taken of the
members on certain parts of this report and to state
remuneration both of senior employees of the group who
whether in their opinion those parts of the report have
are not directors and of staff across the group’s
been properly prepared
in accordance with
the
operations generally. Due allowance is made for
Accounting Regulations. The report has therefore been
differences in remuneration applicable to different
divided into separate sections for audited and unaudited
geographical locations. The committee aims to set
information.
Unaudited information
The remuneration committee
performance related remuneration on a basis that
promotes the long-term success of the company while at
the same time encouraging responsible behaviour in
relation to environmental, social and governance matters.
The key objective of the remuneration policy (which
The company has established a remuneration committee
applies for 2012 and subsequent years) is to attract,
whose members comprise Mr D J Blackett (chairman)
motivate, retain and fairly reward individuals of a high
and Mr D H R Killick.
calibre, while ensuring that the remuneration of each
individual is consistent with the best interests of the
company and its shareholders. In framing its policy on
74
performance related remuneration (which is payable only
In the past, executive directors were eligible to join the
to executive directors), the committee follows the
REA Pension Scheme. That scheme is now closed to
provisions of schedule A to the Code.
new members and, as explained in more detail under
“Director’s pension arrangements – Mr J C Oakley” below,
The committee considers all proposals for executive
Mr Oakley is no longer an active member of the scheme.
directors to hold outside directorships. Such directorships
Mr Parry is based in Singapore and any future executive
are normally permitted only if considered to be of value to
directors of the company would be likely to be based in
the group and on terms that any remuneration payable will
Singapore or Indonesia. Accordingly, it is no longer the
be accounted for to the group.
policy of the company to offer pensionable remuneration
Remuneration of executive directors
to directors.
Matters particularly taken into account in setting Mr
The policy on remuneration of executive directors is that
Oakley’s basic salary for 2012 were the general level of
basic remuneration of each executive director should
salary increases in the group for both employees and
comprise an annual salary and certain benefits-in-kind,
managers in the UK and Indonesia (where a substantial
principally a company car. In addition, an executive
part of Mr Oakley’s responsibilities are discharged), the
director should be paid performance related bonuses.
rate of inflation and confirmation that Mr Oakley’s salary
These are to be awarded annually in arrears on a
was reasonable by comparison with the salaries of
discretionary basis taking into account the progress of the
managing directors of listed companies of a size or
group during the relevant year and the contribution to
business similar to that of the group. Specifically with
progress that a director is assessed by the committee to
respect to Mr Oakley’s salary for 2012, the committee
have made against specific commercial and other
took account of the growth of the group’s oil palm
objectives for that year. Bonuses should not normally
operations and the commensurate increase in Mr
exceed 50 per cent of salary and are paid in cash.
Oakley’s workload, the profitability of the group and the
continuing creation of value for shareholders.
Prior to January 2013, the company had only one
executive director and, given that the business of the
Specific achievements reflected in the bonus paid to Mr
group is inherently long term and not susceptible to
Oakley in 2012 (being in respect of 2011 performance)
influence by short term decision making, it was not
included progress in achieving the group’s planned
thought necessary to establish a longer term incentive
expansion of its plantation business, the strengthening of
pay arrangement for just one long serving director.
the expatriate management
team
(including
the
Following the appointment of a second director, Mr Parry,
recruitment of a new regional director based in
to the board with effect from 1 January 2013, the
Singapore), initiatives with respect to sustainability and
directors are now giving consideration to some form of
responsible agricultural practice, and progress
in
longer term incentive scheme which will be performance
developing robust systems of group reporting and in
related and will be proposed to shareholders for approval
managing governance and compliance matters. Account
in due course. The criteria against which annual bonuses
was taken of the disappointing performance of the new
are awarded in any event include aspects of progress that
coal sub-group but it was noted that overall the group
promote the longer term success of the group.
results for 2011 were good.
75
Directors’ remuneration report continued
The committee has agreed that Mr Oakley should be paid
increased from £20,000 per annum to £22,000 per
a bonus of £105,000 during 2013 in respect of 2012. In
annum with effect from 1 January 2012.
setting this bonus, the committee noted the completion
and successful commissioning of the group’s two new
Service contracts
methane plants, leading to a substantial reduction in
diesel consumption across
the operations with
The company’s current policy on directors’ service
consequential savings in energy costs going forward,
contracts is that contracts should have a notice period of
completion and commissioning of the third oil mill, further
not more than one year and a maximum termination
certification under RSPO with respect to the supply chain
payment not exceeding one year’s salary. No director has
and the successful development of the executive
a service contract that is not fully compliant with this
management team in Singapore and Indonesia. The
policy.
committee also noted the exceptional stress caused by
the village disruptions which contributed to the shortfall in
Mr Oakley has two service agreements whereby his
budgeted production for 2012 as described in the
working time and remuneration are shared between two
“Review of the group”. Against this, the committee took
employing companies to reflect the division of his
account of the coal operations which had fallen short of
responsibilities between different parts of the group.
expectations.
Each contract may be terminated by either party by giving
notice to the other party of not less than six months. At
Continuing performance objectives for the executive
31 December 2012, the unexpired term under each
directors take into consideration the company’s long term
contract remained as six months. There are no provisions
agricultural objectives, including increased crop levels,
for compensation for early termination save that Mr
plantings and cost efficiencies, further initiatives with
Oakley would be entitled to a payment in lieu of notice if
respect to sustainability, including reporting of the group’s
due notice had not been given.
carbon footprint and the development of strategies for
managing and reducing greenhouse gas emissions in
Mr Parry’s service contract may be terminated by either
future.
party by giving notice to the other party of not less than
three months. At 31 December 2012, the unexpired term
Remuneration of non-executive directors
under Mr Parry’s contract remained as three months.
There are no provisions for compensation for early
The remuneration of non-executive directors other than
termination save that Mr Parry would be entitled to a
the chairman is determined by the board within the limits
payment in lieu of notice if due notice had not been given.
set by the articles of association, no director taking part in
the determination of his own remuneration. The level of
Performance graph
remuneration is determined having regard to that paid by
comparable organisations and to the time commitments
A performance graph is shown in the “Key statistics”
expected. No non-executive director has any entitlement
section of this annual report. This compares the
to remuneration on a basis related to performance.
performance of the company’s ordinary shares (measured
Following the approval of shareholders granted at the
by total shareholder return) with that of the FTSE all share
2011 annual general meeting to increase the service fees
index for the period from January 2008 to December
of each director, non-executive remuneration was
2013. The FTSE all share index has been selected as
76
there is no index available that is specific to the activities
Each plan provided that the vesting of a participants’
of the company.
Long term incentive plans
potential entitlements to notional ordinary shares would
be determined by key performance targets with each
performance target measured on a cumulative basis over
the applicable performance period. For both plans, this
A first long term incentive plan (the “first plan”) was
period has now ended. Under the first plan, there were
established in 2007 and a second similar plan (the
three key performance targets with each target governing
“second plan”) was put in place in 2009. The first and
the vesting of one third of each potential entitlement. The
second plans (together the “plans”) were designed to
three targets related to total shareholder return, cost per
provide incentives, linked to the market price performance
tonne of crude palm oil produced and annual planting rate
of ordinary shares in the company, to a small number of
achieved. Under the second plan there were two key
key senior executives in Indonesia with a view to their
performance targets with each target governing the
participating over the long term in value created for the
vesting of one half of each potential entitlement. The two
group. No director was eligible to participate under either
targets related to total shareholder return and cost per
plan. The first plan period commenced on 1 January
tonne of crude palm oil produced. Under each plan there
2007 and ended on 31 December 2010 and the second
were
threshold,
target and maximum
levels of
plan period commenced on 1 January 2009 and ended
performance determining the extent of vesting in relation
on 31 December 2012 (the “performance periods”). As
to each performance target. Targets were subject to
noted under “Remuneration of executive directors” above,
adjustment at the discretion of the remuneration
the directors are giving consideration to a further long
committee where, in the committee’s opinion, warranted
term incentive scheme.
by actual performance.
Under the existing plans, participants were awarded
The exercise of vested entitlements is dependent upon
potential entitlements over notional ordinary shares of the
continued employment with the group. If a participant
company. These potential entitlements then vested to an
with a vested entitlement leaves, the participant may
extent that was dependent upon the achievement of
exercise a vested entitlement within six months of leaving.
targets. Vested entitlements may be exercised in whole
or part at any time within the six years following the date
In the event of a change in control of the company as a
upon which they vest. On exercising a vested entitlement,
result of a takeover offer or similar corporate event,
a participant will receive a cash amount for each ordinary
vested entitlements will be exercisable for a period of one
share over which the entitlement is exercised, equal to the
month following the date of the change of control or
excess (if any) of the market price of an ordinary share on
other relevant event (as determined by the remuneration
the date of exercise over 414.69p in the case of the first
committee).
plan and 224.82p in case of the second plan, being the
market prices of an ordinary share on the dates with
At 31 December 2012, entitlements to a total of 36,002
effect from which the plans were agreed after adjustment
notional ordinary shares had vested under the first plan.
for subsequent variations in the share capital of the
Because the performance period for the second plan
company in accordance with the rules of the plans.
ended only on 31 December 2012, the vested
entitlements under that plan have still to be determined
but they will not exceed the potential maximum total
entitlement of 41,188 ordinary shares. On the basis of
77
Directors’ remuneration report continued
the market price of the ordinary shares on 31 December
scheme of which details are given in note 38 to the
2012 of 432.5p per share, the total gain to participants in
consolidated financial statements. Mr Oakley elected to
respect of their vested entitlements under the first plan
become a pensioner member of the scheme on 31 July
would have been £6,412 and under the second plan
2009. In recognition of Mr Oakley’s withdrawal from
would have been £85,540 were it to be determined that
ordinary membership of the scheme ahead of attaining
the potential entitlements had vested in full.
the age of 65, the company is paying Mr Oakley an
Audited information
amount in lieu of the pension contributions that the
company would otherwise have paid to the pension
scheme. The amount in lieu payable in 2012 was
Directors’ remuneration
£59,000 (2011: £56,000).
The following table shows details of the remuneration of
Director’s pension entitlement - Mr J C Oakley
individual directors holding office during the year ended
31 December 2012 (with comparative totals for 2011):
Details of Mr Oakley’s annual pension entitlement and of
the transfer value of that entitlement are set out below.
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 **
Salary
and fees Other*
2012
Total
£’000 £’000 £’000
197
315
5
184
202
499
2011
Total
£’000
193
414
24
22
22
24
22
22
-
-
-
-
-
-
24
22
22
24
22
22
22
20
20
22
20
20
648
189
837
731
Pension:
In payment at beginning of year
Increase during the year
In payment at end of year
Transfer value:
At beginning of year
£
67,892
2,611
70,503
£
1,505,496
Contributions made by the director during the year
–
Increase during the year
At end of year
21,293
1,526,789
* comprises benefits plus, in the case of Mr Oakley a bonus of £112,500,
and payments in lieu of pension contributions of £59,000 (see “Director’s
pension arrangements – Mr J C Oakley” below).
The increase in the year in annual pension in excess of
inflation was £746.
** retired 31 December 2012
Fees paid to Mr Blackett and Mr Killick in respect of 2012
included, in each case, additional remuneration of £2,500
Approved by the board on
RICHARD M ROBINOW
25 April 2013
in respect of their membership of the audit committee.
Chairman
Fees payable in respect of Mr Green-Armytage, Mr Letts
and Mr Lim were paid to companies in which such
directors were interested.
Director’s pension arrangements - Mr J C Oakley
Mr Oakley (who was aged 64 at 31 December 2012) was
until 31 July 2009 an ordinary member of the R.E.A.
Pension Scheme. That Scheme is a defined benefit
78
Directors’ responsibilities
The directors are responsible for preparing the annual
report and the financial statements in accordance with
applicable law and regulations.
UK company law requires the directors to prepare
financial statements for each financial year. The directors
are required to prepare the group financial statements in
accordance with
International Financial Reporting
Standards (“IFRSs”) as adopted by the European Union
and Article 4 of the IAS Regulation and have elected to
prepare the parent company financial statements in
accordance with United Kingdom Generally Accepted
Accounting Practice (United Kingdom Accounting
Standards and applicable law). Under company law, the
directors must not approve the accounts unless they are
satisfied that they give a true and fair view of the state of
affairs of the company and of the profit or loss of the
company for that period.
In preparing the parent company financial statements, the
directors are required to:
•
select suitable accounting policies and then apply
them consistently;
•
•
present information, including accounting policies, in
a manner that provides relevant, reliable, comparable
and understandable information;
provide additional disclosures when compliance with
the specific requirements in IFRSs are insufficient to
enable users to understand the impact of particular
transactions, other events and conditions on the
entity's financial position and financial performance;
and
• make an assessment of the company's ability to
continue as a going concern.
The directors are responsible for keeping adequate
accounting records that are sufficient to show and explain
the company’s transactions and disclose with reasonable
accuracy at any time the financial position of the company
and enable them to ensure that the financial statements
comply with the Companies Act 2006. 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
• make judgments and accounting estimates that are
integrity of the corporate and financial information
included on the company’s website. Legislation in the
United Kingdom governing
the preparation and
dissemination of financial statements may differ from
legislation in other jurisdictions.
reasonable and prudent;
•
state whether applicable UK Accounting Standards
have been followed, subject to any material
departures disclosed and explained in the financial
statements; and
•
prepare the financial statements on the going
concern basis unless it is inappropriate to presume
that the company will continue in business.
In preparing the group financial statements, International
Accounting Standard 1 requires that directors:
•
properly select and apply accounting policies;
79
Directors’ confirmation
To the best of the knowledge of each of the directors:
•
the financial statements, prepared in accordance with
the relevant financial reporting framework, give a true
and fair view of the assets, liabilities, financial position
and profit or
loss of the company and the
undertakings included in the consolidation taken as a
whole; and
•
the “Directors' report” section of this annual report
including the “Chairman’s statement” and “Review of
the group” sections of this annual report, which the
Directors' report incorporates by reference, provides
a fair review of the development and performance of
the business and the position of the company and the
undertakings included in the consolidation taken as a
whole, together with a description of the principal
risks and uncertainties that they face.
The current directors of the company and their respective
functions are set out in the “Directors” section of this
annual report.
By order of the board
R.E.A. SERVICES LIMITED
Secretary
25 April 2013
80
Auditor’s report (group)
Independent auditor’s report to the members of
R.E.A. Holdings plc
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts
We have audited the group financial statements of R.E.A.
and disclosures in the financial statements sufficient to give
Holdings plc for the year ended 31 December 2012
reasonable assurance that the financial statements are free
which comprise the consolidated income statement, the
from material misstatement, whether caused by fraud or
consolidated balance sheet, the consolidated statement
error. This includes an assessment of: whether the
of comprehensive income, the consolidated statement of
accounting policies are appropriate to the group’s
changes in equity, the consolidated cash flow statement,
circumstances and have been consistently applied and
the accounting policies and the related notes 1 to 44.
adequately disclosed; the reasonableness of significant
The financial reporting framework that has been applied
accounting estimates made by the directors; and the overall
in their preparation is applicable law and International
presentation of the financial statements. In addition, we
Financial Reporting Standards (IFRSs) as adopted by the
read all the financial and non-financial information in the
European Union.
annual report to identify material inconsistencies with the
audited financial statements and to identify any information
This report is made solely to the company’s members, as
that is apparently materially incorrect based on, or materially
a body, in accordance with Chapter 3 of Part 16 of the
inconsistent with, the knowledge acquired by us in the
Companies Act 2006. Our audit work has been
course of performing the audit. If we become aware of any
undertaken so that we might state to the company’s
apparent material misstatements or inconsistencies we
members those matters we are required to state to them
consider the implications for our report.
in an auditor’s report and for no other purpose. To the
fullest extent permitted by law, we do not accept or
Opinion on financial statements
assume responsibility to anyone other than the company
and the company’s members as a body, for our audit work,
In our opinion the group financial statements:
for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ Responsibilities
Statement, the directors are responsible for the preparation
of the group financial statements and for being satisfied
that they give a true and fair view. Our responsibility is to
audit and express an opinion on the group financial
statements in accordance with applicable law and
International Standards on Auditing (UK and Ireland).
