R.E.A. HOLDINGS PLC
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Annual Report and Accounts
2014
R.E.A. Holdings plc (“REA”) is a UK company of which
the shares are admitted to the Official List and to
trading on the main market of the London Stock
Exchange.
The REA group is principally engaged in the cultivation
of oil palms in the province of East Kalimantan in
Indonesia and in the production of crude palm oil and
crude palm kernel oil.
New jetty under construction at Sungai Mariam
Satria oil mill
Contents
Overview
Key statistics
Highlights
Officers and advisers
Maps
Chairman’s statement
Strategic report
Introduction and strategic environment
Agricultural operations
Stone and coal operations
Sustainability
Finance
Risks and uncertainties
Governance
Board of directors
Directors’ report
Corporate governance report
Audit committee report
Directors’ remuneration report
Directors’ responsibilities
Auditor’s report
Group financial statements
Income statement
Balance sheet
Statement of comprehensive income
Statement of changes in equity
Cash flow statement
Accounting policies
Notes
Company financial statements
Balance sheet
Statement of changes in equity
Cash flow statement
Accounting policies
Notes
Notice of annual general meeting
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Currency
Reference to “dollars” and “$” are to the lawful currency of the United States of America.
R.E.A. Holdings plc Annual Report and Accounts 2014
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Overview
Key statistics
Results ($’000)
Revenue
Earnings before interest, tax,
depreciation, amortisation
and biological gain
Profit before tax
Profit for the year
Profit attributable to
ordinary shareholders
Cash generated by operations
Returns per ordinary share
Earnings (US cents)
Dividend (pence)
Allocated area (hectares)
Mature oil palm
Immature oil palm
Titled balance
Allocations
Total
Production (tonnes)
Group FFB
Third party FFB
Total
CPO
Palm kernels
CPKO
2014 2013 2012
125,865 110,547 124,600
38,797 30,269 38,083
23,744 25,216 30,558
21,981 12,672 17,703
14,153 5,457 11,342
33,053 19,358 55,110
40.3 15.8 33.9
7.75 7.25 7.0
28,275 27,102 26,688
6,339 6,960 4,819
34,614 34,062 31,507
35,970 36,522 39,077
70,584 70,584 70,584
37,631 30,043 31,601
108,215 100,627 102,185
631,728 578,785 597,722
149,002 99,348 64,014
780,730 678,133 661,736
169,466 147,649 151,516
35,764 30,741 30,734
12,596 11,393 11,549
CPO extraction rate *
21.7% 21.8% 22.9%
Yields (tonnes per mature hectare) *
FFB
CPO
CPKO
Average exchange rates
Indonesian rupiah to US dollar
US dollar to pound sterling
22.3 21.4 22.4
4.8 4.6 5.1
0.4 0.4 0.4
11,908 10,494 9,392
1.65 1.57 1.59
* The group cannot separately determine extraction rates for its own FFB and for third party FFB. CPO
extraction rate and CPO and CPKO yields are therefore calculated applying uniform extraction rates
across all FFB. Sample analyses indicate that in reality extraction rates for third party FFB are lower than
for own FFB.
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R.E.A. Holdings plc Annual Report and Accounts 2014
Overview
Highlights
Financial
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Revenues up 14 per cent driven by record crop
production and material increases in throughput of
smallholder fruit
•
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Continuing programme of cost saving initiatives, including
in-house production of compost and of materials for
estate infrastructure
A fully restructured management team now in place in
Indonesia and Singapore
Operating profit of $32.1 million, up 14 per cent (2013:
$28.1 million)
Stone quarry and coal operations
Profit before tax of $23.7 million (2013: $25.2 million),
notwithstanding generally weak CPO prices
Estate operating costs unchanged notwithstanding
increased crop and administrative expenses reduced by
$2.6 million
•
•
Proposed final dividend of 3¾p per ordinary share (2013:
3¾p) making total dividends of 7¾p per ordinary share
(2013: 7¼p); capitalisation issue in 2014 equivalent to
slightly over 6p per ordinary share (2013: 6p)
Net new investment of $38.2 million (2013: $33.5 million)
5.2 million preference shares issued by way of a placing
raised $10.6 million net of expenses, applied in reducing
borrowings
$6.3 million of dollar notes 2012/14 redeemed
Agricultural operations
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Record production: crop of fresh fruit bunches (“FFB”)
631,728 tonnes (2013: 578,785 tonnes) and crude palm
oil (“CPO”) 169,466 tonnes (2013: 147,649 tonnes)
representing year on year increases of, respectively, 9 per
cent and 15 per cent
Land bank increased by purchases of two additional land
allocations totalling 7,714 hectares, adjacent to existing
land areas
Recent satisfactory confirmation of land title should
permit early completion of the agreed swap of land held
by PT Prasetia Utama for land currently held by PT
Sasana Yudha Bhakti
Good progress in the construction of perimeter bunding
designed to manage water levels as a preliminary to the
rapid development of new plantings on the land owned by
PT Putra Bongan Jaya whilst planting continues on the
higher ground
• Major refurbishment works during the year to ensure
optimum standards in the mills
•
Plans initiated for expansion of the third, newest oil mill at
Satria to double its capacity by 2016
Operating licence granted for the quarry which will
produce crushed stone for group’s road and building
programmes and for sale to third parties
Cooperation arrangement for mining of principal coal
concession at Kota Bangun by a third party remains in
place to permit resumption of mining when coal prices
improve
Sustainability
•
Compensation payments, community development
programmes and smallholder land allocations covering
substantial new development areas now agreed so that
extension planting of both group and smallholder land can
gain momentum
• Methane generated electricity now being supplied to the
Indonesian state electricity company for distribution to 21
local villages
•
Publication of the group’s second detailed sustainability
report due later in 2015
Prospects
•
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Continuing steady recovery and improvements in
operational efficiency
Good prospects for expansion planting in 2015
Plans to list PT REA Kaltim Plantations, the Indonesian
sub-holding company of the group’s plantation operations,
as soon as practicable
R.E.A. Holdings plc Annual Report and Accounts 2014
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Overview
Officers and 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 Asset Services
The Registry
34 Beckenham Road
Beckenham
Kent BR3 4TU
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R.E.A. Holdings plc Annual Report and Accounts 2014
Overview
Maps
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AKM
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AIT
The smaller map shows the location of the group’s
operations within the context of South East Asia. The
larger map provides a plan of the operational areas
and of the river system by which access is obtained to
the main areas.
Key
Methane capture plant
Oil mill
Stone quarry
Tank storage
CDM PT Cipta Davia Mandiri
KKS PT Kartanegara Kumalasakti
KMS PT Kutai Mitra Sejahtera
PBJ
PBJ2 PT Persada Bangun Jaya
REAK PT REA Kaltim Plantations
SYB PT Sasana Yudha Bhakti
SYB swap: land surrender
SYB swap: new PU land
PT Putra Bongan Jaya
R.E.A. Holdings plc Annual Report and Accounts 2014
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Overview
Chairman’s statement
The group achieved record production levels in 2014,
reflecting the increasing volumes flowing through from the
maturing estates augmented by higher throughput of
smallholder fruit. Volumes of oil palm fresh fruit bunches
(“FFB”) and crude palm oil (“CPO”) were, respectively, 9 per
cent and 15 per cent ahead of 2013.
The results reflected net overall mark to market gains on
produce inventory and biological assets some $5.8 million
lower than in 2013 and a reduction in gains from exchange
rate movements of $7.6 million as compared with the
preceding year. The average price of CPO per tonne, CIF
Rotterdam, in 2014, was $816 per tonne, against $856 in
2013, but the average price realised by the group for its own
CPO production was higher at $665 per tonne against $648
per tonne. This was in part due to lower export duties but also
took account of the improved quality of 2014 CPO production.
Good progress was made in the estate operations with costs
well controlled during the year. A number of new initiatives
were introduced in 2014, including in-house production of
compost and of materials for estate infrastructure. These will
have an ongoing positive impact on production costs. The
recent recruitment of a senior expatriate to head the transport
and logistics operations has further strengthened the
management team on the estates. In the mills, extensive
refurbishment to ensure optimum standards led to a
temporary reduction in processing capacity and to some
harvesting delays during the second half of the year. The
refurbishment programme is now having a discernible impact
on the rates of oil extraction.
Extension planting of both the group’s land and smallholder
land should now proceed at a much faster pace than in the
last two years as significantly improved relations with local
communities, based on a more consistent and systematic
approach, has allowed the group to progress land
compensation payments.
To this end, new planting on the higher ground in the land
areas of the group company, PT Putra Bongan Jaya (“PBJ”),
started towards the end of 2014 and is continuing. Planting
up of the low lying areas of PBJ will start shortly as the group
can now be confident that the perimeter bunding that is
currently under construction to control flooding during the
wetter months of the year will be completed well ahead of the
next wet season. Some 7,000 hectares are available for
planting at PBJ and nurseries are already in place with
sufficient seedlings to complete this development. With little
land clearing and terracing needed, planting at PBJ should be
rapid and very economic. Further significant areas are also
now becoming available for planting in the group company, PT
Cipta Davia Mandiri.
The group added to its land allocations in 2014 with the
purchase of a further 7,714 hectares in the vicinity of the
existing land areas. Following recent satisfactory confirmation
of the land title in respect of the land held by PT Prasetia
Utama (“PU”), which is to be swapped for land currently held
by the group company, PT Sasana Yudha Bhakti,
documentation is now being progressed to complete the
swap. Concurrently, due diligence is being conducted to
establish the PU areas to be designated for conservation.
Upon completion of the swap, the group’s fully titled land bank
will total 76,127 hectares with a further 35,419 hectares
subject to completion of titling. The directors believe that
these areas will support planting of an eventual 60,000
hectares (including existing planted areas) and more if full title
can be obtained for the one conditional land allocation of
12,050 hectares that the group holds.
The group continued to generate renewable energy from its
methane capture plants to provide power for its operations
throughout 2014, largely eliminating the need for diesel
generated power on the group’s principal estates. Following
an inauguration ceremony on 16 April 2015, the group is also
supplying electricity to the Indonesian state electricity
company for distribution to local villages, enhancing the socio-
economic benefits to the communities local to the group’s
operations.
An operating licence has now been obtained to establish a
quarry on the group’s stone concession with a view to
producing stone for the agricultural operations and for sale to
third parties. Contractual arrangements for the provision of
quarry services, together with permissions for upgrading of the
access road, are under negotiation. Cooperation
arrangements for mining the group’s principal coal concession
by a third party remain in place to permit resumption of mining
when coal prices improve.
The early months of 2015 have seen generally lower oil palm
crops throughout East Kalimantan and Malaysia and the
group’s crops have reflected this trend. Crops for April to-date
are showing an improvement and the directors are confident
that crops will return to normal levels. More challenging are
the CPO price, which remains weak, and the recent move by
the Indonesian government to impose a levy of $50 per tonne
on CPO exports. This levy will be applied in subsidising
Indonesian biodiesel production and may well lead, in due
course, to higher CPO prices. At such higher prices, export
duty will be payable under the existing Indonesian sliding scale
of duty and the new export levy will be offset against such
duty. However, current CPO prices are below the level at
which export duty starts to become payable so that, until
prices rise, the new export levy will represent an unwelcome
additional cost to the group.
A more positive development for the group’s markets is a
recent move by the EU to ban the sale of products containing
trans-fats. Trans-fats occur when vegetable oils are artificially
hardened by hydrogenation. Soybean oil, rape oil and
sunflower oil all require hardening before they can be used for
shortening and other solid fat applications but CPO does not.
06
R.E.A. Holdings plc Annual Report and Accounts 2014
This latest move by the EU can therefore be expected to
result in some substitution of CPO for other vegetable oils.
With the continuing improvement in operational efficiencies,
increasing planted hectarage and a restructured, strong and
experienced management team in place in Indonesia and
Singapore, the directors expect that further cost savings will
be achievable and that the group will continue to generate
good operating margins. The directors are pushing ahead with
plans for a public offering of a minority shareholding in the
principal operating subsidiary, PT REA Kaltim Plantations
(“REA Kaltim”), combined with a listing of REA Kaltim’s shares
on the Indonesia Stock Exchange in Jakarta. They are also
exploring the possibility of a placing of REA Kaltim shares
ahead of a listing in order to ensure the availability of funds to
continue the extension planting programme pending listing.
The directors recommend the payment of a maintained final
dividend in respect of 2014 of 3¾p per ordinary share, to give
a total dividend for the year of 7¾p per ordinary share (2013:
7¼p).
Finally, and with some sadness, I have to advise shareholders
that this will be my last chairman’s statement as I shall be
retiring as chairman at the end of the year following my
seventieth birthday in December. John Oakley will be
stepping down as group managing director at the same time.
David Blackett will be succeeding me as chairman and, as
long planned, Mark Parry will assume the managing
directorship. John Oakley and I will remain on the board of the
company as non-executive directors and, for a transitional
period, will undertake some additional responsibilities
overseeing completion, in John Oakley’s case, of the group’s
new information systems and, in my case, of the Jakarta listing
of REA Kaltim. My family’s significant shareholding in the
company will continue to support the development of the
group.
RICHARD M ROBINOW
Chairman
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R.E.A. Holdings plc Annual Report and Accounts 2014
07
Strategic report
Introduction and strategic environment
Introduction
Business model and resources
This strategic report has been prepared to provide holders of
the company’s shares with information that complements the
accompanying financial statements. Such information is
intended to help shareholders in understanding the group’s
business and strategic objectives and thereby assist them in
assessing how the directors have performed their duty of
promoting the success of the company.
The group is principally engaged in the cultivation of oil palms
in the province of East Kalimantan in Indonesia and in the
production of crude palm oil (“CPO”) and crude palm kernel oil
(“CPKO”). Ancillary to this, the group generates renewable
energy from its methane capture plants to provide power for
its own operations and also for sale to local villages via the
Indonesian state electricity company (“PLN”).
This report should not be relied upon by any persons other
than shareholders or for any purposes other than those stated.
The report contains forward-looking statements, which have
been included by the directors in good faith based on the
information available to them up to the time of their approval
of this report. Such statements should be treated with caution
given the uncertainties inherent in any prognosis regarding the
future and the economic and business risks to which the
group’s operations are exposed.
In preparing this report, the directors have complied with section
414C of the Companies Act 2006. The report has been prepared
for the group as a whole and therefore gives emphasis to those
matters that are significant to the company and its subsidiaries
when taken together.
The report is divided into the following sections:
•
•
•
•
•
•
Introduction and strategic environment
Agricultural operations
Stone and coal operations
Sustainability
Finance
Risks and uncertainties
The balance of this first section discusses the group’s
business model and resources, its objectives and strategy for
achieving these, the market context in which the group
operates and the quantitative indicators that the directors
consider relevant to assessment of the group’s performance.
The sections on agricultural and stone and coal operations
review the current status of and trends within the group’s
activities and the group’s plans for their further development.
“Sustainability” deals with environmental and social issues
facing the group while “Finance” provides explanations
regarding amounts disclosed in the financial statements, the
group’s financial resources and its ability to fund its declared
strategies. “Risks and uncertainties” itemises those risks and
uncertainties currently faced by the group that the directors
consider to be material.
The group also holds interests in respect of a stone deposit
and three coal mining concessions, all of which are located in
East Kalimantan. Detailed descriptions of the group’s oil palm
and related activities and of its stone and coal interests are
provided under, respectively, “Agricultural operations” and
“Stone and coal operations” below.
The group and predecessor businesses have been involved for
over one hundred years in the operation of agricultural estates
growing a variety of crops in developing countries in South
East Asia and elsewhere. Today, the group sees itself as
marrying developed world capital and Indonesian opportunity
by offering investors in, and lenders to, the company the
transparency of a 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.
The group’s long involvement in the plantation industry and its
knowledge and expertise represent significant intangible
resources because they underpin the group’s credibility. This
assists materially in sourcing capital, in negotiating with the
Indonesian authorities in relation to project development and
in recruiting management of a high calibre. Other resources
important to the group are its established base of operations,
large, and uniquely near contiguous, land concessions, an
experienced management team familiar with Indonesian
regulatory processes and social customs and committed to
sustainable practices, and a trained workforce with strong
links to the local community.
Objectives and general strategy
The group’s objectives are both to provide attractive overall
returns to investors in the shares and other securities of the
company from the operation and expansion of the group’s
existing businesses and to foster economic progress in the
localities of the group’s activities, while maintaining high
standards of sustainability. Achievement of these objectives is
dependent upon, among other things, the group’s ability to
generate the operating profits that are needed to finance such
achievement.
08
R.E.A. Holdings plc Annual Report and Accounts 2014
CPO and CPKO are primary commodities and, as such, must
be sold at prices that are determined by world supply and
demand. Such prices fluctuate in ways that are difficult to
predict and that the group cannot control. The group’s
operational strategy is therefore to concentrate on minimising
unit production costs, without compromising on quality or its
objectives as respects sustainable practices, with the
expectation that, as a lower cost producer of primary
commodities, the group has greater resilience in any downturn
in price than competitor producers.
In the agricultural operations, the group adopts a two pronged
approach in seeking production cost efficiencies. First, the
group aims to capitalise on its available resources by
developing its land bank as rapidly as logistical, financial and
regulatory constraints permit with a view to utilising the
group’s existing agricultural management capacity to manage
a larger business. Secondly, the group strives to manage its
established agricultural operations as productively and
efficiently as possible.
The stone and coal mining interests represent group
diversifications. The directors believe that quarrying of the
stone interest will complement the agricultural operations and
can be developed to provide a useful additional revenue
source for the group. Following a decision in 2012 to limit
further capital committed to the coal mining interests, the
group’s strategy for those interests is to maximise recovery of
capital already committed.
Future direction
The continuing growth of the Indonesian economy and a
gradual shift in Indonesian political opinion towards
encouraging and potentially mandating increased local
ownership of Indonesian oil palm operations, has reinforced
the directors’ long-held view on the desirability of increasing
Indonesian participation in the ownership of the group’s
agricultural operations through a listing on the Indonesia
Stock Exchange of, and public offering of shares in, the
company’s principal operating subsidiary, PT REA Kaltim
Plantations (“REA Kaltim”), which is now also the parent of all
of the company’s Indonesian plantation subsidiaries.
A new Indonesian plantation law enacted in October 2014,
confirming a 100,000 hectare limit on licensed development
of oil palms for entities that are not listed and under majority
local ownership, should not impact the group in the
foreseeable future as it has significant headroom for
development within the new limit. However, the directors still
believe that there would be significant advantages to an
Indonesian listing of REA Kaltim. As well as going some way
towards meeting local political aspirations and enhancing the
local profile of the group, such a move can be expected to
encourage coverage of the group by South East Asian
investment analysts and to result in REA Kaltim, as a locally
listed company, being treated as a local rather than foreign
company for many Indonesian regulatory purposes, in
particular with respect to land matters.
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 met with
prior ranking capital in the form of fixed return permanent
preferred capital and debt with a maturity profile appropriate to
the group’s projected future cash flows.
Accordingly, the directors have resumed discussions with
advisers on how best to structure a public offering in
Indonesia and on the appropriate timing for such an offering
with the intention that the offering will proceed as soon as
practicable.
The group recognises that its agricultural operations, of which
the total assets at 31 December 2014 represented some 85
per cent of the group’s total assets and which, in 2014,
contributed all of the group’s profits, lie within a single locality
and rely on a single crop. This permits significant economies
of scale but brings with it some risks. Whilst further
diversification would afford the group some offset against
these risks, the directors believe that, for the foreseeable
future, the interests of the group and its shareholders will be
best served by growing the existing operations. They
therefore have no plans for further diversification.
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09
Strategic report
Introduction and strategic environment
continued
The vegetable oil market context
According to Oil World, worldwide consumption of the 17
major vegetable and animal oils and fats increased by 4.2 per
cent to 195.6 million tonnes in the year to 30 September
2014. The increased consumption was reflected in increased
world production during the same period of 196.4 million
tonnes with CPO accounting for 58.5 million tonnes of this
(some 30 per cent of the total).
Vegetable and animal oils and fats have conventionally been
used principally for the production of cooking oil, margarine
and soap. Consumption of these basic commodities
correlates with population growth and, in less developed areas,
with per capita incomes and thus economic growth. Demand
is therefore driven by the increasing world population and
economic growth in the key markets of China and India.
Vegetable and animal oils and fats can also be used to provide
biofuels and, in particular, biodiesel. According to Oil World,
biofuel production accounts for some 15 per cent of all
vegetable and animal oil and fat produced.
The principal competitors of CPO are the oils from the annual
oilseed crops, the most significant of which are soybean,
oilseed rape and sunflower. Because these oilseeds are sown
annually, their production can be rapidly adjusted to meet
prevailing economic circumstances with high vegetable oil
prices encouraging increased planting and low prices
producing a converse effect. Accordingly, in the absence of
special factors, pricing within the vegetable oil and fat complex
can be expected to oscillate about a mean at which adequate
returns are obtained from growing the annual oilseed crops.
Since the oil yield per hectare from oil palms (at between four
and seven tonnes) is much greater than that of the principal
annual oilseeds (less than one tonne), CPO can be produced
more economically than the principal competitor oils and this
provides CPO with a natural competitive advantage within the
vegetable oil and animal fat complex. Within vegetable oil
markets, CPO should also continue to benefit from health
concerns in relation to trans-fatty acids. Such acids are formed
when vegetable oils are artificially hardened by partial
hydrogenation. Poly-unsaturated oils, such as soybean oil, rape
oil and sunflower oil, require partial hydrogenation before they
can be used for shortening and other solid fat applications but
CPO does not. The EU has recently introduced proposed
legislation to ban the sale of products containing trans-fats.
In recent years, biofuel has become an important factor in the
vegetable oil and animal fat markets, not so much because of
the oils and fats that it currently consumes, although this is not
insignificant, but because the size of the energy market means
that biofuel can provide a ready outlet for large volumes of oils
and fats over a short period when surpluses in supply depress
prices to levels at which biofuel can be produced at a cost that
is competitive with prevailing petroleum oil prices. There is a
growing body of evidence that, in recent years, vegetable oil
and petroleum oil prices have moved in tandem and that
petroleum oil prices create a floor for vegetable and animal oil
and fat prices at the level at which such oils and fats can be
converted to biofuel at an overall cost (net of any available
subsidies) that is competitive with the prevailing price of
petroleum oil.
The directors believe that demand for, supply of and
consequent pricing of, vegetable and animal oils and fats will
ultimately be driven by fundamental market factors. However,
they also recognise that normal market mechanisms can be
affected by government intervention. It has long been the
case that some areas (such as the EU) have provided
subsidies to encourage the growing of oilseeds and that such
subsidies have distorted the natural economics of producing
oilseed crops. More recently there have been actions by
governments attempting to reduce dependence on fossil fuels.
These have included steps to enforce mandatory blending of
biofuel as a fixed minimum percentage of all fuels and
subsidies to support the cultivation of crops capable of being
used to produce biofuel.
A graph of CIF Rotterdam spot CPO prices for the last ten
years, as derived from prices published by Oil World, is shown
on the adjacent page. The monthly average price over the ten
years has moved between a high of $1,292 per tonne and a
low of $402 per tonne. The monthly average price over the
ten years as a whole has been $802 per tonne.
The CPO price, CIF Rotterdam, having started 2014 at $900
per tonne, edged up during the early months of the year
towards $1,000 per tonne but then fell progressively to end
the year at $700. It weakened further in January 2015 but
subsequently appeared to stabilise and currently stands at
around $662.5. Bearish factors have been a record soybean
crop in the US and the fall in the petroleum oil price that has
reduced the competitiveness of biodiesel manufactured from
vegetable oil. Latterly, some relief has been afforded by an
increase in the subsidy for biodiesel in Indonesia from
Rp1,500 ($0.12) per litre to Rp 4,000 ($0.31) per litre. CPKO
prices have also fallen since the start of 2014 but have been
supported to an extent by reduced availability of coconut oil,
the principal competitor to CPKO, following damage sustained
by the coconut growing areas of the Philippines in a cyclone in
November 2013. The CPKO price currently stands at $980
compared to $1,170 at the start of 2014.
Throughout 2015, Indonesia continued to apply its previously
established sliding scales of duty on exports of CPO and
CPKO. Under these scales, no export duty is payable when
the price of CPO, CIF Rotterdam, falls below approximately
$750 per tonne. However, the Indonesian government has
recently announced the introduction of a new export levy of
$50 per tonne to be imposed (with immediate effect) on all
export sales of CPO and CPKO regardless of selling price.
This levy will be offset against export duties payable under the
established sliding scale. As the starting rate of export duty
10
R.E.A. Holdings plc Annual Report and Accounts 2014
Crude palm oil monthly average price
1400
1200
1000
800
600
400
200
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
at above the threshold of $750 per tonne is 7.5 per cent, this
means that no additional export costs will be incurred once
CPO prices rise above that threshold.
Revenues from the new export levy will be paid to a newly
established special fund called the “CPO Supporting Fund”
and will be applied principally towards funding government
subsidies for biodiesel. Concurrently with the announcement
of the new export levy, the government also announced an
increase in the mandatory biodiesel content in diesel from 10
per cent to 15 per cent.
There are uncertainties both as to the availability of Indonesian
capacity to produce and blend higher quantities of biodiesel
and as to how the new higher subsidies will be disbursed.
Probably for this reason, the announcement of the increased
mandatory blending requirement had little immediate impact
on CPO prices. In due course, however, the Indonesian
government’s clear commitment to increase significantly the
consumption of CPO in Indonesian domestic biofuel may well
absorb significant volumes of CPO and, together with an
expected slowdown in the growth of Indonesian CPO
production, could lead to stronger CPO prices.
The Indonesian context
The 2014 Indonesian presidential election passed off
peacefully, despite the losing candidate, Prabowo Subianto,
launching an unsuccessful challenge against the result in the
Supreme Court of Indonesia. The new government of
President Joko (“Jokowi”) Widodo is promoting a strong
growth strategy, fiscal balance and investment in infrastructure
and healthcare. Key structural reforms being implemented
include greater transparency in the appointment of top civil
servants, cutting administration costs and revamping
operations in key ministries. All of these changes are
specifically aimed at increasing the attractiveness of Indonesia
to foreign direct investment. Indonesia currently ranks 114th
out of 189 countries in the World Bank’s ranking of countries
by ease of doing business.
An early government initiative was a reduction in Indonesia’s
expensive fuel subsidies with the subsidy for petrol cut by 31
per cent and that for diesel by 36 per cent. At the same time,
the government announced a series of new infrastructure
projects and social welfare initiatives. Commentators expect
that increased focus on health and social assistance will
reduce the poverty rate from the current 12 per cent to 8 per
cent by 2018. Despite these positive initial policies, the
government’s effectiveness is constrained by its lack of a
majority in the legislature.
R.E.A. Holdings plc Annual Report and Accounts 2014
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Strategic report
Introduction and strategic environment
continued
Indonesian CPO production in 2015 is forecast to increase by
5 per cent to 31 million tonnes as compared with 29.5 million
tonnes in 2014. This will be a lower percentage increase than
in recent years reflecting reduced crop expectations caused
by the adverse weather conditions experienced in early 2015
(following on from some sustained dry periods in 2014) and
falling yields on ageing plantations (particularly in Sumatra)
that are partly offsetting increased production from younger
plantings.
Delivery of smallholder crop
Evaluation of performance
In seeking to meet its expansion, efficiency and sustainability
objectives, the group sets operating standards and targets for
most aspects of its activities and regularly monitors
performance against those standards and targets. For many
aspects of the group’s activities, there is no single standard or
target that, in isolation from other standards and targets, can
be taken as providing an accurate continuing indicator of
progress. In these cases, a collection of measures has to be
evaluated and a qualitative conclusion reached.
The directors do, however, rely on regular reporting of certain
key performance indicators that are comparable from one year
to the next, in addition to monitoring the key components of
the group’s profit and loss account and balance sheet. These
performance indicators are summarised in the table below.
Quantifications of the indicators for 2014 with, where
available, comparative figures for 2013 are provided in the
succeeding sections of this report, with each category of
indicators being covered in the corresponding section of the
report.
The year on year inflation rate for 2014 was 8.4 per cent
(2013: 8.4 per cent) reflecting a lower rate in the first half of
2014 followed by a sharply increased rate in the second half
of the year, due largely to the increase in fuel prices. The rate
fell back over the first quarter of 2015 to 6.4 per cent at the
end of March. Bank Indonesia is targeting a rate for 2015 of
between 3.0 to 5.0 per cent but an average of independent
forecasts is predicting a rate of 7.5 per cent. The current
account deficit reduced slightly to 3.1 per cent of gross
domestic product (“GDP”), or $6.8 billion, in the third quarter
of 2014 and is projected to end 2015 at 2.8 per cent of GDP
due largely to the reduction in fuel subsidies and reduced oil
imports.
The Indonesian Rupiah has continued to weaken and fell to a
low of Rp13,242 = $1 on 16 March 2015, 16.6 per cent
below the level on the same day in 2014. It has since rallied
slightly but remains at levels significantly below those of a
year ago suggesting that the current government is more
tolerant of a weak rupiah than its predecessor probably as a
measure to support exports and depress imports and hence
strengthen the balance of payments which is under pressure.
The global downturn in commodity demand and prices has
severely impacted Indonesia’s commodity exports and no
strong recovery is expected in the short term. However,
President Jokowi’s domestic growth strategy, coupled with
Indonesia’s continued strong private consumption, is expected
to largely offset these international factors, with gross
domestic product growth forecasts set at 5.4 per cent for
2015, modestly ahead of the 5.0 per cent recorded in 2014,
the slowest rate of growth since the third quarter of 2009.
In the regions, the system for the election of regency heads
(Bupati) has been changed so that elections will in future
always be held in December of the relevant election year. In
East Kalimantan, Kutai Kartenegara regency will hold
elections in December 2015; Kutai Timur and Kutai Barat
regencies will hold Bupati elections in December 2016. The
next East Kalimantan Gubernatorial election will be in 2018.
Minimum wage increases for 2015 have recently been
announced as 10.8 per cent in Kutai Kartenegara, 5.7 per
cent in Kutai Barat and 8.2 per cent in Kutai Timur.
The 2014 interim report referred to a draft plantation law that
had been tabled, although not at that time enacted, in the
Indonesian House of Representatives that included provisions
which, if passed, would have restricted foreign ownership of oil
palm plantations in Indonesia to 30 per cent. The draft law
was subsequently passed in September 2014, but in modified
form so that the 30 per cent cap on foreign investment was
not included and the limit on foreign ownership remains at 95
per cent. However, the law mandates the Government to
prioritise domestic investment, protect local customary rights,
empower local farmers and set a cap on foreign investment in
plantations at some point in the future.