Those standards require us to comply with the Auditing
Practices Board’s Ethical Standards for Auditors.
•
•
•
give a true and fair view of the state of the group’s
affairs as at 31 December 2012 and of its profit for the
year then ended;
have been properly prepared in accordance with IFRSs
as adopted by the European Union; and
have been prepared
in accordance with
the
requirements of the Companies Act 2006 and Article
4 of the IAS Regulation.
Opinion on other matter prescribed by the Companies
Act 2006
In our opinion the information given in the Directors’ report
for the financial year for which the financial statements are
prepared is consistent with the group financial statements.
81
Auditor’s report (group) continued
Matters on which we are required to report by
exception
We have nothing to report in respect of the following:
Under the Companies Act 2006 we are required to report
to you if, in our opinion:
•
•
certain disclosures of directors’ remuneration specified
by law are not made; or
we have not received all the information and
explanations we require for our audit.
Under the Listing Rules we are required to review:
•
•
the directors’ statement contained within the Directors’
confirmation in relation to going concern;
the part of the Corporate governance statement
relating to the company’s compliance with the nine
provisions of the UK Corporate Governance Code
specified for our review; and
•
certain elements of the report to shareholders by the
Board on directors’ remuneration.
Other matter
We have reported separately on the parent company
financial statements of R.E.A. Holdings plc for the year
ended 31 December 2012 and on the information in the
Directors’ remuneration report that is described as having
been audited.
Mark McIlquham ACA (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, England
25 April 2013
82
Consolidated income statement
for the year ended 31 December 2012
Revenue
Net (loss) / gain arising from changes in fair value of agricultural produce inventory
Cost of sales
Gross profit
Net gain arising from changes in fair value of biological assets
Other operating income
Distribution costs
Administrative expenses
Impairment loss
Operating profit
Investment revenues
Finance costs
Profit before tax
Tax
Profit for the year
Attributable to:
Ordinary shareholders
Preference shareholders
Non-controlling interests
Earnings per 25p ordinary share
Basic
Diluted
All operations for both years are continuing
Note
2012
$’000
2011
$’000
2
4
13
2
5
16
2, 7
8
5
9
10
35
11
124,600
(5,677)
(63,566)
55,357
5,979
12
(1,601)
(18,899)
(3,000)
37,848
411
(7,701)
30,558
(12,855)
147,758
4,011
(68,056)
83,713
7,375
339
(1,719)
(16,959)
–
72,749
2,889
(11,465)
64,173
(18,559)
17,703
45,614
11,342
6,713
(352)
17,703
40,453
5,006
155
45,614
33.9 cents
33.9 cents
121.0 cents
121.0 cents
83
Consolidated balance sheet
as at 31 December 2012
Non-current assets
Goodwill
Biological assets
Property, plant and equipment
Prepaid operating lease rentals
Indonesian coal and stone interests
Investments
Deferred tax assets
Non-current receivables
Total non-current assets
Current assets
Inventories
Investments
Trade and other receivables
Cash and cash equivalents
Total current assets
Total assets
Current liabilities
Trade and other payables
Current tax liabilities
Bank loans
US dollar notes
Other loans and payables
Total current liabilities
Non-current liabilities
Bank loans
Sterling notes
US dollar notes
Preference shares issued by a subsidiary
Derivative financial instruments
Deferred tax liabilities
Other loans and payables
Total non-current liabilities
Total liabilities
Net assets
Equity
Share capital
Share premium account
Translation reserve
Retained earnings
Non-controlling interests
Total equity
Approved by the board on
25 April 2013
and signed on behalf of the board.
RICHARD M ROBINOW
Chairman
84
Note
12
13
14
15
16
19
28
18
19
20
21
30
23
25
29
23
24
25
26
27
28
29
31
32
33
34
35
2012
$’000
12,578
265,663
145,610
26,630
29,480
–
6,063
2,470
2011
$’000
12,578
244,433
102,185
23,497
28,580
1,430
4,689
1,835
488,494
419,227
20,712
1,256
32,155
26,393
80,516
25,559
963
34,162
30,601
91,285
569,010
510,512
(30,051)
(4,348)
(1,000)
(691)
(1,105)
(37,195)
(51,194)
(54,279)
(48,007)
(54)
(11,622)
(44,372)
(7,257)
(19,895)
(8,349)
(2,000)
(4,527)
(1,353)
(36,124)
(27,018)
(51,332)
(29,414)
(1,500)
(16,216)
(40,283)
(5,680)
(216,785)
(171,443)
(253,980)
(207,567)
315,030
302,945
97,565
18,680
(4,854)
201,630
313,021
2,009
315,030
87,939
21,771
(11,762)
202,763
300,711
2,234
302,945
Consolidated statement of
comprehensive income
for the year ended 31 December 2012
Profit for the year
Note
2012
$’000
17,703
2011
$’000
45,614
Other comprehensive income
Changes in fair value of cash flow hedges:
Gains / (losses) arising during the year
Reclassification adjustments for losses included in the consolidated income statement
Changes in fair value of hedged instrument
Reclassification adjustments for gains included in the consolidated income statement
Exchange differences on translation of foreign operations
Tax relating to components of other comprehensive income
9
–
–
–
–
–
(2,064)
–
(2,064)
1,700
894
2,594
(303)
(611)
4,102
(329)
5,453
Total comprehensive income for the year
15,639
51,067
Attributable to:
Ordinary shareholders
Preference shareholders
Non-controlling interests
9,151
6,713
(225)
15,639
45,867
5,006
194
51,067
Consolidated statement of changes in equity
for the year ended 31 December 2012
Share
capital
(note 31)
$’000
60,548
At 1 January 2011
–
Prior year reclassification
Total comprehensive (loss) / income
–
Issue of new preference shares (cash) 24,248
3,143
Issue of new preference shares (scrip)
–
Dividends to preference shareholders
–
Dividends to ordinary shareholders
Share Translation
reserve
(note 33)
$’000
Retained
earnings
(note 34)
$’000
(18,197) 166,228
(1,021)
45,459
–
–
(5,006)
(2,897)
1,021
5,414
–
–
–
–
premium
(note 32)
$’000
24,901
–
–
13
(3,143)
–
–
Non-
controlling
interests
(note 35)
$’000
2,040
–
194
–
–
–
–
Sub total
$’000
233,480
–
50,873
24,261
–
(5,006)
(2,897)
Total
equity
$’000
235,520
–
51,067
24,261
–
(5,006)
(2,897)
At 31 December 2011
Correction of previous
accounting error (note 33)
Total comprehensive income
Issue of new preference shares (cash)
Issue of new preference shares (scrip)
Dividends to preference shareholders
Dividends to ordinary shareholders
87,939
21,771
(11,762) 202,763
300,711
2,234
302,945
–
–
6,389
3,237
–
–
–
–
146
(3,237)
–
–
9,099
(2,191)
–
–
–
–
(9,099)
18,055
–
–
(6,713)
(3,376)
–
15,864
6,535
–
(6,713)
(3,376)
–
(225)
–
–
–
–
–
15,639
6,535
–
(6,713)
(3,376)
At 31 December 2012
97,565
18,680
(4,854) 201,630
313,021
2,009
315,030
85
Consolidated cash flow statement
for the year ended 31 December 2012
Net cash from operating activities
36
32,470
33,776
Note
2012
$’000
2011
$’000
411
4
(50,264)
(15,033)
(2,241)
(1,616)
(3,900)
2,889
11
(19,487)
(18,001)
(6,729)
–
(9,717)
(72,639)
(51,034)
(6,713)
(3,376)
(5,006)
(2,897)
(10,603)
(13,469)
6,535
33,593
24,260
–
(19,000)
(10,000)
–
(259)
36,027
36,204
(3,949)
–
22,649
11,588
37
(3,965)
30,601
(243)
(5,670)
36,710
(439)
21
26,393
30,601
Investing activities
Interest received
Proceeds from 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 interests
Net cash used in investing activities
Financing activities
Preference dividends paid
Ordinary dividends paid
Repayment of borrowings
Proceeds of issue of preference shares
Issue of US dollar notes, net of expenses
Redemption of US dollar notes
Redemption of sterling notes
Net sale and repurchase of US dollar notes
New bank borrowings drawn
Net cash from financing activities
Cash and cash equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Effect of exchange rate changes
Cash and cash equivalents at end of year
86
Accounting policies (group)
General information
R.E.A. Holdings plc is a company incorporated in the United
Kingdom under the Companies Act 2006 with registration
number 00671099. 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 set out on pages 82 to
117 are prepared in accordance with International Financial
Reporting Standards (“IFRS”) as adopted by the EU 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.
For the reasons given under “Going concern basis” in the
“Directors’ report”, the financial statements have been prepared
on the going concern basis.
Details regarding the correction of a previous accounting error
in respect of hedge accounting can be found under “Correction
of previous accounting error” under “Derivative financial
instruments” on page 93, and in notes 33 and 34.
Presentational currency
The consolidated financial statements of the group are
presented in US dollars, which is also 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
these financial statements, the following standards and
interpretations which have not been applied in these financial
statements were in issue but not yet effective (and in some
cases had not yet been adopted by the EU):
•
•
•
•
•
•
•
•
•
•
IFRS 7 (amended): “Financial instruments: disclosures”
IFRS 9: “Financial
instruments: classification and
measurement”
IFRS 10: “Consolidated financial statements”
IFRS 11: “Joint arrangements”
IFRS 12: “Disclosure on interests in other entities”
IFRS 13: “Fair value measurement”
Amendments to IAS 27 and IAS 28 reflecting the changes
from the new IFRS 10 and IFRS 11 above
IAS 19 (amended): “Employee benefits”
IAS 32 (amended): “Financial instruments: presentation -
offsetting financial assets and financial liabilities”
IFRIC 20: “Stripping costs in the production phase of a
surface mine”
The effective date of IFRS 9 was deferred by the International
Accounting Standards Board (IASB) and it now has mandatory
application for accounting periods beginning on or after 1
January 2015. This standard represented the first phase of the
IASB’s project to replace IAS 39 Financial instruments:
recognition and measurement. It sets out the classification and
measurement criteria for financial assets and financial
liabilities. It is not considered that the effect of applying the
standard in its current form would have a material impact on the
group’s reported profit or equity. The impact on the group of
further changes to IFRS 9 and the impact of the second and
third phases of the IASB’s project, covering impairment and
hedge accounting respectively, will be assessed when the IASB
has finalised the proposed requirements. IFRS 9 has not been
endorsed by the EU and will only become applicable once that
endorsement has occurred.
The adoption of IFRS 10 Consolidated financial statements,
which is mandatory for accounting periods beginning on or
after 1 January 2013, may alter the composition of those
subsidiary companies which are included in the consolidated
financial statements of the company.
IFRS 13 Fair value measurement has been issued. This
standard aims to provide a single source of fair value
measurement and disclosure requirements for use across
87
Accounting policies (group) continued
IFRS. The implementation of IFRS 13 does not change where
fair value is or is not applied under IFRS and will not require a
restatement of historical transactions. Mandatory application is
from 1 January 2013.
acquisition or to the effective date of 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.
An amendment to IAS 1 Presentation of financial statements
has been issued and has mandatory application for accounting
periods beginning on or after 1 July 2012. This amendment
in other
changes the disclosure of
comprehensive income grouping them into items which recycle
to profit and loss and items which do not. Apart from the
change in disclosure, this amendment will have little impact on
the group financial statements.
items presented
IAS 19 Employee benefits has been revised and has mandatory
application from 1 January 2013. The new standard does not
substantially change the values of retirement benefit liabilities
on the balance sheet, but it has eliminated an option that
allowed an entity to defer recognition of changes in the net
benefit liability; this will have a non-material impact on the
unrecognised actuarial loss in relation to the group’s
Indonesian retirement benefit obligations. In addition, the
revised standard has extended and amended some of the
disclosure requirements for multi-employer plans, which the
directors are currently evaluating.
The directors do not expect that the adoption of the other
standards listed above will have a material impact on the
financial statements of the group in future periods.
Basis of consolidation
The consolidated financial statements consolidate the financial
statements 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 non-controlling shareholders is stated at the non-
controlling shareholders’ proportion of the fair values of the
liabilities recognised. The share of total
assets and
comprehensive income is attributed to the owners of the parent
and to non-controlling interests even if this results in the non-
controlling interests having a deficit balance. Results of
subsidiaries acquired or disposed of are included in the
consolidated income statement from the effective date of
On acquisition, any excess of the fair value of the consideration
given over the fair value of identifiable net assets acquired is
recognised as goodwill. Any deficiency in consideration given
against the fair value of the identifiable net assets acquired is
credited to profit or loss in the consolidated income statement
in the period of acquisition.
All intra-group transactions, balances, income and expenses
are eliminated on consolidation.
Goodwill
Goodwill is recognised as an asset on the basis described
under “Basis of consolidation” above 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
88
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
for the provision of services.
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, assets and liabilities denominated in
foreign currencies are retranslated at the rates of exchange
prevailing at that date except that non-monetary items that are
measured in terms of historical cost in a foreign currency are
not retranslated. Exchange differences arising on the
settlement of monetary items, and on the retranslation of other
items that are subject to retranslation, are included in the net
profit or loss for the period, except for exchange differences
arising on non-monetary assets and liabilities, including foreign
currency loans, which, to the extent that such loans 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.
Pensions and other post employment benefits
United Kingdom
Certain existing and former UK employees of the group are
members of a defined benefit scheme. The estimated regular
cost of providing for benefits under this scheme 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.
89
Accounting policies (group) continued
Amounts payable 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 to the consolidated
income statement in addition to the adjusted regular cost for
the period.
Indonesia
In accordance with local labour law, the group's employees in
Indonesia are entitled to lump sum payments on retirement.
These obligations are unfunded and provision is made annually
on the basis of a periodic assessment by independent
actuaries. Actuarial gains and losses not recognised at the
balance sheet date are amortised to income over the expected
average remaining lives of the participating employees. Any
increase or decrease in the provision, including adjusted
actuarial gains and losses, is recognised in the consolidated
statement of income, net of amounts added to biological
assets.
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
All biological assets are bearer biological assets as recognised
by IAS 41, and are distinguished from consumable biological
assets by virtue of being harvestable.
Biological assets comprise oil palm trees and nurseries, in the
former case from initial preparation of land and planting of
seedlings through to the end of the 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 such 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 a standard pre-tax profit margin and then
deriving the present value of the resultant profit stream. For
this purpose, the standard pre-tax profit margin is taken to be
the average of the historic pre-tax profit margins for the 20
years ending with the year of the valuation subject to buffering
of year to year changes, such that the change in the standard
pre-tax margin does not exceed 5 per cent and any change in
the standard pre tax margin that runs contrary to the trend in
current margins is ignored. The historic pre-tax profit margin
for each year represents the transfer value of FFB less
standard production costs (including an allowance for
overheads and a recovery charge in respect of buildings and
plant and machinery). FFB transfer value is derived from the
average price of crude palm oil FOB Samarinda (itself based on
90
the CIF Rotterdam price less transport costs and export duty)
over the relevant year, less processing costs. 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.
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) 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
At each balance sheet date, the group reviews the carrying
amounts of its tangible and intangible assets to determine
whether there is any indication that any asset has suffered an
impairment loss. If any such indication exists, the recoverable
amount of the asset is estimated in order to determine the
extent of the impairment loss (if any). Where the asset does not
generate cash flows that are independent from other assets,
the group estimates the recoverable amount of the cash-
generating unit to which the asset belongs. An intangible asset
with an indefinite useful life is tested for impairment annually
and whenever there is an indication that the asset may be
impaired.
The recoverable amount of an asset (or cash-generating unit)
is the higher of fair value less costs to sell and value in use. In
assessing value in use, estimated future cash flows are
discounted to their present value using a pre-tax discount rate
that reflects current market assessments of the time value of
money and those risks specific to the asset (or cash-
generating unit) for which the estimates of future cash flows
have not been adjusted. If the recoverable amount of an asset
(or cash-generating unit) is estimated to be less than its
carrying amount, the carrying amount of the asset (or cash-
generating unit) is reduced to its recoverable amount. An
impairment loss is recognised as an expense immediately,
unless the relevant asset is carried at a revalued amount, in
which case the impairment loss is treated as a revaluation
decrease.
Where, 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.
91
Accounting policies (group) continued
Inventories
Inventories of agricultural produce harvested from the
biological assets are stated at fair value at the point of harvest
of the FFB from which the produce derives plus costs incurred
in the processing of such FFB (including direct labour costs
and overheads that have been incurred in bringing such
inventories to their present location and condition) or at net
realisable value if lower. Inventories of engineering and other
items are valued at the lower of cost, on the weighted average
method, or net realisable value. For these purposes, net
realisable value represents the estimated selling price (having
regard to any outstanding contracts for forward sales of
produce) less all estimated costs of processing and costs
incurred in marketing, selling and distribution.
Recognition and derecognition of financial
instruments
Financial assets and liabilities are recognised in the group’s
financial statements when the group becomes a party to the
contractual provisions of the relative constituent instruments.
Financial assets are derecognised only when the contractual
rights to the cash flows from the assets 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 (including Indonesian coal interests), 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 ‘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. Indonesian coal interests are also classified as
loans and receivables. Indonesian coal interests are measured
at amortised cost. All other loans and receivables held by the
group are non interest bearing and are stated at their nominal
amount.
All loans and receivables are reduced by appropriate
allowances for potentially irrecoverable amounts.
Cash and cash equivalents
Cash and cash equivalents comprise cash in hand, demand
deposits and other short-term highly liquid investments that
have a maturity of not more than three months from the date of
acquisition and 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.
Held-to-maturity investments
Debentures and shares with fixed and determinable payments
and fixed maturity dates that are intended to be held to maturity
are classified as held-to-maturity investments, and are
measured at amortised cost using the effective interest
method, less any impairment, with revenue recognised on an
effective yield basis.
Non-derivative financial liabilities
The group’s non-derivative financial liabilities comprise
redeemable instruments, bank borrowings, finance leases and
trade payables, which are held at amortised cost.
Note issues, bank borrowings and finance leases
issues and
instruments (comprising note
Redeemable
redeemable preference shares of a subsidiary of the company),
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 redeemable instruments, the coupon
payable together with the amortisation of issuance costs
(which include any premiums payable or expected by the
directors to be 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. Redeemable instruments are
recorded in the accounts at their expected 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
92
with the relative unamortised balance of costs treated as non-
current receivables.
Correction of previous accounting error
In previous years, the group accounted for certain cross-
currency interest rate swaps as cash flow hedges of the
group’s liability in respect of 9.5 per cent guaranteed sterling
notes 2015/17 issued by REA Finance B.V.. After discussion
with the Financial Reporting Council’s Conduct Committee, the
group has concluded that this accounting treatment was
incorrect because the swaps represented a hedge of the
group’s presentational currency and cash flow hedge
accounting may not be applied in respect of such a hedge. The
consequential corrections needed have been booked in the
accompanying financial statements as set out in note 33.
Because the overall impact of the accounting error on the
2011 financial statements is not considered material,
comparative figures have not been adjusted but the differences
in profit before tax, tax, profit for the period and the component
of that profit attributable to non-controlling interests that would
have been reported for each of the years 2009 to 2011 had
the cross-currency interest rate swaps been correctly
accounted for are detailed in note 33.
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 not
charged to income. The preference shares of the company are
regarded as equity instruments.
Trade payables
All trade payables owed by the group are non interest bearing
and are stated at their nominal value.
Financial liabilities at FVTPL
A financial liability may be designated as at FVTPL upon initial
recognition if such designation eliminates or significantly
reduces a measurement or recognition inconsistency that
would otherwise arise, or if it forms part of a contract containing
one or more embedded derivatives, and IAS 39 Financial
Instruments: Recognition and Measurement permits the entire
combined contract (asset or liability) to be designated as at
FVTPL. The group designates
its derivative financial
instruments as described below as held at FVTPL.
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 22. 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,
through finance costs (note 8) with the foreign exchange
element recognised through administrative expenses (note 5),
unless the derivative is designated and qualifies as a hedging
instrument (either as a cash flow hedge or a fair value hedge),
in which case the timing of the recognition in profit or loss
depends on the nature of the hedge relationship.
A derivative is presented as a non-current asset or non-current
liability if the remaining maturity of the instrument is more than
12 months and the derivative is not expected to be realised or
settled within 12 months. Other derivatives are presented as
current assets or liabilities.
Cash flow and fair value hedges
The group does not hold any derivatives designated and
qualifying as cash flow or fair value hedges.
93
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. Such judgements, estimates and 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 estimates. The judgements, estimates and assumptions are reviewed on a regular basis. Revisions to estimates are recognised in
the period in which the estimates are revised.
Critical judgements in applying the group’s accounting policies
The following are critical judgements not being judgements involving estimations (which are dealt with below) that the directors have
made in the process of applying the group’s accounting policies.
Biological assets
IAS 41 “Agriculture” requires the determination of the fair value of biological assets. In the absence of an active market for such assets,
similar in condition and location to those owned by the group, management must select an appropriate methodology to be used, together
with suitable metrics, for determining fair value. The directors have applied a discounted cash flow method and have selected a discount
rate that, in their opinion, reflects an appropriate rate of return on investment taking into account the cyclicity of commodity markets (see
note 13).
Capitalisation of interest and other costs
As described under “Biological assets” in “Accounting policies (group)”, all expenditure on biological assets up to maturity, including
interest, is treated as an addition to such assets. The directors have determined that normally such capitalisation will cease at the end of
the third financial year following the year in which land clearing commenced. At this point, plantings should produce a commercial harvest
and accordingly be treated as having been brought into use for the purposes of IAS16 “Property plant and equipment” and of IAS 23
“Borrowing costs”. However, crop yields at this point may vary depending on the time of year that land clearing commenced and on
climatic conditions thereafter. In specific cases, the directors may elect to extend the period of capitalisation by a further year.
Derivatives
As described in note 22, 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.
Key sources of estimation uncertainty
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
Because of the inherent uncertainty associated with the valuation methodology used in determining the fair value of the group’s biological
assets, and in particular the volatility of prices for the group’s agricultural produce and the absence of a liquid market for Indonesian oil
palm plantations, the carrying value of the biological assets may differ from their realisable value (see note 13).
94
1. Critical accounting judgements and key sources of estimation uncertainty - continued
Income taxes
The group is subject to income taxes in various jurisdictions. Significant judgement is required in estimating the group’s liability to both
current and deferred tax 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 assessments of tax
on an Indonesian group company.
2. Revenue
Sales of goods
Revenue from services
Other operating income
Investment revenue
Total revenue
2012
$’000
122,621
1,979
124,600
12
411
125,023
2011
$’000
147,523
235
147,758
339
2,889
150,986
In 2012, three customers accounted for respectively 42 per cent, 21 per cent and 12 per cent of the group’s sales of agricultural goods
(2011: two customers, 51 per cent and 13 per cent). As stated in note 22 “Credit risk”, substantially all sales of goods are made on the
basis of cash against documents or letters of credit and accordingly the directors do not consider that these sales result in a
concentration of credit risk to the group.
The crop of oil palm fresh fruit bunches for 2012 amounted to 597,722 tonnes (2011: 607,335 tonnes). The fair value of the crop of
fresh fruit bunches was $78,468,000 (2011: $90,906,000), based on the price formulae determined by the Indonesian government for
purchases of fresh fruit bunches from smallholders (see note 13).
3. Segment information
In the table below, the group’s sales of goods are analysed by geographical destination and the carrying amount of net assets is analysed
by geographical area of asset location.
Sales by geographical destination:
Indonesia
Rest of Asia
Carrying amount of net assets by geographical area of asset location:
UK, Continental Europe and Singapore
Indonesia
2012
$’m
73.4
51.2
124.6
51.5
263.5
315.0
2011
$’m
53.2
94.3
147.5
44.6
258.3
302.9
The group has three reportable segments under IFRS 8. These comprise two operating segments, cultivation of oil palms, coal and stone
operations, and a head office segment comprising the activities of the parent company and its UK, European and Singaporean
subsidiaries. The accounting policies of the reportable segments are the same as the group’s accounting policies set out on pages 87
to 93. Segment profit is the operating profit or loss earned by each segment before investment revenues, finance costs and taxation. This
is the measure by which the group’s chief executive assesses segment performance. The resolution of competing rights over certain
plantation areas referred to in note 42 concerns assets in the group’s segment ‘cultivation of oil palms’.
95
Notes to the consolidated financial
statements continued
3. Segment information - continued
Year to 31 December 2012
Revenue
Gross profit / (loss)
Net gain from changes in fair value of biological assets
Other operating income
Distribution costs
Administrative expenses
Impairment loss
Operating profit / (loss)
Investment revenues
Finance costs
Profit before taxation
Taxation
Profit for the year
Plantations
$’000
122,134
Coal and
stone
$’000
2,466
56,870
5,979
2
(1,601)
(10,239)
–
51,011
(1,513)
–
–
–
(2,268)
(3,000)
(6,781)
Consolidated total assets
Consolidated total liabilities
Depreciation charged to consolidated income statement
Additions to non-current assets
523,276
141,639
6,125
75,258
34,137
439
10
903
11,597
111,902
79
3
Year to 31 December 2011
Revenue
Gross profit
Net gain from changes in fair value of biological assets
Other operating income
Distribution costs
Administrative expenses
Operating profit / (loss)
Investment revenues
Finance costs
Profit before taxation
Taxation
Profit for the year
Plantations
$’000
129,542
Coal and
stone
$’000
18,216
82,218
7,375
339
(1,719)
(10,756)
77,457
1,495
–
–
–
(1,158)
337
Consolidated total assets
Consolidated total liabilities
Depreciation charged to consolidated income statement
Additions to non-current assets
453,384
113,379
5,385
51,686
36,403
2,341
7
9,721
20,725
91,847
52
1,630
96
Head office
Total
$’000
–
–
–
10
–
(6,392)
–
(6,382)
$’000
–
–
–
–
–
(5,045)
(5,045)
$’000
124,600
55,357
5,979
12
(1,601)
(18,899)
(3,000)
37,848
411
(7,701)
30,558
(12,855)
17,703
569,010
253,980
6,214
76,164
$’000
147,758
83,713
7,375
339
(1,719)
(16,959)
72,749
2,889
(11,465)
64,173
(18,559)
45,614
510,512
207,567
5,444
63,037
Head office
Total
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
Salient items charged / (credited) in arrriving at profit before tax
Administrative expenses (see below)
Movement in inventories (at historic cost)
Operating lease rentals
Depreciation of property, plant and equipment
Amortisation of prepaid operating lease rentals
Administrative expenses
Net foreign exchange (gains) / losses
Increase / (release) of provision for UK pension (see note 38)
Loss on disposal of fixed assets
Net loss on financial liabilities at FVTPL
Indonesian operations
Head office
Administrative expenses before capitalisation
Amounts payable to the company’s auditor
2012
$’000
2011
$’000
18,899
220
456
5,812
223
(845)
1,072
39
190
13,681
4,762
18,899
16,959
(5,943)
405
5,292
152
519
(253)
408
-
11,445
4,840
16,959
The amount payable to Deloitte LLP for the audit of the company’s financial statements was $136,000 (2011: $124,000). Amounts
payable to Deloitte LLP for the audit of accounts of subsidiaries of the company pursuant to legislation were $18,000 (2011: $16,000).
Amounts payable to Deloitte LLP for other services were $10,000 (2011: $3,000) for the provision of certificates of group compliance
with covenants under certain debt instruments (being certificates that those instruments require to be provided by the company’s auditor)
and for group accountancy services.
Amounts payable to affiliates of Deloitte LLP for the audit of subsidiaries’ financial statements were $26,000 (2011: amounts payable
to affiliates of Deloitte LLP for the audit of subsidiaries were $24,000).
Earnings before interest, tax, depreciation and amortisation and net biological gain
Operating profit
Depreciation and amortisation
Net biological gain
2012
$’000
2011
$’000
37,848
6,214
(5,979)
38,083
72,749
5,444
(7,375)
70,818
97
Notes to the consolidated financial
statements continued
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
Other interest income
8. Finance costs
Interest on bank loans and overdrafts
Interest on US dollar notes
Interest on sterling notes
Change in value of sterling notes arising from exchange fluctuations
Change in fair value of derivative financial instruments
Reclassification from translation reserve in equity
Other finance charges
Amount included as additions to biological assets
2012
Number
2011
Number
4,720
2,524
9
7,253
4,668
2,850
7
7,525
$’000
$’000
23,869
692
1,604
26,165
2012
$’000
164
247
411
2012
$’000
4,145
3,433
5,598
1,029
(2,108)
–
372
12,469
(4,768)
7,701
23,651
893
423
24,967
2011
$’000
507
2,382
2,889
2011
$’000
2,510
3,671
5,679
–
–
283
1,942
14,085
(2,620)
11,465
The reclassification from translation reserve in equity arose from the early repurchase for cancellation of £2.46 million of 9.5 per cent
guaranteed sterling notes 2015/17 (see note 24) which was hedged by a cross currency interest swap (see note 27). Deferred tax
previously provided in respect of this amount was also reclassified to income (see note 9).
Amounts included as additions to biological assets and construction in progress arose on borrowings applicable to the Indonesian
operations and reflected a capitalisation rate of 34.9 per cent (2011: 20.9 per cent); there is no directly related tax relief.
98
9. Tax
Current tax:
UK corporation tax
Foreign tax
Prior year
Total current tax
Deferred tax:
Current year
Prior year
Total deferred tax
Total tax
2012
$’000
534
9,638
557
10,729
2,068
58
2,126
2011
$’000
–
14,634
–
14,634
3,925
–
3,925
12,855
18,559
Taxation is provided at the rates prevailing for the relevant jurisdiction. For Indonesia, the current and deferred taxation provision is based
on a tax rate of 25 per cent (2011: 25 per cent) and for the United Kingdom, the taxation provision reflects a corporation tax rate of 24.5
per cent (2011: 26.5 per cent) and a deferred tax rate of 23 per cent (2011: 26 per cent).