12
R.E.A. Holdings plc Annual Report and Accounts 2014
Performance indicator
Agricultural operations
New extension area planted
Crop of fresh fruit bunches
(“FFB”) harvested
Measurement
Purpose
The area in hectares of new land
planted out during the applicable
period
The weight in tonnes of FFB delivered
to oil mills from the group’s estates
during the applicable period
CPO extraction
rate achieved
The percentage by weight of CPO
extracted from FFB processed
Palm kernel extraction
rate achieved
The percentage by weight of palm
kernels extracted from FFB processed
CPKO extraction
rate achieved
The percentage by weight of CPKO
extracted from palm kernels crushed
To measure performance against the
group’s expansion objective
To measure field efficiency and assess
the extent to which the group is
achieving its objective of maximising
output from its operations
To measure mill efficiency and assess
the extent to which the group is
achieving its objective of maximising
output from its operations
To measure mill efficiency and assess
the extent to which the group is
achieving its objective of maximising
output from its operations
To measure mill efficiency and assess
the extent to which the group is
achieving its objective of maximising
output from its operations
Stone and coal operations
Stone or coal produced
Sustainability
Work related fatalities
Smallholder percentage
Greenhouse gas emissions
per tonne of CPO and
per planted hectare
Finance
Return on adjusted equity
Net debt to total equity
The weight in tonnes of stone or coal
extracted from each applicable
concession during the applicable period
To measure production efficiency and
assess the extent to which the group is
achieving its objective of maximising
output from its operations
Number of work related fatalities during
the applicable period
To measure the efficacy of the group’s
health and safety policies
The area of associated smallholder
plantings expressed as a percentage of
the planted area of the group’s estates
To measure the performance against the
group’s smallholder expansion objective
Greenhouse gas emissions measured in
tonnes of CO2 equivalent divided,
respectively, by the weight of CPO
extracted from FFB processed and the
number of group planted hectares
supplying the group mills
Profit before tax for the period less
amounts attributable to preferred capital
expressed as a percentage of average
total equity (less preferred capital) for
the period
Borrowings and other indebtedness
(other than intra group indebtedness)
less cash and cash equivalents
expressed as a percentage of total equity
To measure the intensity of the group’s
greenhouse gas emissions
To measure the group’s financial
performance
To assess the risks of the group’s capital
structure
R.E.A. Holdings plc Annual Report and Accounts 2014
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Strategic report
Agricultural operations
Structure
Land areas
All of the group’s agricultural operations are located in East
Kalimantan and have been established pursuant to an
understanding dating from 1991 whereby the East
Kalimantan authorities undertook to support the group in
acquiring, for its own account and in cooperation with local
interests, substantial areas of land in East Kalimantan for
planting with oil palms.
The oldest planted areas, which represent the core of the
group’s agricultural operations, are owned through REA Kaltim
in which a group company holds a 100 per cent economic
interest. With the REA Kaltim land areas approaching full
utilisation, over the four year period from 2005 to 2008 the
company established or acquired five additional Indonesian
subsidiaries, each potentially bringing with it a substantial
allocation of land in the vicinity of the REA Kaltim estates.
Each of these five subsidiaries is currently owned as to 95 per
cent by REA Kaltim and 5 per cent by Indonesian local
investors. A further subsidiary PT Persada Bangun Jaya
acquired in 2012 and with additional land allocations will, upon
completion of necessary legal formalities, be owned as to at
least 95 per cent by the group and as to the balance by a local
investor. A diagram showing the structure of the REA Kaltim
sub-group is set out below.
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 tributary
of the Mahakam, one of the major river systems of South East
Asia. The SYB area and one KKS area are contiguous with
the REA Kaltim areas and together form a single site. All of
these areas fall within the Kutai Kartanegara regency of East
Kalimantan. The PBJ area sits some 70 kilometres to the
south of the REA Kaltim areas in the West Kutai regency of
East Kalimantan while the CDM and KMS areas and a second
KKS area are located in close proximity of each other in the
East Kutai regency of East Kalimantan less than 30
kilometres to the east of the REA Kaltim areas. There are
three strips of land pertaining to PBJ2, two of these lie
adjacent to the land areas held by REA Kaltim and SYB, while
the third borders the PBJ land area.
At present, the REA Kaltim, SYB, KKS, CDM and KMS areas
are most readily accessed by river but a road bridge over the
Mahakam at Kota Bangun, completed in 2005, may eventually
be linked up to provide road access. A bridge across the
Senyiur River links REA Kaltim and the KMS, CDM and
second KKS areas. The PBJ area is easily accessible by road.
Although the 1991 understanding established a basis for the
provision of land for development by, or in cooperation with,
the group, all applications to develop previously undeveloped
land areas have to be agreed by the Indonesian Ministry of
Forestry and to go through a titling and permit process. This
process begins with the grant of an allocation of Indonesian
state land by the Indonesian local authority responsible for
administering the land area to which the allocation relates (an
“izin lokasi”). Allocations are normally valid for periods of
between one and three years but may be extended if steps
have been taken to obtain full titles.
REA Kaltim sub-group
PT. REA Kaltim
Plantations
REA Kaltim
PT. Cipta Davi
Mandiri
CDM
PT. Kartanegara
Kumala Sakti
KKS
PT. Kutai Mitra
Sejahtera
KMS
PT. Putra
Bongan Jaya
PBJ
PT. Sasana
Yudha Bhakti
SYB
PT. Persada
Bangun Jaya
PBJ2
14
R.E.A. Holdings plc Annual Report and Accounts 2014
After a land allocation has been obtained (either by direct
grant from the applicable local authority or by acquisition from
the original recipient of the allocation or a previous assignee),
the progression to full title involves environmental and other
assessments to delineate those areas within the allocation
that are suitable for development, settlement of compensation
claims from local communities and other necessary legal
procedures that vary from case to case. The titling process is
then completed by a cadastral survey (during which boundary
markers are inserted) and the issue of a formal registered land
title certificate (an “hak guna usaha” or “HGU”). Once full title
has been obtained, central government and local authority
permits are required for the development of the fully titled
land. These permits are often issued in stages.
During 2014, the overall area of the group’s fully titled
agricultural land remained at 70,584 hectares. In addition, at
31 December 2014, the group held land allocations subject to
completion of titling totalling 37,631 hectares. This figure
includes 7,714 hectares that were acquired during 2014 and
for which the process of obtaining full title has been initiated.
Of this additional area, 2,564 hectares were acquired by PBJ
and are adjacent to PBJ’s fully titled land areas and 5,150
hectares were acquired by KKS adjacent to CDM’s fully titled
land areas. These additions will mean that when PBJ and the
combined CDM and new KKS areas are eventually fully
planted, the resultant planted areas will form larger and more
efficient contiguous units than would previously have been the
case.
Certain of the land areas held by SYB overlap with mineral
rights held by an Indonesian third party company, PT Ade
Putra Tanrajeng (“APT”). Pursuant to a land swap agreement
reached in 2011 between SYB and APT, it was agreed that
SYB would swap 3,554 hectares of fully titled land and 2,212
hectares of untitled land allocations (both being areas the
subject of the overlapping rights), in exchange for the transfer
to SYB of ownership of PT Prasetia Utama (“PU”), an
associate of APT, and thus, indirectly, for the fully titled land
areas of 9,097 hectares held by PU. The PU land is located
on the southern side of the Belayan River opposite the SYB
northern areas that are to be retained and is linked by a
government road to the southern REA Kaltim areas.
Efforts to bring the swap arrangement to a conclusion and to
proceed with the agreement reached in 2014 for the
implementation of the swap were held up by the need to
confirm continuation of the land titles within PU. The
necessary confirmation has now been obtained and
documentation to complete the swap is being progressed.
Concurrently, survey work is in hand to identify the areas to be
designated for conservation.
The breakdown of the land areas held by the group as they
currently are and as they are expected to be following
completion of the SYB land swap agreement is set out below:
Pre Post
swap swap
Group land Hectares Hectares
Fully titled land
CDM 9,784 9,784
KMS 7,321 7,321
PBJ 11,602 11,602
PU – 9,097
REA Kaltim 30,106 30,106
SYB 11,771 8,217
70,584 76,127
Land subject to completion of titling
CDM 6,280 6,280
KKS (area adjacent to CDM) 5,150 5,150
KKS (provisional allocation) 12,050 12,050
KMS 1,964 1,964
PBJ 2,564 2,564
PBJ2 7,411 7,411
SYB 2,212 –
37,631 35,419
The KKS provisional allocation is conditional not only upon
satisfaction of the normal titling requirements but also upon
completion of a necessary rezoning of the area concerned. A
substantial proportion of the PBJ2 land allocation will be
transferred to smallholder cooperatives.
Titling of the not yet fully titled land allocations may be
expected to result in full titles being granted to only part of the
allocated areas as land the subject of conflicting claims or
deemed unsuitable for oil palm cultivation may be excluded.
Moreover, not all of the areas in respect of which full HGU
titles are issued can be planted with oil palms. Some fully
titled land may be unsuitable for planting, a proportion will be
set aside for conservation and a further proportion will be
required for roads, buildings and other infrastructural facilities.
The directors believe that the 76,127 hectares of fully titled
land expected to be held following completion of the SYB land
swap agreement, together with the land allocations listed
above (but excluding the KKS provisional land allocation), will
permit extension of the group’s existing oil palm planting to an
eventual total area approaching 60,000 hectares. If the KKS
provisional allocation becomes available for development, this
could be expected to provide an additional 7,000 hectares.
With land prices rising and increasing interest in plantation
development, land is much less available than was the case in
1991 when the group was first established in East
Kalimantan. Moreover, the Indonesian government is now
applying a “use it or lose it” policy to land. Pursuant to this
policy, land allocations and titles may be rescinded if the land
concerned is not utilised within a reasonable period for the
purposes for which it was allocated. The group must therefore
be careful in expanding its land bank to ensure that it can
demonstrate clear plans for the development of all of its
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R.E.A. Holdings plc Annual Report and Accounts 2014
15
Strategic report
Agricultural operations
continued
undeveloped land holdings in addition to monitoring its
compliance with the new regulations in respect of the limit on
foreign ownership of plantation land as referred to under
“Future direction” in “Introduction and strategic environment”
above.
Land development
Areas planted as at 31 December 2014 amounted in total to
34,614 hectares. Of this total, mature plantings comprised
28,275 hectares having a weighted average age of 12 years.
A further 860 hectares planted in 2011 was scheduled to
come to maturity at the start of 2015.
The breakdown by planting year of the total of 34,614 planted
hectares (which excludes planted areas to be relinquished by
SYB upon completion of the SYB land swap agreement
described under “Land areas” above) is shown below:
Planted areas Hectares
Mature areas
1994 416
1995 1,956
1996 2,272
1997 2,479
1998 4,829
1999 351
2000 874
2004 3,190
2005 2,279
2006 3,362
2007 3,455
2008 991
2009 461
2010 1,360
28,275
Immature areas
2011 860
2012 2,140
2013 2,555
2014 784
34,614
Planted areas that complete a planned planting programme for a particular year but
are planted in the early months of the succeeding year are normally allocated to the
planting year for which they were planned. However, 213 hectares of late 2011
plantings at PBJ have been reclassified as 2012 plantings. It was decided during
2014 to abandon a total of 232 hectares of flood prone areas forming part of the
2009 and 2010 plantings at CDM and these have been excluded from the above
table.
Plantings in KMS were extended to some 4,500 hectares in
2014 and there remain some additional areas to be planted so
that in due course total planted hectarage should amount to
around 5,800 hectares. These figures include some 800
hectares that will be transferred to village cooperatives.
Development of the group's newer land areas held by PBJ
and CDM and the allocation of land for smallholder
cooperatives proceeded at a slower pace in 2014 than the
group would have liked although the group did extend its
planted areas by 784 hectares.
In PBJ, where preparations for further planting began in
earnest at the end of 2013 with the setting up of a nursery
and mobilisation of contractors for land clearing, progress was
impeded in 2014 by the need to address some villagers’
concerns regarding the location of village cooperative
developments, as well as to settle one late villager land
compensation claim. As work progressed on the construction
of a new arterial road through the property and it became
possible to undertake more detailed surveys of the
topography, it became apparent that it was essential to
establish a methodology for the control of flooding in the
lower lying areas of PBJ. Then, late in 2014, new legislation
enacted by the Ministry of Forestry brought in a requirement
that plantation companies conduct a complete analysis of any
land containing standing timber rather than extrapolating from
analyses of sample areas, as had previously been permitted.
Having established that large areas to be developed at PBJ
do not contain standing timber, extension planting on the
higher areas of PBJ is continuing. At the same time, bunding,
which will eventually run to some 20 kilometres, is being
constructed along certain boundaries to control water levels in
the low lying areas. Construction is advancing at a rate of
about 5 kilometres per month and to-date, almost 10
kilometres of bunding have been completed. The group will
commence planting in the low lying areas ahead of completion
of the bunding as the flooding that the bunding is designed to
prevent normally occurs only in the wetter months of October
to April and the group can now be confident that the bunding
will be completed in good time to be available to control
flooding from October 2015 onwards. Accordingly, with the
weather now becoming drier, the group will shortly commence
planting in the low lying areas while maintaining the existing
planting programme in higher areas. A substantial proportion
of PBJ requires little land clearing and no terracing so that
planting should be very economic and proceed rapidly.
In CDM, it has taken time to delineate and establish
appropriate measures to manage the conservation reserves so
that valuable wetlands are preserved. In the meantime, work is
underway to satisfy the recent timber analysis legislation for
areas that are available for planting so that early development
of an additional 1,000 hectares may proceed.
Although CPO prices are currently depressed, at current cost
levels extension planting in areas adjacent to the existing
developed areas still offers the prospect of good returns.
Accordingly, it remains the policy of the directors that, subject
to financial and logistical constraints, the group should
continue its expansion and should aim over time to plant with
oil palms all suitable undeveloped land available to the group
(other than areas set aside by the group for conservation).
Such expansion will, however, involve a series of discrete
annual decisions as to the area to be planted in each
forthcoming year and the rate of planting may be accelerated
16
R.E.A. Holdings plc Annual Report and Accounts 2014
or scaled back in the light of prevailing circumstances.
Moreover, the group’s capacity for extension development is
likely to remain dependent upon the rate at which the group
can make additional land areas available for planting.
Expansion of smallholder cooperatives is highly complex and
has been slow owing to a number of factors. Significant
progress is being made so that development may press ahead
in 2015.
Processing and transport facilities
The group currently operates three oil mills in which the FFB
crops harvested from the mature oil palm areas are processed
into CPO and palm kernels. The two older mills date from
1998 and 2006 respectively and each is designed to have
effective processing capacity of 80 tonnes per hour. The third
mill, operating since 2012, has a current capacity of 40 tonnes
per hour but is currently being expanded to double its capacity
to 80 tonnes per hour with completion expected in 2016.
A number of engineering and operational deficiencies, which
were identified in the mills during 2014, are being addressed
to ensure optimum standards for grading and processing of
FFB. Extensive refurbishment of one of the boilers in each of
the two older mills has been completed and both boilers are
now back in service and providing sufficient steam for current
processing requirements. Following on from this, the second
boilers in these mills are similarly undergoing refurbishment
(although less extensive in nature) so that, once the works are
completed, there will be sufficient resilience in both mills to
allow for routine boiler maintenance while maintaining the
design throughputs.
Other essential works during 2014 included the construction
of a second loading ramp in the oldest mill to facilitate the
complete rather than sample grading of all crop delivered for
processing by third party suppliers of FFB. Following
commissioning of this new loading ramp, the existing loading
ramp is currently being refurbished. Other upgrading and
maintenance work in the mills is on-going, with enhanced
security systems and flow meters to monitor throughput due
for installation during 2015.
Steps are being taken to double the processing capacity of
the newest oil mill with effect from 2016. This should ensure
that the three existing mills together have, for the immediate
future, sufficient processing capacity to handle all crop from
the group’s own estates and from the growing number of
maturing smallholder plantings in the vicinity.
will be sold to neighbouring mills (of which there are several)
but, as FFB production from PBJ grows, it is expected that
PBJ will need its own oil mill. The directors do not currently
foresee either of the two further oil mills that may eventually
be needed being required before 2019.
Two of the group’s oil mills incorporate, within the overall
facilities, palm kernel crushing plants 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 difficulties and cost associated with the
transport and sale of kernels. Each kernel crushing plant has
a final design capacity of 150 tonnes of kernels per day which
is sufficient to process kernel output from the group’s three oil
mills. Total installed capacity is currently 250 tonnes per day.
The group maintains a fleet of barges for transport of CPO
and CPKO. The fleet is used in conjunction with tank storage
adjacent to the oil mills and a transhipment terminal owned by
the group downstream of the port of Samarinda. The terminal
jetty, which was built in 2000, is currently being refurbished
and extended to ensure that it can accommodate increased
traffic flow as the group expands. The barge fleet now
comprises one larger vessel of 4,000 tonnes, which the group
time charters, and a number of smaller vessels, ranging
between 750 and 2,400 tonnes, which are owned or
chartered by the group. The smaller barges can be used for
transporting CPO and CPKO from the upriver operations to
points downstream for transfer either to the transhipment
terminal or directly to buyers’ own vessels. Both the 4,000
tonne barge and the 2,400 tonne barge are equipped for sea
voyages and can be used to make deliveries to customers in
other parts of Indonesia and overseas. On occasions, the
group also time charters barges for additional shipments and
to provide temporary storage if required.
The directors believe that flexibility of delivery options is
helpful to the group in its efforts to optimise the net prices,
FOB port of Samarinda, that it is able to realise for its produce.
Moreover, the group’s ability itself to deliver CPO and CPKO
allows the group to make sales without the collection delays
sometimes experienced with FOB buyers.
Most CPO and CPKO is delivered either to the group’s
transhipment terminal in Samarinda for collection by
customers or to refineries or traders in Balikpapan. The
majority of CPO sales are now made to Indonesian refineries
that can be easily accessed from the group’s estates and to
which the voyage time is in most cases shorter than to East
Malaysia where historically the majority of sales were made.
Once the recent plantings at KMS and the existing and
planned plantings at CDM reach a certain level of maturity, a
further oil mill is likely to be needed to process the additional
FFB production from these new areas. The PBJ areas are too
far away from the group’s other planted areas for PBJ fruit to
be processed in any of the group’s three existing mills or
prospective fourth mill. It is planned that early fruit from PBJ
During periods of lower rainfall (which normally occur for short
periods during the drier months of May to August of each
year), river levels on the upper part of the Belayan become
volatile and CPO and CPKO at times have to be transferred by
road from the mills to a point downstream where year round
loading of barges of up to 2,000 tonnes is possible. The
group maintains its own fleet of trucks for this purpose.
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Agricultural operations
continued
The group has for many years owned a riverside site some 70
kilometres downstream at Pendamaran that is suitable for
development as a loading point. In past years, the last stretch
of the road from the estates to Pendamaran was inadequate
to carry heavy vehicles and the group relied on third party
facilities slightly closer to the estates for downstream loading
during drier periods. During 2014, the government
completed improvements to the hitherto impassable final
section of the road and the group decided to save the costs of
renting the third party loading facilities and switch its
downstream loading to Pendamaran. This required an
agreement with the local authority regarding road
maintenance. This was duly concluded but only after a delay
resulting in some hiatus in transfers downstream of CPO and
CPKO and a build-up in estate stocks during what turned out
to be a longer than normal drier period. In the event, all stocks
were successfully evacuated without material loss of volume
but some potential revenue was lost as a result of the period
of higher stockholding coinciding with a period of falling CPO
prices.
The group now plans to develop permanent loading facilities
at Pendamaran. To provide resilience, it also intends to
establish an alternative route from the estates to Pendamaran
so that, as volumes increase, the group can continue to
evacuate all palm product output promptly during drier periods.
The current river route downstream from the mature estates
follows the Belayan River to Kota Bangun (where the Belayan
joins the Mahakam River), and then the Mahakam through
Tenggarong, the capital of the Kutai Kartanegara regency,
Samarinda, the East Kalimantan provincial capital, and
ultimately through the Mahakam’s mouth into the Makassar
Straits. When a fourth oil mill is eventually constructed to
process FFB from the newer estates at KMS and CDM, the
CPO and CPKO from that mill is likely to be evacuated by an
alternative upstream route via the Kedang Kepala River which
joins the Mahakam between Kota Bangun and Tenggarong.
FFB delivery
18
R.E.A. Holdings plc Annual Report and Accounts 2014
Crops and extraction rates
The following table shows the FFB crops, the CPO, palm
kernel and CPKO production, resultant extraction rates and
annual rainfall for 2014, together with comparative figures for
2013:
FFB crops (tonnes) 2014 2013
Group 631,728 578,785
External purchases 149,002 99,348
Total 780,730 678,133
Production (tonnes)
CPO 169,466 147,649
Palm kernels 35,764 30,741
CPKO 12,596 11,393
Extraction rates (percentage)
CPO 21.7 21.8
Palm kernels 4.6 4.5
CPKO 38.1 36.8
Rainfall (mm)
Average across the estates 2,606 3,385
Production levels in 2014 were comfortably ahead of 2013
levels, but after a period of steady improvement in the first half
of the year, operations were temporarily set back by two
factors. First, as noted under “Processing and transport”
above, several weeks of particularly dry weather during
September and October caused some disruption to CPO and
CPKO movements downstream and, secondly, the on-going
programme of refurbishment in the group’s oil mills restricted
the volume of fruit that the group was able to process, during
the peak cropping period spanning the year end. As a
consequence harvesting rounds were delayed and the levels
of crop harvested were lower than they would otherwise have
been.
The widely predicted recurrence of an El Nino did not
materialise in 2014 but rainfall across the estates for the
whole of the year, was substantially below the average of
3,385 mm for the previous year and the average of 3,560 mm
for the preceding eight years. However, the return of heavy
rains in mid November brought welcome relief. It remains to
be seen whether moisture stress during the drier periods will
affect the overall crop in 2015.
Whilst the processing inefficiencies that have resulted from
the necessary refurbishment of boilers distort comparisons, it
is clear that the continuing focus on the mills is starting to
have a positive impact on extraction rates. Further progress
should be made over the coming months of 2015.
A steady stream of third party FFB from smallholders and
other estates in the vicinity of the group’s estates is continuing
to provide additional throughput and revenue.
The FFB crop for the period from the beginning of 2015 to
the end of March 2015 amounted to 131,207 tonnes, against
150,635 tonnes for the same period in 2014. Reports
indicate that oil palm crops generally in East Kalimantan and
East Malaysia during this period have been well down on the
preceding year with many companies experiencing crop
reductions of 10 to 15 per cent probably because of unusually
high rainfall (the highest for five years) in February following
on from the extended dry period in September and October
2014. In the group’s case, crops for January were also
affected by limitations in processing capacity but this was no
longer a factor in February and March. Daily cropping rates in
April to date have shown an improvement.
Revenues
In 2014, as in 2013, substantially all of the group’s CPO and
all CPKO was sold in the local Indonesian market, reflecting
continuing strong demand from easily accessible local refiners
and the delivery efficiencies achievable from selling to this
nearby customer base. The group has established
relationships with each of the four refineries now operating in
the region. Competition between these refineries ensures that
prices achieved are competitive. Local sales do not attract
export duty but arbitrage between the local and international
markets means that the price differential between the markets
is normally an almost exact reflection of the additional imposts
incurred on exports.
CPO and CPKO sales are made on contract terms that are
comprehensive and standard for each of the markets into
which the group sells. The group therefore has no current
need to develop its own terms of dealing with customers.
Revenues continued to benefit from premia achievable on
sales of ISSC certified CPO which averaged $13.6 per tonne
on sales of 75,425 tonnes in 2014. In addition, the group sold
9,563 Greenpalm certificates (5,000 certificates at $60 each
and 4,563 certificates at $35 each) in respect of RSPO
certified CPKO using the RSPO book and claim system as
further detailed under “Certification” in “Sustainability” below.
As a general rule, all CPO and CPKO produced by the group
is sold on the basis of prices prevailing immediately ahead of
delivery but, on occasions when market conditions appear
favourable, the group may make forward sales at fixed prices.
The fact that export duty is levied on prices prevailing at date
of delivery, not on prices realised, does act as a disincentive to
making forward fixed price sales since a rise in CPO prices
prior to delivery of such sales will mean that the group will not
only forego the benefit of a higher price but may also pay
export tax on, and at a rate calculated by reference to, a higher
price than it has obtained. No deliveries were made against
forward fixed price sales of CPO or CPKO during 2014 and
the group currently has no sales outstanding on this basis.
The average prices per tonne realised by the group in respect
of 2014 sales of CPO and CPKO, adjusted to FOB,
Samarinda, and net of export duty were, respectively, $665
(2013: $648) and $951 (2013: $755). Delays in harvesting
fruit, as referred to under “Crops and extraction rates above”,
had a negative impact on the free fatty acid (“FFA”) content of
oil production in the final quarter of 2014 and the early part of
2015 with a consequent negative impact on prices realised for
the production of those periods. Revenues for 2014 were
further impacted by the general decline in the CPO price
during the year.
Operating efficiency
The group’s revenue costs principally comprise: direct costs of
harvesting, processing and despatch; direct costs of upkeep of
mature areas; estate and central overheads in Indonesia; the
overheads of the UK head office; and financing costs. The
group’s strategy, in seeking to minimise unit costs of
production, is to maximise yields per hectare, to seek
efficiencies in overall costs and to spread central overheads
over as large a cultivated hectarage as possible.
The level of rainfall in the areas of the agricultural operations
provides the group with some natural advantage in relation to
crop yields. The group endeavours to capitalise on this
advantage by constantly striving to achieve economic
efficiencies and best agricultural practice. In particular, careful
attention is given to ensuring that new oil palm areas are
planted with high quality seed from proven seed gardens and
that all oil palm areas receive the upkeep and fertiliser that
they need.
Methane from the group’s two methane capture plants, which
were commissioned in 2012, drives four generators (each of
one megawatt capacity) generating power for the group’s own
use. These generators have enabled the group to achieve
material savings in energy costs with consumption of diesel oil
for electricity generation largely eliminated on the REA Kaltim
and SYB estates.
Sales of carbon credits are no longer being pursued following
the decline in their economic value. Instead, the group has
installed an additional three megawatts of generating capacity
dedicated to the Indonesian state electricity company (“PLN”)
for PLN to use in supplying power to 21 villages surrounding
the group’s estates by way of a local grid. Construction of the
reticulation to connect the group’s generating stations to the
adjacent villages was largely completed by PLN during 2014
and, following finalisation of the related licences and an
inaugural ceremony on 16 April 2015, electricity can now be
distributed to many of the agreed villages. Payment for the
power so utilised is to be made by PLN to the company and
the district power company, Perusahaan Daerah Kelistrikan
Dan Sumber Daya Energi Kabupaten Kutai Kartanegara
(“PKSDE”), at fixed rates determined by Indonesian state
regulations. These rates have recently been revised
downwards and will now equate to about $700,000 per
megawatt year. PLN may, in due course, be able to increase
its power capacity requirement to six megawatts.
R.E.A. Holdings plc Annual Report and Accounts 2014
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Agricultural operations
continued
Current methane production is more than double that needed
to drive the installed generators (including the three
generators dedicated to PLN). Moreover, utilisation of
methane production could be further increased by erecting a
third methane capture plant in the group’s most recently
constructed mill. Accordingly, the group continues to seek
opportunities for cost reduction from the use of surplus
methane. In particular, the group intends to convert its vehicle
fleet to run on a biomethane and diesel mix, which has the
potential to reduce diesel consumption in the group’s vehicles
by some 70 per cent.
Compost produced from CPO and CPKO by-products has, in
recent years, provided an efficient replacement for a useful
proportion of the inorganic fertiliser that the group would
otherwise consume. During 2014, the group took over
responsibility for the composting operations from an external
contractor. This has involved some capital expenditure on
equipment used for the composting operations but is
expected to result in material cost savings going forward. The
area in which compost was substituted for inorganic fertiliser
continued to increase during 2014.
Other cost saving initiatives that have been implemented by
the group in recent years include measures to reduce the use
of pesticides, increased mechanical handling of FFB collection
and transport and the establishment of an in-house road
maintenance capability. A number of initiatives were
introduced in 2014 to achieve further economies by switching
to in house production of harvester bridges and bricks for
housing (in the latter case using a mixture of cement and
boiler ash from the mills). Development of the stone quarry
concession, described under “Stone and coal operations”
below, should permit further economies in respect of building
and maintenance of the group’s infrastructure.
Following a substantial increase in the minimum wage in East
Kalimantan of 49 per cent in 2013 and a further increase of
some 11 per cent in 2014, the combined increase announced
by the national and provincial authorities for 2015, as it affects
the group, is approximately 10 per cent. This increase, a need
to maintain the differentials for those of the group’s employees
paid at a level above the minimum wage and a requirement to
ensure that the group’s wages remain competitive with the
market has meant that the group’s employment costs, which
represent about one third of the cost of sales attributable to
the group’s agricultural operations, continue to rise in
Indonesian rupiah terms. During 2014, this rise was mitigated
in US dollar terms by the weakness of the rupiah against the
US dollar but, nevertheless, the group continues to seek
labour efficiencies wherever possible.
An important tool in achieving such efficiencies is likely to be
the new information system in which the group has been
investing for several years. Installation of this system, which
integrates the recording and reporting of operational and
accounting information, is expected to be completed during
2015. It is already providing much greater insight into estate
activities than has hitherto been possible and this is facilitating
the identification of potential savings and efficiencies.
Nursery at PBJ
Bunding in PBJ
20
R.E.A. Holdings plc Annual Report and Accounts 2014
Strategic report
Stone and coal operations
Concessions
Operating activities
The group holds interests in respect of a stone deposit and
three coal mining concessions, all of which are located in East
Kalimantan in Indonesia. The coal mining concessions
comprise a high calorific value deposit near Kota Bangun and
the lower grade, and broadly adjacent, Liburdinding and Muser
concessions in the southern part of East Kalimantan.