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 24.5 per cent (2011: 26.5 per cent)
Tax effect of the following items:
Expenses not deductible in determining taxable profit
Non taxable income
Overseas tax rates above / (below) UK standard rate
Overseas withholding taxes, net of relief
Tax effect of change in rate on UK net deferred tax assets
Tax credit on loss in overseas subsidiary not recognised
Tax losses in overseas subsidiaries time expired
Reduction in recoverable amounts relating to disputed Indonesian tax assessments
Additional tax provisions
2012
$’000
30,558
2011
$’000
64,173
7,487
17,006
796
(85)
267
1,890
160
1,739
58
557
(14)
532
(135)
(793)
1,947
41
–
–
–
(39)
Tax expense at effective tax rate for the year
12,855
18,559
In addition to the amount charged to the income statement, the following amounts relating to tax have been recognised directly in other
comprehensive income:
Tax relating to cash flow hedges:
Current
Deferred
Reclassification to income statement (see note 8)
–
–
–
–
–
286
(73)
213
116
329
99
Notes to the consolidated financial
statements continued
10. Dividends
Amounts recognised as distributions to equity holders:
Preference dividends of 9p per share
Ordinary dividends of 6.5p per share (2011: 5.5p per share)
2012
$’000
6,713
3,376
10,089
2011
$’000
5,006
2,897
7,903
An interim dividend of 3.5p per ordinary share in respect of the year ended 31 December 2012 was paid on 25 January 2013. In
accordance with IAS10 “Events after the reporting period”, this dividend, amounting in aggregate to $1,852,000, has not been included
in the 2012 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
2012
$’000
11,342
‘000
33,415
–
33,415
2012
$’000
12,578
12,578
2011
$’000
40,453
‘000
33,415
–
33,415
2011
$’000
12,578
12,578
The goodwill of $12,578,000 arose from the acquisition by the company in 2006 of a non-controlling 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 is reviewed for impairment as explained under “Goodwill” in “Accounting policies (group)”. The recoverable amount of the
goodwill is based upon value in use of the oil palm business in Indonesia, which is regarded as the cash generating unit to which the
goodwill relates. Value in use is assessed by revaluing the biological assets of the oil palm business on the basis of the principles applied
in determining their fair value as detailed in note 13 but utilising a standard unit profit margin calculated by reference to a five year
average of historic profit margins rather than the longer term average assumed in determining fair value. The directors consider this to
be an appropriate method for determining value in use as it maintains consistency of methodology between estimations of value in use
and the IAS 41 valuation. Based upon the recent review, the directors have concluded that no impairment of goodwill is required.
Acquisition of subsidiary
Pursuant to contracts dated 13 March and 6 June 2012, the group acquired 95 per cent of the issued share capital of PT Persada
Bangun Jaya (“PBJ2”) for a cash consideration of $1,616,000. At the date of acquisition, PBJ2 held land permits (izin lokasi) in respect
of 5,192 hectares in 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
Satisfied by:
Cash payment by group
Subscription by Indonesian investor
100
$’000
1,641
1,616
25
1,641
13. Biological assets
Beginning of year
Additions to planted area and costs to maturity including finance costs (see note 8)
Transfers to property, plant and equipment (see note 14)
Transfers from prepaid operating lease rentals (see note 15)
Transfers to non-current receivables
Transfers to current receivables
Net biological gain
End of year
Net biological gain comprises:
Fair value of crops harvested during the year (see note 2)
Gain arising from movement in fair value attributable to other physical changes
Gain arising from movement in fair value attributable to price changes
2012
$’000
244,433
15,369
–
45
(79)
(84)
5,979
265,663
(78,468)
72,226
12,221
5,979
2011
$’000
221,883
15,502
(76)
–
(3)
(248)
7,375
244,433
(90,906)
87,186
11,095
7,375
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)”. Critical judgements in relation to these matters are detailed in note 1. The fair value determination assumed
a discount rate of 15 per cent in the case of PT REA Kaltim Plantations (“REA Kaltim”), 15 per cent in the case of PT Sasana Yudha
Bhakti (“SYB”) and 18 per cent in the case of all other group companies (2011: 16 per cent in the case of REA Kaltim, 17.5 per cent in
the case of SYB and 19 per cent in the case of all other group companies) and a standard unit margin of $55.20 per tonne of oil palm
fresh fruit bunches (“FFB”) (2011: standard unit margin of $52.50 per tonne of FFB).
The fair valuation of the group’s biological assets as at 31 December 2012 determined on the basis of the methodology utilised as at
31 December 2011 would have amounted to $251 million.
The valuation of the group’s biological assets would have been reduced by $14,250,000 (2011: $13,600,000) if the crops projected for
the purposes of the valuation had been reduced by 5 per cent; by $13,570,000 (2011: $12,890,000) if the discount rates assumed had
been increased by 1 per cent and by $25,810,000 (2011: $25,880,000) if the assumed unit profit margin per tonne of oil palm FFB had
been reduced by $5.
As a general rule, all palm products produced by the group are sold at prices prevailing immediately prior to delivery but on occasions,
when market conditions appear favourable, the group makes forward sales at fixed prices. When making such sales, the group would not
normally commit more than 60 per cent of its projected production for a forthcoming period of twelve months. At 31 December 2012,
the group had no outstanding forward sale contracts at fixed prices (2011: none).
At 31 December 2012, the group had no outstanding forward sales for delivery in 2013, on terms that the sales price of each delivery
be determined immediately ahead of delivery by reference to prevailing open market prices (31 December 2011: 6,000 tonnes per month
for the eleven month period to 30 November 2012).
At the balance sheet date, biological assets of $67,580,000 (2011: $64,349,000) had been charged as security for bank loans (see
note 23) but there were otherwise no restrictions on titles to the biological assets (2011: none). Expenditure approved by the directors
for the development of immature areas in 2013 amounts to $20,000,000 (2011: $47,000,000).
101
Notes to the consolidated financial
statements continued
14. Property, plant and equipment
Buildings
and structures
Plant, Construction
in progress
Total
Cost:
At 1 January 2011
Additions
Exchange differences
Disposals
Transfers (see note 13)
At 31 December 2011
Additions
Exchange differences
Disposals
At 31 December 2012
Accumulated depreciation:
At 1 January 2011
Charge for year
Exchange differences
Eliminated on disposals
At 31 December 2011
Charge for year
Exchange differences
Eliminated on disposals
At 31 December 2012
Carrying amount:
End of year
Beginning of year
equipment
and vehicles
$’000
39,464
1,747
(17)
(234)
7,193
48,153
18,847
31
(462)
66,569
14,831
3,379
(12)
(159)
18,039
3,994
17
(422)
21,628
$’000
53,818
3,329
–
(76)
2,035
59,106
16,533
–
–
75,639
4,373
2,047
–
(11)
6,409
2,573
–
–
8,982
$‘000
$‘000
11,410
17,116
–
–
(9,152)
19,374
14,638
–
–
34,012
–
–
–
–
–
–
–
–
–
104,692
22,192
(17)
(310)
76
126,633
50,018
31
(462)
176,220
19,204
5,426
(12)
(170)
24,448
6,567
17
(422)
30,610
66,657
52,697
44,941
30,114
34,012
19,374
145,610
102,185
The depreciation charge for the year includes $171,000 (2011: $135,000) 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 $nil (2011: $nil).
At the balance sheet date, the group had entered into contractual commitments for the acquisition of property, plant and equipment
amounting to $5,212,000 (2011: $37,849,000).
102
15. Prepaid operating lease rentals
Cost:
Beginning of year
Additions
Transfers to biological assets (note 13)
Transfers to non-current assets
End of year
Accumulated amortisation:
Beginning of year
Charge for year
End of year
Carrying amount:
End of year
Beginning of year
2012
$‘000
25,261
3,857
(45)
(291)
28,782
1,764
388
2,152
2011
$‘000
18,532
6,729
–
–
25,261
1,255
509
1,764
26,630
23,497
23,497
17,277
Additions in the year include $1,641,000 (2011: $nil) in respect of a subsidiary acquired during the year.
The amortisation charge for the year includes $164,000 (2011: $357,000) which has been capitalised as part of the additions to
biological assets.
Balances classified as prepaid operating lease rentals represent amounts invested in land utilised for the purpose of the plantation
operations in Indonesia. At 31 December 2012, certificates of hak guna usaha had been obtained in respect of areas covering 70,584
hectares (2011: 70,584 hectares). An hak guna usaha (literally a “right of agricultural use”) is effectively a government lease entitling
the lessee to utilise the land leased for agricultural and related purposes. Retention of an hak guna usaha is subject to payment of annual
land taxes in accordance with prevailing tax regulations. Hak guna usaha are granted for an initial term of 30 years and are renewable
on expiry of such term.
16. Indonesian coal and stone interests
The balance of $29,480,000 (2011: $28,580,000) comprises interest bearing loans made to two Indonesian companies that, directly
and through a further Indonesian company, own rights in respect of certain coal and stone concessions in East Kalimantan Indonesia,
together with related balances; such loans are repayable not later than 2020. Pursuant to the arrangements between the group and its
local partners, KCC Resources Limited (“KCC”) has the right, subject to satisfaction of local regulatory requirements, to acquire the three
concession holding companies at original cost on a basis that will give the group (through KCC) 95 per cent ownership with the balance
of five per cent remaining owned by the local partners. In the meantime, the concession holding companies are being financed by loan
funding from the group and no dividends or other distributions or payments may be paid or made by the concession holding companies
to the local partners without the prior agreement of KCC.
The directors have carried out an impairment review of the loans from PT KCC Resources Indonesia (“KCCI”) by which the group is
funding the concession holding companies. Each concession holding company has been treated as a cash-generating unit and its
recoverable amount has been estimated on the basis of value in use, applying a discount rate of 10 per cent. In view of the uncertainties
arising from the potential difficulties on the extraction and marketing of coal from one of the concessions, the directors have concluded
that an impairment charge of $3.0 million should be recognised in the 2012 consolidated income statement (2011: $nil).
103
Notes to the consolidated financial
statements continued
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.
18. Inventories
Agricultural produce
Engineering and other operating inventory
19. Investments
Shares (non-current assets)
US dollar notes (current assets)
2012
$’000
11,220
9,492
20,712
2012
$’000
–
1,256
1,256
2011
$’000
16,169
9,390
25,559
2011
$’000
1,430
963
2,393
The investments are categorised as held-to-maturity and are carried at amortised cost. The shares comprise redeemable participating
preference shares of $10 each issued by KCC Resources Limited as described in note 26, of which the company owned 146,050
(2011: 143,050). For the reasons given in note 26, at 31 December 2012 the investment has been netted off against the corresponding
liability. The US dollar notes comprise $1,256,000 nominal of the 7.5 per cent dollar notes 2017 issued by the company, as described
in note 25. The fair value of these investments is set out in note 22 under the heading 'Fair value of financial instruments'.
20. Trade and other receivables
Due from sale of goods
Prepayments and advance payments
Advance payment of taxation
Deposits and other receivables
2012
$’000
3,545
10,527
14,022
4,061
32,155
2011
$’000
2,507
11,380
13,226
7,049
34,162
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 30) of 4 days (2011: 4 days). The directors consider that the carrying amount of trade and other receivables
approximates their fair value.
21. Cash and cash equivalents
Cash and cash equivalents comprise cash held by the group and short-term bank deposits and UK government securities with maturities
of less than three months. Cash balances amounting to $555,000 (2011: $nil) are subject to a charge in favour of the trustee for the
9.5 per cent guaranteed sterling notes 2015/17 issued by a subsidiary (see note 24). The Moody’s prime rating of short term bank
deposits amounting to $26.3 million is set out in note 22 under the heading ‘Credit risk’.
104
22. Financial instruments
Capital risk management
The group manages as capital its debt, which includes the borrowings and redeemable preference shares of a subsidiary disclosed in
notes 23 to 26, 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 31 to 34. 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 ranking capital and to constitute that capital as a mix of preference
share capital and borrowings from banks, development institutions and the public debt market, in proportions which suit, and as respects
borrowings have a maturity profile which suits, the assets that such capital is financing. In so doing, the directors regard the company’s
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
Net debt, equity and the net debt to equity ratio at the balance sheet date were as follows:
Debt and related engagements *
Cash and cash equivalents
Net debt and related engagements
* being the book value of long and short term borrowings as detailed in the table below under “Fair value of financial instruments”.
Equity (including non-controlling interests)
Net debt to equity ratio
Significant accounting policies
2012
$’000
163,536
(26,393)
137,143
2011
$’000
126,588
(30,601)
95,987
315,030
43.5%
302,945
31.7%
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 2012 comprised loans, investments and receivables (including Indonesian coal and
stone interests) and cash and cash equivalents amounting to $65,558,000 (2011: $67,127,000).
Non-derivative financial liabilities as at 31 December 2012 comprised liabilities at amortised cost amounting to $170,850,000 (2011:
$123,694,000).
Derivative financial instruments at 31 December 2012 comprised instruments not in designated hedge accounting relationships at fair
value representing a liability of $11,622,000. In 2011, as explained in “Accounting policies (group)”, the group incorrectly accounted for
certain cross-currency interest rate swaps as cash flow hedges and, on that basis, reported liabilities at 31 December 2011 of
$15,321,000 in respect of derivative financial instruments in designated hedge accounting relationships at fair value and $895,000 in
respect of derivative financial instruments not in designated hedge accounting relationships at fair value.
105
Notes to the consolidated financial
statements continued
22. Financial instruments - continued
As explained in note 16, conditional arrangements exist for the group to acquire at historic cost the shares in the Indonesian companies
owning rights over certain coal and stone concessions. The directors have attributed a fair value of zero to these rights in view of the prior
claims of loans to the concession owning companies and the present stage of the operations.
Financial risk management objectives
The group manages the financial risks relating to its operations 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 an Indonesian rupiah term loan facility at 3.5 per cent (2011: 3.5 per cent) above the Jakarta Inter
Bank Offer Rate. In addition, the interest rate formula includes an allowance for the bankers’ cost of funds. Interest is payable on drawings
under US dollar short-term facilities at floating rates varying between 4.9 per cent and 9.9 per cent (2011: between 6.9 per cent and 8.0
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 2012 which carry interest at floating rates would have resulted over a period of one year in a pre-
tax profit (and equity) decrease of approximately $258,000 (2011: pre-tax profit (and equity) increase of $16,000).
The group regards the US dollar as the functional currency of most of its operations and has, until recently, sought to ensure that, as
respects that proportion of its investment in the operations that is met by borrowings, it has no material currency exposure against the
US dollar. Accordingly, where borrowings were incurred in a currency other than the US dollar, the group endeavoured to cover the
resultant currency exposure by way of a debt swap or other appropriate currency hedge. The receipt by a subsidiary of the company
during 2010 of an Indonesian tax assessment seeking to disallow for tax purposes losses on currency hedges has called into question
this policy and, for the immediate future, the group has not hedged its Indonesian rupiah borrowings. The group does not cover the
currency exposure in respect of the component of the investment in its operations 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 up to twelve months and a balance in Indonesian rupiahs up to the aggregate amount drawn in that currency under local bank
facilities 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.
106
22. Financial instruments - continued
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 $974,000 on the net sterling denominated non-derivative monetary items (excluding the sterling notes which
are hedged) (2011: gain of $421,000). 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 $1,439,000 on the net Indonesian rupiah denominated, non-
derivative monetary items (2011: loss of $1,151,000).
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 2012, 66 per cent of bank
deposits were held with banks with a Moody’s prime rating of P1, 2 per cent with a Moody’s prime rating of P2, 26 per cent with a bank
with a Moody’s prime rating of P3 and the balance with banks with no Moody’s prime rating. 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 2012 and 31 December 2011 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 23.
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.
2012
Bank loans
US dollar notes
Sterling notes
KCC preference shares (see note 26)
Trade and other payables, and customer deposits
Weighted
average
interest rate
%
9.0
8.5
10.4
Under
1 year
$’000
5,703
4,739
5,324
–
13,373
29,139
Between
1 and 2
years
$’000
18,951
18,676
5,318
–
–
Over 2
years
$’000
38,517
40,388
67,045
54
–
Total
$’000
63,171
63,803
77,687
54
13,373
42,945
146,004
218,088
107
Notes to the consolidated financial
statements continued
22. Financial instruments - continued
2011
Bank loans
US dollar notes
Sterling notes
KCC preference shares (see note 26)
Trade and other payables, and customer deposits
Weighted
average
interest rate
%
11.3
9.1
10.4
Under
1 year
$’000
4,988
7,625
5,080
–
10,997
28,690
Between
1 and 2
years
$’000
2,797
17,250
5,070
–
–
Over 2
years
$’000
30,223
16,125
69,118
1,500
–
Total
$’000
38,008
41,000
79,268
1,500
10,997
25,117
116,966
170,773
At 31 December 2012, the group’s non-derivative financial assets (other than receivables) comprised cash and deposits of $26,400,000
(2011: $30,601,000) carrying a weighted average interest rate of 1.4 per cent (2011: 2.3 per cent) all having a maturity of under one
year, and Indonesian coal interests of $29,480,000 (2011: $28,580,000) details of which are given in note 16.
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 27. The cash flows are settled gross and, therefore, the table takes no account
of sterling receipts under the CCIRS.
At 31 December 2012
At 31 December 2011
Fair value of financial instruments
Under
1 year
$’000
7,197
7,296
Between
1 and 2
years
$’000
7,138
7,197
Over 2
years
$’000
75,798
82,936
Total
$’000
90,133
97,429
The table below provides an analysis of the book values and fair values of financial instruments, excluding receivables and trade payables
and Indonesian coal interests, as at the balance sheet date. All financial instruments are classified as level 1 in the fair value hierarchy
prescribed by IFRS 7 “Financial instruments: disclosures” other than the cross currency interest rate swaps and the preference shares
issued by a subsidiary that are classified as levels 2 and 3 respectively. No reclassifications between levels in the fair value hierarchy
were made during 2012 (2011: none).
Cash and deposits +
Bank debt - within one year +
Bank debt - after more than one year +
Preference shares issued by a subsidiary
US dollar notes o
Sterling notes o
Cross currency interest rate swaps - hedge against principal liabilities
Net debt and related engagements
Cross currency interest rate swaps - hedge against interest liabilities
Cross currency interest rate swaps - hedge against interest liabilities
+bearing interest at floating rates
o bearing interest at fixed rates
108
2012
Book value
$’000
26,393
(1,000)
(51,194)
(54)
(48,698)
(54,279)
(8,311)
(137,143)
(2,416)
(894)
2012
Fair value
$’000
26,393
(1,000)
(51,194)
–
(48,813)
(59,233)
(8,311)
(142,158)
(2,416)
(894)
2011
Book value
$’000
30,601
(2,000)
(27,018)
(1,500)
(33,941)
(51,332)
(10,797)
(95,987)
(4,524)
(895)
2011
Fair value
$’000
30,601
(2,000)
(27,018)
(1,500)
(35,000)
(56,094)
(10,797)
(101,808)
(4,524)
(895)
(140,453)
(145,468)
(101,406)
(107,227)
22. Financial instruments - continued
The fair values of cash and deposits and bank debt approximate their carrying values since these carry interest at current market rates.
The fair values of the US dollar notes and sterling notes are based on the latest prices at which those notes were traded prior to the
balance sheet dates.
For 2012, the book value of the preference shares issued by a subsidiary is net of the investment held by the company (see note 19).
The fair value of the preference shares issued by a subsidiary has been estimated by the directors on the basis of their assessment of
the probability of the shares becoming redeemable on 31 December 2014 in accordance with their terms and of the redemption value
then applicable discounted for the period from the balance sheet date to 31 December 2014.
The fair value of the CCIRS has been derived by a discounted cash flow analysis using quoted foreign forward exchange rates and yield
curves derived from quoted interest rates with maturities corresponding to the applicable cash flows. The valuation of the CCIRS at 31
December 2012 at fair value resulted in a loss of $11,622,000 (2011: loss of $16,216,000). The movement in 2012 has been dealt
with through the consolidated income statement. In 2011, as explained in “Accounting policies (group)”, the group incorrectly accounted
for the CCIRS as a cash flow hedge and the movement of $1,510,000, before related tax relief, was dealt with as follows: a loss of
$190,000 was included in finance charges in the consolidated income statement and a gain of $1,700,000 was recognised in other
comprehensive income.
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 $1,192,000 (2011: $1,607,000).
23. Bank loans
Bank loans
The bank loans are repayable as follows:
On demand or within one year
Between one and two years
After two years
Amount due for settlement within 12 months (shown under current liabilities)
Amount due for settlement after 12 months
2012
$‘000
52,194
1,000
17,714
33,480
52,194
1,000
51,194
52,194
2011
$‘000
29,018
2,000
–
27,018
29,018
2,000
27,018
29,018
All bank loans are denominated in either US dollars ($16.0 million - 2011: $2.0 million) or Indonesian rupiahs ($36.2 million - 2011:
$27.0 million) and are at floating rates, thus exposing the group to interest rate risk. The weighted average interest rate in 2012 was 9.9
per cent (2011: 11.3 per cent). Bank loans of $37,194,000 (2011: $27,018,000) are secured on the land, plantations, property, plant
and equipment owned by PT Sasana Yudha Bhakti (“SYB”), having an aggregate book value of $121 million (2011: $91 million), and are
the subject of an unsecured guarantee by the company and REA Kaltim. The banks are entitled to have recourse to their security on
usual banking terms.
At the balance sheet date, the group had undrawn US dollar denominated bank facilities of $9.0 million (2011: $10.0 million) and
undrawn Indonesian rupiah denominated facilities of $nil (2011: $11.6 million).
109
Notes to the consolidated financial
statements continued
24. Sterling notes
The sterling notes comprise £34.54 million (2011: £34.54 million) nominal of 9.5 per cent guaranteed sterling notes 2015/17 issued
by the company’s subsidiary, REA Finance B.V. (“REAF”). The sterling notes are guaranteed by the company and another wholly owned
subsidiary of the company, R.E.A. Services Limited (“REAS”), and are secured principally on unsecured loans made by REAS to
Indonesian plantation operating subsidiaries of the company. 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 £34.54 million ($56.1 million) is hedged by forward foreign exchange
contracts 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. The gain or loss on the ineffective portion of these contracts is reflected in finance costs in the
consolidated income statement.
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.
The sterling notes are issued by REA Finance B.V., a wholly owned subsidiary of the company, are guaranteed by the company and
another wholly owned subsidiary of the company, R.E.A. Services Limited (“REAS”), are secured principally on unsecured loans made by
REAS to Indonesian plantation operating subsidiaries of the company and, save to the extent previously redeemed or cancelled, are
repayable by three equal annual instalments commencing 31 December 2015.
25. US dollar notes
The US dollar notes comprise US$16 million (2011: $35 million) nominal of 7.5 per cent dollar notes 2012/14 (“2012/14 dollar notes”)
and US$34.0 million (2011: nil) nominal of 7.5 per cent dollar notes 2017 (“2017 dollar notes”) of the company, and are stated net of
the unamortised balance of the note issuance costs.
$34 million nominal of 2017 dollar notes were issued in November 2012, as to some $19 million nominal by way of an exchange offer
to holders of existing 2012/14 dollar notes and as to the balance by way of a placing at par. Pursuant to the placing R.E.A. Services
Limited (“REAS”), a subsidiary of the company, agreed to subscribe for $2.0 million nominal of 2017 dollar notes, pending investment
decisions by certain external prospective placees. At 31 December 2012 REAS had resold, at the placing price, $0.7 million nominal of
the notes so subscribed by it, leaving a balance as at that date of $1.26 million nominal (see note 19). REAS has, subsequent to the year-
end, sold its remaining holding.
The 2012/14 and 2017 dollar notes are unsecured obligations of the company. The 2012/14 dollar notes are repayable by three
instalments commencing 31 December 2012 but repayment obligations are reduced to the extent that notes have been previously
redeemed or purchased and cancelled. A substantial nominal amount of the original issue of 2012/14 dollar notes has now been
purchased and cancelled (including the $19.0 million nominal of the notes acquired under the exchange offer referred to above). As a
result, and subject to any further purchases and cancellations, slightly under $1 million of the outstanding 2012/14 dollar notes will fall
due for repayment at the end of 2013 and the balance at the end of 2014. The 2017 dollar notes are repayable on 30 June 2017.
110
26. Preference shares issued by a subsidiary
On 11 February 2010 150,000 redeemable participating preference shares of $10 each were issued by KCC Resources Limited (“KCC
preference shares”), a subsidiary undertaking of the company, fully paid, by way of a placing at par. The KCC preference shares provide
a limited participation in the coal and stone interests of the company such that if those interests achieve an average annual level of
earnings before interest, tax, depreciation and amortisation of $8 million over the four and a half year period from 1 January 2010 to 30
June 2014 (equivalent to $36 million for the full period), those persons who subscribed 7.5 per cent dollar notes 2012/14 of the
company and KCC preference shares in a combined issue of those securities pursuant to a placing agreement dated 28 January 2010,
and who retain their notes and shares until redeemed, will receive an overall compound return of 15 per cent per annum on their total
investment. If the required level of earnings is not achieved, then, except in certain limited circumstances (such as divestment of all or a
significant part of the coal and stone interests or a change in control of the company), no dividends or other distributions will be paid or
made on the KCC preference shares and after 31 December 2014 such shares will be converted into valueless deferred shares.
On 11 February 2010 150,000 redeemable participating preference shares of $10 each were issued by KCC Resources Limited (“KCC
preference shares”), a subsidiary undertaking of the company, fully paid, by way of a placing at par. The KCC preference shares provide
a limited participation in the coal and stone interests of the company such that if those interests achieve an average annual level of
earnings before interest, tax, depreciation and amortisation of $8 million over the four and a half year period from 1 January 2010 to 30
June 2014 (equivalent to $36 million for the full period), those persons who subscribed 7.5 per cent dollar notes 2012/14 of the
company and KCC preference shares in a combined issue of those securities pursuant to a placing agreement dated 28 January 2010,
and who retain their notes and shares until redeemed, will receive an overall compound return of 15 per cent per annum on their total
investment. If the required level of earnings is not achieved, then, except in certain limited circumstances (such as divestment of all or a
significant part of the coal and stone interests or a change in control of the company), no dividends or other distributions will be paid or
made on the KCC preference shares and after 31 December 2014 such shares will be converted into valueless deferred shares.
At 31 December 2012 the company had acquired 146,050 KCC preference shares (2011: 143,050). Following conclusion by the
directors that it is unlikely that the required level of earnings will be achieved, the KCC preference shares at 31 December 2012 have
been carried net of the company’s holding.
27. Derivative financial instruments
At both 31 December 2012 and 31 December 2011, the group had outstanding three contracts providing in aggregate for the forward
purchase of £37 million and sale of $68.6 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 had or has the option to terminate the
CCIRS as to £22 million on 14 February 2012 (not exercised), as to £8 million on 30 September 2013 and as to £7 million on any of
24 October 2013, 2014 and 2015 on the basis that, upon such termination, the CCIRS will be closed out at prevailing market value
calculated by reference to mid market interest and sterling US dollar exchange rates with no adjustment for specific credit risk. As
described in Accounting policies (group), the group has concluded that these instruments do not qualify to be accounted for as cash flow
hedges and has transferred the balance in hedging reserve at 1 January 2012 to retained earnings (note 33).
111
Notes to the consolidated financial
statements continued
28. 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)
Property, plant
and equipment
Biological
assets
Income/
expenses*
At 1 January 2011
(Charge) / credit to income for the year
Effect of change in tax rate
Charge to equity for the year
Exchange differences **
At 31 December 2011
(Charge) / credit to income for the year
Effect of change in tax rate
Charge to equity for the year
Exchange differences **
$’000
(22,670)
(1,816)
(1)
–
4,060
(20,427)
(1,706)
–
–
83
$’000
(17,278)
(2,260)
–
–
–
(19,538)
(1,818)
–
–
–
At 31 December 2012
(22,050)
(21,356)
Deferred tax assets
Deferred tax liabilities
At 31 December 2012
Deferred tax assets
Deferred tax liabilities
17
(22,067)
–
(21,356)
(22,050)
(21,356)
247
(20,674)
–
(19,538)
Agricultural
produce
inventory
$’000
(983)
(1,003)
–
–
–
(1,986)
1,420
–
–
–
(566)
–
(566)
(566)
–
(1,986)
(1,986)
Tax
losses
$’000
898
760
(21)
–
(31)
1,606
1,371
–
–
(98)
2,879
2,879
–
2,879
1,606
–
1,606
Total
$’000
(35,267)
(3,903)
(22)
(271)
3,869
(35,594)
(2,445)
–
(338)
68
(38,309)
6,063
(44,372)
(38,309)
6,675
(42,269)
(35,594)
$’000
4,766
416
–
(271)
(160)
4,751
(1,712)
–
(338)
83
2,784
3,167
(383)
2,784
4,822
(71)
4,751
At 31 December 2011
*
** forming part of the exchange differences on translation of foreign operations.
(20,427)
(19,538)
includes income, gains or expenses recognised for reporting purposes, but not yet charged to or allowed for tax.
At the balance sheet date, the group had unused tax losses of $11.8 million (2011: $6.4 million) available to be applied against future
profits. A deferred tax asset of $2,879,000 (2011: $1,606,000) has been recognised in respect of these losses. A tax loss of $5.6 million
incurred by the group’s coal subsidiary in 2012 has not been so recognised.
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 $11,125,000 (2011: $11,869,000). 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 Indonesian tax losses assumes that losses for tax purposes incurred by the operating companies in
Indonesia may be carried forward for five years.
112
29. Other loans and payables
Retirement benefit obligations (see note 38):
UK
Indonesia
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
Amounts of liabilities by currency:
Sterling
US dollar
Indonesian rupiah
2012
$’000
3,429
4,659
274
8,362
2011
$’000
2,230
4,260
543
7,033
1,105
1,353
1,473
2,509
3,275
7,257
1,316
2,524
1,840
5,680
8,362
7,033
3,523
180
4,659
8,362
2,469
304
4,260
7,033
Further details of the retirement benefit obligations are set out in note 38. The directors estimate that the fair value of retirement benefit
obligations and of other loans and payables approximates their carrying value.
30. 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 (2011: 38 days).
The directors estimate that the fair value of trade payables approximates their carrying value.
31. Share capital
Authorised (in pounds sterling):
50,000,000 - 9 per cent cumulative preference shares of £1 each (2011: 45,000,000)
41,000,000 - ordinary shares of 25p each (2011: 41,000,000)
2012
$’000
11,414
585
4,464
12,088
1,500
30,051
2012
£’000
50,000
10,250
60,250
2011
$’000
7,013
3,695
2,982
5,694
511
19,895
2011
£’000
45,000
10,250
55,250
113
Notes to the consolidated financial
statements continued
31. Share capital - continued
Issued and fully paid (in US dollars):
50,000,000 - 9 per cent cumulative preference shares of £1 each (2011: 44,068,553)
33,414,545 - ordinary shares of 25p each (2011: 33,414,545)
2012
2011
$’000
83,007
14,558
97,565
$’000
73,381
14,558
87,939
The preference shares entitle the holders thereof to payment, out of the profits of the company available for distribution and resolved to
be distributed, of a fixed cumulative preferential dividend of 9 per cent per annum on the nominal value of the shares and to repayment,
on a winding up of the company, of the amount paid up on the preference shares and any arrears of the fixed dividend in priority to any
distribution on the ordinary shares. Subject to the rights of the holders of preference shares, holders of ordinary shares are entitled to
share equally with each other in any dividend paid on the ordinary share capital and, on a winding up of the company, in any surplus assets
available for distribution among the members.
Changes in share capital:
•
•
on 17 September 2012, 3,926,575 9 per cent cumulative preference shares were issued, fully paid, by way of a placing at 105p
per share (total consideration £4,123,000 - $6,708,000)
on 28 September 2012, 2,004,872 9 per cent cumulative preference shares were issued, credited as fully paid, to ordinary
shareholders by way of capitalisation of share premium account.