Structure
Stone quarrying is classified as a mining activity for Indonesian
licensing purposes and is subject to the same regulatory
regime as coal mining. Initial investigation of the group’s stone
concession was therefore managed in conjunction with the
group’s coal interests. It was agreed during 2013 to
reorganise ownership of the concession so as to bring it under
the direct control of REA Kaltim as the agricultural operations
will be an important customer of the stone concession and it
was felt that the logistics of operating the quarry (which is
located in close proximity to the SYB estates) could be
sensibly coordinated with the logistics of the agricultural
operations. However, regulatory approvals for the proposed
reorganisation have still not been obtained and, with the group
now planning the listing of REA Kaltim on the Indonesia Stock
Exchange during 2015, the directors believe that any transfer
of ownership of the stone interests to REA Kaltim should be
postponed until REA Kaltim has been established as a listed
company.
Accordingly, the group’s stone and coal interests continue to
be coordinated through an Indonesian subsidiary company, PT
KCC Resources Indonesia (“KCCRI”), which is 95 per cent
owned by the company’s UK subsidiary company, KCC
Resources Limited, and five per cent owned by local partners.
The stone and coal mining concessions (or interests therein)
are held by Indonesian concession holding companies, which
are currently wholly owned by the group’s local partners but
with the group having the right, subject to satisfaction of
certain conditions (the “applicable conditions”), to acquire 95
per cent of each of the concession holding companies at the
local partners’ original cost. In the meanwhile, the concession
holding companies are financed by loan funding from the
group on terms such that 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
the group.
Changes over the last couple of years to the Indonesian
regulatory regime applicable to foreign investment in mining
are likely to mean that the applicable conditions cannot be
satisfied in their existing form. The group is confident that
such conditions can over time be successfully renegotiated
without material loss to the group but, pending such
renegotiation, the concession holding companies have not
been consolidated. In the meanwhile, in consideration of the
group’s continuing support for KCCRI and all the concession
holding companies, the stone concession holding company
has guaranteed the obligations to the group of the coal
concession holding companies.
The operating licence required to establish a simple stone
crushing operation at the quarry on the group’s stone
concession was obtained in 2014. Contractual arrangements
for the provision of quarry services are under negotiation and
ancillary permissions for upgrading of the existing access road
to the concession to support heavy duty trucks are being
secured. Crushed stone will be transferred from the
concession site by truck to a stockpile on the REA Kaltim
estates from which onward deliveries will be made to the
agricultural operations and third party buyers. The agricultural
operations can utilise significant quantities of crushed stone
for their building and infrastructure construction programmes
and indications are encouraging that there will also be good
third party demand for crushed stone for road building and use
as a concrete aggregate. The group is aiming to secure a
“cornerstone” contract for third party offtake to underpin the
investment of some $3 million that is likely to be required in
upgrading the access road.
Following a decision by the directors in 2012, further capital
commitments to the coal operations have been limited as the
group concentrates on maximising recoveries from the
existing coal concessions and minimising related costs.
Project agreements were signed in 2013 with two separate
third parties relating to the development and operation of the
Kota Bangun and Liburdinding concessions, whereby an
income stream would be provided to the group calculated by
reference to coal prices prevailing from time to time but
subject to an agreed floor.
A significant fall in international coal prices in 2014 had
negative consequences for these arrangements. In the case
of Kota Bangun, the agreement to give effect to the
arrangements was duly completed and coal production started
but, with prices realisable for coal produced falling below the
cost of producing it, the group agreed to a suspension of
mining operations. Nevertheless, the Kota Bangun agreement
remains in place and mining operations should be resumed as
soon as coal prices recover. In the case of Liburdinding, the
third party proposing to take on the development and
operation of the concession withdrew. When coal prices
recover, the group will seek to put in place a new project
agreement for Liburdinding. The group is also exploring the
possibility of converting part or all of the land areas at
Liburdinding and Muser to agricultural use.
In due course, the group would expect to recover at least the
carrying value of the coal concessions with some upside in the
event that coal prices rise. The recent fall in petroleum prices
should be beneficial to coal extraction costs so that
resumption of mining is likely to be less dependent upon an
improvement in coal prices than previously. In the meanwhile,
expenditure on the concessions continues to be minimised
with such expenditure as is being incurred on the Kota
Bangun concession being borne substantially by the third
party operator.
R.E.A. Holdings plc Annual Report and Accounts 2014
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Production of building bricks
Bricks for estate housing
PLN electricity inauguration ceremony
Inauguration of village water treatment plant
Estate garden at REA Kaltim
Opening of new school classrooms on
REA Kaltim estate
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R.E.A. Holdings plc Annual Report and Accounts 2014
Strategic report
Sustainability
Reporting
In June 2015, the group will publish its second Sustainability
Report, produced in accordance with the Global Reporting
Initiative (“GRI”). The purpose of this report is to provide the
group’s stakeholders with detailed information about the
group’s performance on all material environmental and socio-
economic issues. This report will be available for download
from the group’s website: www.rea.co.uk and will contain more
comprehensive information on all of the environmental and
socio-economic issues covered by this sustainability section of
the annual report.
Certification
The group believes that compliance with international and
national sustainability standards provides the foundation for
environmentally and socio-economically responsible palm oil
production, as well as third party assurance that best practices
are being implemented. The group therefore remains
committed to ensuring that all of its operations achieve and
maintain Roundtable on Sustainable Palm Oil (“RSPO”) and
Indonesian Sustainable Palm Oil (“ISPO”) certification.
The group participates actively in the RSPO, of which it has
been a member since 2007. To date, the group has obtained
RSPO certification for the two REA Kaltim mills, all of the REA
Kaltim estates and SYB’s southern estate and some of its
associated smallholders. In 2014, the group took measures to
bring these operations into compliance with the revised RSPO
Principles and Criteria, which were adopted in 2013 and come
into force with effect from April 2015. Such measures
included revision of the group’s policy framework, which now
incorporates policies on business ethics and human rights,
and conducting carbon stock assessments prior to land
clearing. The group is on track to meet its target of obtaining
RSPO certification for its third palm oil mill before the end of
2015.
biofuel of the CPO, the subject of the certification application,
will be at least 35 per cent lower than if the equivalent amount
of energy was generated by burning fossil fuels. Obtaining
this certification allows the group to sell the CPO produced
from these operations for the production of biodiesel that
meets the requirements of the European Union Renewable
Energy Directive (“EU RED”).
In 2014, 59 per cent of the CPO (100,742 tonnes) and 68
per cent of the CPKO (9,563 tonnes) produced by the group
was RSPO certified. Of the CPO that was RSPO certified,
89,052 tonnes was also ISCC certified. However, in making
sales of CPO that is both RSPO and ISCC certified, the group
has to decide which certification should apply to each sale.
Whilst the group maintains its RSPO Supply Chain
Certification, the logistics of finding a suitable buyer for what,
in the context of the overall market in such oils, are relatively
small monthly volumes of RSPO certified CPO and CPKO
remain challenging. Moreover, there was very low demand for
CPO “Greenpalm certificates” during 2014. This system
enables end users of palm products to support RSPO certified
producers by purchasing Greenpalm certificates, even if they
do not physically purchase oil from these producers. One
Greenpalm certificate is equivalent to one tonne of RSPO
certified CPO or CPKO respectively. In 2014, therefore, some
75,000 tonnes of CPO was sold as ISCC certified and no
CPO was sold as RSPO certified. Conversely, demand for
CPKO through the RSPO’s book and claim system remained
strong and sales of CPKO through this system produced
some 9,500 CPKO Greenpalm certificates which were sold in
2014.
Employees
At the end of 2014, the group’s workforce numbered nearly
9,800, representing an increase of some 8.5 per cent since
2013.
The ISPO scheme was introduced by the Indonesian
government in 2010. It mandates that all palm oil mills and
their supply base must be audited against the ISPO standard,
which is largely based on existing national regulations and
includes requirements covering key economic, environmental
and social issues. All three of the group’s oil mills and their
supply bases undertook the first stage of the ISPO audit in
November 2014. The second stage of the audit is scheduled
to take place in April 2015.
In April 2015, the group’s third oil mill was subject to an
International Sustainability and Carbon Certification (“ISCC”)
audit. The group’s two older oil mills and the REA Kaltim
estates have been previously certified as ISCC compliant.
Most requirements of the ISCC standard are broadly similar to
those of the RSPO but one key difference is that, to obtain
ISCC certification, it must be shown that the net greenhouse
gas emissions associated with the production and use as a
The group has continued to develop its systems for managing
human resources, including a comprehensive employee
database of personal data, salaries, benefits, facilities, training,
performance and absenteeism. In an effort to reduce
absenteeism, finger-printing technology has now been
installed in all mills and offices.
The group endeavours to provide competitive salary packages,
opportunities for career development and a decent standard
of living on the estates for employees and their families. This
is particularly important given the remote location of the
group’s estates. In 2014, a review of the group’s salary
structure was conducted to ensure consistency against
industry benchmarks throughout the group hierarchy. In
response to this, significant revisions were made to the
remuneration of junior staff. It is hoped that this will help the
group to attract the best young talent available in the industry
and to retain junior employees with management potential.
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Strategic report
Sustainability
continued
In addition to salaries, the group provides a range of benefits
and facilities. Permanent employees, other than those living
locally, are provided with housing, equipped with potable water
and electricity, for themselves and their families.
The group operates a network of schools across its
plantations. As at December 2014, 118 secondary school
children were enrolled at the group’s schools, in addition to
1,765 primary school and 460 pre-school children. In April
2014, the group received an award from the Kutai
Kartanegara regency in recognition of its contribution to
education in the region.
The group continues to run its long established cadet training
programme from its central training school. Each year,
between 30 and 40 fresh graduates from Indonesian
universities and existing employees who demonstrate
management potential are selected to participate in 12
months of theoretical and practical training covering all
aspects of plantation management. Cadets who successfully
complete the training are appointed as assistants in the
group’s estates, mills and various supporting departments. In
addition to the cadet programme, the group also runs a
training programme for existing employees, which comprises
both in-house training and participation in external training
courses and conferences.
The group aims to reward employees based on their
performance. All assistants and above are evaluated on a
biannual basis against quantitative key performance indicators,
which are closely aligned with the group’s overall objectives. In
an effort to improve performance in the mills, in 2014 the
group introduced performance related pay for mill employees
at all levels. Although no employee will receive less than the
Indonesian minimum wage, a bonus is available depending on
the quarterly performance of the mill against a variety of
production and management parameters.
The group’s workforce is diverse, comprising people from 41
different ethnicities and five different religions. The group
does not tolerate discrimination based on age, disability,
ethnicity, gender, marital status, political opinion, race, religion
or sexual orientation and works to promote equal opportunities
for all employees. As at 31 December 2014, 27 per cent of
the group’s workforce was female, including 21 per cent of
management.
2014 2013
Number of Number of Number of Number of
male staff female staff male staff female staff
Directors 5 1 5 1
Management 56 15 51 14
Rest of workforce 7,100 2,627 6,130 2,833
Total 7,161 2,643 6,186 2,848
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R.E.A. Holdings plc Annual Report and Accounts 2014
Management
Mark Parry, the group’s regional director based in Indonesia
and Singapore, has overall local responsibility for the
Indonesian operations. Mr Parry is the president director and,
currently, the chief operating officer of REA Kaltim.
Following changes to broaden and strengthen the senior
management team running the Indonesian operations, the
board of REA Kaltim currently comprises, in addition to Mr
Parry, two executive directors, of whom one is female and an
Indonesian national and one is male and a British expatriate. It
is intended that a second Indonesian national will be
appointed to the board in the near future, replacing an
Indonesian director who left REA Kaltim in March 2015. The
REA Kaltim directors have overall local responsibility for the
group’s affairs and have individual responsibilities covering
estate operations and development, corporate affairs
(including government and village relations, human resources,
security, safety and conservation), commercial administration
(including legal affairs, sales and marketing) and financial
reporting.
The experienced senior management team now in place under
the board of directors comprises departmental heads with
responsibility for, respectively, mature estates, immature
estates, mill operations, transport and logistics, biogas and
engineering, central data, health and safety, operations audit,
sustainability, internal audit, village affairs and human
resources. A second tier of management has responsibility for
information technology, security, accounting, purchasing,
corporate finance and taxation, legal matters and sales and
marketing.
As a foreign investor in Indonesia, the group is conscious that
it is in essence a guest in Indonesia and an understanding of
local customs and sensitivities is important. The group’s ability
to rely on senior Indonesian staff to handle its local interface is
therefore a significant asset upon which the group continues
to build. This asset is augmented by the local support and
advice that the group obtains from local advisers and from the
local non-controlling investors in, and local non-executive
directors of, the company’s Indonesian subsidiaries.
The directors believe that basing senior management in the
same time zone as the group’s operations facilitates
management oversight and improves its effectiveness. They
intend that, over time, overall executive responsibility for the
direction and management of the group will progressively be
transferred from the UK to Indonesia and Singapore. In line
with this policy and, as noted in the “Corporate governance
report” below, it is intended that at the end of 2015, Mr Oakley
will step down as group managing director and Mr Parry will
take over that role. In addition, the group has recently
augmented its corporate secretarial functions with the
appointment of an additional senior executive, based in
Singapore, who, among other responsibilities, will assist in
ensuring consistency of secretarial and investor relation
activities between Jakarta and London.
Health and safety
The group maintains a total of 18 clinics across its estates.
These are manned by paramedics assisted by two resident
doctors, midwives and, since 2013, a dentist. In serious cases,
the group arranges for employees to be evacuated by land or
air to a larger hospital in Samarinda or Jakarta where it has
established relationships. The clinics treat patients from the
local villages as well as the group’s employees and their
families.
The directors regret that four group employees were involved
in fatal motorbike accidents during 2014. Although only one
of these occurred within the boundaries of the group’s
operations during working hours and is therefore considered
work-related, the group takes any avoidable loss of life within
its workforce very seriously. Consequently all such accidents
are subject to detailed investigations to determine the cause
and any corrective actions required.
The group aims to provide every employee with a safe working
environment. However, the group is conscious that both
structural improvements and changes in behaviour are needed
if international safety standards are to be implemented
consistently throughout its operations. In an effort to achieve
this, the group is working to develop and implement an
Occupational Health and Safety (“OHS”) management system
that conforms to the internationally recognised OHSAS
18001 standard.
Community relations
The group recognises that developing and maintaining
harmonious relations with the communities that live in the
vicinity of its operations is critical to the success of its
business. The group endeavours to ensure that all legal or
customary community land use rights are identified prior to
development of a new area of land. The group will only
proceed if the free, prior and informed consent (“FPIC”) is
obtained from the holders of such rights, in return for which
fair compensation is paid. In order to engender mutual
interest in the success of its commercial operations, the group
aims to ensure that the socio-economic benefits are shared
with the local communities. Strategies to achieve this include
maximising the number of local people who are employed by
the group, developing oil palm smallholder schemes for local
villages and implementing community development projects
that will assist the communities to become more socio-
economically independent.
Despite these efforts, with over 60,000 people living in the
villages surrounding the group’s established plantations,
disagreements do sometimes arise. In 2012 and the early
part of 2013, the group experienced a series of protests by
representatives from these local communities, the majority of
which related to claims for land compensation in the group’s
longest established concessions and demands to expand the
group’s smallholder schemes. Concerted efforts made to
resolve outstanding claims for land compensation in a
systematic, consistent and transparent manner, as well as
steady progress in developing new smallholder schemes, have
significantly improved relationships between the group and the
local communities.
Establishing more effective and regular channels of
communication with a wider variety of groups within the
surrounding communities has also contributed to the better
relationship. This includes holding formal meetings with
village leaders, as well as formal and informal interaction
between the group’s team of village ambassadors and
traditional leaders, religious leaders, farmers’ groups and
women’s groups.
Regrettably, a local villager was seriously injured in late
November 2014 in an encounter with army personnel based
on the estates. An official military police enquiry into this
incident is continuing.
Smallholder schemes
The group believes that smallholder schemes are one of the
most effective ways to share the economic benefits of its
operations with the surrounding communities. The group
established its first smallholder scheme in 2000. Under this
original scheme, known as “Program Pemberdayaan
Masyarakyat Desa” or “PPMD”, the group assisted
cooperatives of local people with access to land to cultivate oil
palm by providing them with oil palm seedlings, fertilisers,
herbicides and technical assistance. The cost of the inputs
provided are repaid by the members of these cooperatives,
interest free, through deductions made when their FFB is sold
to the group’s mills. In addition to the 1,561 hectares originally
established by the 15 PPMD cooperatives with assistance
from the group, these cooperatives have since expanded in
terms of both membership and land area. Consequently, the
15 semi-independent PPMD cooperatives, together with the
ten completely independent smallholder cooperatives, that
supply the group’s mills now comprise well over 2,000 farmers
cultivating in excess of 7,000 hectares of oil palm.
In 2014, the group started to establish a comprehensive
database of these farmers and their land. This will enable the
group to trace every delivery of FFB purchased from a
cooperative to a specific plot of smallholder land. Given the
large number of people and the vast expanse of land
dispersed over a wide area such cataloguing is complex and
time consuming, but it is hoped that the database will be
completed before the end of 2015.
In 2007, the Indonesian government introduced a new
regulation which mandated that an area equivalent to 20 per
cent of the land developed with oil palm by a commercial
entity should be developed as so called “plasma schemes” for
R.E.A. Holdings plc Annual Report and Accounts 2014
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Strategic report
Sustainability
continued
the benefit of the local communities. Although this regulation
only applies to oil palm concessions developed after the new
regulation was introduced, the villages surrounding the group’s
long established REA Kaltim concession still expect to be
eligible to participate in plasma schemes. In the interests of
equitable treatment, the group has therefore made a voluntary
commitment to include these villages in its plasma scheme
programme.
Plasma schemes involve the development of oil palm areas
owned by village cooperatives but, in contrast with the PPMD
schemes, the group, rather than the cooperatives themselves,
manages the plasma oil palm plantings in return for a pre-
agreed management fee. Financing for the group supported
plasma schemes initiated to-date has been agreed with a local
development bank in the form of fifteen year loans secured on
the land and assets of the schemes and guaranteed by the
group. These facilities are designed to finance most of the
initial development costs of the schemes but will be
supplemented to the extent necessary by funds advanced by
the group.
As at 31 December 2014, the group had developed some
3,100 hectares under its plasma schemes. Although this
represents limited progress since 2013 in terms of expansion
of the planted area, the group has made steady progress in
establishing and developing the institutional management
structures for both existing and new plasma cooperatives and
completing the field surveys and land inventories necessary to
ensure that the plasma land will be developed in accordance
with the group’s policy on responsible development of new
land.
Community development
The group aims to make a long term, tangible contribution to
improving the welfare of the people living in the vicinity of its
operations by implementing projects that will assist these
communities to become more socio-economically self-reliant.
In accordance with this vision, the group has decided to
prioritise investment in infrastructure projects that will provide
benefits to the whole community, particularly access to
electricity and clean water, as well as improvement of roads
and other public facilities. Wherever possible, the group aims
to involve the communities themselves in these projects, as
well as local government and neighbouring companies.
In 2014, the group completed the installation of water
treatment plants for two villages in the vicinity of its REA
Kaltim concession. In an effort to ensure that these villages
do not rely on the group to maintain and manage this
infrastructure, the group provided the operators of the plants,
whose wages are covered by the villages’ annual budgets, with
the necessary training prior to handing over full responsibility
for the management of these plants to the villages.
26
R.E.A. Holdings plc Annual Report and Accounts 2014
On 16 April 2015, as noted under “Operating efficiency” in
“Agricultural operations” above, the group’s collaboration with
PLN came to fruition when electricity generated by the group’s
two methane capture plants started to supply electricity to
villages in the vicinity of the group’s operations. PLN has so
far installed the infrastructure necessary to connect the
majority of the 21 agreed villages to the electricity from this
renewable source. Installation of infrastructure to the
remaining villages continues. This includes nine villages that
were not connected to PLN’s existing transmission line in the
area, which previously supplied electricity produced from
diesel powered generators. This collaboration will bring
significant socio-economic benefits to the local communities,
who will have access to a reliable source of electricity that will
hopefully promote further socio-economic development.
Greenhouse Gas (“GHG”) emissions reduction
2014 is the fourth year for which the group has calculated
and publicly reported its carbon footprint using the RSPO’s
PalmGHG methodology. Since 2011 significant reductions
have been achieved in terms of both the net GHG emissions
per tonne of CPO and CPKO produced by the group, as well
as the net GHG emissions per hectare of oil palm planted by
the group and its scheme smallholders. Although the net
GHG emissions per tonne of product increased slightly
between 2013 and 2014, a continued decline is seen using
the planted area intensity measure. This is because the net
GHG emissions associated with the KMS concession, which is
fully planted but largely still immature, were included in the
scope of the carbon footprint for the first time in 2014.
GHG emissions from land use change continue to account for
the largest component of the group’s GHG emissions. Whilst
the GHG emissions associated with the digestion of palm oil
mill effluent (“POME”) remain the second largest source of
GHG emissions from the group’s operations, a 50 per cent
reduction has been achieved in the total GHG emissions from
POME between 2011 and 2014. This is almost completely
attributable to the installation of methane capture facilities at
the group’s Perdana and Cakra oil mills in 2012. Not only do
the methane capture facilities reduce GHG emissions of
methane but, by converting captured methane to electricity,
they also reduce the use of diesel powered electricity
generators, thus further reducing GHG emissions.
The group continues to contribute to the improvement of the
RSPO’s PalmGHG calculator and the development of practical
measures to assist oil palm growers in reducing their carbon
footprint through participation in the RSPO’s GHG Emissions
Reduction Working Group, which the group joined as a
representative of the Indonesian growers in 2014.
GHG emissions by source for 2014 tonnes of CO2
0.2%
0.1%
3% 2%
6%
7%
67%
15%
Land clearing
Methane from POME
Peat CO2 emissions
Cultivation of outgrower FFB (estimated)*
Inorganic fertilisers
Fuel for transport and storage
Organic fertilisers
Fuel for gensets
* Outgrowers comprise PPMD, independent
smallholders and third party corporates.
Conservation
The group is conscious that cultivating oil palm in a region that
is rich in biodiversity can have significant negative
environmental impacts unless precautions are taken. To
mitigate the impact of its operations on biodiversity and
ecosystem services as far as possible, the group undertakes a
detailed land use planning process prior to developing any
new land for oil palm cultivation. This involves engaging
external experts to conduct an environmental impact
assessment (“EIA”), a soil survey, a high conservation value
(“HCV”) assessment and, from 2015, a carbon stock
assessment. The results of these surveys are used to
designate networks of conservation reserves, which
encompass the HCV management areas identified, steep
areas and riparian zones, as well as any peat soil areas, in line
with the group’s commitment to avoid development of these
high carbon stock areas.
Whilst undertaking environmental surveys can significantly
delay the commencement of land clearing, such detailed due
diligence is key to the group’s ability to produce palm oil in a
sustainable manner. To ensure that everyone involved in the
process of planning and developing new areas of land,
including contractors, is aware of these requirements and their
specific responsibilities a new policy and standard operating
procedure for responsible development was adopted by the
group early in 2015.
The conservation reserves within the group’s titled land bank
total some 18,250 hectares (2013: some 20,000 hectares),
which amounts to some 26 per cent of the group’s titled land
area. These figures have been revised following the HCV
assessments of PBJ and CDM, conducted by RSPO approved
assessors in 2014 and early 2015. These areas may be
increased further as the land development process advances.
Since 2008, this network of conservation reserves has been
managed by REA Kon, an in-house team of experienced
conservationists and local staff with good knowledge of the
biological and cultural diversity of the region. REA Kon’s aim
is to conserve and enhance the natural biodiversity and
ecosystem functions of the landscape in which the group
operates. REA Kon’s work focuses on gaining a scientific
understanding of the biodiversity present and trying to ensure
that the group’s agricultural activities, employees and the local
communities do not have a detrimental impact on this
biodiversity. Activities include conducting routine biodiversity
surveys for a variety of taxa, including camera trapping and
R.E.A. Holdings plc Annual Report and Accounts 2014
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Since 2012, a significant portion of the POME produced by
the group’s two longest established mills has been treated in
methane capture facilities, as opposed to the open pond
system that has traditionally been used on palm oil mills. The
remainder of the POME produced by these mills, as well as
the majority of the POME produced at the group’s newest mill,
which does not yet have a methane capture facility, is
combined with empty fruit bunches from the mill and
converted into organic compost on site. Treated POME is
finally pumped from the open ponds at each mill to flat beds in
between the rows of oil palm, enabling the remaining nutrient
content to be used as a fertiliser. The BOD of the POME in
the final open pond at each mill is tested on a monthly basis
by a third party to ensure that the BOD is below the legal limit
for land application in Indonesia, which is 5,000 milligrams per
litre.
The group aims to keep inputs of inorganic fertilisers to a
minimum as this helps to reduce costs and minimise the risk
of water pollution by way of run-off or leaching. The
substitution of organic compost for inorganic fertiliser is
helpful to achievement of this objective. Previously compost
was produced onsite by a third party, but from 2014 compost
production is being managed in-house. Inorganic fertiliser
regimes are based on analyses of the nutrient content of
systematically selected oil palm frond samples to ensure that
the optimal amount and type of fertiliser is applied.
The group has a long established system of integrated pest
management (“IPM”), which is designed to optimise natural
pest control and limit the need to use chemical pesticides.
IPM measures include planting varieties of flowering plants
which are known to support the natural predators of the key
oil palm pests, such as bagworm and caterpillars. Where
chemical pest control is necessary, the group takes
precautions to minimise the risks to humans and the
environment. From June 2013, the group ceased to use the
herbicide Paraquat in any of its operations and has instead
used a glufosinate ammonium based alternative that is less
hazardous.
Strategic report
Sustainability
continued
orangutan nest surveys, water quality monitoring, boundary
patrols in an effort to prevent and detect logging, over-hunting
and land clearing within the conservation reserves, and
community outreach, which includes inviting children from both
the estate and village schools to participate in conservation
education camps.
As at 31 March 2015, biodiversity surveys of the group’s
conservation reserves conducted by both REA Kon and
external experts had revealed the presence of a total of 504
species, including 78 that are listed on the International Union
for the Conservation of Nature’s (“IUCN”) Red List of
Threatened Species within the categories of “Near
Threatened”, “Vulnerable”, “Endangered” and “Critically
Endangered”. The presence of the Borneo orangutan, which is
categorised as Endangered, has been recorded within the
conservation reserves of four of the group’s concessions, both
by camera traps and orangutan nest surveys. In order to
monitor the orangutan population the group has established a
number of permanent transects, along which orangutan nest
surveys are conducted monthly.
Preventing local communities from logging and clearing
portions of the conservation reserves for cultivation is a
constant challenge and REA Kon is aware of nearly 350
hectares where encroachment has occurred. Regrettably, it is
expected that further areas of encroachment will be identified
as the mapping exercise continues. Once the mapping has
been completed, a programme of work will be developed to
restore these areas where this is feasible. REA Kon continues
to work on raising the awareness of local communities and its
own employees about the value of maintaining natural habitat
within the landscape.
Responsible agricultural practices
The group operates a zero burning policy in relation to land
development and has established standard procedures to
identify and rapidly bring under control any accidental fires
that may occur.
The group is conscious that its palm oil mills, agricultural
operations, employees and the surrounding communities, the
majority of which are traditionally river-dwelling, are dependent
on access to an adequate supply of clean water. The group is
also aware that there is a risk of POME and run-off or
leachate from fertilisers causing water pollution unless proper
precautions are taken. The group does not discharge POME
from any of its mills into the rivers. Instead, the group seeks to
utilise as much of the organic matter contained in the POME
as possible prior to applying it to the land, which also serves to
reduce the Biological Oxygen Demand (“BOD”) and therefore
the damage that this liquid would cause to the natural flora
and fauna if it were to enter a local water course.
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Camera trap photo from KMS
conservation reserve 2015
Company birthday celebrations 2014
R.E.A. Holdings plc Annual Report and Accounts 2014
29
Strategic report
Finance
Accounting policies
The group continues to report in accordance with International
Financial Reporting Standards (“IFRS”) and presents its
financial statements in dollars. The company also produces its
financial statements under IFRS and presents these in dollars
thus aligning its basis of accounting and presentational
currency with those of the group. For the group, the IFRS
accounting policy relating to biological assets (comprising oil
palm plantings and nurseries) is of particular importance.
Such assets are not depreciated but are instead restated at
fair value at each reporting date and the movement on
valuation over the reporting period, after adjustment for
additions and disposals, is taken to income. Deferred tax is
provided or credited as appropriate in respect of each such
movement.
As in previous years, the fair value of the biological assets at
31 December 2014 has been derived by the directors on a
discounted cash flow basis by reference to the FFB 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 historic FFB profit
margins for the 20 years to 2014 buffered to restrict the
implied annual movement in such estimated unit margin to 5
per cent and to prevent any change in estimated unit margin
that runs contrary to the trend in current margins. For this
purpose, the historic profit margin for each applicable year has
been derived either from the budgeted unit cost of FFB
production and the actual historic average of CPO prices
(FOB Port of 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 each year.
The discount rates used for the purposes of the biological
asset revaluation at 31 December 2014 were 15 per cent for
the estates owned by REA Kaltim and SYB, 16.5 per cent for
the estates owned by KMS and 18 per cent for all other group
companies. These discount rates are the same as those
applied in 2013, except that, in the case of KMS, the rate has
been reduced from 18 per cent per annum in 2013. This
reduction is in line with the group’s policy that, as development
on any particular area progresses, the discount rate will be
steadily reduced, reflecting the view of the directors that the
risks of harvesting FFB projected to be produced from areas
under development are greater than those applicable on an
established estate.
The directors recognise that the IFRS accounting policy in
relation to biological assets may have theoretical merits in
charging each year to income a proper measure of capital
consumed but it has always been a concern to the directors
that no estimate of fair value can ever be completely accurate
and that, in the case of the group’s biological assets, small
differences in valuation assumptions can have a quite
disproportionate effect on the biological gains or losses
30
R.E.A. Holdings plc Annual Report and Accounts 2014
reflected in profits. The directors therefore welcome the
decision by the International Accounting Standards Board to
amend IAS 41 (the standard that imposes the current policy
on biological assets) in a way that will, for plantation
companies, permit reversion substantially to the accounting
policies that were applied to biological assets prior to the
introduction of IAS 41 whereby such assets were accounted
for as property, plant and equipment. This will mean that, in
the group income statement, the annual movement on the fair
value of biological assets will be replaced by an annual
depreciation charge. It is expected that the amended version
of IAS 41 will be adopted for use in the EU during 2015 and
will be applied by the group in 2016.