32. Share premium account
At 1 January 2011
Issue of new preference shares (cash and scrip)
At 31 December 2011
Issue of new preference shares (cash and scrip)
At 31 December 2012
33. Translation reserve
At 1 January 2011
Prior year reclassification (note 34)
Change in fair value of cash flow hedge
Exchange differences on translation of foreign operations
Other movements in the year
Taxation for the year
Attributable to non-controlling interests
At 31 December 2011
Correction of previous accounting error
Change in fair value of cash flow hedge
Exchange differences on translation of foreign operations
Other movements in the year
Taxation for the year
Attributable to non-controlling interests
At 31 December 2012
114
$’000
24,901
(3,130)
21,771
(3,091)
18,680
Total
$’000
(18,197)
1,021
1,700
3,799
283
(329)
(39)
(11,762)
9,099
–
(2,064)
–
–
(127)
(4,854)
Hedging
reserve
$’000
(10,451)
–
1,700
(303)
283
(329)
1
(9,099)
9,099
–
–
–
–
–
–
Other
reserve
$’000
(7,746)
1,021
–
4,102
–
–
(40)
(2,663)
–
–
(2,064)
–
–
(127)
(4,854)
33. Translation reserve - continued
As described in Accounting policies (group), the group has concluded that its hedging instruments do not qualify to be accounted for as
cash flow hedges and has transferred the balance in hedging reserve at 1 January 2012 to retained earnings.
Had the correct accounting been applied in the years 2009 to 2011 the effect on reported profit before tax, tax, profit for the period and
the component of that profit attributable to non-controlling interests would have been as follows:
2009:
Profit before tax
Tax
Profit after tax
Attributable to non controlling interests
2010:
Profit before tax
Tax
Profit after tax
Attributable to non controlling interests
2011:
Profit before tax
Tax
Profit after tax
Attributable to non controlling interests
As reported
$’000
Correction As corrected
$’000
$’000
41,717
(11,861)
29,856
6,674
(1,791)
4,883
48,391
(13,652)
34,739
518
(39)
479
50,447
(15,474)
34,973
(2,292)
(4,944)
(7,236)
48,155
(20,418)
27,737
288
16
304
64,173
(18,559)
45,614
1,680
(329)
1,351
65,853
(18,888)
46,965
155
1
156
The cumulative amount recognised in equity in respect of the erroneous hedge accounting was $9,099,000, which has been reclassified
at the beginning of the current year from translation reserve to retained earnings.
34. Retained earnings
Beginning of year
Correction of previous accounting error (note 33)
Prior year reclassification
Profit for the year
Ordinary dividend paid
End of year
2012
$’000
202,763
(9,099)
–
11,342
(3,376)
2011
$’000
166,228
–
(1,021)
40,453
(2,897)
201,630
202,763
115
Notes to the consolidated financial
statements continued
35. Non-controlling interests
Beginning of year
Share of profit for the year
Share of items taken directly to equity
Exchange translation differences
Subscription to share capital of new subsidiary
End of year
36. 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 gain
Impairment loss
Loss on disposal of property, plant and equipment
Operating cash flows before movements in working capital
Increase in inventories (excluding fair value movements)
Decrease / (increase) in receivables
Increase in payables
Exchange translation differences
Cash generated by operations
Taxes paid
Tax refund received
Interest paid
Net cash from operating activities
2012
$’000
2,234
(352)
–
127
–
2,009
2012
$’000
37,848
6,162
5,678
388
645
(5,979)
3,000
39
47,781
(831)
2,070
6,891
(801)
55,110
(16,200)
1,261
(7,701)
2011
$’000
2,040
155
(1)
40
–
2,234
2011
$’000
72,749
5,292
(4,011)
152
1,012
(7,375)
–
419
68,238
(7,661)
(9,028)
8,490
(185)
59,854
(15,176)
–
(10,902)
32,470
33,776
No additions to property, plant and equipment during the year were financed by new finance leases (2011: $nil).
37. Movement in net borrowings
Change in net borrowings resulting from cash flows:
Decrease in cash and cash equivalents
Net increase in borrowings
Issue of US dollar notes, net of amortisation of issue expenses
Redemption of US dollar notes, net of amortisation of issue expenses
Redemption of sterling notes, net of amortisation of issue expenses
Investments netted off against preference shares liability
Net sale and repurchase of US dollar notes
Currency translation differences
Net borrowings at beginning of year
Net borrowings at end of year
116
2012
$’000
2011
$’000
(3,965)
(25,424)
(29,389)
(33,593)
18,355
–
(1,430)
259
(45,798)
2,156
(85,190)
(5,670)
(9,180)
(14,850)
–
9,328
3,609
–
–
(1,913)
501
(83,778)
(128,832)
(85,190)
38. Retirement benefit obligations
United Kingdom
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 employers are unable to identify their respective shares 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 2011. This method was
adopted in the previous valuation as at 31 December 2008, as it was considered the appropriate method of calculating future service
benefits as the Scheme is closed to new members. At 31 December 2011 the Scheme had an overall shortfall in assets (deficit), when
measured against the Scheme’s technical provisions, of £5,197,000. The technical provisions were calculated using assumptions of an
investment return of 4.70 per cent pre-retirement and 3.20 per cent post-retirement and annual increases in pensionable salaries of 3.0
per cent. The basis for the inflationary revaluation of deferred pensions and increases to pensions in payment was changed from the
Retail Prices Index (RPI) to the Consumer Prices Index (CPI) with effect from 1 January 2011 in line with the statutory change, except
that the change does not apply to pension accrual from 1 January 2006, where the RPI still applies. The rates of increase in the RPI and
the CPI were assumed to be 3.0 per cent and 2.25 per cent respectively. It was further assumed that both non-retired and retired
members’ mortality would reflect S1PXA tables at 85 per cent and that non-retired members would take on retirement the maximum cash
sums permitted from 1 January 2012. Had the Scheme been valued at 31 December 2011 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 participating employers covering normal contributions which are payable at a rate calculated to cover future service benefits under
the Scheme. The Scheme has also agreed a recovery plan with participating employers which provides for recovery of the deficit shown
by the 31 December 2011 valuation through the payment of quarterly additional contributions over the period from 1 January 2013 to
30 September 2018 after taking account of the additional contributions paid in 2012 under the 31 December 2008 valuation.
The normal contributions paid by the group in 2012 were £17,000 - $27,000 (2011: £16,000 - $26,000) and represented 23.4 per
cent (2011: 23.4 per cent) of pensionable salaries. The additional contribution applicable to the group for 2012 was £231,000 -
$367,000 (2011: £225,000 - $362,000). Under the valuation as at 31 December 2011 the normal contributions will increase to the
rate of 36.4 per cent of pensionable salaries and the additional contribution will rise to £396,000 - $643,000 for 2013, £407,000 -
$661,000 for 2014 and thereafter by 2.75 per cent per annum. A provision of £2,109,000 - $3,429,000 (2011: £1,435,000 -
$2,230,000) for these additional contributions adjusted for the time value of money has been recognised under retirement benefit
obligations (see note 29) with an equal charge to income, net of related tax relief. To the extent that the group makes additional
contribution to the scheme, a relevant portion of such provision will credited to income.
The net charge/ (credit) to administrative expenses was as follows:
Release of provision relating to additional contributions paid in the year
Additional provision arising from the 2011 actuarial valuation
Net charge/ (credit) to administrative expenses (note 5)
The next actuarial valuation will be made as at 31 December 2014.
2012
$’000
(367)
1,439
1,072
2011
$’000
(253)
–
(253)
117
Notes to the consolidated financial
statements continued
38. Retirement benefit obligations - continued
The company has a contingent liability of $3.8 million (2011: $2.5 million) 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.
Indonesia
In accordance with Indonesian labour laws, group employees in Indonesia are entitled to lump sum payments on retirement at the age of
55 years. The group makes a provision for such payments in its financial statements but does not fund these with any third party or set
aside assets to meet the entitlements. The provision was assessed at each balance sheet date by an independent actuary using the
projected unit method. The principal assumptions used were as follows:
Discount rate
Salary increases per annum
Mortality table (Indonesia)
Retirement age (years)
Disability rate (% of the mortality table)
The movement in the provision for employee service entitlements was as follows:
2012
6.3%
6%
TM11-2009
55
10
2011
7.1%
7%
TM 1-11
55
10
2012
$’000
4,260
846
327
(2)
(52)
(20)
(285)
(415)
4,659
2012
$’000
846
327
(2)
(52)
1,119
(100)
1,019
2011
$’000
2,779
849
285
725
–
–
(71)
(307)
4,260
2011
$’000
849
285
725
–
1,859
(337)
1,522
Balance at 1 January
Current service cost
Interest expense
Actuarial (gain) / loss
Effect of curtailments
Effect of settlements
Exchange
Paid during the year
Balance at 31 December (see note 29)
The amounts recognised in adminstrative expenses in the consolidated income statement were as follows:
Current service cost
Interest expense
Actuarial (gain) / loss
Effect of curtailments
Amount included as additions to biological assets
118
38. Retirement benefit obligations - continued
Unrecognised actuarial losses at 31 December 2012 amounted to $512,000 (2011: $448,000). The movement in the present value
of the employee service entitlements (including such unrecognised actuarial losses) were as follows:
Balance at 1 January
Current service cost
Interest expense
Actuarial loss
Effect of curtailments
Effect of settlements
Exchange
Paid during the year
Balance at 31 December
2012
$’000
4,708
846
327
100
(52)
(20)
(323)
(415)
5,171
2011
$’000
3,096
849
285
856
–
–
(71)
(307)
4,708
Estimated benefit payments in 2013 are $261,000 (2012: $885,000).
39. 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”.
Short term benefits
Post employment benefits
Other long term benefits
Termination benefits
Share based payments
40. Rates of exchange
Indonesia rupiah to US dollar
US dollar to pound sterling
2012
$’000
1,484
–
–
–
–
1,484
2011
$’000
1,315
–
–
–
–
1,315
2012
Closing
2012
Average
2011
Closing
2011
Average
9,670
1.6255
9,392
1.59
9,046
1.554
8,790
1.61
119
Notes to the consolidated financial
statements continued
41. Events after the reporting period
An interim dividend of 3½p per ordinary share in respect of the year ended 31 December 2012 was paid on 25 January 2013. In
accordance with IAS 10 “Events after the reporting period” this dividend, amounting in aggregate to $1,852,000, has not been reflected
in these financial statements.
42. Resolution of competing rights over certain plantation areas
The fully titled land areas held by PT Sasana Yudha Bhakti (“SYB”), a plantation subsidiary of the company, include 3,557 hectares that
are the subject of third party claims in respect of the rights to coal underneath such land. On 30 December 2011, SYB entered into a
conditional settlement arrangement to resolve such claims. Under this agreement, SYB has agreed to swap the 3,557 hectares the
subject of the claims for 9,097 hectares of fully titled land held by another company, PT Prasetia Utama (“PU”), the whole of the issued
share capital of which is to be transferred to SYB. As a term of the settlement, SYB has also agreed to relinquish the 2,212 hectares in
respect of which it holds a land allocation still subject to completion of titling (being land that is also subject to overlapping mineral rights).
The book value of the assets to be relinquished by SYB amounted as at 31 December 2012 to $8.8 million (2011: $13.9 million),
comprising prepaid operating lease rentals of $2.8 million (2011:$2.9 million) and biological assets of $6.0 million (2011:$11.0 million).
The reduction in value of $5.1 million results mainly from the group’s decision to exclude the SYB hectarage to be swapped from the
group’s core plantation land areas, to reduce upkeep expenditure thereon to a minimum and to reflect this decision in the valuation of
biological assets as at 31 December 2012.
The arrangements are conditional, inter alia, upon the consent of the holders of the 9.5 per cent guaranteed sterling notes 2015/17 (see
note 24) which was obtained on 14 March 2012.
During 2012, progress was made in regard to satisfying other conditions. However, completion has been delayed by a need to obtain
comfort as to the continuing validity of the land titles held by PU.
43. Contingent liabilities
Guarantee given by a subsidiary company
In furtherance of Indonesian government policy which requires the owners of oil palm plantations to develop smallholder plantations,
during 2009 and 2010 PT REA Kaltim Plantations (“REA Kaltim”) and PT Sasana Yudha Bhakti (“SYB) , both wholly owned subsidiaries
of the company, entered into agreements with three cooperatives to develop and manage land owned by the cooperatives as oil palm
plantations. To assist with the funding of such development, the cooperatives have concluded various long term loan agreements with
Bank Pembangunan Daerah Kalimantan Timur (“Bank BPD”), a regional development bank, under which the cooperatives may borrow in
aggregate up to Indonesian rupiah 157 billion ($16.3 million) with amounts borrowed repayable over 15 years and secured on the lands
under development (“the bank facilities”). REA Kaltim has guaranteed the obligations of two cooperatives as to payments of principal and
interest under the respective bank facilities and, in addition, has committed to lend to the cooperatives any further funds required to
complete the agreed development. REA Kaltim is entitled to a charge over the developments when the bank facilities have been repaid
in full. SYB has guaranteed the obligations of the third cooperative on a similar basis.
On maturity of the developments, the cooperatives are required to sell all crops from the developments to REA Kaltim and SYB
respectively and to permit repayment of indebtedness to Bank BPD, REA Kaltim and SYB respectively out of the sales proceeds.
As at 31 December 2012 the aggregate outstanding balances owing by the three cooperatives to Bank BPD amounted to Indonesian
rupiah 101 billion ($10,513,000) (2011: Indonesian rupiah 54 billion - $5,963,000).
120
44. Operating lease commitments
The group leases office premises under operating leases in London, Jakarta and Samarinda. These leases, which are renewable, run for
periods of between 1 month and 50 months, and do not include contingent rentals, or options to purchase the properties.
The future minimum lease payments under operating leases are as follows:
Within one year
In the second to fifth year inclusive
After five years
2012
$’000
356
570
–
926
2011
$’000
93
508
–
601
121
Auditor’s report (company)
Independent auditor’s report to the members of R.E.A.
Holdings plc
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts
We have audited the parent company financial statements
and disclosures in the financial statements sufficient to
of R.E.A. Holdings plc for the year ended 31 December
give reasonable assurance that the financial statements
2012 which comprise the balance sheet, the movement in
are free from material misstatement, whether caused by
total shareholders’ funds, the statement of total
fraud or error. This includes an assessment of: whether
recognised gains and losses, the accounting policies and
the accounting policies are appropriate to the parent
the related notes (i) to (xiii). The financial reporting
company’s circumstances and have been consistently
framework that has been applied in their preparation is
applied and adequately disclosed; the reasonableness of
applicable
law and United Kingdom Accounting
significant accounting estimates made by the directors;
Standards
(United Kingdom Generally Accepted
and the overall presentation of the financial statements
Accounting Practice).
and to identify any information that is apparently
materially incorrect based on, or materially inconsistent
This report is made solely to the company’s members, as
with, the knowledge acquired by us in the course of
a body, in accordance with Chapter 3 of Part 16 of the
performing the audit. In addition, we read all the financial
Companies Act 2006. Our audit work has been
and non-financial information in the annual report to
undertaken so that we might state to the company’s
identify material inconsistencies with the audited financial
members those matters we are required to state to them
statements. If we become aware of any apparent material
in an auditor’s report and for no other purpose. To the
misstatements or inconsistencies we consider the
fullest extent permitted by law, we do not accept or
implications for our report.
assume responsibility to anyone other than the company
and the company’s members as a body, for our audit work,
Opinion on financial statements
for this report, or for the opinions we have formed.
Respective responsibilities of directors and auditor
As explained more fully in the statement of Directors’
responsibilities, the directors are responsible for the
preparation of the parent company financial statements
and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on
the parent company financial statements in accordance
with applicable law and International Standards on
Auditing (UK and Ireland). Those standards require us to
comply with the Auditing Practices Board’s Ethical
Standards for Auditors.
In our opinion the parent company financial statements:
•
•
•
give a true and fair view of the state of the parent
company’s affairs as at 31 December 2012;
have been properly prepared in accordance with
United Kingdom Generally Accepted Accounting
Practice; and
have been prepared
in accordance with the
requirements of the Companies Act 2006.
122
Opinion on other matters prescribed by
Companies Act 2006
the
Other matter
In our opinion:
•
•
the part of the Directors’ remuneration report to be
audited has been properly prepared in accordance
with the Companies Act 2006; and
We have reported separately on the group financial
statements of R.E.A. Holdings plc for the year ended 31
December 2012.
the information given in the Directors’ report for the
financial year for which the financial statements are
prepared is consistent with the parent company
Mark McIlquham ACA (Senior Statutory Auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
financial statements.
London, England
25 April 2013
Matters on which we are required to report by
exception
We have nothing to report in respect of the following
matters where the Companies Act 2006 requires us to
report to you if, in our opinion:
•
adequate accounting records have not been kept by
the parent company, or returns adequate for our audit
have not been received from branches not visited by
us; or
•
the parent company financial statements and the part
of the Directors’ remuneration report to be audited
are not in agreement with the accounting records and
returns; or
•
•
certain disclosures of directors’ remuneration
specified by law are not made; or
we have not received all the information and
explanations we require for our audit.
123
Company balance sheet
as at 31 December 2012
Fixed and non-current assets
Investments
Deferred tax asset
Current assets
Debtors
Cash
Total current assets
Creditors: amounts falling due within one year
Net current liabilities
Note
2012
£’000
2011
£’000
(i)
(ii)
(iii)
(iv)
145,166
432
130,678
223
145,598
130,901
3,258
2,716
5,974
(8,248)
(2,274)
5,957
6,122
12,079
(14,465)
(2,386)
Total assets less current liabilities
143,324
128,515
Creditors: amounts falling due after more than one year
Borrowings
Net assets
(v)
(67,044)
(56,532)
76,280
71,983
Capital and reserves
Share capital
Share premium account
Profit and loss account
Total shareholders’ funds
(vi)
(vii)
(vii)
58,353
9,233
8,694
76,280
52,422
11,148
8,413
71,983
Approved by the board on and signed on behalf of the board.
25 April 2013
RICHARD M ROBINOW
Chairman
124
Movement in total shareholders’
funds
for the year ended 31 December 2012
Total recognised gains for the year
Dividends to preference shareholders
Dividends to ordinary shareholders
Issue of new preference shares by way of placing
Issue costs of ordinary shares, preference shares and debt securities
Shareholders' funds at beginning of year
Shareholders' funds at end of year
There are no gains or losses other than those recognised in the profit or loss account.
2012
£’000
2011
£’000
6,686
(4,233)
(2,172)
4,123
(107)
4,297
71,983
76,280
8,734
(3,201)
(1,838)
15,450
(443)
18,702
53,281
71,983
125
Accounting policies (company)
Accounting convention
Taxation
Separate financial statements of R.E.A. Holdings plc (the
“company”) are required by the Companies Act 2006; 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 408 of the Companies Act 2006, 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
Leases
No assets are held under finance leases. Rentals under
operating leases are charged to profit and loss account
on a straight-line basis over the lease term.
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 paid by subsidiaries are credited to the
company's profit and loss account.
Foreign exchange
Transactions in foreign currencies are recorded at the
rates of exchange at the dates of the transactions.
Monetary assets and liabilities denominated in foreign
currencies at the balance sheet date are reported at the
rates of exchange prevailing at that date. Differences
arising on the translation of foreign currency borrowings
have been offset against those arising on an equivalent
amount of investment in the equity of, or loans to, foreign
subsidiaries and taken to reserves, net of any related
taxation. All other exchange differences are included in
the profit and loss account.
126
Notes to the company financial
statements
(i) Investments
Shares in subsidiaries
Loans to subsidiaries
The movements were as follows:
Beginning of year
Additions to shares in and loans to subsidiaries
Exchange translation difference arising on foreign currency hedge
End of year
2012
£’000
57,760
87,406
2011
£’000
58,004
72,674
145,166
130,678
Shares
£’000
58,004
10
(254)
57,760
Loans
£’000
72,674
15,665
(933)
87,406
Shares in subsidiaries include an investment in KCC Resources Limited’s redeemable participating preference shares of $10 each.
3,000 of these shares were purchased from the original placees during June and July 2012 at a cost of $15,600 (£9,990) representing
a price of $5.20 per share (2011: 143,050 of these shares were purchased at a price of $11.07 per share).
The principal subsidiaries at the year end, together with their countries of incorporation, are listed below. Details of UK 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 KCC Resources Indonesia (Indonesia)
PT Kutai Mitra Sejahtera (Indonesia)
PT Persada Bangun Jaya (Indonesia)
PT Putra Bongan Jaya (Indonesia)
PT REA Kaltim Plantations (Indonesia)
PT Sasana Yudha Bhakti (Indonesia)
KCC Resources Limited
KCC Resources Limited
REA Finance B.V. (Netherlands)
R.E.A. Services Limited (England and Wales)
REA Services Private Limited (Singapore)
Sub holding company
Plantation agriculture
Plantation agriculture
Coal operations
Plantation agriculture
Plantation agriculture
Plantation agriculture
Plantation agriculture
Plantation agriculture
Group finance
Group finance
Group finance
Group finance and services
Group services
Class of
shares
Percentage
owned
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Ordinary
Preference
Ordinary
Ordinary
Ordinary
100
95
95
95
95
95
95
100
95
100
97
100
100
100
The entire shareholdings in Makassar Investments Limited, R.E.A. Services Limited, REA Finance B.V. and REA Services Private Limited
are held directly by the company. All other shareholdings are held by subsidiaries.
The following dormant UK subsidiaries, together with their company registration number have taken advantage of the exemption pursuant
to Companies Act 2006 s394A from preparing individual accounts:
Subsidiary
Cairnhill Investments Limited
Jentan Plantations Limited
Kutai Plantations Limited
Sandan Investments Limited
Company
registrarion number
6424228
6662767
4740407
6419813
127
Notes to the company financial
statements continued
(ii) Deferred tax asset
Deferred tax:
Beginning of year
Net amount credited to profit and loss account
End of year
Included in non-current assets
Net deferred tax asset at end of year
The deferred tax asset is made up as follows:
Timing differences
Tax losses available
Undiscounted deferred tax
2012
£’000
2011
£’000
223
209
432
432
432
–
432
432
–
223
223
223
223
–
223
223
At the balance sheet date, the company had unused tax losses available to be applied against future profits amounting to £1,880,000
(2011: £860,000). A deferred tax asset of £432,000 (2011: £223,000) has been recognised in respect of these losses as the company
considers, based on financial projections, that the losses will be utilised.
(iii) Debtors
Trade debtors
Amount owing by group undertakings
Other debtors
Prepayments and accrued income
(iv) Creditors: amounts falling due within one year
US dollar notes
Amount owing to group undertakings
Other creditors
Accruals
(v) Creditors: amounts falling due after more than one year
US dollar notes
Amount owing to group undertaking
Amounts due between two and five years
Amounts due after five years
128
2012
£’000
464
2,458
336
–
3,258
2012
£’000
425
7,633
20
170
8,248
2012
£’000
29,569
37,475
67,044
67,044
–
67,044
2011
£’000
–
5,921
4
32
5,957
2011
£’000
2,913
11,431
22
99
14,465
2011
£’000
19,057
37,475
56,532
44,040
12,492
56,532
(v) Creditors: amounts falling due after more than one year - continued
The US dollar notes comprise US$16 million (2011: $35 million) nominal of 7.5 per cent dollar notes 2012/14 (“2012/14 dollar notes”)
and US$34.0 million (2011: nil) nominal of 7.5 per cent dollar notes 2017 (“2017 dollar notes”) of the company, and are stated net of
the unamortised balance of the note issuance costs.
US$34 million nominal of 2017 dollar notes were issued in November 2012, as to some $19 million nominal by way of an exchange
offer to holders of existing 2012/14 dollar notes and as to the balance by way of a placing at par. Pursuant to the placing R.E.A. Services
Limited (“REAS”), a subsidiary of the company, agreed to subscribe for $2.0 million nominal of 2017 dollar notes, pending investment
decisions by certain external prospective placees. At 31 December 2012 REAS had resold, at the placing price, $0.7 million nominal of
the notes so subscribed by it, leaving a balance as at that date of $1.26 million nominal (see note 19 to the consolidated financial
statements). REAS has, subsequent to the year-end, sold its remaining holding.
The 2012/14 and 2017 dollar notes are unsecured obligations of the company. The 2012/14 dollar notes are repayable by three
instalments commencing 31 December 2012 but repayment obligations are reduced to the extent that notes have been previously
redeemed or purchased and cancelled. A substantial nominal amount of the original issue of 2012/14 dollar notes has now been
purchased and cancelled (including the $19.0 million nominal of the notes acquired under the exchange offer referred to above). As a
result, and subject to any further purchases and cancellations, slightly under $1 million nominal of the outstanding 2012/14 dollar notes
will fall due for repayment at the end of 2013 and the balance at the end of 2014. The 2017 dollar notes are repayable on 30 June
2017.
As disclosed in note (viii), the 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.
(vi) Share capital
Authorised:
50,000,000 - 9 per cent cumulative preference shares of £1 each (2011: 45,000,000)
41,000,000 - ordinary shares of 25p each (2011: 41,000,000)
Called-up and fully paid:
50,000,000 - 9 per cent cumulative preference shares of £1 each (2011: 44,068,553)
33,414,545 - ordinary shares of 25p each (2011: 33,414,545)
2012
£’000
50,000
10,250
60,250
50,000
8,353
58,353
2011
£’000
45,000
10,250
55,250
44,069
8,353
52,422
The preference shares entitle the holders thereof to payment, out of the profits of the company available for distribution and resolved to
be distributed, of a fixed cumulative preferential dividend of 9 per cent per annum on the nominal value of the shares and to repayment,
on a winding up of the company, of the amount paid up on the preference shares and any arrears of the fixed dividend in priority to any
distribution on the ordinary shares. Subject to the rights of the holders of preference shares, holders of ordinary shares are entitled to
share equally with each other in any dividend paid on the ordinary share capital and, on a winding up of the company, in any surplus assets
available for distribution among the members.
Changes in share capital:
•
•
on 17 September 2012, 3,926,575 9 per cent cumulative preference shares were issued, fully paid, by way of a placing at 105p
per share (total consideration £4,123,000).
on 28 September 2012, 2,004,872 9 per cent cumulative preference shares were issued, credited as fully paid, to ordinary
shareholders by way of capitalisation of share premium account.
129
Notes to the company financial
statements continued
(vii) Movement in reserves
Beginning of year
Recognised gains for the year
Dividends to preference shareholders
Dividends to ordinary shareholders
Issue of preference shares (scrip)
Issue of preference shares (cash)
Costs of issues
End of year
Share
premium
account
£’000
11,148
–
–
–
(2,004)
196
(107)
Profit
and loss
account
£’000
8,413
6,686
(4,233)
(2,172)
–
–
–
9,233
8,694
As permitted by section 408 of the Companies Act 2006, 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 for the year is £6,686,000 (2011:
profit £8,734,000) - see statement of total recognised gains and losses.
(viii) 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
2012
Book value
£’000
2,716
(29,994)
2012
Fair value
£’000
2,716
(30,030)
2011
Book value
£’000
6,122
(21,970)
2011
Fair value
£’000
6,122
(21,970)
(27,278)
(27,314)
(15,848)
(15,848)
The fair value of the US dollar notes reflects the last price at which transactions in those notes were effected prior to 31 December 2012
(2011: 31 December 2011). The interest expense in the year relating to the US dollar notes was £1.8 million (2011: 2.0 million).
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.
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 2012, the company had outstanding US$16 million nominal (2011: $35 million) of 7.5 per cent dollar
notes 2012/14 and US$34 million nominal (2011: $nil) of 7.5 per cent dollar notes 2017. 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 shareholders’ funds.
130
(viii) Financial instruments and risks - continued
A limited degree of interest rate risk is accepted. A substantial proportion of the company’s financial instruments at 31 December 2012
carried interest at fixed rates rather than floating rates. On the basis of the company’s analysis, it is estimated that a rise of one
percentage point in interest rates applied to those financial instruments which carry interest at floating rates would have resulted in an
increase of £nil (2011: £nil) in the company’s interest revenues in its profit and loss account.
(ix) 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 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 employers are unable to identify their respective shares of the underlying assets
and liabilities (because there is no segregation of the assets), and does not prepare valuations on an FRS 17 “Retirement Benefits” basis,
the company accounts for the Scheme as if it were a defined contribution scheme.
A non-FRS 17 valuation of the Scheme was last prepared, using the attained age method, as at 31 December 2011. This method was
adopted in the previous valuation as at 31 December 2008, as it was considered the appropriate method of calculating future service
benefits as the Scheme is closed to new members. At 31 December 2011 the Scheme had an overall shortfall in assets (deficit), when
measured against the Scheme’s technical provisions, of £5,197,000. The technical provisions were calculated using assumptions of an
investment return of 4.70 per cent pre-retirement and 3.20 per cent post-retirement and annual increases in pensionable salaries of 3.0
per cent. The basis for the inflationary revaluation of deferred pensions and increases to pensions in payment was changed from the
Retail Prices Index (RPI) to the Consumer Prices Index (CPI) with effect from 1 January 2011 in line with the statutory change, except
that the change does not apply to pension accrual from 1 January 2006, where the RPI still applies. The rates of increase in the RPI and
the CPI were assumed to be 3.0 per cent and 2.25 per cent respectively. It was further assumed that both non-retired and retired
members’ mortality would reflect S1PXA tables at 85 per cent and that non-retired members would take on retirement the maximum cash
sums permitted from 1 January 2012. Had the Scheme been valued at 31 December 2011 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 participating employers covering normal contributions which are payable at a rate calculated to cover future service benefits under
the Scheme. The Scheme has also agreed a recovery plan with participating employers which provides for recovery of the deficit shown
by the 31 December 2011 valuation through the payment of quarterly additional contributions over the period from 1 January 2013 to
30 September 2018 after taking account of the additional contributions paid in 2012 under the 31 December 2008 valuation.
The normal contributions paid by the group in 2012 were £17,000 (2011: £16,000) and represented 23.4 per cent (2011: 23.4 per
cent) of pensionable salaries. The additional contribution applicable to the group for 2012 was £231,000 (2011: £225,000). Under the
valuation as at 31 December 2011 the normal contributions will increase to the rate of 36.4 per cent of pensionable salaries and the
additional contribution will rise to £396,000 for 2013, £407,000 for 2014 and thereafter by 2.75 per cent per annum. A provision of
£2,109,000 (2011: £1,435,000) for these additional contributions adjusted for the time value of money has been recognised under
retirement benefit obligations with an equal charge to income, net of related tax relief. To the extent that the group makes additional
contribution to the scheme, a relevant portion of such provision will credited to income.
The next actuarial valuation will be made as at 31 December 2014.
131
Notes to the company financial
statements continued
(ix) Pensions - continued
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.
(x) Related party transactions
Aggregate directors’ remuneration:
Salaries and fees
Benefits
Annual bonus
2012
£’000
2011
£’000
650
77
112
839
613
48
70
731
During 2012 and 2011, 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.