The biological assets in the group balance sheet at 31
December 2014 amounted to $310.2 million. An increase or
reduction of $5 per tonne in the estimated profit margin used
for the purpose of the valuation (namely $60.9 per tonne of
FFB) would increase or reduce the valuation by approximately
$20.7 million.
Group results
Revenue, operating profit and profit before tax reported by the
group for 2014, with comparative figures for 2013, were as
follows:
2013
$’m $’m
2014
Revenue 125.9 110.5
Operating profit 32.1 28.1
Profit before tax 23.7 25.2
As detailed below, the results reflected net overall mark to
market gains on produce inventory and biological assets some
$5.8 million lower than in 2013 and a reduction in gains from
exchange rate movements of $6.9 million as compared with
the preceding year. The average price of CPO per tonne, CIF
Rotterdam, in 2014, was $816 per tonne, against $856 in
2013, but the average price realised by the group for its own
CPO production was higher at $665 per tonne against $657
per tonne. This was in part due to lower export duties but also
took account of the improved quality of 2014 CPO production.
Costs were generally well controlled reflecting, in particular,
the decision to move to in-house compost production and the
continuing benefit from the substitution of internally produced
methane for diesel. The weakness of the rupiah was also
helpful in mitigating inflation in rupiah denominated costs.
Although the cost of sales reported for 2014 was significantly
higher than in 2013, as the following table shows, the
increase was entirely due to the purchase of a greater volume
of third party fruit:
2013
$’m $’m
2014
Purchase of external FFB 19.7 12.1
Estate operating costs 47.9 47.9
Depreciation and amortisation 10.3 9.9
77.9 69.9
Estate operating costs in fact reduced in unit terms to $76
per tonne of FFB harvested against $83 per tonne in 2013.
Further development of the group’s plantations resulted in a
net gain from changes in the fair value of biological assets of
$3.6 million (2013: $7.1 million) but the benefit of this was
partially offset by a loss of $1.7 million on the movement in
the fair value of agricultural produce inventory (2013: gain of
$0.5 million) reflecting a closing inventory not markedly
different from the opening but valued at lower unit market
prices.
Administrative expenses for 2014 amounted to $16.4 million,
a reduction of $2.6 million from the $19.0 million reported in
2013. As with cost of sales, the reduction was in part the
result of favourable currency movements but efficiencies
resulting from the management changes effected over the last
three years were also a significant factor.
After deduction of the finance cost component added to
biological assets and assets under construction, finance costs
for 2014 amounted to $8.8 million. Whilst this is $5.5 million
higher than the comparable costs in 2013, the increase is
entirely accounted for by a lower benefit from changes in the
value of loans and derivative financial instruments which are
primarily foreign exchange rate related and which contributed
a net gain in 2014 of $1.3 million against a gain in 2013 of
$8.2 million. Excluding these items, borrowing and other
finance costs in fact fell by some $2 million in 2014, reflecting
the refinancing of UK borrowings with lower cost local
Indonesian borrowings.
Tax charged against profit for 2014 amounted to $1.8 million
(against $12.5 million in 2013). The reduction reflects the
write back by the group of a net $8.4 million of previous tax
provisions following a favourable decision of the Jakarta Tax
Court in relation to an appeal by REA Kaltim against a
disputed tax assessment disallowing mark to market losses
incurred in 2008 on cross currency interest rate swaps.
Without this write back, the tax charge would have been $10.2
million representing a group tax rate of 42.9 per cent (2013:
49.7 per cent). As in 2013, the relatively high rate in part
reflected Indonesian withholding tax incurred on intra-group
dividends paid by REA Kaltim but an additional factor was a
new Indonesian tax rule limiting the carry forward of losses
incurred by companies with limited revenues (such as group
companies with only small areas of producing hectarage) and
thus reducing the deferred tax credit that would otherwise
have been booked by the group.
At the after tax level, profit amounted to $22.0 million (2013:
$12.7 million) while profit attributable to ordinary shareholders
was $14.2 million against $5.5 million. Earnings per share
amounted to US40.3 cents (2013: US15.8 cents).
The group’s target long term average annual return on
adjusted equity is 20 per cent. The return achieved for 2014
was 7.4 per cent (2013: 8.0 per cent).
Appeals by both REA Kaltim and the Indonesian tax
authorities remain pending with the Supreme Court of
Indonesia in respect of decisions by the Jakarta Tax Court in
2012 on disputed elements of a 2006 Indonesian assessment
of tax payable by REA Kaltim. In addition, REA Kaltim has
now been served by the Indonesian tax authorities with notice
of an appeal to the Supreme Court of Indonesia for judicial
review of the Jakarta Tax Court’s decision referred to above in
relation to tax payable by REA Kaltim on its 2008 profits.
The 2006 and 2008 disputed tax assessments were both
paid in full ahead of the appeals. The group had previously
provided in full against those components of the 2006
assessment as respects which REA Kaltim is appealing
findings against it by the Tax Court and in full against the
2008 assessment. Following the 2014 decision of the
Indonesian tax court regarding the 2008 assessment, $8.4
million was refunded to REA Kaltim. $2.9 million of this was
then applied in settling an increased tax liability for 2009 that
arose as a consequence of the tax law interpretation adopted
in the Jakarta Tax Court’s decision (against which full provision
had also previously been made).
Based on advice received regarding the merits of the appeal
to the Supreme Court of Indonesia regarding the decision on
mark to market losses, the group concluded that it was
appropriate to release provisions to the extent of the amount
recovered (namely $8.4 million). The write back referred to
above is the result. No credit has been taken for interest (of
48 per cent of the amounts repaid) due to REA Kaltim on tax
repayments already received in relation to the 2006 and 2008
assessments as the Indonesian tax authorities contend that
such interest will only become payable after receipt by REA
Kaltim of final judgement from the Supreme Court of
Indonesia confirming the repayments concerned.
Dividends
The fixed semi-annual dividends on the 9 per cent cumulative
preference shares that fell due on 30 June and 31 December
2014 were duly paid. An interim dividend in respect of 2014
of 4p per ordinary share was paid in January 2015 and the
directors recommend the payment of a final dividend in
respect of 2014 of 3¾p per ordinary share to be paid on 24
July 2015 to ordinary shareholders on the register of
members on 3 July 2015. The total dividend payable per
ordinary share during 2015 in respect of 2014 will thus
amount to 7¾p. This compares with the total paid during
2014 in respect of 2013 of 7¼p. In addition, the company
R.E.A. Holdings plc Annual Report and Accounts 2014
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Strategic report
Finance
continued
made a capitalisation issue of 2,105,116 new preference
shares to ordinary shareholders on 26 September 2014 on
the basis of 3 new preference shares for every 50 ordinary
shares held (2013: 2,105,116 new preference shares on the
basis of 3 new preference shares for every 50 ordinary shares
held).
The development of the group’s agricultural operations
continues to require major capital expenditure and the need to
fund this expenditure constrains the rates at which the
directors feel that they can prudently declare, or recommend
the payment of, ordinary dividends. They believe that
capitalisation issues of new preference shares to ordinary
shareholders provide a useful mechanism for augmenting
returns to ordinary shareholders in periods when good profits
are achieved but demands on cash resources limit the scope
for payment of cash dividends.
Looking forward, if, as is planned, REA Kaltim becomes listed
on the Indonesia Stock Exchange, it is expected that the
future planned expansion of the agricultural operations will
permit REA Kaltim to distribute each year around one third of
its after tax profits. The directors then 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.
Capital structure
The group is financed by a combination of debt and
shareholder funds. Total shareholder funds less non-
controlling interests at 31 December 2014 amounted to
$304.9 million as compared with $297.4 million at 31
December 2013. Non-controlling interests at 31 December
2014 amounted to $1.7 million (2013: $2.0 million).
In July 2014, 5,210,000 new preference shares were issued
for cash at a price of 120p per share by way of a placing to
raise $10.6 million net of expenses. This issue was followed
in September 2014 by the issue of a further 2,105,116 new
preference shares by way of capitalisation of share premium
account as referred to under “Dividends” above.
The company has obtained shareholder authority to buy back
limited numbers of ordinary shares into treasury with the
intention that, once a holding of a reasonable size has been
accumulated, the holding be placed with one or more
investors. 152,533 ordinary shares were acquired during
2014 pursuant to this authority. Taking into account the
4,967 ordinary shares held at 31 December 2013, and sales
of 25,000 ordinary shares during 2014, this resulted in
132,500 ordinary shares being held in treasury at 31
December 2014.
All of the 2014 dollar notes that remained outstanding on 31
December 2014, being some $6.3m nominal, were redeemed
at face value on that date in accordance with the terms and
conditions of the trust deeds in respect of such dollar notes.
Following these transactions, group indebtedness and related
engagements at 31 December 2014 amounted to $195.4
million against which the group held cash and cash
equivalents of $16.2 million. The composition of the resultant
net indebtedness of $179.2 million was as follows:
$’m
7.5 per cent dollar notes 2017
(“2017 dollar notes”) ($34.0 million nominal) 33.4
9.5 per cent guaranteed sterling notes 2015/17
(“sterling notes”) (£34.5 million nominal) 52.4
Hedge of the principal amount of £22 million
nominal of the sterling notes 8.6
Indonesian term bank loans 70.0
Drawings under working capital lines 31.0
195.4
Cash and cash equivalents (16.2)
Net indebtedness 179.2
The group has no material contingent indebtedness save that,
in connection with the development of oil palm plantings
owned by village cooperatives and managed by the group, the
group has, as noted under “Smallholder schemes” in
“Sustainability” above, guaranteed the bank borrowings of the
cooperatives concerned. The outstanding balance of these at
31 December 2014 was equivalent to $9.6 million.
The 2017 dollar notes are unsecured obligations of the
company and repayable on 30 June 2017. The sterling notes
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 of sterling notes previously
redeemed or cancelled (the nominal amount of such notes at
31 December 2014 totalling £2.5 million), are repayable by
three equal annual instalments commencing 31 December
2015.
During 2007 and 2008, the group entered into three long-
term sterling dollar debt swaps to hedge against dollars the
sterling liability for principal and interest payable in respect of
the entire original issue of the sterling notes (but, in the case
of interest, only as respects interest payments falling due up
to 31 December 2015). Of these three swaps, one was
terminated during 2013, a second in 2014, and the third,
which hedges £22 million nominal of sterling notes, will
mature on 27 December 2015. As the remaining life of the
sterling notes is now much less than it was when the swaps
were originally contracted, the group has no plans to replace
the maturing swaps but will simply run the sterling dollar
exchange rate exposure arising from the sterling notes until
such notes are repaid.
Indonesian term bank loans comprise Indonesian rupiah
denominated amortising term loans to REA Kaltim and SYB
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R.E.A. Holdings plc Annual Report and Accounts 2014
from PT Bank DBS Indonesia (“DBS”) and a US dollar
amortising term loan to REA Kaltim. The REA Kaltim loans are
secured on certain assets of REA Kaltim and guaranteed by
the company. The outstanding balance of the loans at 31
December 2014 was the equivalent of $47.2 million
repayable as follows: 2015: $5.5 million, 2016: $9.8 million
and 2017 and thereafter: $31.9 million. The SYB loan is
secured on the assets of SYB and is guaranteed by the
company and REA Kaltim. The outstanding balance of the
loan at 31 December 2014 was the equivalent of $22.8
million repayable as follows: 2015: $3.8 million, 2016: $5.3
million and 2017 and thereafter: $13.7 million.
At 31 December 2014, unutilised facilities available to the
group comprised the equivalent of $7.2 million in REA Kaltim
available to be drawn from DBS as an addition to the existing
amortising term loan and the equivalent of $32.2 million in
PBJ available to be drawn from PT Bank UOB Indonesia as
an amortising term loan. Negotiations are at an advanced
stage to augment these facilities with an additional working
capital facility for SYB and a new amortising term loan for
KMS together totalling in excess of $30 million.
Group cash flow
Group cash inflows and outflows are analysed in the
consolidated cash flow statement. Cash and cash equivalents
decreased over 2014 from $34.6 million to $16.2 million. The
decrease of $18.2 million (ignoring the negative impact of
$0.1 million from the effect of exchange rate movements)
represented a combination of the $13.8 million component of
the outflow on investing activities that was not covered by net
cash from operating activities and an outflow on financing
activities of $4.4 million.
As noted under “Group results” above, operating profit for
2014 amounted to $32.1 million as compared with $28.1
million in the preceding year. A $9.2 million positive
adjustment for the non-cash components of operating profit
was substantially offset by an almost equivalent increase in
working capital; as a result cash generated by operations for
2014 amounted to $33.1 million against the $19.4 million
reported for 2013. A net tax recovery of $5.1 million
(reflecting the tax repayment following the favourable decision
of the Jakarta Tax Court referred to under “Group results”
above) compared with taxes of $7.1 million paid in 2013 but
the benefit of this was partially offset by an increase in
interest payments. The overall result was that cash from
operating activities for 2014 amounted to $24.4 million
against $0.8 million for 2013.
Investing activities for 2014 involved a net outflow of $38.2
million (2013: $33.5 million). This represented new
investment totalling $38.6 million (2013: $34.0 million), offset
by inflows from interest and minor items of $0.4 million (2013:
$0.5 million). The new investment comprised expenditure of
$33.4 million (2013: $28.8 million) on further development of
the group's agricultural operations, $4.3 million (2013: $4.3
million) on land rights and titling, and $0.9 million (2013: $0.9
million) on the stone and coal operations (concentrated on the
development of the stone concession).
The net cash outflow on financing activities amounted to $4.4
million (2013: inflow of $41.8 million) made up as follows:
2013
$’m $’m
2014
Issue of new preference shares
(2013: new ordinary shares) 10.6 10.5
Purchase of treasury shares (1.0) –
Net (reduction)/increase in
borrowings (1.6) 42.3
Dividend payments (12.4) (11.0)
(4.4) 41.8
Liquidity and financing adequacy
With CPO trading internationally at a lower price level than for
some years and with the recently introduced Indonesian
government levy of $50 per tonne on export sales of CPO (as
referred to under “The vegetable oil market context” in
“Introduction and strategic environment” above), the group
must be cautious in its expectations of dollar sales revenues
for 2015. The negative impact of lower net dollar sale prices
will, however, be mitigated by the continuing weakness of the
Indonesian rupiah and, as respects sales of CPO derived from
third party FFB, by commensurate reductions in the prices
paid for such FFB. Moreover, as the group continues its
recovery from recent challenges, costs remain under good
control and further costs efficiencies can be expected. The
directors therefore remain confident that the group’s
operations will remain cash generative.
As noted under “Capital structure” above, at 31 December
2014, the group held cash and cash equivalents of $16.2
million and had undrawn facilities equivalent to a total of
$39.4 million under the DBS and UOB amortising term loan
facilities. In addition, the group is currently at an advanced
stage in negotiating additional bank facilities of in excess of
$30 million. Furthermore, for the reasons explained under
“Future direction” in “Introduction and strategic environment”
above, the group is planning that, as soon as practicable, it will
make a public offering of new shares in REA Kaltim to
Indonesian investors while listing the shares of REA Kaltim on
the Indonesia Stock Exchange. The group is also considering
a limited placing of shares in REA Kaltim with a lead investor
ahead of the listing and has held some preliminary discussions
in this connection. These moves would provide the group with
additional equity capital.
The directors intend that the additional bank facilities currently
being arranged will be utilised to refinance indebtedness
falling due for repayment at the end of 2015, principally
comprising £9.8 million nominal of sterling notes and the
liability falling due on maturity of the remaining sterling dollar
debt swap ($9.6 million when measured at the rates prevailing
R.E.A. Holdings plc Annual Report and Accounts 2014
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Strategic report
Finance
continued
on 31 December 2014). The UOB amortising term loan
facility will be used to fund development expenditure on PBJ.
Beyond that, all extension planting and other new capital
expenditure during 2015 must be met from internally
generated cash and the proceeds of sale of new shares in
REA Kaltim. The directors therefore intend to commit to
planned capital expenditure only as the availability of funding
for such expenditure becomes certain.
In any event, current crop projections suggest that, apart from
expanding the capacity of the group’s newest oil 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 fourth mill now projected to be brought into
production in 2019. New investment in processing and
compression of methane and the conversion of the group’s
vehicle fleet to run on a biomethane diesel mix, as referred to
under “Operating efficiency” in “Agricultural operations” above
offers the prospect of attractive returns but the timing of such
an investment is discretionary.
Extension planting on the group’s available land bank at PBJ
and CDM, and, once the SYB land swap is completed, at PU,
should significantly enhance the value of the group. However,
such extension planting, and the additional estate buildings
and general plant and equipment that such planting will
require, will entail a capital investment programme spanning a
period of years and the directors have discretion to vary the
speed of that programme in line with the availability of cash.
Some further capital expenditure will be required to open
quarrying operations on the group’s stone concession but the
directors expect that this will be limited, can be funded with
separate bank finance and that such finance can be rapidly
repaid. Once mining operations on the group’s coal
concessions are resumed, the directors also expect that those
concessions will start returning cash to the group.
Within the competing demands for cash for capital
expenditure during 2015, the directors intend to give priority
to the development of PBJ. As already noted, the topography
and existing ground cover at PBJ should facilitate rapid and
very economic planting while the UOB amortising term loan is
already in place to meet a substantial proportion of the
development costs incurred by PBJ.
The group’s financing is materially dependent upon the
contracts governing its indebtedness. Under the terms of
those contracts, there are no restrictions on the use of group
cash resources or existing borrowings and facilities that the
directors would expect materially to impact the planned
development of the group. Under the terms of the DBS and
UOB facilities, REA Kaltim, SYB and PBJ are restricted to an
extent in the payment of interest on borrowings from, and on
the payment of dividends to, other group companies. The
directors do not believe that the applicable covenants will
affect the ability of the company to meet its cash obligations.
The group’s oil palms fruit continuously throughout the year
and there is therefore no material seasonality in the funding
requirements of the agricultural operations in their ordinary
course of business. It is not expected that development of the
stone and coal operations will cause any material swings in
the group’s utilisation of cash for the funding of its routine
activities.
Financing policies
The directors believe that, in order to maximise returns to
holders of the company’s ordinary shares, a proportion of the
group’s funding needs should be met with prior ranking capital,
namely borrowings and preference share capital. The latter
has the particular advantage that it represents relatively low
risk permanent capital and, to the extent that such capital is
available, the directors believe that it is to be preferred to debt.
Insofar as the group does have borrowings, the directors
believe that the group’s interests are best served if the
borrowings are structured to fit the maturity profile of the
assets that the borrowings are financing. Since oil palm
plantings take nearly four years from nursery planting to
maturity and then a further period of three to four years to full
yield, the directors aim to structure borrowings for the group’s
agricultural operations so that shorter term bank debt is used
only to finance working capital requirements, while debt
funding for the group’s extension planting programme is
sourced from issues of listed debt securities and medium term
bank borrowings.
The directors believe that the group’s existing capital structure
is consistent with these policy objectives but recognise that
the planned further development of the group, and the
inevitable shortening of the maturity profile of the group’s
current indebtedness caused by the passage of time, mean
that further action will be required to ensure that the group’s
capital structure continues to meet the objectives. Specifically,
the directors intend that, when market conditions permit,
existing shorter dated debt should be repaid and replaced with
preference share capital or debt of a longer tenor.
Net debt at 31 December 2014 was 58.4 per cent of total
shareholder funds against a level of 54.9 per cent at 31
December 2013. The directors intend at least to maintain the
overall amount of the group’s prior ranking capital (other than
short term borrowings under working capital lines) but would
expect that, with growth in the net assets attributable to
ordinary shareholders, prior ranking capital will, over time, fall
as a percentage of ordinary shareholder funds. If debt
continues over time to be replaced by preference capital, net
debt as a percentage of shareholder funds may be expected
to fall to an even greater extent. Moreover, if, as is intended,
the group proceeds with its plans to establish a minority local
shareholding in REA Kaltim through a public offering (and
perhaps a preliminary placing) of new shares in REA Kaltim,
group equity will be increased and the ratios of prior ranking
34
R.E.A. Holdings plc Annual Report and Accounts 2014
capital to ordinary shareholder funds and of net debt to equity
will be further reduced.
The sterling notes and the 2017 dollar notes carry interest at
fixed rates of, respectively, 9.5 and 7.5 per cent per annum.
Interest is payable by REA Kaltim and SYB under the DBS
amortising term loans and the working capital line and by PBJ
under the UOB term loan at floating rates equal to Jakarta
Inter Bank Offered Rate plus a margin. As a policy, the group
does not hedge its exposure to floating rates but maintains a
balance between floating and fixed rate borrowings. A one
per cent increase in the floating rates of interest payable on
the group’s floating rate borrowings at 31 December 2014
would have resulted in an annual cost to the group of
approximately $1,010,000 (2013: $973,000).
The group regards the dollar as the functional currency of
most of its operations and formerly sought to ensure that, as
respects that proportion of its investment in the group’s
operations that was met by borrowings, it had no material
currency exposure against the dollar. The debt swaps referred
to under “Capital structure” above were arranged for this
reason. The receipt by REA Kaltim during 2011 of an
Indonesian tax assessment on its 2008 profits seeking to
disallow, for tax purposes, losses on two of the debt swaps (as
referred to in “Group results” above) called into question the
wisdom of entering into currency hedges and the group
decided (at least until such time as the disputed tax issue was
clarified) not to take out any further hedges against dollars of
non-dollar borrowings.
With the recent decision by the Jakarta Tax Court in REA
Kaltim’s favour regarding the disputed losses, the directors
have considered whether the group should now revert to its
previous policy of hedging non-dollar exposures against the
dollar. They have concluded that, given that tax law in
Indonesia is uncertain and that precedent is often not
determinative of Indonesian judicial decisions, the group will
be best served going forward by simply maintaining a balance
between its borrowings in different currencies and avoiding
any new currency hedging transactions.
Accordingly, the group will in future regard some exposure to
currency risk on its non-dollar borrowing as an inherent and
unavoidable risk of its business. The group has never covered,
and does not intend in future to cover, the currency exposure
in respect of the component of the investment in its
operations that is financed with sterling denominated
shareholder capital.
The group’s policy is to maintain a cash balance in sterling
sufficient to meet its projected sterling expenditure for a
period of between six and twelve months and a limited cash
balance in Indonesian rupiahs.
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35
Strategic report
Risks and uncertainties
The group’s business involves risks and uncertainties.
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 responsibility as described in
“Corporate governance” below.
Where risks are reasonably capable of mitigation, the group
seeks to mitigate them. Beyond that, the directors endeavour
to manage the group’s finances on a basis that leaves the
group with some capacity to withstand adverse impacts from
identified areas of risk but such management cannot provide
insurance against every possible eventuality.
Those risks and uncertainties that the directors currently
consider to be material are described below. There are or may
be other risks and uncertainties faced by the group that the
directors currently deem immaterial, or of which they are
unaware, that may have a material adverse impact on the group.
Material risks, related policies and the group’s successes and
failures with respect to environmental, social and governance
matters and the measures taken in response to any failures
are described in more detail under “Sustainability” above.
Potentially significant risks are detailed below under “Produce
prices”, “Community relations” and “Country exposure”. The
“Community relations” risk is thought to be reducing as
detailed under “Community relations” in “Sustainability” above
but the “Produce prices” and “Country exposure” risks may be
increasing as a result of declining prices for the group’s
produce and signs of pressure for increased local participation
in Indonesian oil palm operations.
Risk
Potential impact
Mitigating or other
relevant considerations
Agricultural operations
Climatic factors
Material variations from the norm in
climatic conditions
Unusually low levels of rainfall that lead to
a water availability below the minimum
required for the normal development of the
oil palm
Overcast conditions
A loss of crop or reduction in the
quality of harvest resulting in loss of
potential revenue
A reduction in subsequent crop levels
resulting in loss of potential revenue;
the reduction is likely to be broadly
proportional to the cumulative size of
the water deficit
Delayed crop formation resulting in
loss of potential revenue
Over a long period, crop levels should
be reasonably predictable
Operations are located in an area of
high rainfall
Normal sunshine hours in the location
of the operations are well suited to the
cultivation of oil palm
Low levels of rainfall disrupting river
transport or, in an extreme situation,
bringing it to a standstill
Inability to obtain delivery of estate
supplies or to evacuate CPO and CPKO
(possibly leading to suspension of
harvesting)
The group is developing alternative routes
to and from its estates (including licences
to access third party owned roads and
establishment of a permanent downstream
loading facility)
Cultivation risks
Pest and disease damage to oil palms and
growing crops
Other operational factors
A loss of crop or reduction in the quality
of harvest resulting in loss of potential
revenue
The group adopts best agricultural practice
to limit pests and diseases
Shortages of necessary inputs to the
operations, such as fuel and fertiliser
Disruption of operations or increased input
costs leading to reduced profit margins
The group maintains stocks of necessary
inputs to provide resilience and is investing
to improve its self-reliance in relation to
fuel and fertiliser
A hiatus in collection or processing of
FFB crops
FFB crops becoming rotten or over-ripe
leading either to a loss of CPO production
(and hence revenue) or to the production
of CPO that has an above average free
fatty acid content and is saleable only at
a discount to normal market prices
The group endeavours to maintain
resilience in its palm oil mills with each of
the mills operating separately and some
ability within each mill to switch from
steam based to biogas or diesel based
electricity generation
36
R.E.A. Holdings plc Annual Report and Accounts 2014
Potential impact
Mitigating or other
relevant considerations
The requirement for CPO and CPKO
storage exceeding available capacity and
forcing a temporary cessation in FFB
harvesting or processing with a resultant
loss of crop resulting in a loss of
potential revenue
The group’s bulk storage facilities have
substantial capacity and further storage
facilities are afforded by the fleet of barges.
Together, these have hitherto always proved
adequate to meet the group’s requirements
for CPO and CPKO storage
Risk
Other operational factors
Disruptions to river transport between
the main area of operations and the Port
of Samarinda or delays in collection of
CPO and CPKO from the transhipment
terminal
Occurrence of an uninsured or inadequately
insured adverse event; certain risks (such
as crop loss through fire or other perils), for
which insurance cover is either not available
or is considered disproportionately
expensive, are not insured
Produce prices
Volatility of CPO and CPKO prices which
as primary commodities may be affected
by levels of world economic activity and
factors affecting the world economy,
including levels of inflation and interest
rates
Restriction on sale of the group’s CPO and
CPKO at world market prices including
restrictions on Indonesian exports of palm
products and imposition of high export
duties (as has occurred in the past for
short periods)
Material loss of potential revenues or
claims against the group
Reduced revenue from the sale of CPO
and CPKO production and a consequent
reduction in cash flow and profit
Reduced revenue from the sale of CPO
and CPKO production and a consequent
reduction in cash flow and profit
Distortion of world markets for CPO and
CPKO by the imposition of import controls
or taxes in consuming countries
Depression of selling prices for CPO and
CPKO if arbitrage between markets for
competing vegetable oils proves
insufficient to compensate for the market
distortion created
Expansion
Failure to secure in full, or delays in
securing, the land or funding required for
the group’s planned extension planting
programme
Inability to complete, or delays in
completing, the planned extension planting
programme with a consequential reduction
in the group’s prospective growth
A shortfall in achieving the group’s planned
extension planting programme impacting
negatively the annual revaluation of the
group’s biological assets
A reduction in reported profit and a
possible adverse effect on market
perceptions as to the value of the
company’s securities
The group maintains insurance at levels
that it considers reasonable against those
risks that can be economically insured and
mitigates uninsured risks to the extent
reasonably feasible by management
practices
Price swings should be moderated by the
fact that the annual oilseed crops account
for the major proportion of world vegetable
oil production and producers of such crops
can reduce or increase their production
within a relatively short time frame
The Indonesian government allows the
free export of CPO and CPKO but applies
a sliding scale of duties on exports which
allows producers economic margins. The
recent extension of this sliding scale to
incorporate a new $50 per tonne export
levy to fund biodiesel subsidies may be
regarded as a measure to support CPO
and CPKO producers
The imposition of controls or taxes on CPO
or CPKO in one area can be expected to
result in greater consumption of alternative
vegetable oils within that area and the
substitution outside that area of CPO and
CPKO for other vegetable oils
The group holds substantial fully titled or
allocated land areas suitable for planting.
It works continuously to obtain and
maintain up to date permits for the
planting of these areas and aims to
manage its finances to ensure, in so far as
practicable, that it will be able to fund the
planned extension planting programme
Movements on the annual revaluation of
the group’s biological assets do not affect
the group’s underlying cash flow
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R.E.A. Holdings plc Annual Report and Accounts 2014
37
Strategic report
Risks and uncertainties
continued
Risk
Potential impact
Environmental, social and governance practices
Failure by the agricultural operations to
meet the standards expected of them as a
large employer of significant economic
importance to local communities
Reputational and financial damage
Reputational and financial damage
Criticism of the group’s environmental
practices by conservation organisations
scrutinising land areas that fall within a
region that in places includes substantial
areas of unspoilt primary rain forest
inhabited by diverse flora and fauna
Community relations
A material breakdown in relations between
the group and the host population in the
area of the agricultural operations
Disruption of operations, including
blockages restricting access to oil palm
plantings and mills, resulting in reduced
and poorer quality CPO and CPKO
production
Disputes over compensation payable for
land areas allocated to the group that were
previously used by local communities for
the cultivation of crops or as respects
which local communities otherwise have
rights
Disruption of operations, including
blockages restricting access to the area
the subject of the disputed compensation
Individuals party to a compensation
agreement subsequently denying or
disputing aspects of the agreement
Disruption of operations, including
blockages restricting access to the areas
the subject of the compensation disputed
by the affected individuals
Mitigating or other
relevant considerations
The group has established standard
practices designed to ensure that it meets
its obligations, monitors performance
against those practices and investigates
thoroughly and takes action to prevent
recurrence in respect of any failures
identified
The group is committed to sustainable
development of oil palm and has obtained
RSPO certification for most of its current
operations. All group oil palm plantings are
on land areas that have been previously
logged and zoned by the Indonesian
authorities as appropriate for agricultural
development. The group maintains
substantial conservation reserves that
safeguard landscape level biodiversity
The group seeks to foster mutually
beneficial economic and social interaction
between the local villages and the
agricultural operations. In particular, the
group gives priority to applications for
employment from members of the local
population, encourages local farmers and
tradesmen to act as suppliers to the group,
its employees and their dependents and
promotes smallholder development of oil
palm plantings
The group has established standard
procedures to ensure fair and transparent
compensation negotiations and
encourages the local authorities, with
whom the group has developed good
relations and who are therefore generally
supportive of the group, to assist in
mediating settlements
Where claims from individuals in relation to
compensation agreements are found to
have a valid basis the group seeks to
agree a new compensation arrangement;
where such claims are found to be falsely
based the group encourages appropriate
action by the local authorities
38
R.E.A. Holdings plc Annual Report and Accounts 2014
Risk
Potential impact
Stone and coal operations
Operational factors
Failure by external contractors to achieve
agreed production volumes
Loss of prospective revenue
External factors, in particular weather,
delaying or preventing delivery of extracted
stone and coal
Delays to receipt or loss of revenue
Geological assessments, which are
extrapolations based on statistical
sampling, proving inaccurate
Unforeseen extraction complications
causing cost overruns and production
delays
Prices
Volatility of international coal prices and
competition reducing stone prices
Reduced revenue and a consequent
reduction in cash flow and profit
Imposition of additional royalties or duties
on the extraction of stone or coal
Reduced revenue and a consequent
reduction in cash flow and profit
Unforeseen variations in quality of deposits Inability to supply product within the
specifications that are, at any particular
time, in demand with consequent loss of
revenue
Environmental, social and governance practices
Failure by the stone and coal
operations to meet the expected
standards
Reputational and financial damage
Mitigating or other
relevant considerations
The group endeavours to use experienced
contractors, to supervise them closely and
to take care to ensure that they have
equipment of capacity appropriate for the
planned production volumes
Deliveries are not normally time critical and
adverse external factors would not
normally have a continuing impact for
more than a limited period
The group seeks to ensure the accuracy of
geological assessments by drilling ahead
of any extraction programme and taking
expert geological advice on drilling results
The cooperation arrangement negotiated
for the mining of the group’s main coal
concession provides a minimum floor price
for the coal mined. In relation to stone,
there are currently no other stone quarries
in the vicinity of the group’s concession
and the cost of transporting stone should
restrict competition
The Indonesian government has not to
date imposed measures that would
seriously affect the viability of Indonesian
stone quarrying or coal mining operations
Geological assessments ahead of
commencement of extraction operations
should have identified any material
variations in quality
The areas of the stone and coal
concessions are relatively small and
should not be difficult to supervise. The
group is committed to international
standards of best environmental and
social practice and, in particular, to
proper management of waste water and
reinstatement of quarried and mined
areas on completion of extraction
operations
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R.E.A. Holdings plc Annual Report and Accounts 2014
39
Strategic report
Risks and uncertainties
continued
Risk
General
Currency
Potential impact
Mitigating or other
relevant considerations
Strengthening of sterling or the Indonesian
rupiah against the dollar
Adverse exchange movements on those
components of group costs and funding
that arise in Indonesian rupiah or sterling
and are not hedged against the dollar
Counterparty risk
Default by a supplier, customer or financial
institution
Loss of any prepayment, unpaid sales
proceeds or deposit
Regulatory exposure
Failure to renegotiate the existing
arrangements relating to the stone and
coal interests
New, and changes to, laws and regulations
that affect the group (including, in
particular, laws and regulations relating to
land tenure, work permits for expatriate
staff and taxation)
Breach of the various continuing
conditions attaching to the group’s land
rights and the mining concessions
(including conditions requiring utilisation of
the rights and concessions) or failure to
maintain all permits and licences required
for the group’s operations
Limitation of the group’s return from these
interests to the loans advanced
Restriction on the group’s ability to retain
its current structure or to continue
operating as currently
Civil sanctions and, in an extreme case,
loss of the affected rights or concessions
Failure by the group to meet the standards
expected in relation to bribery and
corruption
Reputational damage and criminal
sanctions
As respects costs and sterling
denominated shareholder capital, the
group considers that this risk is inherent in
the group’s business and structure and
must simply be accepted. As respects
borrowings, where efficient the group
seeks to borrow in dollars but, when
borrowing in another currency, considers it
better to accept the resultant currency risk
than to hedge that risk with hedging
instruments
The group maintains strict controls over its
financial exposures which include regular
reviews of the creditworthiness of
counterparties and limits on exposures to
counterparties. Export sales are made
either against letters of credit or on the
basis of cash against documents
Recent changes in legislation in Indonesia
limited foreign investment in mining
concessions
Save as noted above regarding interests in
stone and coal, the directors are not aware
of any specific changes that would
adversely affect the group to a material
extent; recent changes introduced to limit
the size of oil palm growers in Indonesia
will not impact the group for the
foreseeable future
The group endeavours to ensure
compliance with the continuing conditions
attaching to its land rights and the mining
concessions and that activities are
conducted within the terms of the licences
and permits that are held and that licences
and permits are obtained and renewed as
necessary
The group has traditionally had, and
continues to maintain, strong controls in
this area because Indonesia, where all of
the group’s operations are located, has
been classified as relatively high risk by
the International Transparency Corruption
Perceptions Index
40
R.E.A. Holdings plc Annual Report and Accounts 2014
Potential impact
Mitigating or other
relevant considerations
Risk
Country exposure
Deterioration in the political or economic
situation in Indonesia
Difficulties in maintaining operational
standards particularly if there was a
consequential deterioration in the security
situation
In the recent past, Indonesia has been
stable and the Indonesian economy has
continued to grow but, in the late 1990s
Indonesia experienced severe economic
turbulence and there have been
subsequent occasional instances of civil
unrest, often attributed to ethnic tensions,
in certain parts of Indonesia. The group
has never, since the inception of its East
Kalimantan operations in 1989, been
adversely affected by regional security
problems
The directors are not aware of any
circumstances that would lead them to
believe that, under current political
conditions, any Indonesian government
authority would impose exchange controls
or otherwise seek to restrict the group’s
freedom to manage its operations
The group accepts there is a significant
possibility that foreign owners may be
required over time to partially divest
ownership of Indonesian oil palm
operations but has no reason to believe
that such divestment would be at anything
other than market value. The group aims
to mitigate such risk by listing REA Kaltim
on the Indonesia Stock Exchange in
Jakarta
The group appreciates its material
dependence upon its staff and employees
and endeavours to manage this
dependence in accordance with
international employment standards as
detailed under “Employees” in
“Sustainability” above
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
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Introduction of exchange controls or other
restrictions on foreign owned operations in
Indonesia
Restriction on the transfer of profits from
Indonesia to the UK with potential
consequential negative implications for the
servicing of UK obligations and payment
of dividends; loss of effective management
control
Mandatory reduction of foreign ownership
of Indonesian plantation operations
Forced divestment of interests in Indonesia
at below market values with consequential
loss of value
Miscellaneous relationships
Disputes with staff and employees
Disruption of operations and consequent
loss of revenues
Breakdown in relationships with the local
shareholders in the company’s Indonesian
subsidiaries
Reliance on the Indonesian courts for
enforcement of the agreements governing
its arrangements with local partners with
the uncertainties that any juridical process
involves and with any failure of
enforcement likely to have a material
negative impact on the value of the stone
and coal operations because the
concessions are at the moment legally
owned by the group’s local partners
Approved by the board on 23 April 2015 and signed on behalf of the board by
RICHARD M ROBINOW
Chairman
R.E.A. Holdings plc Annual Report and Accounts 2014
41
Governance
Board of directors
Richard Robinow
Chairman (69)
Mr Robinow was appointed a director in 1978 and has been
chairman since 1984. After early investment banking
experience, he has been involved for some 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
David Blackett
Senior independent non-executive director (64)
Committees: audit (chairman), nomination, remuneration
(chairman)
Mr Blackett was appointed a non-executive director in July
2008. 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’s Asia
Pacific operations. Previously, he was a director of an
international investment bank with responsibility for the bank’s
South East Asian operations and until October 2014 served
as an independent non-executive director of South China
Holdings Limited (now Orient Victory China Holdings Limited),
a company listed on the Hong Kong Stock Exchange.
Managing director (66)
Irene Chia
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. He transferred 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 and, until the appointment of a regional executive
director in 2013, was the sole executive director of the group.
Mr Oakley, who is based in London, has overall responsibility
for the operations of the group.
Independent non-executive director (74)
Ms Chia was appointed a non-executive director in 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 (77)
Mark Parry
Executive director (54)
Mr Parry was appointed an executive director in January
2013. Mr Parry joined the group in 2011 as the group’s
regional director and was appointed president director of REA
Kaltim in July 2012. He worked for 10 years as a surveyor
and engineer in the mining, oil and gas industries. Following
completion of an MBA at the London Business School, he
spent 15 years with an international bank, ultimately as
managing director, project finance. He subsequently
established and ran a private consultancy business for two
years prior to joining the group. Based in Indonesia and
Singapore, Mr Parry is also chief operating officer of REA
Kaltim with local responsibility for all of the group’s operations.
Committees: audit, nomination (chairman), remuneration
Mr Killick was appointed a non-executive director in 2006.
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. He is currently a director of Reallyenglish.com
Limited.
42
R.E.A. Holdings plc Annual Report and Accounts 2014
Governance
Directors’ report
The directors present their annual report on the affairs of the
group, together with the financial statements and auditor’s
report, for the year ended 31 December 2014. The
“Corporate governance report” below forms part of this report.
Details of significant events since 31 December 2014 are
contained in note 40 to the consolidated financial statements.
An indication of likely future developments in the business of
the company and details of research and development
activities are included in the “Strategic report” above.
Moreover, as the group continues to make a steady recovery
from previous challenges and to improve operational
efficiencies, the group’s operations can be expected to
generate 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.
Information about the use of financial instruments by the
company and its subsidiaries is given in note 21 to the
consolidated financial statements.
Results and dividends
After making enquiries, the directors have a reasonable
expectation that the company and the group have adequate
resources to continue in operational existence for the
foreseeable future. Accordingly, they continue to adopt the
going concern basis of accounting in preparing the financial
statements.
The results are presented in the consolidated income
statement and notes thereto.
Greenhouse gas emissions (“GHG”)
The fixed annual dividends on the 9 per cent cumulative
preference shares that fell due on 30 June and 31 December
2014 were duly paid. A first interim dividend in respect of
2014 of 4p per share was paid on the ordinary shares on 23
January 2015 and the board recommends that a final dividend
in respect of the year of 3¾p per share be paid on
24 July 2015 to ordinary shareholders on the register of
members on 3 July 2015. Resolution 4 in the company’ s
notice of the 2015 annual general meeting (the “2015
Notice”) set out at the end of this annual report, which will be
proposed as an ordinary resolution, deals with the payment of
this dividend.
Going concern basis
The group’s business activities, together with the factors likely
to affect its future development, performance and position are
described in the Strategic report above which also provides
(under the heading “Finance”) a description of the group’s
cash flow, liquidity and financing adequacy, and treasury
policies. In particular, the review highlights the risks
associated with the local operating environment. In addition,
note 21 to the consolidated financial statements includes
information as to the group’s policy, objectives and processes
for managing capital, its financial risk management objectives,
details of financial instruments and hedging activities and
exposures to credit and liquidity risks.
Although the group has indebtedness, a reasonable proportion
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
and that medium term indebtedness falling due for repayment
during 2015 will be refinanced.
GHG emissions data for the period 1 January 2012 to
31 December 2014 is as shown below:
Tonnes of CO2e 2014 2013 2012
Gross emissions associated
with oil palm operations
in Indonesia1 706,579 627,799 686,208
Net emissions associated
with oil palm operations
in Indonesia 392,109 346,438 407,656
Net emissions per tonne
of CPO produced 1.95 1.91 2.30
Net emissions per
planted hectare 10.94 11.19 13.17
Electricity, heat, steam
and cooling purchased
for own use 3.3 11.8 No data
1 In addition to all material Scope 1 emissions, some Scope 3 emissions have also
been included in this category. Examples include GHG emissions associated
with the manufacture and transport of the inorganic fertilisers used by, and an
estimate of the GHG emissions associated with, the cultivation of fresh fruit
bunches purchased by the group’s mills from third parties.
2 The Greenhouse Gas Protocol defines direct GHG emissions as emissions from
sources that are owned or controlled by the reporting entity. These are
categorised as Scope 1 emissions. The Protocol defines indirect GHG
emissions as emissions that are a consequence of the activities of the reporting
entity, but occur at sources owned or controlled by another entity. Indirect GHG
emissions are further categorised into Scope 2 (indirect GHG emissions from
the consumption of purchased electricity, heat and steam) and Scope 3
emissions (all other indirect GHG emissions, such as the extraction and
production of purchased materials and fuel and transport in vehicles not owned
or controlled by the reporting entity). PalmGHG takes into account all Scope 2
emissions and some Scope 3 GHG emissions.
3 The figures for 2012 and 2013 have been re-calculated using the latest version
of the RSPO PalmGHG methodology. The details of the changes made will be
described in full in the 2014 Sustainability Report.
The group has used the PalmGHG tool developed by the
Roundtable on Sustainable Palm Oil (“RSPO”) to calculate the
carbon footprint of its oil palm operations in Indonesia
between 2011 and 2014. This methodology was chosen
because it is tailored to the palm oil industry. It was developed
by a multi-stakeholder group which included leading scientists
R.E.A. Holdings plc Annual Report and Accounts 2014
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Governance
Directors’ report
continued
in the field of GHG accounting for oil palm. From 31
December 2016, all RSPO member palm oil producers will be
required to publicly report their GHG emissions using the
PalmGHG tool, so it is expected that this methodology will
become industry best practice.
The PalmGHG tool uses a lifecycle assessment approach,
whereby all of the major sources of GHG emissions (carbon
dioxide (CO2), methane (CH4) and nitrous oxide (N 2O))
linked to the cultivation, processing and transport of oil palm
products are quantified and balanced against the carbon
sequestration and GHG emissions’ avoidance as a result of
those processes. All direct and the majority of the indirect
emissions associated with the group’s oil palm operations in
Indonesia are reflected. Aspects of the operations that are
not included are the production of oil palm seedlings, the
application of pesticides, fuel used for land clearing, emissions
associated with infrastructure and machinery and the
sequestration of carbon in oil palm products and by-products.
The GHG emissions linked to these processes are not
considered to be material.
The unit of calculation for the PalmGHG tool is the palm oil
mill and its supply base. Whereas the boundary of the 2012
calculation was limited to the group’s two longest established
palm oil mills, this was expanded to include the group’s newest
palm oil mill and its supply base for the 2013 and 2014
carbon footprint calculation. The boundary for the GHG
emissions’ reporting thus differs from that used for financial
reporting, as the emissions linked to oil palm estates which do
not yet supply fresh fruit bunches to one of the group’s mills
are not directly included. Instead, emissions associated with
the land use change component of new oil palm developments
(which represent the majority of emissions from new
developments) are accumulated over the immaturity period of
each development and then amortised over the 25 year oil
palm lifecycle.
The group has reported both the gross and net GHG
emissions associated with its oil palm operations in Indonesia.
The net GHG emissions were calculated by deducting from
the gross GHG emissions the CO2 that is estimated to have
been fixed (sequestered) by the oil palms through the process
of photosynthesis. A further deduction was made to account
for the GHG emissions that have been avoided as a result of
the export of renewable electricity from the group’s methane
capture facilities to domestic buildings that were previously
supplied with electricity by diesel powered generators.
The group’s net GHG emissions have been expressed per
tonne of crude palm oil produced and per planted hectare
(immature and mature). It is deemed necessary because the
trend in GHG emissions per planted hectare is not influenced
by the maturity of the oil palm within the supply base, whereas
this does impact the GHG emissions per tonne of crude palm
oil.
The group’s Scope 2 emissions are limited to the electricity
purchased by the group’s offices in London, Jakarta and
Samarinda. These GHG emissions are not accounted for in
the PalmGHG methodology. These emissions were therefore
estimated separately by multiplying the amount of electricity
consumed in kilowatt hours by the electricity emission
coefficients for the UK and Indonesia respectively. Since
these emissions are immaterial by comparison with the GHG
emissions associated with the group’s oil palm operations they
have not been included in the net GHG emissions in an effort
to ensure that the methodology used to calculate the intensity
of the group’s GHG emissions is consistent with what is likely
to become the standard oil palm industry methodology for
reporting GHG emission intensity.
Control and structure of capital
Details of the company’s share capital and changes in share
capital during 2014 are set out in note 30 to the company’s
financial statements. At 31 December 2014, the preference
share capital and the ordinary share capital represented,
respectively, 86.7 and 13.3 per cent of the total issued
nominal value of share capital.
The rights and obligations attaching to the ordinary and
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 are summarised
in note 30 to the company’s financial statements.
On a show of hands at a general meeting of the company,
every holder of shares and every duly appointed proxy of a
holder of shares, in each case being entitled to vote on the
resolution before the meeting, shall have one vote. On a poll,
every holder of shares present in person or by proxy and
entitled to vote on the resolution the subject of the poll shall
have one vote for each share held. Holders of preference
shares are not entitled to vote on a resolution proposed at a
general meeting unless, at the date of notice of the meeting,
the dividend on the preference shares is more than six months
in arrears or the resolution is for the winding up of the
company or is a resolution directly and adversely affecting any
of the rights and privileges attaching to the preference shares.
Deadlines for the exercise of voting rights and for the
appointment of a proxy or proxies to vote in relation to any
resolution 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.
There are no restrictions on the size of any holding of shares
in the company. Shares may be transferred either through the
CREST system (being the relevant system as defined in the
Uncertificated Securities Regulations 2001 of which
CRESTCo Limited is the operator) where held in
uncertificated form or by instrument of transfer in any usual or
44
R.E.A. Holdings plc Annual Report and Accounts 2014
common form duly executed and stamped, subject to
provisions of the company’s articles of association
empowering the directors to refuse to register any transfer of
shares where the shares are not fully paid, the shares are to
be transferred into a joint holding of more than four persons,
the transfer is not appropriately supported by evidence of the
right of the transferor to make the transfer or the transferor is
in default in compliance with a notice served pursuant to
section 793 of the Companies Act 2006. The directors are
not aware of any agreements between shareholders that may
result 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.
The 7.5 per cent dollar notes 2017 (the “2017 dollar notes”)
of the company and the 9.5 per cent guaranteed sterling
notes 2015/17 of REA Finance B.V. (the “sterling notes”)
(which are guaranteed by the company) are transferable either
through the CREST system where held in uncertificated form
or by instrument of transfer in any usual or common form duly
executed in amounts and multiples, in the case of the dollar
notes, of $1 and, in the case of the sterling notes, of £1,000.
There is no maximum limit on the size of any holding in either
case.
All of the 7.5 per cent dollar notes 2014 that remained
outstanding on 31 December 2014 were redeemed at face
value on 31 December 2014 and cancelled forthwith in
accordance with the terms and conditions of the trust deeds in
respect of such dollar notes.
Substantial holders
On 31 December 2014, the company had received
notifications in accordance with chapter 5 of the Disclosure
Rules and Transparency Rules of the Financial Conduct
Authority of the following voting rights as shareholders of
the company:
Number Percentage
of of
ordinary voting
Substantial holders of ordinary shares shares rights
Emba Holdings Limited 9,957,500 28.4
Prudential plc and certain subsidiaries* 6,043,129 17.2
Alcatel Bell Pensioenfonds VZW 4,167,049 11.9
Artemis UK Smaller Companies 3,563,620 10.2
*
The company has been notified that the interest of Prudential plc group of
companies includes 6,021,116 ordinary shares (17.16 per cent) in which
M&G Investment Funds 3 is also interested.
The shares held by Emba Holdings Limited (“Emba”) are
included as part of the interest of Mr Robinow shown under
“Statement of directors’ shareholdings” in the Directors’
remuneration report.
During the period from 31 December 2014 to the date of this
report, the company did not receive any further notifications
under chapter 5 of the Disclosure Rules and Transparency
Rules.
Significant holdings of preference shares, dollar notes and
sterling notes shown by the respective registers of members
and noteholders at 31 December 2013 were as follows:
Dollar
Preference notes Sterling
notes
shares 2017
Substantial holders of securities ’000 $’000
£’000
The Bank of New York (Nominees) Limited – –
HSBC Global Custody Nominee
(UK) Limited 641898 account – –
KBC Securities NV Client account – 11,143
Rulegale Nominees Limited JAMSCLT account 6,326 –
Securities Services Nominees
Limited 2300001 account – –
State Street Nominees Limited OM04 account – –
Vidacos Nominees Limited CLRLUX account – 3,466
9,847
4,667
–
–
3,495
5,500
–
A change of control of the company would entitle holders of
the sterling notes to require repayment of the notes held by
them as detailed in note 23 to the consolidated financial
statements.
Awards under the company’s long term incentive plans will
vest and may be encashed within one month of a change of
control as detailed under “Scheme interests” in the Directors’
remuneration report below. The directors are not aware of any
agreements between the company and its directors or
between any member of the group and a group employee that
provides for compensation for loss of office or employment
that occurs because of a takeover bid.
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R.E.A. Holdings plc Annual Report and Accounts 2014
45
Governance
Directors’ report
continued
Directors
The directors, all of whom served throughout 2014, are listed
under “Board of directors” above which is incorporated by
reference in this Directors’ report.
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 directors who have served as such for more
than nine years. Resolution 5, which is set out in the 2015
Notice and will be proposed as an ordinary resolution, deals
with the re-election of Mr Robinow.
The senior independent non-executive director confirms that,
following a formal performance evaluation, Mr Robinow’s
performance continues to be effective and to demonstrate his
commitment to the role. Mr Robinow, chairman, devotes a
significant proportion of his working time to the affairs of the
group and is recommended for re-election by the board of
directors.
Messrs Blackett and Oakley retire at the forthcoming annual
general meeting and being eligible, offer themselves for re-
election, such retirement being in compliance with the
company’s articles of association providing for the rotation of
directors. Resolutions 6 and 7, which are set out in the 2015
Notice and will be proposed as ordinary resolutions, deal with
the re-election of Messrs Blackett and Oakley.
As noted in the “Corporate governance report” below, Mr
Robinow and Mr Oakley intend to relinquish their current
positions as, respectively, chairman and managing director of
the company with effect from 31 December 2015. It is
intended that they will remain on the board as non-executive
directors and, for a limited transitional period, will continue to
oversee certain executive matters to the extent necessary to
ensure a smooth transfer of responsibilities.
Directors’ indemnities
Qualifying third party indemnity provisions (as defined in
section 234 of the Companies Act 2006) were in force for the
benefit of directors of the company and of other members of
the group throughout 2014 and remain in force at the date of
this report.
Political donations
No political donations were made during the year.
Acquisition of the company’s own shares
The company’s articles of association permit the purchase 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.
Pursuant to the buy-back authority granted at an extraordinary
general meeting of shareholders on 10 June 2014, the
company has purchased 132,500 of its ordinary shares of
25p each, representing 0.4 per cent of the called up ordinary
share capital, for a total consideration of £1,010,000. The
purchased shares are currently held as treasury shares with
the intention that, once a holding of reasonable size has been
accumulated, such holding be placed with one or more
substantial investors on a basis that, to the extent reasonably
possible, broadens the spread of substantial shareholders in
the company. Save to the extent of this intention, no
agreement, arrangement or understanding exists whereby any
ordinary shares acquired pursuant to the share buy-back
authority will be transferred to any person.
The directors are seeking renewal at the forthcoming annual
general meeting (resolution 10 set out in the 2015 Notice) of
the buy-back authority to purchase up to 5,000,000 ordinary
shares, on terms that the maximum number of ordinary shares
that may be bought back and held in treasury at any one time
is limited to 400,000 ordinary shares. The directors may, if it
remains appropriate, seek further annual renewals of this
authority at subsequent annual general meetings. The
authorisation being sought will continue to be utilised only for
the limited purpose of buying back ordinary shares into
treasury with the expectation that the shares bought back will
be re-sold within a limited period. The new authority, if
provided, will expire on the date of the annual general meeting
to be held in 2016 or on 30 June 2016 (whichever is the
earlier).
This authority is sought on the basis that the price (exclusive
of expenses, if any) that may be paid by the company for each
ordinary share purchased by it will be not less than £1.00 and
not greater than an amount equal to the higher of (i) 105 per
cent of the average of the middle market quotations for the
ordinary shares in the capital of the company as derived from
the Daily Official List of the London Stock Exchange for the
five business days immediately preceding the day on which
such share is contracted to be purchased and (ii) that
stipulated by article 5(1) of the EU Buyback and Stabilisation
Regulation 2003 (namely the higher of the price of the last
independent trade and the current highest independent bid on
the London Stock Exchange).
Any ordinary shares held in treasury by the company will
remain listed and form part of the company’s issued ordinary
share capital. However, the company will not be entitled to
attend meetings of the members of the company, exercise any
voting rights attached to such ordinary shares or receive any
dividend or other distribution (save for any issue of bonus
shares). Sales of shares held in treasury will be made from
time to time as investors are found, following which the new
legal owners of the ordinary shares will be entitled to exercise
46
R.E.A. Holdings plc Annual Report and Accounts 2014
the usual rights from time to time attaching to such shares and
to receive dividends and other distributions in respect of the
ordinary shares.
The consideration payable by the company for any ordinary
shares purchased by it will come from the distributable
reserves of the company. The proceeds of sale of any ordinary
shares purchased by the company would be credited to
distributable reserves up to the amount of the purchase price
paid by the company for the shares, with any excess over such
price being credited to the share premium account of the
company. Thus, as regards its impact on both cash resources
and distributable reserves, it is intended that exercise of the
share buy-back authority will be broadly neutral.
The company will continue to comply with its obligations under
the Listing Rules of the Financial Conduct Authority (“the
Listing Rules”) in relation to the timing of any share buy-backs
and re-sales of ordinary shares from treasury.
Increase in share capital
At the forthcoming annual general meeting, a resolution will be
proposed (resolution 11 set out in the Notice) to increase the
authorised share capital of the company (being the maximum
amount of shares in the capital of the company that the
company may allot) from £75,250,000 to £85,250,000 by the
creation of 10,000,000 9 per cent cumulative preference
shares of £1 each ranking pari passu in all respects with the
existing preference shares and representing 15 per cent of
the existing authorised preference share capital.
As noted in the “Finance” section of the “Strategic report”
above, the directors believe that capitalisation issues of new
preference shares to ordinary shareholders provide a useful
mechanism for augmenting returns to ordinary shareholders in
periods in which good profits are achieved but demands on
cash resources limit the scope for payment of cash dividends.
The directors also believe that, when circumstances permit, it
is sensible to replace 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
further 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).
Authorities to allot share capital
At the annual general meeting held on 10 June 2014,
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 shares within
specified limits. Replacement authorities are being sought at
the 2015 AGM (resolutions 12 and 13 set out in the 2015
Notice) to authorise the directors (a) 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 of
£1,478,682.75 (being all of the unissued ordinary share
capital of the company and representing 16.9 per cent of the
issued ordinary share capital at the date of this report), and (b)
subject to the passing of resolution 12 set out in the Notice, to
allot and to grant rights to subscribe for, or to convert any
security into, 9 per cent cumulative preference shares in the
capital of the company up to an aggregate nominal amount of
£15,579,768 (including the additional £10,000,000
preference share capital proposed to be created at the
forthcoming annual general meeting), representing 26 per
cent of the issued preference share capital of the company at
the date of this report.
The new authorities, if provided, will expire on the date of the
annual general meeting to be held in 2016 or on 30 June
2016 (whichever is the earlier). Save in relation to the
preference shares as indicated under “Increase in share
capital” above, the directors have no present intention of
exercising these authorities.
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
14 set out in the 2015 Notice) will, if passed, empower the
directors to make issues of ordinary shares for cash other
than by way of a rights issue or open offer up to a maximum
nominal amount of £438,565 (representing 5 per cent of the
issued ordinary share capital of the company at the date of
this report). The foregoing powers (if granted) will expire on
the date of the annual general meeting to be held in 2016 or
on 30 June 2016 (whichever is the earlier).
General meeting notice period
At the 2015 AGM a resolution (resolution 15 set out in the
2015 Notice) will be proposed to authorise the directors to
convene a general meeting (other than an annual general
meeting) on 14 clear days’ notice (subject to due compliance
with requirements for electronic voting). The authority will be
effective until the date of the annual general meeting to be
held in 2016 or on 30 June 2016 (whichever is the earlier).
This resolution is proposed following legislation which,
notwithstanding the provisions of the company’s articles of
association and in the absence of specific shareholder
R.E.A. Holdings plc Annual Report and Accounts 2014
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Governance
Directors’ report
continued
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 use of the flexibility is merited
by the business of the meeting and is thought to be to the
advantage of shareholders as a whole.
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 “Acquisition of the company’s own
shares”, “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 period” 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
resolutions 10 to 15 as set out in the 2015 Notice.
Directors’ remuneration report
Resolution 3 as set out in the 2015 Notice provides for
approval of the company’s revised policy regarding the
remuneration of directors as detailed in the Directors’
remuneration report below. In his statement on page 58, the
chairman of the remuneration committee describes the revised
elements of the remuneration policy. If approved, the revised
policy will take effect from the date of such approval and will
supersede the previously approved policy which took effect
from 1 January 2015.
Auditor
Each director of the company at the date of approval of this
report has confirmed that, so far as such director is aware,
there is no relevant audit information of which the company’s
auditor is unaware; and that such director has taken all the
steps that ought to be taken as a director in order to make
himself or herself 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 Resolution 8 set out in the 2015 Notice
proposes their re-appointment.
Disclosure requirements of Listing Rule 9.8.4R
The following table references the location of information
required to be disclosed in accordance with Rule 9.8.4R of
the Listing Rules published by the Financial Conduct
Authority.