(xi) Rates of exchange
See note 40 to the consolidated financial statements.
(xii) Contingent liabilities and commitments
Sterling notes
The company has guaranteed the obligations for both principal and interest relating to the outstanding £35 million nominal (2011: £35
million) 9.5 per cent guaranteed sterling notes 2015/17 issued by REA Finance B.V.. The directors consider the risk of loss to the
company from this guarantee to be remote.
Bank borrowings
The company has given, in the ordinary course of business, guarantees in support of the subsidiary company borrowings from, and other
contracts with, banks (including cross currency interest rate swaps) amounting in aggregate to £32 million (2011: £29 million). The
directors consider the risk of loss to the company from these guarantees to be remote.
Pension liability
The company’s contingent liability for pension contributions is disclosed in note (ix) above.
Operating leases
The company has an annual commitment under a non-cancellable operating lease of £111,000 (2011: £105,000). The commitment
expires after 4 years. The lease does not contain any contingent rentals or an option to purchase the property.
132
(xiii) Post balance sheet event
A first interim dividend of 3½p per ordinary share in respect of the year ended 31 December 2012 was paid on 25 January 2013. In
accordance with IAS10 “Events after the reporting period” this dividend, amounting in aggregate to £1,002,000, has not been reflected
in these financial statements.
133
Notice of annual general meeting
This notice is important and requires your immediate
attention. If you are in any doubt as to what action to
take, you should consult your stockbroker, solicitor,
accountant or other appropriate
independent
professional adviser authorised under the Financial
Services and Markets Act 2000 if you 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 fifty-third annual general meeting
of R.E.A. Holdings plc will be held at the London office of Ashurst
LLP at Broadwalk House, 5 Appold Street, London EC2A 2HA
on 11 June 2013 at 10.00 am to consider and, if thought fit, to
pass the following resolutions. Resolution 13 and 14 will be
proposed as special resolutions; all other resolutions will be
proposed as ordinary resolutions.
1 To receive the company's annual accounts for the financial
year ended 31 December 2012, together with the directors'
report, the directors' remuneration report and the auditor’s
report.
2 To approve the directors' remuneration report for the
financial year ended 31 December 2012.
3 To declare a final dividend in respect of the year ended 31
December 2012 of 3½p per ordinary share to be paid on 26
July 2013 to ordinary shareholders on the register of
members at the close of business on 28 June 2013.
4 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 UK Corporate Governance Code and
submits himself for re-election.
5 To re-elect as a director Mr M A Parry, 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 Ms I Chia, who was appointed as a
director since the last annual general meeting and submits
herself for re-election.
7 To re-elect as a director Mr D H R Killick, 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.
8 To re-appoint Deloitte LLP, chartered accountants, as auditor
of the company to hold office until the conclusion of the next
annual general meeting of the company at which accounts
are laid before the meeting.
9 To authorise the directors to fix the remuneration of the
auditor.
10 That the authorised share capital of the company (being the
maximum amount of shares in the capital of the company
that the company may allot) be and is hereby increased from
£60,250,000
the creation of
15,000,000 9 per cent cumulative preference shares of £1
each ranking pari passu in all respects with the existing 9 per
cent cumulative preference shares of £1 each in the capital
of the company.
to £75,250,000 by
11 That the directors be and are hereby generally and
unconditionally authorised for the purposes of section 551
of the Companies Act 2006 (the “Act”) to exercise all the
powers of the company to allot, and to grant rights to
subscribe for or to convert any security into, shares in the
capital of the company (other than 9 per cent cumulative
preference shares) up to an aggregate nominal amount
(within the meaning of sub-sections (3) and (6) of section
551 of the Act) of £1,896,363.75; such authorisation to
expire at the conclusion of the next annual general meeting
of the company (or, if earlier, on 30 June 2014), save that
the company may before such expiry make any offer or
agreement which would or might require shares to be
allotted, or rights to be granted, after such expiry and the
directors may allot shares, or grant rights to subscribe for or
to convert any security into shares, in pursuance of any such
offer or agreement as if the authorisations conferred hereby
had not expired.
12 That the directors be and are hereby generally and
unconditionally authorised for the purposes of section 551
of the Companies Act 2006 (the “Act”) to exercise all the
powers of the company to allot, and to grant rights to
134
subscribe for or to convert any security into, 9 per cent
cumulative preference shares in the capital of the company
(“preference shares”) up to an aggregate nominal amount
(within the meaning of sub-sections (3) and (6) of section
551 of the Act), subject to the passing of resolution 10 set
out in the notice of the 2013 annual general meeting of the
company of £15,000,000; such authorisation to expire at
the conclusion of the next annual general meeting of the
company (or, if earlier, on 30 June 2014), save that the
company may before such expiry make any offer or
agreement which would or might require preference shares
to be allotted or rights to be granted, after such expiry and
the directors may allot preference shares, or grant rights to
subscribe for or to convert any security into preference
shares, in pursuance of any such offer or agreement as if the
authorisations conferred hereby had not expired.
13 That, subject to the passing of resolution 11 set out in the
notice of the 2013 annual general meeting of the company
(the “2013 Notice”), the directors be and are hereby given
power:
(a) for the purposes of section 570 of the Companies Act
2006 (the “Act”), to allot equity securities (as defined in
sub-section (1) of section 560 of the Act) of the
company for cash pursuant to the authorisation
conferred by resolution 11 set out in the 2013 Notice;
and
(b) for the purposes of section 573 of the Act, to sell
ordinary shares (as defined in sub-section (1) of section
560 of the Act) in the capital of the company held by the
company as treasury shares for cash
as if section 561 of the Act did not apply to the allotment or
sale, provided that such powers shall be limited:
(i)
to the allotment of equity securities for cash in
connection with a rights issue or open offer in favour of
holders of ordinary shares and to the sale of treasury
shares by way of an invitation made by way of rights to
holders of ordinary shares, in each case in proportion (as
nearly as practicable) to the respective numbers of
ordinary shares held by them on the record date for
participation in the rights issue, open offer or invitation
(and holders of any other class of equity securities
entitled to participate therein or, if the directors consider
it necessary, as permitted by the rights of those
securities) but subject in each case to such exclusions
or other arrangements as the directors may consider
necessary or appropriate to deal with fractional
entitlements, treasury shares (other than treasury shares
being sold), record dates or legal, regulatory or practical
difficulties which may arise under the laws of any
territory or the requirements of any regulatory body or
stock exchange in any territory whatsoever; and
(ii) otherwise than as specified at paragraph (i) of this
resolution, to the allotment of equity securities and the
sale of treasury shares up to an aggregate nominal
amount (calculated, in the case of the grant of rights to
subscribe for, or convert any security into, shares in the
capital of the company, in accordance with sub-section
(6) of section 551 of the Act) of £417,681
and shall expire at the conclusion of the next annual general
meeting of the company (or, if earlier, on 30 June 2014),
save that the company may before such expiry make any
offer or agreement which would or might require equity
securities to be allotted, or treasury shares to be sold, after
such expiry and the directors may allot equity securities or
sell treasury shares, in pursuance of any such offer or
agreement as if the power conferred hereby had not expired.
14 That a general meeting of the company other than an annual
general meeting may be called on not less than 14 clear
days' notice.
By order of the board
R.E.A. SERVICES LIMITED
Secretary
25 April 2013
Registered office:
First Floor
32 – 36 Great Portland Street
London W1W 8QX
Registered in England and Wales no: 00671099
135
Notice of annual general meeting continued
Notes
The sections of the accompanying Directors' report
entitled “Results and dividends”, “Directors”, “Increase
in share capital”, “Authorities to allot share capital”,
“Authority to disapply pre-emption rights”, “General
meeting notice period” and “Recommendation” contain
information regarding, and recommendations by the
board of the company as to voting on, resolutions 3 to 7
and 10 to 14 set out above in this notice of the 2013
annual general meeting of the company (the “2013
Notice”).
their share certificate). Completion of a form of proxy, or other
written instrument appointing a proxy, or any appointment of a
proxy submitted electronically, will not preclude a holder of ordinary
shares from attending and voting in person at the annual general
meeting if such holder wishes to do so.
CREST members may register the appointment of a proxy or
proxies for the annual general meeting and any adjournment(s)
thereof through the CREST electronic proxy appointment service
by using the procedures described in the CREST Manual (available
via www.euroclear.com/CREST) subject to the company’s articles
of association. CREST personal members or other CREST
sponsored members, and those CREST members who have
The company specifies that in order to have the right to attend and
appointed (a) voting service provider(s), should refer to their
vote at the annual general meeting (and also for the purpose of
CREST sponsor or voting service provider(s), who will be able to
determining how many votes a person entitled to attend and vote
take the appropriate action on their behalf.
may cast), a person must be entered on the register of members of
the company at 6.00 pm on 9 June 2013 or, in the event of any
In order for a proxy appointment or instruction regarding a proxy
adjournment, at 6.00 pm on the date which is two days before the
appointment made or given using the CREST service to be valid,
day of the adjourned meeting. Changes to entries on the register
the appropriate CREST message (a “CREST proxy instruction”)
of members after this time shall be disregarded in determining the
must be properly authenticated
in accordance with the
rights of any person to attend or vote at the meeting.
specifications of Euroclear UK and Ireland Limited (“Euroclear”)
and must contain the required information as described in the
Only holders of ordinary shares are entitled to attend and vote at
CREST Manual (available via www.euroclear.com/CREST). The
the annual general meeting. A holder of ordinary shares may
CREST proxy instruction, regardless of whether it constitutes a
appoint another person as that holder’s proxy to exercise all or any
proxy appointment or an instruction to amend a previous proxy
of the holder’s rights to attend, speak and vote at the annual
appointment, must, in order to be valid be transmitted so as to be
general meeting. A holder of ordinary shares may appoint more
received by the company’s registrars (ID: RA10) by 10.00 am on 9
than one proxy in relation to the meeting provided that each proxy
June 2013. For this purpose, the time of receipt will be taken to be
is appointed to exercise the rights attached to (a) different share(s)
the time (as determined by the time stamp applied to the message
held by the holder. A proxy need not be a member of the company.
by the CREST applications host) from which the company’s
A form of proxy for the meeting is enclosed. To be valid, forms of
registrars are able to retrieve the message by enquiry to CREST in
proxy and other written instruments appointing a proxy must be
the manner prescribed by CREST. The company may treat as
received by post or by hand (during normal business hours only) by
invalid a CREST proxy instruction in the circumstances set out in
the company’s registrars, Capita Registrars, PXS, 34 Beckenham
Regulation 35(5)(a) of the Uncertificated Securities Regulations
Road, Beckenham BR3 4TU by no later than 10.00 am on 9 June
2001.
2013.
CREST members and, where applicable, their CREST sponsors or
Alternatively, appointment of a proxy may be submitted
voting service provider(s) should note that Euroclear does not make
electronically by using either Capita Registrars' share portal service
available special procedures in CREST for particular messages.
at www.capitashareportal.com or the CREST electronic proxy
Normal system timings and limitations will therefore apply in
appointment service as described below (and so that the
relation to the input of CREST proxy instructions. It is the
appointment is received by the service by no later than 10.00 am
responsibility of the CREST member concerned to take (or, if the
on 9 June 2013). Shareholders who have not already registered
CREST member is a CREST personal member or sponsored
for Capita Registrars' share portal service may do so by registering
member or has appointed (a) voting service provider(s), to procure
as a new user at www.capitashareportal.com and giving the
that such member’s CREST sponsor or voting service provider(s)
investor code shown on the enclosed proxy form (as also shown on
take(s)) such action as shall be necessary to ensure that a
136
message is transmitted by means of the CREST system by any
meeting (including the auditor’s report and the conduct of the
particular time. In this connection, CREST members and, where
audit); or (ii) any circumstance connected with an auditor of the
applicable, their CREST sponsors or voting service provider(s) are
company having ceased to hold office since the last annual general
referred, in particular, to those sections of the CREST Manual
meeting of the company. The company may not require the
concerning practical limitations of the CREST system and timings.
members requesting any such website publication to pay its
expenses in complying with section 527 or section 528 of the
The rights of members in relation to the appointment of proxies
Companies Act 2006. Where the company is required to place a
described above do not apply to persons nominated under section
statement on a website under section 527 of the Companies Act
146 of the Companies Act 2006 to enjoy information rights
2006, it must forward the statement to the company's auditor by
(“nominated persons”) but a nominated person may have a right,
not later than the time when it makes the statement available on
under an agreement with the member by whom such person was
the website. The business which may be dealt with at the annual
nominated, to be appointed (or to have someone else appointed) as
general meeting includes any statement that the company has
a proxy for the annual general meeting. If a nominated person has
been required under section 527 of the Companies Act 2006 to
no such right or does not wish to exercise it, such person may have
publish on a website.
a right, under such an agreement, to give instructions to the
member as to the exercise of voting rights.
As at the date of this 2013 Notice, the issued share capital of the
company comprises 33,414,545 ordinary shares and 50,000,000
Any member attending the annual general meeting has the right to
9 per cent cumulative preference shares. Only holders of ordinary
ask questions. The company must cause to be answered any such
shares (and their proxies) are entitled to attend and vote at the
question relating to the business being dealt with at the meeting
annual general meeting. Accordingly, the voting rights attaching to
but no such answer need be given if (a) to do so would interfere
shares of the company exercisable in respect of each of the
unduly with the preparation for the meeting or involve the
resolutions to be proposed at the annual general meeting total
disclosure of confidential information, (b) the answer has already
33,414,545 as at the date of this 2013 Notice.
been given on a website in the form of an answer to a question, or
(c) it is undesirable in the interests of the company or the good
Shareholders may not use any electronic address (within the
order of the meeting that the question be answered.
meaning of sub-section 4 of section 333 of the Companies Act
2006) provided in this 2013 Notice (or any other related document
Copies of the executive director’s service agreement and letters
including the form of proxy) to communicate with the company for
setting out the terms and conditions of appointment of non-
any purposes other than those expressly stated.
executive directors are available for inspection at the company's
registered office during normal business hours from the date of this
Under section 338 and section 338A of the Companies Act 2006,
2013 Notice until the close of the annual general meeting
members meeting the threshold requirements in those sections
(Saturdays, Sundays and public holidays excepted) and will be
have the right to require the company (i) to give, to members of the
available for inspection at the place of the annual general meeting
company entitled to receive notice of the annual general meeting,
for at least 15 minutes prior to and during the meeting.
notice of a resolution which may properly be moved and is intended
A copy of this 2013 Notice, and other information required by
be dealt with at the meeting any matter (other than a proposed
section 311A of the Companies Act 2006, may be found on the
resolution) which may be properly included in the business. A
to be moved at the meeting and/or (ii) to include in the business to
company's website www.rea.co.uk.
resolution may properly be moved or a matter may properly be
included in the business unless (a) (in the case of a resolution only)
Under section 527 of the Companies Act 2006, members meeting
it would, if passed, be ineffective (whether by reason of
the threshold requirements set out in that section have the right to
inconsistency with any enactment or the company’s constitution or
require the company to publish on a website (in accordance with
otherwise), (b) it is defamatory of any person, or (c) it is frivolous or
section 528 of the Companies Act 2006) a statement setting out
vexatious. Such a request may be in hard copy form or electronic
any matter that the members propose to raise at the relevant
form, must identify the resolution of which notice is to be given or
annual general meeting relating to (i) the audit of the company's
the matter to be included in the business, must be authorised by
annual accounts that are to be laid before the annual general
the person or persons making it, must be received by the company
137
Notice of annual general meeting continued
not later than the date 6 clear weeks before the meeting, and (in
the case of a matter to be included in the business only) must be
accompanied by a statement setting out the grounds for the
request.
138
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