Listing
Rule
9.8.4(1)
9.8.4(2)
9.8.4(4)
9.8.4(5)
9.8.4(6)
9.8.4(7)
Disclosure in
annual report
Note 8 to the
consolidated
financial
statements
Not applicable
Not applicable
Not applicable
Not applicable
Not applicable
Disclosure requirement
The amount of interest capitalised
during the year with an indication of
the amount and treatment of any
related tax relief
Any information required by Listing
Rules 9.2.18 R (publication of
unaudited financial information)
Long-term incentive scheme as
required under LR 9.4.2R (2) (for a
sole director to facilitate recruitment
or retention)
Any arrangements under which a
director has waived or agreed to
waive any emoluments from the
company or any subsidiary
undertaking
Any arrangement under which a
director has agreed to waive future
emoluments
Allotments for cash of equity
securities made during the period
under review otherwise than to the
holders of the company’s equity
shares in proportion to their holdings
of such equity shares and which has
not been specifically authorised by the
company’s shareholders
9.8.4(8)
9.8.4(9)
Allotments of shares for cash by a
major subsidiary of the company
Not applicable
Participation by a parent company in
any placing made by the company
Not applicable
9.8.4(10) Any contract of significance:
Not applicable
(i) to which the listed company, or
one of its subsidiary
undertakings, is a party and in
which a director of the listed
company is or was materially
interested; and
(ii) between the listed company, or
one of its subsidiary undertakings,
and a controlling shareholder
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R.E.A. Holdings plc Annual Report and Accounts 2014
Listing
Rule
Disclosure requirement
9.8.4(11) Contracts for the provision of services
to the company or any of its
subsidiary undertakings by a
controlling shareholder
Disclosure in
annual report
Not applicable
9.8.4(12) Arrangements under which a
Not applicable
shareholder has waived or agreed to
waive any dividends
9.8.4(13) Where a shareholder has agreed to
waive future dividends
Not applicable
9.8.4(14) Board statement in respect of
Not applicable
relationship agreement with the
controlling shareholder
By order of the board
R.E.A. SERVICES LIMITED
Secretary
23 April 2015
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49
Governance
Corporate governance report
Throughout the year ended 31 December 2014, the company
was in compliance with the provisions set out in the 2012 UK
Corporate Governance Code issued by the Financial
Reporting Council (the “Code”). The Code is available from
the Financial Reporting Council’s website at “www.frc.org.uk”.
Chairman’s statement on corporate governance
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 Code provide
a widely endorsed model for achieving this. The directors
seek to apply the Code principles in a manner proportionate to
the group’s size but, as the Code permits, reserving the right,
when it is appropriate to the individual circumstances of the
company, not to comply with certain Code principles and to
explain why.
The directors are mindful of the recently published 2014 UK
Corporate Governance Code (the “2014 Code”) and
associated guidance, applicable for reporting periods
commencing on or after 1 October 2014, and have had regard
to the provisions of the 2014 Code in the preparation of this
report.
At the performance evaluation conducted in 2014, the board
concluded that the board is performing effectively as
constituted and that the complementary skills of individual
board members are appropriate for the size and strategic
direction of the group and for the challenges that it faces. It
was acknowledged that each director brings valuable
additional insights into the plantation industry, business in
Indonesia and the group’s own affairs.
The directors are conscious that the group relies not only on
its shareholders but also on the holders of its debt securities
for the provision of the capital that the group utilises. The
comments below regarding liaison with shareholders apply
equally to liaison with holders of debt securities.
Role and responsibilities of the board
The board is responsible for the proper management of the
company. 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 and
operational controls, risk and compliance with the group’s
policies and procedures with respect to business ethics,
human rights and sustainability.
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 the discharge
of its duties; the managing director has responsibility for the
executive management of the group overall. 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. There is a regular and robust dialogue, both formal
and informal, between all directors and senior management
and communication is open and constructive. The ethos of
discussions is consistent with that of the company and non-
executive directors are able to express their views and speak
frankly or to raise any issues or concerns; executive
management is responsive to feedback from non-executives
directors and to requests for clarification and amplification.
The company carries appropriate insurance against legal
action against its directors. The current policy was in place
throughout 2014 in compliance with the Code requirement to
carry such insurance.
Composition of the board
The board currently comprises two executive directors and
four non-executive directors (including the chairman). The two
executive directors are John Oakley and Mark Parry. Mr
Oakley is the group’s managing director and is based in
London. Mr Parry is the group’s regional director and is based
in Indonesia and Singapore with overall local responsibility for
the Indonesian operations. Mr Parry is also the president
director and, since January 2014, the chief operating officer
of the company’s principal operating subsidiary in Indonesia,
PT REA Kaltim Plantations (“REA Kaltim”). Biographical
information concerning each of the directors is set out under
“Board of directors” above.
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 respective skills and experience of
its members complement each other and that their knowledge
and commitment is of specific relevance to the nature and
geographical location of the group’s operations.
In line with the previously stated intention that, over time,
overall executive responsibility for the management of the
group will progressively be transferred from the UK to
Indonesia and Singapore, it has been agreed that, upon
retirement of the current managing director at the end of
2015, Mr Parry will be appointed group managing director. Mr
Parry will continue in his role as president director of REA
Kaltim, based in South East Asia. Although Mr Oakley will
cease to have executive responsibilities from January 2016, it
is intended that he will remain on the board in a non-executive
capacity, and during a limited transitional period, will continue
to discharge certain executive responsibilities, particularly in
50
R.E.A. Holdings plc Annual Report and Accounts 2014
relation to the installation of the group’s new information
technology systems to ensure continuity and a smooth hand
over.
It has been agreed that, concurrently with Mr Oakley’s
retirement as managing director, Mr Robinow will step down
from the chairmanship of the company; it is intended that he
too will remain on the board as a non-executive director and,
for a transitional period sufficient to ensure completion of all
transactions associated with the proposed listing of REA
Kaltim on the Indonesian Stock Exchange, will devote such
additional time to the affairs of the group as are appropriate
for that purpose. Upon Mr Robinow’s retirement as chairman,
Mr Blackett, the current senior independent director will be
appointed as chairman.
The planned changes in board positions and responsibilities
are in line with the group’s previously announced intention
that, in due course, the group’s London office will be reduced
to a secretariat managing the company’s London listing and
liaising with its European shareholders.
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 the policy of the company that the board should be
refreshed on the basis that independent non-executive
directors will not normally be proposed for reappointment if at
the date of reappointment they have served on the board for
more than 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.
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.
Information and support
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 monthly
management reports, 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.
Board evaluation
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 2014, the board
concluded that it performs effectively as constituted and that
the directors work well together as a team.
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R.E.A. Holdings plc Annual Report and Accounts 2014
51
Governance
Corporate governance report
continued
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.
An executive committee of the board, currently comprising Mr
Robinow and Mr Oakley, has been appointed to deal with
various matters of a routine or executory nature.
Appropriate changes to the composition of board committees,
to take account of the planned changes to the composition of
the board as discussed above, will be addressed in due
course.
Audit committee
The audit committee reports on its composition and activities
in the “Audit committee report” below. This also provides
information concerning the committee’s relationship with the
external auditor.
Nomination committee
The nomination committee comprises Mr D Killick (chairman)
and Mr 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 and race.
Remuneration committee
The remuneration committee reports on its composition and
activities in the “Directors’ remuneration report” below. This
also provides information concerning the remuneration of the
directors and includes details of the basis upon which such
remuneration is determined.
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 and provided
with relevant supporting information. 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
2014, at the regular and “ad hoc” board meetings held in
2014 was as follows:
Regular Ad hoc
meeting meeting
R M Robinow 4 1
J C Oakley 4 1
D J Blackett 4 1
I Chia 4 –
D H R Killick 4 1
M A Parry 4 –
In addition, during 2014 there were four meetings of the audit
committee and one meeting of the remuneration committee.
The nomination committee did not meet during 2014 but, at a
meeting in 2015, recommended the proposals outlined above
regarding changes to the chairmanship and managing
directorship of the company. 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.
Risk management and 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 the principal risks which
the group faces (including risks arising from environmental,
social and governance matters). The board regularly reviews
the process and internal control systems, which were in place
throughout 2014 and up to the date of approval of this report
and which are in accordance with the current guidance on
internal control (the Turnbull Guidance). The board is working
to ensure that it is fully compliant with the Financial Reporting
Council (“FRC”) Guidance on Risk Management, Internal
52
R.E.A. Holdings plc Annual Report and Accounts 2014
Control and Related Financial and Business Reporting for
2015.
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, in accordance with the group’s
policies on business ethics and human rights.
Policies and procedures in respect of bribery and corruption
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, 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 and the internal
audit process, reviews the effectiveness of the group’s system
of internal control on an on-going basis. 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. Details of the internal audit function are provided
under “Internal audit” in the Audit committee report below.
Following formal reviews of the systems of internal control and
risk management (including the group’s internal audit
arrangements) in November 2014 and April 2015, the board
concluded that these remain effective and sufficient for their
purpose. The board did not identify, nor was it advised of, any
specific failings or weaknesses that it determined to be
significant and warranting further action.
Internal audit and reporting
management reports, budgets and management accounts.
Management is required to seek authority from the board in
respect of any transaction outside the normal course of
trading which is above an approved limit and in respect of any
matter that is likely to have a material impact on the
operations that the transaction concerns. Monthly meetings to
consider operational matters are held between management
in London and Indonesia by way of conference calls of which
minutes are taken and circulated. At least four supervisory
visits are made each year to the overseas operations by the
managing director; other directors also make periodic visits to
these operations. Such visits are reported on and reviewed by
the non-executive directors at the regular board meetings.
The president director and chief operating officer of REA
Kaltim has a continuing dialogue with the managing director
and with other members of the board.
Relations with shareholders
The “Chairman’s statement” and “Strategic report above”, when
read in conjunction with the financial statements, the
“Directors’ report” above and the “Audit committee report” and
“Directors’ remuneration report” below 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 “Directors’ responsibilities” below
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 the limits 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.
The group’s internal audit arrangements are described in the
Audit committee report below.
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 and
department heads who in turn report to the regional director
and the managing director.
Management reports to the audit committee and the board on
a regular basis by way of the circulation of progress reports,
All ordinary shareholders may attend the company’s annual
and other general meetings and put questions to the board.
As noted above, 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. For every general meeting, proxy votes are counted
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53
Governance
Corporate governance report
continued
and 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.
The company maintains its website at “www.rea.co.uk”. The
website has detailed information on, and photographs
illustrating various aspects of, the group’s activities, including
its commitment to sustainability, conservation work and
managing its carbon footprint. The website is updated
regularly and includes information on the company’s share
prices 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.
Approved by the board on 23 April 2015 and signed on behalf
of the board by
RICHARD M ROBINOW
Chairman
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R.E.A. Holdings plc Annual Report and Accounts 2014
Governance
Audit committee report
Summary of the role of the audit committee
The terms of reference of the audit committee are available
for download from the company’s website rea.co.uk.
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 that such statements and announcements
contain;
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, remuneration and terms of engagement; and
reviewing and monitoring the independence of the
external auditor and the effectiveness of the audit
process.
The audit committee also monitors the engagement of the
external auditor to perform non-audit work. During 2014, 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) and routine
taxation compliance services. The audit committee considered
that the nature and scope of, and remuneration payable in
respect of, these engagements was such that the
independence and objectivity of the auditor was not impaired.
Fees payable are detailed in note 5 to the consolidated
financial statements.
by consideration of reports from management, the Indonesian
internal audit function and the external auditor.
The committee provides advice and recommendations to the
board with respect to the financial statements to ensure that
these offer fair, balanced and comprehensive information for
the purpose of informing and protecting the interests of the
company’s shareholders.
Composition of the audit committee
The audit committee currently comprises Mr Blackett
(chairman) and Mr Killick both of whom are considered by the
directors to have relevant financial and professional
experience in order to be able to fulfil their specific duties with
respect to the audit committee.
Meetings
Three audit meetings are fixed to match the company’s
budgeting and reporting cycle. There are additional ad hoc
meetings held to discuss specific matters when required.
Significant issues related to the financial statements
The committee reviewed the half year financial statements to
30 June 2014 (on which the auditor did not report) and the
full year consolidated financial statements for 2014 (the
“2014 financial statements”) contained in this annual report.
The external audit report on the latter was considered
together with a paper to the committee by the auditor
reporting on the principal audit findings. The audit partner of
Deloitte LLP responsible for the audit of the group attended
the audit planning meeting prior to the year end as well as the
meeting of the committee at which the full year audited
consolidated financial statements were considered and
approved. Senior members of staff of Deloitte LLP who were
involved in the audit also attended the meetings.
The members of the audit committee discharge their
responsibilities by informal discussions between themselves,
meetings with the external auditor, with the internal auditor in
Indonesia and with management in Indonesia and London and
In relation to the group’s audited 2014 financial statements,
the committee considered the significant accounting and
judgement issues set out below.
Significant accounting and judgement issues
Issues
Relevant considerations
Fair valuation of biological assets: the valuation is based on a
discounted cash flow model which contains some significant
management assumptions in regard to certain inputs.
Each year the group considers the various inputs for the
valuation model and adjusts these as necessary to reflect the
current status of the group’s plantations, crop yields, the
margins achieved from sale of product and general financial
conditions. These are also compared as appropriate with
inputs for such valuations disclosed by other oil palm
plantation companies.
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R.E.A. Holdings plc Annual Report and Accounts 2014
55
Governance
Audit committee report
continued
Issues
Relevant considerations
Indonesian tax balances: Indonesian legislation as to the tax
treatment of transactions is sometimes unclear and can result
in disputes between the group and the Indonesian tax
authorities. Certain disputed items are currently the subject of
cases in appeal courts.
Valuation of Indonesian stone and coal loans: the value of
these loans is based on their expected future generation of
revenue; following a review in 2012, a provision of $3 million
was booked in the 2012 consolidated financial statements.
Fair valuation of cross currency swaps: the valuation is
derived as the difference between the net present values of
the bought and sold positions converted to US dollars with
assumptions as to appropriate discount rates.
Revenue recognition: compliance with the “bill and hold” sale
revenue recognition requirements of IAS18 “Revenue” and
those relating to forward sales.
Each year the group prepares an evaluation of items that may
be disputed and adjusts tax balances as required. Following a
favourable judgement from the Jakarta Tax Court in May
2014, some $8.4 million of tax previously paid was refunded.
Although this and another long disputed judgement still
remain subject to judicial review by the Supreme Court of
Indonesia, based on advice received, tax provisions previously
made were reduced by writing back an amount equal to the
cash recovered. Pending the outcome of such review, which
may take some years, interest receivable in the event of
favourable judgements has not been recognised.
The group has made good progress towards commencement
of quarrying operations on the stone deposit and feasibility
studies indicate that the value of such operations will be
significantly in excess of the loan values. At current
depressed coal prices, the operation of the coal concessions
is uneconomic but it is expected that prices will recover from
current levels. There is also potential for alternative use for
agricultural development at two of the three properties. In
consideration of the group’s continuing support of the stone
and coal concession companies, the stone concession holding
company has guaranteed the obligations to the company of
the coal concession companies. These considerations support
the conclusion that no further impairment charge is required at
this time.
The group has assumed discount rates based on published
rates for the periods and currencies involved and has adjusted
these for credit risk; the relatively short remaining duration of
the swaps means that the scope for error in the valuation
method is limited.
There are long-standing operating procedures for the storage
of product where the buyer has requested a delivery delay, and
these comply with IFRS. In addition the shift of delivery
method over recent years from FOB Samarinda to CIF has
reduced the occurrence and the materiality of this issue. The
group has no forward sales at fixed prices.
In its review of the annual report and the consolidated
financial statements, the committee has considered
management’s submissions on the matters above, together
with the conclusions reached by the auditor, in order to ensure
that the annual report and the consolidated financial
statements are fair, balanced and understandable and provide
sufficient information to enable shareholders to make an
assessment of the group’s performance, business model and
strategy.
External Audit
The external auditor was appointed as the company’s external
auditor in 2002. There has been no tender for audit services
since that time. Mark McIlquham has been the company’s audit
engagement partner since November 2010 and will step
down this year under the standard rotation procedure of his
firm.
The audit committee has recommended to the board that it
should seek the approval of the company’s shareholders for
the reappointment of the company’s current auditor. That
recommendation reflects 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 the auditor and feedback from 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. However, given the current level of audit fees, the
56
R.E.A. Holdings plc Annual Report and Accounts 2014
limited choice of audit firms with sufficient international
coverage and experience 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.
In its assessment of the external auditor, the audit committee
considered the following criteria:
•
•
•
•
•
delivery of a thorough and efficient audit of the group in
accordance with agreed plans and timescales
provision of accurate, relevant and robust advice on key
accounting and audit judgments, technical issues and
best practice
the degree of professionalism and expertise
demonstrated by the audit staff
sufficient continuity within the core audit team
adherence to independence policies and other
regulatory requirements.
Risk Management and Internal Control
The board of the company has primary responsibility for the
group’s risk management and internal control systems. The
audit committee supervises the internal audit function, which
forms an important component of the control systems, and
keeps the control systems generally under review. Any
deficiencies identified are drawn to the attention of the board.
Internal audit
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. An internal audit
programme is agreed at the beginning of each year and
supplemented by special audits through the year as and when
required by management. In addition, follow-up audits are
undertaken to ensure that the necessary remedial action has
been taken. In the opinion of the audit committee and the
board, there is no need for an internal audit function outside
Indonesia due to the limited nature of the non-Indonesian
operations.
Approved by the audit committee on 23 April 2015 and
signed on behalf of the committee by:
DAVID J BLACKETT
Chairman
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R.E.A. Holdings plc Annual Report and Accounts 2014
57
Governance
Directors’ remuneration report
This report has been prepared in accordance with Schedule 8 of The Large and Medium-sized Companies and Groups
(Accounts and Reports) Regulations 2008 (the “Regulations”) as amended in August 2013. The report is split into three main
sections: the statement by the chairman of the remuneration committee, the annual report on remuneration and the policy
report. The policy report is a revised report and will be subject to a binding shareholder vote at the 2015 Annual General
Meeting (“2015 AGM”) and it is intended that the revised policy should take effect immediately upon approval at the AGM,
superseding the previously approved policy that took effect from 1 January 2015. The annual report on remuneration provides
details on remuneration during 2014 and certain other information required by the Regulations. The directors’ remuneration
report, excluding the policy report, will be subject to an advisory shareholder vote at the 2015 AGM.
The Companies Act 2006 requires the auditor to report to the shareholders on certain parts of the annual report on
remuneration component of the directors’ remuneration report and to state whether, in its opinion, those parts of the report
have been properly prepared in accordance with the Regulations. The parts of the annual report on remuneration that are
subject to audit are indicated at the beginning of that report. The statement by the chairman of the remuneration committee
and the policy report are not subject to audit.
Statement by Mr D Blackett, the chairman of the remuneration committee
The succeeding sections of this directors’ remuneration report cover the activities of the remuneration committee during 2014
and provide information regarding the remuneration of executive and non-executive directors and the future policy on directors’
remuneration. In particular, the report is designed to compare the remuneration of directors with the performance of the
company.
The policy and principles applied by the remuneration committee in fixing the remuneration of directors continues to take
account of, in particular for executive directors, the company’s sustainability objectives as well as its commercial goals and
achievements.
A key challenge for the committee in considering executive remuneration for 2015 and bonuses in respect of 2014 has been
striking the right balance between positive and negative factors. It is positive that the group has continued to recover from the
difficulties faced by the group in 2012 and the first half of 2013 but negative that the recovery has been impacted by certain
operational and engineering deficiencies exacerbated by factors beyond the group’s control, specifically a particularly dry period
of weather and a weakening crude palm oil price in the second half of 2014.
The executive has made significant progress in identifying and addressing deficiencies, developing the operational
management team and putting in place consistent procedures for managing relationships with the local communities so as to
establish a sound footing for proceeding with the group’s extension planting programme. In addition, arrangements and the
related agreements for the supply of electricity using methane from the methane capture plants have now been secured.
Against this, the progress made has yet to be reflected in the group’s results.
The committee has reflected these factors in 2014 bonuses and the remuneration awarded for 2015. The committee believes
that remuneration should continue to motivate and reward individual performance in a way that is consistent with the best long
term interests of the company and its shareholders, and, in approving the remuneration package for 2015, considers that it
struck an appropriate balance between reward and incentive. The remuneration awarded for 2015 is consistent with the
current policy on remuneration.
The area in which a revised remuneration policy is proposed relates to long term incentives. In the past, these have been
structured as individual agreements with executives, and have provided for cash payments on vesting. The only outstanding
long term incentive is that of Mr Parry, as described below. The revised policy, outlined in the future policy tables below,
provides for an increased individual limit capping the grant-date value of unvested awards held by any one individual at 150 per
cent of annual base salary (or 200 per cent in exceptional circumstances). It also provides for the award of rights to acquire
shares. This would be effected under a new long term incentive plan for which a separate approval from shareholders is
required under the Listing Rules of the London Stock Exchange. To this end, an extraordinary general meeting is to be
convened, to follow immediately after the close of the Company's annual general meeting, for the purpose of considering and, if
thought fit, approving the new long term incentive plan. The notice of extraordinary general meeting will provide a summary of
the principal terms of the proposed plan.
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R.E.A. Holdings plc Annual Report and Accounts 2014
Annual report on remuneration
The information provided below under “Single total figure of remuneration for each director”, “Pension entitlements”, “Scheme
interests awarded during the financial year”, “Directors’ shareholdings” and “Scheme interests” has been audited.
Single total figure of remuneration for each director
The remuneration of the executive and non-executive directors for 2013 and 2014 was as follows:
Payment
Salary All taxable Annual Long term in lieu of
and fees benefits* bonus incentive pension Total
2014 £’000 £’000 £’000 £’000 £’000 £’000
Chairman and executive directors
R M Robinow 200.0 6.9 – – – 206.9
J C Oakley 336.0 17.7 108.0 – – 461.7
M A Parry 268.9 33.9 129.2 – – 432.0
Non-executive directors
D J Blackett 29.5 – – – – 29.5
I Chia 27.0 – – – – 27.0
D H R Killick 29.5 – – – – 29.5
Total 890.9 58.5 237.2 – – 1,186.6
Payment
Salary All taxable Annual Long term in lieu of
and fees benefits* bonus incentive pension Total
2013 £’000 £’000 £’000 £’000 £’000 £’000
Chairman and executive directors
R M Robinow 197.5 5.9 – – – 203.4
J C Oakley 324.5 16.3 105.0 – 43.0 488.8
M A Parry 275.5 28.8 115.3 – – 419.6
Non-executive directors
D J Blackett 24.5 – – – – 24.5
I Chia 22.0 – – – – 22.0
D H R Killick 24.5 – – – – 24.5
Total 868.5 51.0 220.3 – 43.0 1,182.8
*
Types of benefit: company car, medical insurance, overseas rental accommodation
Fees paid to Mr Blackett and Mr Killick in respect of 2013 and 2014 included, in each case, additional remuneration of £2,500
in respect of their membership of the audit committee.
Pension entitlements
In the past, executive directors were eligible to join the R.E.A. Pension Scheme, a defined benefit scheme of which details are
given in note 37 to the consolidated financial statements. That scheme is now closed to new members and it is no longer the
policy of the company to offer pensionable remuneration to directors, except to the extent as may be or may become required
under local legislation.
Mr Oakley (who was aged 66 at 31 December 2014) was until 31 July 2009 an ordinary member of the R.E.A. Pension
Scheme. Mr Oakley elected to become a pensioner member of the scheme on 31 July 2009. In recognition of Mr Oakley’s
withdrawal from ordinary membership of the scheme ahead of attaining the age of 65, the company paid to Mr Oakley amounts
in lieu of the pension contributions equivalent to the amounts that the company would otherwise have paid to the pension
scheme during the period from 1 August 2009 until 17 August 2013 when Mr Oakley attained the age of 65. There were no
further payments in lieu of pension contributions payable in 2014 (2013: £43,000) and no further payments are due in the
future.
R.E.A. Holdings plc Annual Report and Accounts 2014
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Governance
Directors’ remuneration report
continued
Details of Mr Oakley’s annual pension entitlement are set out below.
£
In payment at beginning of year 72,089
Increase during the year 1,903
In payment at end of year 73,992
Scheme interests awarded during the financial year
There were no scheme interests awarded during the year to a director.
Directors’ shareholdings
There is no requirement for directors to hold shares in the company.
At 31 December 2014, the interests of directors (including interests of connected persons as defined in section 96B (2) of the
Financial Services and Markets Act 2000 of which the company is, or ought upon reasonable enquiry to have been, aware) in the
9 per cent cumulative preference shares of £1 each and the ordinary shares of 25p each of the company were as set out in the
table below.
Preference Ordinary
Directors shares shares
R M Robinow – 9,957,500
D J Blackett 250,000 10,000
I Chia – 1,000
D H R Killick – 30,000
J C Oakley 26,549 442,493
M A Parry 42,155 25,822
There have been no changes in the interests of the directors between 31 December 2014 and the date of this report. During
2014, the total number of ordinary shares held by Mr Robinow ceased to include 24,166 ordinary shares that were previously
held in trust on behalf of a person connected with Mr Robinow and a further 24,167 ordinary shares held by a member of Mr
Robinow’s family who no longer meets the criteria of a connected person.
Scheme interests
The following table shows the total number of scheme interests, being entitlements to notional shares with and without
performance conditions, held by Mr Parry. No director, other than Mr Parry, currently holds any interests in shares other than
those disclosed in the table above and no director holds any share options.
With Without
performance performance
Scheme interests in ordinary shares conditions conditions
M A Parry 106,247 Nil
A long term incentive was approved by shareholders and put in place for Mr Parry in June 2013. The scheme is linked to the
market price performance of ordinary shares in the company, designed with a view to participation over the long term in value
created for the group. The performance period commenced on 1 January 2013 and will end on 31 December 2016 (the
“performance period”).
Under the plan, the participant was awarded potential entitlements over notional ordinary shares of the company. These
potential entitlements then vest to an extent that is dependent upon the achievement of certain targets. Vested entitlements
are exercisable in whole or part at any time within the six years following the date upon which they vested. On exercising a
vested entitlement, the participant receives a cash amount for each ordinary share over which the entitlement is exercised,
equal to the excess (if any) of the market price of an ordinary share on the date of exercise over 389.4p, being the market price
of an ordinary share on the date with effect from which the plan was agreed after adjustment for subsequent variations in the
share capital of the company in accordance with the rules of the plan.
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R.E.A. Holdings plc Annual Report and Accounts 2014
The plan provides that the vesting of the participant’s potential entitlements to notional ordinary shares be determined by key
performance targets with each performance target measured on a cumulative basis over a designated performance period.
There are threshold, target and maximum levels of performance determining the extent of vesting in relation to each
performance target. The three key performance targets and the respective thresholds for determining the extent of vesting
under the plan are set out in the table below. Targets are subject to adjustment at the discretion of the remuneration
committee where, in the committee’s opinion, warranted by actual performance.
Director
Type of scheme
interest
Percentage
of award
vesting for
Face value* minimum Length of vesting Summary of performance
Basis of award £’000 performance** period measures and targets
M A Parry Long term
A notional right to 413,687 33.33 1 January 2013 to Up to 50 per cent of the maximum
incentive plan acquire 103,035 31 December 2016 aggregate amount will be payable
ordinary shares at dependent on the annual total
401.5p per share shareholder return (TSR) per
exercisable subject to ordinary share; up to 25 per cent
certain performance dependent upon the percentage
conditions amount by which the inflation
adjusted cost per tonne of crude
palm oil and equivalents produced
by the group has reduced (RCPT);
and up to 25 per cent dependent
upon the average annual
extension planting rate achieved
by the group (AEPR). For each
performance measure, the
thresholds for one third, two thirds
or full vesting, are, respectively.
as follows: TSR – 10, 15 and
20 per cent; RCPT – 5,10 and
15 per cent; and AEPR – 2,500,
3,000 and 3,500 hectares
*
The face value comprises the number of shares awarded multiplied by the closing share price (401.5p) on the day immediately preceding the date of grant (11 June
2013) being the price at which the award was initially exercisable.
** Assuming minimum performance against all performance conditions.
In the event of a change in control of the company as a result of a takeover offer or similar corporate event, vested entitlements
will be exercisable for a period of one month following the date of the change of control or other relevant event (as determined
by the remuneration committee).
The exercise of vested entitlements depends upon continued employment with the group. If the participant leaves, he may
exercise a vested entitlement within six months of leaving.
On the basis of the market price of the ordinary shares at 31 December 2014 of 350p, there would have been no gain under
the plan.
As described in the statement by the chairman of the remuneration committee above, it is intended that, subject to approval of
the revised remuneration policy at the 2015 AGM and a necessary approval at the subsequent EGM, a new long term incentive
plan will be adopted for senior managers based in Indonesia and Singapore, including Mr Parry. Mr Parry is the only current
director who will participate in the new long term incentive plan.
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R.E.A. Holdings plc Annual Report and Accounts 2014
61
Governance
Directors’ remuneration report
continued
Performance graph and managing director remuneration table
The following graph shows the company’s performance, measured by total shareholder return, compared with the performance
of the FTSE All Share Index also measured by total shareholder return. The FTSE All Share index has been selected for this
comparison as there is no index available that is specific to the activities of the company.
180
160
140
120
100
80
60
40
20
0
2007
2008
2009
2010
2011
2012
2013
2014
R.E.A
FTSE
Record of remuneration of the managing director
The table below provides details of the remuneration of the managing director over the five years to 31 December 2014.
Long term
incentive
Annual bonus vesting rates
Single figure of pay-out against
total against maximum
remuneration maximum opportunity
Managing director’s remuneration £’000 % %
2014 461.7 67 N/A
2013 488.8 65 N/A
2012 499.5 71 N/A
2011 428.7 47 N/A
2010 419.4 46 N/A
The single figure of total remuneration and the bonus calculations in 2011 above have been adjusted to reflect refunds of a
benefit in kind. As previously reported, the total remuneration paid to Mr Oakley in respect of 2011 was £15,050 less than the
amount to which he would normally have been entitled in each year, reflecting an agreement that a benefit in kind received in
2006 (relating to a tax liability arising on a gain on exercise of share options) should be refunded by commensurate reductions
in subsequent remuneration. The reduction in 2011, together with earlier reductions, fully offset the applicable benefit in kind.
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R.E.A. Holdings plc Annual Report and Accounts 2014
Percentage change in remuneration of the managing director
The table below shows the percentage changes in the remuneration of the managing director and in the average remuneration of
certain senior management and executives in Indonesia and Singapore between 2013 and 2014. The selected comparator
employee group is considered to be the most relevant taking into consideration the nature and location of the group’s operations.
Using the entire employee group would involve comparison with a workforce in Indonesia, whose terms and conditions are
substantially different from those pertaining to employees elsewhere and of which the changes from year to year reflect local
employment conditions. In order to achieve a meaningful comparison, the remuneration for the selected employee group in 2013
no longer includes certain expatriate employees who ceased to be employees of the group after 31 December 2013 and has
also been restated at prevailing average exchange rates for 2014 so as to eliminate distortions based on exchange rate
movements of the Indonesian rupiah, US dollar and Singapore dollar against sterling.
2014 2013 change
Percentage change in managing director’s remuneration £’000 £’000 %
Salary 336.0 367.5 (9)
Benefits 17.7 16.3 8
Annual bonus 108.0 105.0 3
Total 461.7 488.8 (6)
2014 2013 change
Percentage change in selected employee group remuneration £’000 £’000 %
Salary 175.1 136.0 29
Benefits 12.5 9.5 32
Annual bonus 89.6 100.9 (11)
Total 277.2 246.4 13
Relative importance of spend on pay
The graph below shows the movements between 2013 and 2014 in total employee remuneration, cost of goods sold, and
ordinary and preference dividends. Cost of goods sold has been selected as an appropriate comparator as it provides a
reasonable measure of the growth in the group’s activities.
$’000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
+11%
+2%
2013
2014
Total employee remuneration
2013
2014
Cost of goods sold
2013
2014
Ordinary and preference dividends
+13%
R.E.A. Holdings plc Annual Report and Accounts 2014
63
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Governance
Directors’ remuneration report
continued
Functions of the remuneration committee
The remuneration committee currently comprises two independent non-executive directors, Mr D J Blackett (chairman) and Mr
D H R Killick. The committee sets the remuneration and benefits of the chairman and the executive directors. The committee
is also responsible for long term incentive arrangements, if any, for key senior executives in Indonesia.
The committee does not use independent consultants but takes into consideration external guidance, including the annual
publication by Deloitte LLP regarding directors’ remuneration in smaller companies. The committee also takes account of the
views of the chairman of the company. The chairman plays no part in the discussion of his own remuneration.
Service contracts of directors standing for re-election
Mr Robinow, Mr Blackett and Mr Oakley are proposed for re-election at the forthcoming annual general meeting. Mr Robinow
and Mr Blackett each have a contract for services to the company which is terminable at will by either party. Mr Robinow’s
reappointment is subject to annual review and the continuation of his appointment depends upon satisfactory performance and
annual re-election at annual general meetings. Continuation of Mr Blackett’s appointment depends upon satisfactory
performance and re-election at annual general meetings in accordance with the articles of association of the company.
Mr Oakley has two service agreements whereby his working time and remuneration are shared between two employing
companies to reflect the division of his responsibilities between different parts of the group. Each contract may be terminated
by either party by giving notice to the other party of not less than six months. At 31 December 2014, the unexpired term under
each contract remained as six months.
Statement of voting at general meeting
At the AGM held on 10 June 2014, votes lodged by proxy in respect of the directors’ remuneration were as follows:
Votes Percentage Votes Percentage Total Votes
for for against against votes cast withheld
Voting on remuneration report 23,758,038 99.999 158 0.001 23,758,196 –
Voting on remuneration policy 23,757,599 99.999 227 0.001 23,758,196 370
The company pays due attention to voting outcomes. Where there are substantial votes against resolutions in relation to
directors’ remuneration, the reasons for any such vote will be sought, and any actions in response will be detailed in the next
directors’ remuneration report.
Policy Report
The information provided in this part of the directors’ remuneration report is not subject to audit.
Commencement and transition
The revised remuneration policy detailed below is subject to approval at the company’s 2015 AGM on 11 June 2015 and, if
approved, will take effect immediately thereafter. The proposed policy will not change the policy adopted in setting the current
remuneration of the directors.
Future policy tables
The table below provides a summary of the key components that it will in future be the policy of the company to provide in the
remuneration package of each executive director. It is not the policy of the company to provide for possible recovery after
payment of directors’ remuneration except under the proposed R.E.A. Holdings 2015 long term incentive plan, details of which
will be set out in the notice convening an extraordinary general meeting to follow the annual general meeting.
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R.E.A. Holdings plc Annual Report and Accounts 2014
Purpose
Operation
Opportunity
Applicable performance
measures
Executive directors
Salary and
fees
To provide a competitive
level of fixed remuneration
aligned to market practice
for comparable
organisations, reflecting the
demands, seniority and
location of the position and
the expected contribution
to achievement of the
company’s strategic
objectives
Taxable
benefits
To attract, motivate, retain
and reward fairly individuals
of suitable calibre
Annual
bonus
To incentivise performance
over a 12 month period,
based on achievements
linked to the company’s
strategic objectives
Reviewed annually with
annual increases effective
from 1 January by
reference to: the rate of
inflation, specific
responsibilities and
location of the executive,
current market rates for
comparable organisations,
rates for senior employees
and staff across the
operations, and allowing
for differences in
remuneration applicable to
different geographical
locations
Company car; and, where
relevant, other benefits
customarily provided to
equivalent senior
management in their
country of residence
Annual review of
performance measured
against prior year progress
in corporate development,
both commercial and
financial, and including
objectives relating to
sustainability and
governance
Within the second or third
quartile for similar sized
companies
None
None
The cost of providing the
appropriate benefits,
subject to regular review
to ensure that such costs
are competitive
Up to a maximum of 50
per cent of annual base
salary
Long term
incentives
To provide incentives, linked
to ordinary shares, with a
view to participation by the
director over the long term
in the value that a director
helps to create for the
group
The grant of rights to
acquire shares or to
receive cash payments
vesting by reference to the
achievement over a
defined period of certain
key performance targets
Cumulative unvested
awards, measured at face
value on dates of grant,
limited to 150 per cent of
prevailing annual base
salary (200 per cent in
exceptional
circumstances)
A range of objectives for the
respective director, reflecting
specific goals for the
relevant year, with weighting
assessed annually on a
discretionary basis
depending upon the
dominant influences during
the year to which a bonus
relates
Total shareholder return,
cost per tonne of crude
palm oil produced, and the
annual extension planting
rate achieved in
proportions considered at
the remuneration
committee’s discretion
appropriate to the
company’s objectives at the
time of making any award
Pensions
Compliance with prevailing
legislation
Compliance with prevailing
legislation
Compliance with
prevailing legislation
None
R.E.A. Holdings plc Annual Report and Accounts 2014
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Governance
Directors’ remuneration report
continued
The table below provides a summary of each of the components that it will in future be the policy of the company to provide
in the remuneration package of each non-executive director.
Purpose
Operation
Non-executive directors
Fees
To attract and retain
individuals with suitable
knowledge and experience
to serve as directors of a
listed UK company
engaged in the plantation
business in Indonesia
Fees for
additional
duties
An additional flat fee in
each year in respect of
membership of certain
committees and additional
fees in respect of particular
services performed
Taxable
benefits
Continuance of previously
agreed arrangements
Determined by the board
within the limits set by the
articles of association and
by reference to
comparable organisations
and to the time
commitment expected;
reviewed annually
Determined by the board
having regard to the time
commitment expected and
with no director taking part
in the determination of
such additional
remuneration in respect of
himself; reviewed annually
The provision of private
medical insurance, subject
to regular review to ensure
that the cost is competitive
The policies on remuneration set out above in respect of executive directors are applied generally to the senior management
and executives of the group but adjusted appropriately to reflect the position, role and location of an individual. Remuneration
of other employees, almost all of whom are based in Indonesia, is based on local and industry benchmarks for basic salaries
and benefits, subject as a minimum to an annual inflationary adjustment, and with additional performance incentives as and
where this is appropriate to the nature of the role.
Where any arrangements have been agreed with a director within the existing policies on remuneration, such arrangements
shall be deemed to be arrangements falling within the new policies on remuneration set out above.
Approach to recruitment remuneration
In setting the remuneration package for a newly appointed executive director, the committee will apply the policy as set out
above. Base salary and bonuses, if any, will be set at levels appropriate to the role and the experience of the director being
appointed and, together with any benefits to be included in the remuneration package, will also take account of the
geographical location in which the executive is to be based. The maximum variable incentive which may be awarded by way
of annual bonus will be 50 per cent of the annual base salary and by way of long term incentive will be 150 per cent of annual
base salary, except in exceptional circumstances when the maximum long term incentive would be 200 per cent of annual base
salary.
In instances where a new executive is to be domiciled outside the United Kingdom, the company may provide certain relocation
benefits to be determined as appropriate on a case by case basis taking account of the specific circumstances and costs
associated with such relocation.
66
R.E.A. Holdings plc Annual Report and Accounts 2014
Directors’ service agreements and letters of appointment
The company’s policy on directors’ service contracts is that contracts should have a notice period of not more than one year and
a maximum termination payment not exceeding one year’s salary. No director has a service contract that is not fully compliant
with this policy.
Mr Oakley’s service arrangements are set out under “Service contracts of director standing for re-election” above.
Mr Parry’s service contract may be terminated by either party by giving notice to the other party of not less than three months.
At 31 December 2014, the unexpired term under Mr Parry’s contract was three months.
Contracts for the services of non-executive directors may be terminated at the will of either party, with fees payable only to the
extent accrued to the date of termination. Continuation of the appointment of each non-executive director depends upon
satisfactory performance and re-election at annual general meetings in accordance with the articles of association of the
company and the provisions of the UK Corporate Governance Code.
Illustration of application of remuneration policy
The charts below provide estimates of the potential remuneration receivable pursuant to the remuneration policy by each
executive director, and the potential split of such remuneration between its different components (being the fixed component,
the annual variable component and the long term variable component) under three different performance scenarios: minimum,
in line with expectations and maximum. The long term variable component in respect of 2015 will be nil.
J C Oakley: managing director M A Parry: regional director
£’000
600
500
400
300
200
100
0
530.5
471.5
£’000
600
500
353.7
25%
33%
400
100%
75%
67%
300
200
100
0
403.8
454.3
302.8
25%
33%
100%
75%
67%
Minimum
remuneration
receivable
In line with
expectations
Maximum
remuneration
receivable
Minimum
remuneration
receivable
In line with
expectations
Maximum
remuneration
receivable
Fixed pay Annual bonus
The figures reflected in the chart above have been calculated against the policies that were applicable throughout 2014 and on
the basis of remuneration paid or payable in respect of 2014..
Payment for loss of office
It is not company policy to include provisions in directors’ service contracts for compensation for early termination beyond
providing for an entitlement to a payment in lieu of notice if due notice is not given.
The company may cover the reasonable cost of repatriation of any expatriate executive director and the director’s spouse in the
event of termination of appointment, other than for reasons of misconduct, and provided that the move back to the director’s
home country takes place within a reasonable period of such termination.
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R.E.A. Holdings plc Annual Report and Accounts 2014
67
Governance
Directors’ remuneration report
continued
Consideration of employment conditions elsewhere in the company
In setting the remuneration of executive directors, regard will be had to the levels of remuneration of expatriate employees
overseas and to the increments granted to employees operating in the same location as the relevant director. Employee views
are not specifically sought in determining this policy. Employee salaries will normally be subject to the same inflationary
adjustment as the salaries of executive directors in their respective locations.
Shareholder views
Shareholders are not specifically consulted on the remuneration policy of the company. Shareholders who have expressed
views on remuneration have supported the company’s policies and the application of those policies to date. Were a significant
shareholder to express a particular concern regarding any aspect of the policy, the views expressed would be carefully weighed.
Approved by the board on 23 April 2015 and
signed on behalf of the board by
RICHARD M ROBINOW
Chairman
68
R.E.A. Holdings plc Annual Report and Accounts 2014
Responsibility statement
To the best of the knowledge of each of the directors:
•
•
•
the financial statements, prepared in accordance with
the International Financial Reporting Standards, give
a true and fair view of the assets, liabilities, financial
position and profit or loss of the company and the
undertakings included in the consolidation taken as
a whole;
the “Strategic report” section of this annual report
includes 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; and
the annual report and financial statements, taken as a
whole, are fair, balanced and understandable and provide
the information necessary for shareholders to assess the
company’s performance, business model and strategy.
By order of the board
R.E.A. SERVICES LIMITED
23 April 2015
Governance
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 (“IFRS”) as
adopted by the European Union (the “EU”) and Article 4 of the
IAS Regulation and have also elected from 2013 to prepare
the parent company financial statements in accordance with
IFRSs as adopted by the EU. 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
as at the end of and for the period covered by the financial
statements.
In preparing these financial statements, the directors are
required to:
•
•
•
•
properly select and apply accounting policies;
present information, including accounting policies, in a
manner that provides relevant, reliable, comparable and
understandable information;
provide additional disclosure when compliance with the
specific requirements in IFRS 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
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.
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R.E.A. Holdings plc Annual Report and Accounts 2014
69
Governance
Independent auditor’s report to
the members of R.E.A. Holdings plc
Opinion on financial statements of R.E.A. Holdings plc
(the “Company” and together with its subsidiaries the
“Group”)
In our opinion:
•
•
•
•
the financial statements give a true and fair view of the
state of the Group’s and of the Company’s affairs as at
31 December 2014 and of the Group’s profit for the
year then ended;
the Group financial statements have been properly
prepared in accordance with International Financial
Reporting Standards (IFRSs) as adopted by the
European Union;
the Company financial statements have been properly
prepared in accordance with IFRSs as adopted by the
European Union and as applied in accordance with the
provisions of the Companies Act 2006; and
the financial statements have been prepared in
accordance with the requirements of the Companies
Act 2006 and, as regards the group financial
statements, Article 4 of the IAS Regulation.
The financial statements comprise the Consolidated Income
Statement, the Consolidated and Company Balance Sheets,
the Consolidated Statement of Comprehensive Income, the
Consolidated and Company Cash Flow Statements, the
Consolidated and Company Statements of Changes in Equity
and the related notes 1 to 43 to the Group financial
statements and notes (i) to (xvii) to the Company financial
Risk
Valuation of biological assets
Under IFRS, biological assets are required to be fair valued in
accordance with IAS 41 at each financial reporting date. This
valuation is performed using a discounted cash flow model
which involves a number of significant assumptions with
changes in fair value being recorded in the income statement.
The principal assumptions within management’s model remain:
number of forecasted tonnes of Fresh Fruit Bunches (“FFB”)
harvested; the profit margin per tonne of FFB; and the
discount rate (for mature and juvenile estates). Biological
assets are valued at $310m (2013: $288m) and are
discussed in note 13 to the financial statements, as well as in
the accounting policy note and note 1, “Critical accounting
judgements and key sources of estimation uncertainty.”
statements. The financial reporting framework that has been
applied in their preparation is applicable law and IFRSs as
adopted by the European Union and, as regards the parent
company financial statements, as applied in accordance with
the provisions of the Companies Act 2006.
Going concern
As required by the Listing Rules we have reviewed the
directors’ statement on page 69 that the Group is a going
concern. We confirm that:
•
•
we have concluded that the directors’ use of the going
concern basis of accounting in the preparation of the
financial statements is appropriate; and
we have not identified any material uncertainties that
may cast significant doubt on the Group’s ability to
continue as a going concern.
However, because not all future events or conditions can be
predicted, this statement is not a guarantee as to the Group’s
ability to continue as a going concern.
Our assessment of risks of material misstatement
The assessed risks of material misstatement described below
are those that had the greatest effect on our audit strategy,
the allocation of resources in the audit and directing the
efforts of the engagement team.
How the scope of our audit responded to the risk
We have re-performed management’s calculations to check
mathematical accuracy, and agreed inputs in the model to
supporting evidence. We have recalculated the forecasted
number of tonnes of FFB that are expected to be harvested,
by applying the output per hectare based on its maturity to the
number of hectares. The profit margin per tonne is arrived at
by applying extraction rates to existing crops as well as the
forecasted price of Crude Palm Oil (“CPO”). We have checked
the accuracy of the forecasted price of CPO calculation and
agreed the prices to CIF Rotterdam. We have also compared
the extraction rate to other market participants. To determine
the profit margin, forecasted variable and fixed costs are
deducted from the calculated price of a FFB. We therefore
performed a year-on-year analysis of the forecasted variable
and fixed costs. We have compared the discount rates used
by management to those used by other market participants.
70
R.E.A. Holdings plc Annual Report and Accounts 2014
Taxation matters arising in Indonesia
Tax legislation in Indonesia can be complex and issues can
take a significant number of years to resolve. In particular, the
Group has released a provision of $8.4m relating to a
successful appeal to the Indonesian tax authorities relating to
a 2008 case. Furthermore, significant deferred tax balances
(assets of $8.9m, liabilities of $77.2m (2013: assets of $9.5m,
liabilities of $73.4m)) arise in the consolidated financial
statements because a number of items are carried at fair
value, which may result in a different valuation to that used for
tax purposes, giving rise to judgements in how much deferred
tax should be recognised. Notes 1 and 9 contain more
disclosure relating to the status of tax issues.
We utilised tax experts in the UK in order to understand the
potential impacts of Indonesian tax regulations on the group’s
operations. This included reviewing the status of open queries
with the Indonesian tax authorities and tax advice obtained by
the Group’s external tax advisors in Indonesia. We also
assessed the tax disclosures for consistency with the status of
open queries. We also challenged management’s assumptions
in determining deferred tax balances by independently re-
computing temporary differences on those assets and
liabilities which were expected to give rise to significant
deferred tax, as well as reviewing forecasts to assess the
recoverability of the assets.
The assessment of the carrying value of Indonesian stone and coal investments
The carrying value of these loans relies on certain
assumptions and estimates (such as the discount rate, the
timing of commencement of future operations, and expected
sale prices) in relation to the likelihood of the underlying
investments generating suitable future profits in order to repay
the loans made by the Group. At 31 December 2014 the
carrying value of the loans was $31.3m (2013: $30.4m) and
further information is provided in note 16 to the financial
statements, as well as in the accounting policy note and note
1, “Critical accounting judgements and key sources of
estimation uncertainty.”
Accounting for cross currency swaps
The accounting used to hedge foreign currency exposures
arising on the principal and interest elements of loans used to
finance plantation operations in Indonesia is complex. This is
because financial instruments that are measured at fair value
are done so at ‘exit price’, which requires consideration of
counterparty credit and own default risk when valuing
derivative financial instruments. The fair value of the swap was
a liability of $9.6m at 31 December 2014 compared to a
liability of $7.9m in 2013. Further information is contained in
notes 21 and 26 to the financial statements.
We assessed the assumptions and estimates used to
generate discounted cash flow models which support the
carrying value of the underlying investments which are held by
the debtors who will repay the loans. This included agreeing
the volume of deposits and expected extraction rates to
surveyors’ reports, reviewing forecast prices and underlying
contracts, using our knowledge of expected timing of future
production and evaluating the sensitivity of the assumptions.
We also challenged the appropriateness of the discount rate
used in the models, by looking at the cost of the Group’s
capital and other comparable companies, as well as checking
the numerical accuracy of the calculations. Finally, we
assessed the ability of the company that provided the
guarantee to repay the outstanding amounts.
We involved financial instruments specialists in the team to
help assess the appropriateness of the accounting treatment
adopted by management in line with accounting standards,
including the valuation of the swaps, particularly in the context
of adjustments for credit risk which we compared with our
independent calculations based on observable market data. In
addition, we have independently revalued the swap.
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R.E.A. Holdings plc Annual Report and Accounts 2014
71
Governance
Independent auditor’s report to
the members of R.E.A. Holdings plc continued
Last year our report included two other risks which are not
included in our report this year, relating to villager disputes
and revenue recognition. Material villager disputes disrupted
operations during 2012 and the first half of 2013. No such
issues occurred during 2014, nor are we aware of any
disputes arising since the balance sheet date; accordingly,
this is not considered a significant risk for the 31 December
2014 audit.
Revenue recognition was identified by us at the planning
stage as being a significant risk due to the potential for
material bill and hold sales and the potential for derivatives to
exist where there are future contracted sales. As the total bill
and hold sales at 31 December 2014 were not material, and
there were no contractual agreements giving rise to
derivatives in existence at that date, revenue recognition was
not considered to be a risk which had the greatest effect on
our audit strategy, the allocation of resources in the audit and
directing the efforts of the engagement team.
The description of risks above should be read in conjunction
with the significant issues considered by the Audit Committee
discussed on pages 55 to 57.
Our audit procedures relating to these matters were designed
in the context of our audit of the financial statements as a
whole, and not to express an opinion on individual accounts or
disclosures. Our opinion on the financial statements is not
modified with respect to any of the risks described above, and
we do not express an opinion on these individual matters.
Our application of materiality
We define materiality as the magnitude of misstatement in
the financial statements that makes it probable that the
economic decisions of a reasonably knowledgeable person
would be changed or influenced. We use materiality both in
planning the scope of our audit work and in evaluating the
results of our work.
In determining materiality, we have had regard to a range of
financial metrics that we consider to be relevant. We
concluded that, using an average of the last five years’ profit
before tax to be most relevant, as this removes short term
fluctuations in the price of crude palm oil, exchange rate
movements, and any one off adverse effects caused by
villager disruptions.
We determined materiality for the group to be $3.1m (2013:
$3m), which is below 7.5% (2013: below 7%) of normalised
pre-tax profit, and below 1% (2013: below 1%) of equity.
We agreed with the Audit Committee that we would report to
the Committee all audit differences in excess of $62,000
(2013: $60,000), as well as differences below that threshold
that, in our view, warranted reporting on qualitative grounds.
We also report to the Audit Committee on disclosure matters
that we identified when assessing the overall presentation of
the financial statements.
An overview of the scope of our audit
Our Group audit was scoped by obtaining an understanding
of the Group and its environment, including group-wide
controls, and assessing the risks of material misstatement at
the group level. Based on that assessment, we focused our
group audit scope primarily on the audit work at 13 (2013:
13) active legal entities, 12 (2013: 12) of these were subject
to a full audit, whilst the remaining one was subject to
specified audit procedures where the extent of our testing
was based on our assessment of the risks of material
misstatement and of the materiality of the Group’s operations
at this active legal entity. These 13 active legal entities
represent the principal business activities and account for
96% (2013: 97%) of the Group’s net assets,100% (2013:
100%) of the Group’s revenue and 100% (2013: 98%) of
the Group’s profit before tax. They were also selected to
provide an appropriate basis for undertaking audit work to
address the risks of material misstatement identified above.
Our audit work at the 13 active legal entities was executed at
levels of materiality applicable to each individual entity which
were lower than group materiality. Component materiality
levels ranged from $1.55m to $2.9m (2013: $1.5m to
$2.85m).
At the parent entity level we also tested the consolidation
process and carried out analytical procedures to confirm our
conclusion that there were no significant risks of material
misstatement of the aggregated financial information of the
remaining components not subject to audit or audit of
specified account balances.
The group audit team continued to follow a programme of
planned visits that has been designed so that the Senior
Statutory Auditor and a senior member of the group audit
team visit the Group’s operations and component auditors in
Indonesia annually and visit the plantation estates at least
once every three years, with the most recent visit to the
plantation being in 2014.
Opinion on other matters prescribed by the Companies
Act 2006
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
the information given in the Strategic Report and the
Directors’ Report for the financial year for which the
financial statements are prepared is consistent with the
financial statements.
72
R.E.A. Holdings plc Annual Report and Accounts 2014
Matters on which we are required to report by exception
Respective responsibilities of directors and auditor
Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to
you if, in our opinion:
•
•
•
we have not received all the information and
explanations we require for our audit; or
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 are not in
agreement with the accounting records and returns.
We have nothing to report in respect of these matters.
As explained more fully in the Directors’ Responsibilities
Statement, the directors are responsible for the preparation of
the 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 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. We
also comply with International Standard on Quality Control 1
(UK and Ireland). Our audit methodology and tools aim to
ensure that our quality control procedures are effective,
understood and applied. Our quality controls and systems
include our dedicated professional standards review team and
independent partner reviews.
Directors’ remuneration
Under the Companies Act 2006 we are also required to
report if in our opinion certain disclosures of directors’
remuneration have not been made or the part of the
Directors’ Remuneration Report to be audited is not in
agreement with the accounting records and returns. We have
nothing to report arising from these matters.
Corporate Governance Statement
Under the Listing Rules we are also required to review the
part of the Corporate Governance Statement relating to the
company’s compliance with ten provisions of the UK
Corporate Governance Code. We have nothing to report
arising from our review.
Our duty to read other information in the Annual Report
Under International Standards on Auditing (UK and Ireland),
we are required to report to you if, in our opinion, information
in the annual report is:
•
•
•
materially inconsistent with the information in the
audited financial statements; or
apparently materially incorrect based on, or materially
inconsistent with, our knowledge of the Group acquired
in the course of performing our audit; or
otherwise misleading.
In particular, we are required to consider whether we have
identified any inconsistencies between our knowledge
acquired during the audit and the directors’ statement that
they consider the annual report is fair, balanced and
understandable and whether the annual report appropriately
discloses those matters that we communicated to the audit
committee which we consider should have been disclosed.
We confirm that we have not identified any such
inconsistencies or misleading statements.
This report is made solely to the company’s members, as a
body, in accordance with Chapter 3 of Part 16 of the
Companies Act 2006. Our audit work has been undertaken
so that we might state to the company’s members those
matters we are required to state to them in an auditor’s report
and for no other purpose. To the fullest extent permitted by
law, we do not accept or assume responsibility to anyone
other than the company and the company’s members as a
body, for our audit work, for this report, or for the opinions we
have formed.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and
disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free
from material misstatement, whether caused by fraud or error.
This includes an assessment of: whether the accounting
policies are appropriate to the group’s and the parent
company’s circumstances and have been consistently applied
and adequately disclosed; the reasonableness of significant
accounting estimates made by the directors; and the overall
presentation of the financial statements. In addition, we read
all the financial and non-financial information in the annual
report to identify material inconsistencies with the audited
financial statements and to identify any information that is
apparently materially incorrect based on, or materially
inconsistent with, the knowledge acquired by us in the course
of performing the audit. If we become aware of any apparent
material misstatements or inconsistencies we consider the
implications for our report.
MARK MCILQUHAM ACA (Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London, United Kingdom
23 April 2015
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R.E.A. Holdings plc Annual Report and Accounts 2014
73
Group financial statements
Consolidated income statement
for the year ended 31 December 2014
2014 2013
Note $’000 $’000
Revenue 2 125,865 110,547
Net (loss) / gain arising from changes in fair value of agricultural produce inventory 4 (1,692) 548
Cost of sales (77,914) (69,901)
Gross profit 46,259 41,194
Net gain arising from changes in fair value of biological assets 13 3,571 7,133
Other operating income 2 2 –
Distribution costs (1,325) (1,290)
Administrative expenses 5 (16,391) (18,959)
Operating profit 32,116 28,078
Investment revenues 2, 7 398 467
Finance costs 8 (8,770) (3,329)
Profit before tax 5 23,744 25,216
Tax 9 (1,763) (12,544)
Profit for the year 21,981 12,672
Attributable to:
Ordinary shareholders 14,153 5,457
Preference shareholders 10 8,140 7,291
Non-controlling interests 34 (312) (76)
21,981 12,672
Earnings per 25p ordinary share 11 40.3 cents 15.8 cents
All operations for both years are continuing
74
R.E.A. Holdings plc Annual Report and Accounts 2014
Group financial statements
Consolidated balance sheet
as at 31 December 2014
2014 2013
Note $’000 $’000
Non-current assets
Goodwill 12 12,578 12,578
Biological assets 13 310,175 288,180
Property, plant and equipment 14 151,172 146,998
Prepaid operating lease rentals 15 33,879 30,454
Indonesian stone and coal interests 16 31,334 30,427
Deferred tax assets 27 8,909 9,515
Non-current receivables 2,749 2,250
Total non-current assets 550,796 520,402
Current assets
Inventories 18 16,180 17,345
Trade and other receivables 19 25,487 28,625
Cash and cash equivalents 20 16,224 34,574
Total current assets 57,891 80,544
Total assets 608,687 600,946
Current liabilities
Trade and other payables 29 (17,818) (16,908)
Current tax liabilities (2,581) (2,934)
Bank loans 22 (40,326) (35,033)
Sterling notes 23 (14,693) –
US dollar notes 24 – (5,964)
Hedging instruments 26 (9,590) –
Other loans and payables 28 (1,238) (940)
Total current liabilities (86,246) (61,779)
Non-current liabilities
Bank loans 22 (60,638) (62,281)
Sterling notes 23 (37,713) (55,708)
US dollar notes 24 (33,472) (33,468)
Preference shares issued by a subsidiary 25 – (38)
Hedging instruments 26 – (7,892)
Deferred tax liabilities 27 (77,191) (73,404)
Other loans and payables 28 (6,802) (6,935)
Total non-current liabilities (215,816) (239,726)
Total liabilities (302,062) (301,505)
Net assets 306,625 299,441
Equity
Share capital 30 112,974 101,574
Share premium account 31 23,366 25,161
Translation reserve 32 (44,324) (32,549)
Retained earnings 33 212,928 203,225
304,944 297,411
Non-controlling interests 34 1,681 2,030
Total equity 306,625 299,441
Approved by the board on 23 April 2015 and signed on behalf of the board.
RICHARD M ROBINOW
Chairman
R.E.A. Holdings plc Annual Report and Accounts 2014
75
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Group financial statements
Consolidated statement of comprehensive income
for the year ended 31 December 2014
2014 2013
Note $’000 $’000
Profit for the year 21,981 12,672
Other comprehensive income
Items that may be reclassified to profit or loss:
Actuarial losses (212) (171)
Deferred tax on actuarial losses 27 42 48
37 (170) (123)
Items that will not be reclassified to profit and loss:
Exchange differences on translation of foreign operations 32 (8,429) (12,341)
Exchange differences on deferred tax 27 (3,383) (15,257)
(11,982) (27,721)
Total comprehensive income for the year 9,999 (15,049)
Attributable to:
Ordinary shareholders 2,171 (22,416)
Preference shareholders 8,140 7,291
Non-controlling interests (312) 76
9,999 (15,049)
Consolidated statement of changes in equity
for the year ended 31 December 2014
Share Share Translation Retained Subtotal Non- Total
capital premium reserve earnings controlling equity
interests
(note 30) (note 31) (note 32) (note 33) (note 34)
$’000 $’000 $’000 $’000 $’000 $’000 $’000
At 1 January 2013 97,565 18,680 (4,854) 201,630 313,021 2,009 315,030
Total comprehensive income – – (27,695) 12,625 (15,070) 21 (15,049)
Correction to share premium – 7 – – 7 – 7
Issue of new ordinary shares (cash) 641 9,878 – – 10,519 – 10,519
Issue of new preference shares (scrip) 3,404 (3,404) – – – – –
Purchase of treasury shares (36) – – – (36) – (36)
Dividends to preference shareholders – – – (7,291) (7,291) – (7,291)
Dividends to ordinary shareholders – – – (3,739) (3,739) – (3,739)
At 31 December 2013 101,574 25,161 (32,549) 203,225 297,411 2,030 299,441
Total comprehensive income – – (11,775) 22,123 10,348 (349) 9,999
Issue of new preference shares (cash) 8,946 1,618 – – 10,564 – 10,564
Issue of new preference shares (scrip) 3,420 (3,420) – – – – –
Purchase of treasury shares (966) 7 – – (959) – (959)
Dividends to preference shareholders – – – (8,140) (8,140) – (8,140)
Dividends to ordinary shareholders – – – (4,280) (4,280) – (4,280)
At 31 December 2014 112,974 23,366 (44,324) 212,928 304,944 1,681 306,625
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R.E.A. Holdings plc Annual Report and Accounts 2014
Group financial statements
Consolidated cash flow statement
for the year ended 31 December 2014
2014 2013
Note $’000 $’000
Net cash from operating activities 35 24,392 764
Investing activities
Interest received 398 467
Proceeds from disposal of property, plant and equipment – 79
Purchases of property, plant and equipment (14,892) (12,026)
Expenditure on biological assets * (18,522) (16,794)
Expenditure on prepaid operating lease rentals (4,261) (4,281)
Investment in Indonesian stone and coal interests (897) (947)
Net cash used in investing activities (38,174) (33,502)
Financing activities
Preference dividends paid (8,140) (7,291)
Ordinary dividends paid (4,280) (3,739)
Repayment of borrowings (30,715) (5,000)
Proceeds of issue of ordinary shares – 10,519
Purchase of treasury shares, net of sales (959) (36)
Proceeds of issue of preference shares 10,564 –
Redemption of US dollar notes (6,310) (9,678)
Payment to close out hedging contract (41) (1,862)
Net sale and repurchase of US dollar notes – 1,238
New bank borrowings drawn 35,419 57,600
Net cash (used in) / from financing activities (4,462) 41,751
Cash and cash equivalents
Net (decrease) / increase in cash and cash equivalents 36 (18,244) 9,013
Cash and cash equivalents at beginning of year 34,574 26,393
Effect of exchange rate changes (106) (832)
Cash and cash equivalents at end of year 20 16,224 34,574
* Net of capitalised depreciation and amortisation (see notes 14 and 15)
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77
Group financial statements
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
Strategic report.
Basis of accounting
The consolidated financial statements set out on pages 74
to 109 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.
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
In the current year the group has applied new IFRSs, a
number of amendments to IFRSs and a new interpretation
(IFRIC) issued by the International Accounting Standards
Board (IASB) that are mandatorily effective for an
accounting period beginning on 1 January 2014, as follows:
•
•
•
•
•
•
•
IFRS 10: Consolidated financial statements
IFRS 12: Disclosure of interests in other entities
IAS 27 (amendments): Investment entities
IAS 32 (amendments): Offsetting financial assets and
financial liabilities
IAS 36 (amendments): Recoverable amount
disclosures for non-financial assets
IAS 39 (amendments): Novation of derivatives and
continuation of hedge accounting
IFRIC 21: Levies
IFRS 10 Consolidated financial statements amended the
definition of control that an entity exercises over an
investee. The directors considered carefully the application
of this new standard to all the company’s investments and
concluded that there was no requirement to change the
identity of any investee company which the company
78
R.E.A. Holdings plc Annual Report and Accounts 2014
includes in its consolidated financial statements. The
adoption of the other new and amended standards and the
interpretation set out above has also not had any material
impact on the disclosures or amounts reported in these
financial statements.
At the date of authorisation of these financial statements,
the standards and interpretations which were in issue but
not yet effective and, in certain cases, had not yet been
adopted by the EU (and therefore have not been applied in
these financial statements), were as set out below together
with their effective dates of implementation:
IFRS 9: Financial instruments 1 January 2018
IFRS 14: Regulatory deferral accounts 1 January 2016
IFRS 15: Revenue from contracts with
customers 1 January 2017
IFRS 11(amendments): Accounting for
acquisitions of interests in joint
operations 1 January 2016
IAS 16 and IAS 38 (amendments):
Clarification of acceptable methods of
depreciation and amortisation 1 January 2016
IAS 16 and IAS 41 (amendments):
Bearer plants 1 January 2016
IAS 19 (amendments): Defined benefit
plans: employee contributions 1 July 2014
IAS 27 (amendments): Equity method in
separate financial statements 1 January 2016
IFRS 10 and IAS 28 (amendments):
Sale or contribution of assets between
an investor and its associate or
joint venture 1 January 2016
Annual improvements to IFRSs:
2010-2012 cycle 1 July 2014
2011-2013 cycle 1 July 2014
2012-2014 cycle 1 January 2016
IFRS 10, IFRS 12 and IAS 28 (amendments):
Investment entities: applying the
consolidation exception 1 January 2016
The effective date of IFRS 9 was deferred by the IASB and
it now has mandatory application for accounting periods
beginning on or after 1 January 2018. This standard
implements the first two phases 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 and the requirements relating to hedge accounting.
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 third phase
of the IASB’s project, covering impairment, 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,
which is not expected until the second half of 2015.
IAS 41 Agriculture currently requires all biological assets
related to agricultural activity to be measured at fair value
less costs to sell. This is based on the principle that the
biological transformation that these assets undergo during
their lifespan is best reflected by fair value measurement.
However, there is a subset of biological assets, known as
bearer plants, which are used solely to grow produce over
several periods, including oil palms. At the end of their
productive lives they are usually scrapped. Once a bearer
plant is mature, apart from bearing produce, its biological
transformation is no longer significant in generating future
economic benefits. The only significant future economic
benefits it generates come from the agricultural produce
that it creates.
The IASB has decided that bearer plants should be
accounted for in the same way as property, plant and
equipment in IAS 16 Property, plant and equipment,
because their operation is similar to that of manufacturing.
Consequently, IAS 16 and IAS 41 (amendments): Bearer
plants (issued on 30 June 2014) bring bearer plants within
the scope of IAS 16, instead of IAS 41. The produce
growing on bearer plants will remain within the scope of IAS
41.
The directors are considering the impact on the group’s
financial statements of these changes. On transition it is
probable that the directors will decide to adopt the values
under IAS 41 as the initial carrying value under IAS 16.
There will be a charge to consolidated income for
depreciation replacing the net gain or loss arising from
changes in the fair value of biological assets. The directors
are studying the most appropriate method of computing
such depreciation. These amendments to IAS 16 and IAS
41 have not been endorsed by the EU and will only become
applicable once that endorsement has occurred, which is
not expected until the second half of 2015.
The directors are also considering the impact of IFRS 15
Revenue from contracts with customers. The new standard
requires entities to recognise revenue on the transfer of
goods or services to customers in amounts that reflect the
consideration to which the company expects to be entitled
in exchange for those goods or services. The new standard
will also result in enhanced disclosures about revenue,
provide guidance for transactions that were not previously
addressed comprehensively (for example, service revenue
and contract modifications) and improve guidance for
multiple-element arrangements. The directors do not
consider that the adoption of IFRS 15 will result in any
change to the amount and timing of the group’s revenue, but
may require some additional disclosures.
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 (iii) 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 assets and liabilities recognised. The share
of total 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 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.
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.
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79
Group financial statements
Accounting policies (group)
continued
Revenue recognition
Revenue is measured at the fair value of the consideration
received or receivable in respect of goods and services
provided in the normal course of business, net of VAT and
other sales related taxes. Sales of goods are recognised
when the significant risks and rewards of ownership of the
goods are transferred to the buyer and include contracted
sales in respect of which the contracted goods are available
for collection by the buyer in the accounting period. Income
from services is accrued on a time basis by reference to the
rate of fee agreed 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
80
R.E.A. Holdings plc Annual Report and Accounts 2014
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.
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 are
recognised in the statement of comprehensive income; any
other increase or decrease in the provision 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 infrastructure, buildings and
plant and machinery). FFB transfer value is derived from the
average price of crude palm oil FOB Samarinda (itself based
on 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 commercial quantities of 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
R.E.A. Holdings plc Annual Report and Accounts 2014
81
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Group financial statements
Accounting policies (group)
continued
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 intangible assets excluding
goodwill
At each balance sheet date, the group reviews the carrying
amounts of its tangible and intangible assets to determine
whether there is any indication that any asset has suffered
an impairment loss. If any such indication exists, the
recoverable amount of the asset is estimated in order to
determine the extent of the impairment loss (if any). Where
the asset does not generate cash flows that are
independent from other assets, the group estimates the
recoverable amount of the cash-generating unit to which the
asset belongs. An intangible asset with an indefinite useful
life is tested for impairment annually and whenever there is
an indication that the asset may be impaired.
The recoverable amount of an asset (or cash-generating
unit) is the higher of fair value less costs to sell and value in
use. In assessing value in use, estimated future cash flows
are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of
the time value of money and those risks specific to the
asset (or cash-generating unit) for which the estimates of
future cash flows have not been adjusted. If the recoverable
amount of an asset (or cash-generating unit) is estimated to
be less than its carrying amount, the carrying amount of the
asset (or cash-generating unit) is reduced to its recoverable
amount. An impairment loss is recognised as an expense
immediately, unless the relevant asset is carried at a
revalued amount, in which case the impairment loss is
treated as a revaluation decrease.
Where, 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
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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.
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 de-recognition 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 stone and 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 stone and 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
Redeemable instruments being US dollar and sterling note
issues, bank borrowings and finance leases are classified in
accordance with the substance of the relative contractual
arrangements. Finance costs are charged to income on an
accruals basis, using the effective interest method, and
comprise, with respect to 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 with the
relative unamortised balance of costs treated as non-current
receivables.
Trade payables
All trade payables owed by the group are non-interest
bearing and are stated at their nominal value.
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 21. Derivatives
are initially recognised at fair value at the date of the
contract and remeasured to their fair value at the balance
sheet date. The resulting gain or loss is recognised
immediately in profit or loss, through finance costs (note 8),
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.
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.
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83
Group financial statements
Notes to the consolidated financial statements
1. Critical accounting judgements and key sources of
estimation uncertainty
Derivatives
In the application of the group’s accounting policies, which
are set out in “Accounting policies (group)” above, 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.
As described in note 21, the directors use their judgement
in selecting appropriate valuation techniques for financial
instruments not quoted in an active market. For derivative
financial instruments, assumptions are made based on
quoted market rates adjusted for the specific features of
the instruments.
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).
Taxes
The group is subject to taxes in various jurisdictions.
Significant judgement is required in estimating the group’s
tax liabilities (including liabilities to deferred tax) having
regard to the uncertainties relating to certain Indonesian
legislative provisions, the availability of tax losses, the future
periods in which timing differences are likely to reverse and
the final determination of liabilities in respect of disputed
tax items in Indonesia (see note 9).
Provisions
Provisions have been made in past years and adjusted in
the year under review against balances relating to the
group’s interests in stone and coal. Whilst the directors
have obtained geological advice in relation to reserves, the
inherent uncertainty of any assessment of future returns
from mining and recoverability of trading balances has
required the exercise of judgement in determining the
appropriateness of current carrying values.
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2. Revenue
2014 2013
$’000 $’000
Sales of goods 124,538 108,350
Revenue from services 1,327 2,197
125,865 110,547
Other operating income 2 –
Investment revenue 398 467
Total revenue 126,265 111,014
In 2014, three customers accounted for respectively 48 per cent, 15 per cent and 14 per cent of the group’s sales of
agricultural goods (2013: three customers, 59 per cent, 11 per cent and 8 per cent). As stated in note 21 “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 2014 amounted to 631,728 tonnes (2013: 578,785 tonnes). The fair value of the
crop of fresh fruit bunches was $87,647,000 (2013: $66,796,000), 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. The group operates in two segments: the cultivation of oil palms and stone
and coal operations. In 2014 and 2013, the latter did not meet the quantitative thresholds set out in IFRS 8 “Operating
segments” and, accordingly, no analyses are provided by business segment.
2014 2013
$’m $’m
Sales by geographical destination:
Indonesia 125.9 110.5
Rest of Asia – –
125.9 110.5
Carrying amount of net assets by geographical area of asset location:
UK, Continental Europe and Singapore 58.0 50.5
Indonesia 248.6 248.9
306.6 299.4
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).
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85
Group financial statements
Notes to the consolidated financial statements
continued
5. Profit before tax
2014 2013
$’000 $’000
Salient items charged/(credited) in arriving at profit before tax
Administrative expenses (see below) 16,391 18,959
Movement in inventories (at historic cost) (706) (593)
Operating lease rentals 412 623
Depreciation of property, plant and equipment 9,704 9,751
Amortisation of prepaid operating lease rentals 548 189
Administrative expenses
Net foreign exchange (gains) / losses (391) 56
Net charge for additional pension contributions (see note 37) 314 272
Loss / (gain) on disposal of fixed assets 484 (20)
Indonesian operations 13,794 16,575
Head office 5,587 5,522
19,788 22,405
Amount included as additions to biological assets (3,397) (3,446)
16,391 18,959
Amounts payable to the company’s auditor
The amount payable to Deloitte LLP for the audit of the company’s financial statements was $174,000 (2013: $157,000).
Amounts payable to Deloitte LLP for the audit of accounts of subsidiaries of the company pursuant to legislation were $21,000
(2013: $15,000).
Amounts payable to Deloitte LLP for other services were $6,000 (2013: $12,000) 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 tax administrative services.
Amounts payable to affiliates of Deloitte LLP for the audit of subsidiaries’ financial statements were $29,000 (2013: $30,000).
2014 2013
$’000 $’000
Earnings before interest, tax, depreciation and amortisation and net biological gain
Operating profit 32,116 28,078
Depreciation and amortisation 10,252 9,324
Net biological gain (3,571) (7,133)
38,797 30,269
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R.E.A. Holdings plc Annual Report and Accounts 2014
6. Staff costs, including directors
2014 2013
Number Number
Average number of employees (including executive directors):
Agricultural – permanent 5,909 5,333
Agricultural – temporary 3,545 2,991
Head office 11 9
9,465 8,333
$’000 $’000
Their aggregate remuneration comprised:
Wages and salaries 36,994 35,849
Social security costs 963 1,049
Pension costs 370 550
38,327 37,448
7. Investment revenues
2014 2013
$’000 $’000
Interest on bank deposits 398 251
Other interest income – 216
398 467
8. Finance costs
2014 2013
$’000 $’000
Interest on bank loans and overdrafts 4,869 5,497
Interest on US dollar notes 3,438 4,008
Interest on sterling notes 5,414 5,599
Change in value of sterling notes arising from exchange fluctuations (3,350) 1,064
Movements relating to derivative financial instruments 2,404 (2,974)
Change in value of loans arising from exchange fluctuations (354) (6,298)
Other finance charges (402) 293
12,019 7,189
Amount included as additions to biological assets (3,249) (3,860)
8,770 3,329
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 16.8 per cent (2013: 55.1 per cent); there is no directly related tax
relief.
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87
Group financial statements
Notes to the consolidated financial statements
continued
9. Tax
2014 2013
$’000 $’000
Current tax:
UK corporation tax – 399
Foreign tax 7,711 1,773
Prior year (7,000) –
Total current tax 711 2,172
Deferred tax:
Current year 2,063 8,040
Change in UK tax rate – 211
Prior year (1,011) 2,121
Total deferred tax 1,052 10,372
Total tax 1,763 12,544
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 (2013: 25 per cent) and for the United Kingdom, the taxation provision reflects a
corporation tax rate of 21.5 per cent (2013: 23.25 per cent) and a deferred tax rate of 20 per cent (2013: 20 per cent).
The tax charge for the year can be reconciled to the profit per the consolidated income statement as follows:
2014 2013
$’000 $’000
Profit before tax 23,744 25,216
Notional tax at the UK standard rate of 21.5 per cent (2013: 23.25 per cent) 5,105 5,863
Tax effect of the following items:
Expenses not deductible 1,476 962
Non taxable income (384) (37)
Overseas tax rates above UK standard rate 944 586
UK deferred tax lower than standard rate – 78
Overseas withholding taxes, net of relief 1,752 1,560
Tax credit on loss in overseas subsidiary not recognised 902 880
Deferred tax credit for underlying local tax loss (23) –
Tax losses in overseas subsidiaries time expired 496 317
Release of provisions following appeal to Jakarta Tax Court (8,418) –
Prior year adjustments (including change in rate of tax) (89) 2,332
Additional tax provisions 2 3
Tax expense at effective tax rate for the year 1,763 12,544
The release of earlier provisions of $8,418,000 relates to a disputed assessment with respect to mark-to-market losses
recorded in 2008 by a subsidiary on its cross currency interest rate swaps. These losses were disallowed by the tax authorities
following an audit, and the disputed tax was paid by the subsidiary. Pending the outcome of an appeal, the group had made full
provision against the recovery of the disputed tax. In May 2014 the Jakarta Tax Court found in favour of the subsidiary,
following which the disputed tax was refunded in full.
The tax authorities have the right to apply to the Supreme Court of Indonesia for a judicial review of the Tax Court decision.
This comprises an examination of the reasoning of the lower court judges, consideration of the consistency of the judgement
with the evidence presented and with the relevant law, and consideration of any new evidence submitted by either party which
could have a bearing on the matter. It is the normal practice of the tax authorities to file such an appeal in cases which have
been decided by the lower court in favour of the taxpayer. In February 2015, the subsidiary was notified that the tax authorities
filed an appeal for judicial review with the Supreme Court of Indonesia and the subsidiary filed its counter submission in March
2015 within the prescribed time limit.
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R.E.A. Holdings plc Annual Report and Accounts 2014
9. Tax - continued
The group’s tax advisers, who have acted on all aspects of the appeal stages, have advised the directors of the sound merits of
the subsidiary’s case and the directors have accordingly decided to release in full the provisions previously made. In addition, the
subsidiary is entitled, following the Tax Court decision, to interest of up to 48 per cent of the disputed tax. However, this interest
is being withheld pending the outcome of the review which is not expected for some considerable time, and has not been
recognised in these financial statements.
10. Dividends
2014 2013
$’000 $’000
Amounts recognised as distributions to equity holders:
Preference dividends of 9p per share 8,140 7,291
Ordinary dividends of 7.25p per share (2013: 7.0p per share) 4,280 3,739
12,420 11,030
An interim dividend of 4p per ordinary share in respect of the year ended 31 December 2014 was paid on 23 January 2015. In
accordance with IAS10 “Events after the reporting period”, this dividend, amounting in aggregate to $2,124,000, has not been
included in the 2014 financial statements.
11. Earnings per share
2014 2013
$’000 $’000
Earnings for the purpose of earnings per share * 14,153 5,457
* being net profit attributable to ordinary shareholders
’000 ’000
Weighted average number of ordinary shares for the purpose of earnings per share 35,085 34,494
12. Goodwill
2014 2013
$’000 $’000
Beginning of year 12,578 12,578
End of year 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 and has an indefinite life. 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 otherwise 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.
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89
Group financial statements
Notes to the consolidated financial statements
continued
13. Biological assets
2014 2013
$’000 $’000
Beginning of year 288,180 265,663
Additions to planted area and costs to maturity including finance costs (see note 8) 20,617 17,330
Transfers to property, plant and equipment (see note 14) (2,095) –
Transfers to non-current receivables – (1,942)
Transfers to current receivables (98) (4)
Net biological gain 3,571 7,133
End of year 310,175 288,180
Net biological gain comprises:
Fair value of crops harvested during the year (see note 2) (87,647) (66,796)
Gain arising from movement in fair value attributable to other physical changes 76,808 60,646
Gain arising from movement in fair value attributable to price changes 14,410 13,283
3,571 7,133
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”) and PT Sasana
Yudha Bhakti (“SYB”), 16.5 per cent in the case of PT Kutai Mitra Sejahtera ("KMS") and 18 per cent in the case of all other
group companies (2013: 15 per cent in the case of REA Kaltim and SYB and 18 per cent in the case of all other group
companies) and a standard unit margin of $60.9 per tonne of oil palm fresh fruit bunches (“FFB”) (2013: standard unit margin
of $58.0 per tonne of FFB).
The valuation of the group’s biological assets would have been reduced by $10,370,000 (2013: $15,370,000) if the crops
projected for the purposes of the valuation had been reduced by 5 per cent; by $9,030,000 (2013: $14,370,000) if the
discount rates assumed had been increased by 1 per cent and by $20,650,000 (2013: $26,530,000) if the assumed unit profit
margin per tonne of oil palm FFB had been reduced by $5.
Because substantially the entire business of the group consists of agricultural activities, the group’s financial risk management
strategies relating to agricultural activities are the same as its overall financial risk management strategies. These are detailed
in note 21. At 31 December 2014, the group had no outstanding forward sale contracts at fixed prices (2013: none).
At the balance sheet date, biological assets of $164 million (2013: $162 million) had been charged as security for bank loans
(see note 22) but there were otherwise no restrictions on titles to the biological assets (2013: none). Expenditure approved by
the directors for the development of immature areas in 2015 amounts to $26 million (2013: $15 million).
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R.E.A. Holdings plc Annual Report and Accounts 2014
14. Property, plant and equipment
Buildings Plant, Construction Total
and structures equipment in progress
and vehicles
$’000 $’000 $’000 $’000
Cost:
At 1 January 2013 75,639 66,569 34,012 176,220
Opening balance adjustment – (39) (237) (276)
Additions 2,421 1,830 7,776 12,027
Exchange differences – 5 – 5
Disposals – (515) – (515)
Transfers to / (from) construction in progress 4,194 29,494 (33,688) –
Transfers to non-current receivables (286) – – (286)
At 31 December 2013 81,968 97,344 7,863 187,175
Additions 673 3,995 8,129 12,797
Exchange differences (117) (9) – (126)
Disposals (407) (134) – (541)
Transfers from biological assets 2,095 – – 2,095
Transfers to / (from) construction in progress 184 3,236 (3,420) –
Transfers to current receivables – – (64) (64)
At 31 December 2014 84,396 104,432 12,508 201,336
Accumulated depreciation:
At 1 January 2013 8,982 21,628 – 30,610
Opening balance adjustment – (3) – (3)
Charge for year 3,271 6,747 – 10,018
Exchange differences – 8 – 8
Eliminated on disposals – (456) – (456)
At 31 December 2013 12,253 27,924 – 40,177
Charge for year 3,940 6,186 – 10,126
Exchange differences 135 (217) – (82)
Eliminated on disposals (37) (20) – (57)
At 31 December 2014 16,291 33,873 – 50,164
Carrying amount:
End of year 68,105 70,559 12,508 151,172
Beginning of year 69,715 69,420 7,863 146,998
The depreciation charge for the year includes $421,000 (2013: $267,000) 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 (2013: $nil).
At the balance sheet date, the group had entered into contractual commitments for the acquisition of property, plant and
equipment amounting to $3,873,000 (2013: $6,469,000).
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Group financial statements
Notes to the consolidated financial statements
continued
15. Prepaid operating lease rentals
2014 2013
$’000 $’000
Cost:
Beginning of year 33,063 28,782
Additions 4,261 4,281
Exchange differences (38) –
End of year 37,286 33,063
Accumulated amortisation:
Beginning of year 2,609 2,152
Exchange differences 100 –
Charge for year 698 457
End of year 3,407 2,609
Carrying amount:
End of year 33,879 30,454
Beginning of year 30,454 26,630
The amortisation charge for the year includes $150,000 (2013: $268,000) 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 2014, certificates of hak guna usaha (“HGU”) had been obtained in
respect of areas covering 70,584 hectares (2013: 70,584 hectares). A HGU is effectively a government lease entitling the
lessee to utilise the land leased for agricultural and related purposes. Retention of a HGU is subject to payment of annual land
taxes in accordance with prevailing tax regulations. HGUs are granted for an initial term of 30 years and are renewable on
expiry of such term.
16. Indonesian stone and coal interests
2014 2013
$’000 $’000
Stone company 14,100 14,100
Coal companies 20,234 19,327
Provision against loan to coal companies (3,000) (3,000)
End of year 31,334 30,427
Interest bearing loans have been made to two Indonesian companies that, directly and through a further Indonesian company,
own rights in respect of certain stone and coal 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. Under current regulations such rights cannot be exercised. 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. A guarantee has been executed by the stone concession company in respect of the amounts owed to the
group by the two coal concession companies due to uncertainty surrounding the recoverability of the coal loans given the
current weakness of coal prices.
The directors have carried out a recoverability assessment of the loans 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 an appropriate discount rate and, where applicable, taking into account
cross guarantees. No impairment charge has been considered necessary in the 2014 consolidated income statement (2013:
$nil).
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R.E.A. Holdings plc Annual Report and Accounts 2014
17. Subsidiaries
A list of the principal subsidiaries, including the name, country of incorporation and proportion of ownership is given in note (iii)
to the company’s individual financial statements.
18. Inventories
2014 2013
$’000 $’000
Agricultural produce 7,912 6,189
Engineering and other operating inventory 8,268 11,156
16,180 17,345
19. Trade and other receivables
2014 2013
$’000 $’000
Due from sale of goods 6,817 2,438
Prepayments and advance payments 6,962 5,613
Advance payment of taxation 3,660 14,817
Deposits and other receivables 8,048 5,757
25,487 28,625
Sales of goods are normally made on a cash against documents basis with an average credit period (which takes account of
customer deposits as disclosed in note 29) of 7 days (2013: 3 days). The directors consider that the carrying amount of trade
and other receivables approximates their fair value.
20. Cash and cash equivalents
Cash and cash equivalents comprise cash held by the group and short-term bank deposits and UK government securities with
maturities of less than three months. The Moody’s prime rating of short term bank deposits amounting to $16.2 million is set
out in note 21 under the heading “Credit risk”.
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93
Group financial statements
Notes to the consolidated financial statements
continued
21. Financial instruments
Capital risk management
The group manages as capital its debt, which includes the borrowings disclosed in notes 22 to 25, cash and cash equivalents
and equity attributable to shareholders of the parent, comprising issued ordinary and preference share capital, reserves and
retained earnings as disclosed in notes 30 to 33. The group is not subject to externally imposed capital requirements.
The directors’ policy in regard to the capital structure of the group is to seek to enhance returns to holders of the company's
ordinary shares by meeting a proportion of the group's funding needs with prior ranking capital and to constitute that capital as
a mix of preference share capital and borrowings from financial institutions and the public debt market, in proportions which
suit, and as respects borrowings that 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 listed debt securities and medium term borrowings from financial
institutions.
Net debt to equity ratio
Net debt, equity and the net debt to equity ratio at the balance sheet date were as follows:
2014 2013
$’000 $’000
Debt and related engagements * 195,409 198,946
Cash and cash equivalents (16,224) (34,574)
Net debt and related engagements 179,185 164,372
*
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) 306,625 299,441
Net debt to equity ratio 58.4% 54.9%
Significant accounting policies
Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of
measurement and the basis on which income and expenses are recognised, in respect of each class of financial instrument are
disclosed in “Accounting policies (group)” above.
Categories of financial instruments
Non-derivative financial assets as at 31 December 2014 comprised loans, investments and receivables (including Indonesian
stone and coal interests) and cash and cash equivalents amounting to $61,608,000 (2013: $73,432,000).
Non-derivative financial liabilities as at 31 December 2014 comprised liabilities at amortised cost amounting to $195,626,000
(2013: $197,869,000).
Derivative financial instruments at 31 December 2014 comprised instruments not in designated hedge accounting
relationships at fair value representing a liability of $9,590,000 (2013: $7,892,000).
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 stone and coal concessions. The directors have attributed a fair value of zero to these
interests in view of the prior claims of loans to the concession owning companies and the present stage of the operations.
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R.E.A. Holdings plc Annual Report and Accounts 2014
21. Financial instruments - continued
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 economically practicable 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 Indonesian rupiah term loan facilities at 4.5 per cent (2013: 4.5 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 3.0 per cent and 3.8 per
cent above the relevant Inter Bank Offer Rate (2013: between 3.0 per cent and 4.0 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 2014 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 $847,000 (2013: pre-tax profit (and equity) decrease of
$627,000).
The group regards the US dollar as the functional currency of most of its operations and formerly sought to ensure that, as
respects that proportion of its investment in the operations that was met by borrowings, it had 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 REA Kaltim during 2011 of an Indonesian tax assessment on its 2008 profits seeking to disallow, for tax purposes, losses
on two of the debt swaps (as referred to in “Group results” above) called into question the wisdom of entering into currency
hedges and the group decided (at least until such time as the disputed tax issue was clarified) not to take out any further
hedges against dollars of non-dollar borrowings.
With the recent decision by the Jakarta Tax Court in REA Kaltim’s favour regarding the disputed losses, the directors have
considered whether the group should now revert to its previous policy of hedging non-dollar exposures against the dollar. They
have concluded that, given that tax law in Indonesia is uncertain and that precedent is often not determinative of Indonesian
judicial decisions, the group will be best served going forward by simply maintaining a balance between its borrowings in different
currencies and avoiding any new currency hedging transactions.
Accordingly, the group will in future regard some exposure to currency risk on its non-dollar borrowing as an inherent and
unavoidable risk of its business. The group has never covered, and does not intend in future to cover, the currency exposure in
respect of the component of the investment in its operations that is financed with sterling denominated shareholder capital.
The group’s policy is to maintain a cash balance in sterling sufficient to meet its projected sterling expenditure for a period of
between six and twelve months and a limited cash balance in Indonesian rupiahs.
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95
Group financial statements
Notes to the consolidated financial statements
continued
21. 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 loss dealt with in the
consolidated income statement and equity of $799,000 on the net sterling denominated non-derivative monetary items
(excluding the element of the sterling notes that is hedged) (2013: loss of $1,455,000). 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 $4,808,000 on the net Indonesian rupiah denominated, non-derivative monetary items (2013: loss of $4,564,000).
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 2014, 89 per
cent of bank deposits were held with banks with a Moody’s prime rating of P1, 10 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 2014 and 31 December 2013 equal the amounts reported under the corresponding balance
sheet headings.
Liquidity risk
Ultimate responsibility for liquidity risk management rests with the board of directors of the company, which has established an
appropriate framework for the management of the group’s short, medium and long-term funding and liquidity requirements.
Within this framework, the board continuously monitors forecast and actual cash flows and endeavours to maintain adequate
liquidity in the form of cash reserves and borrowing facilities while matching the maturity profiles of financial assets and
liabilities. Undrawn facilities available to the group at balance sheet date are disclosed in note 22.
The board reviews the cash forecasting models for the operation of the plantations and compares these with the forecast
outflows for debt obligations and projected capital expenditure programmes for the plantations, applying sensitivities to take
into account perceived major uncertainties. In their review, the directors place the greatest emphasis on the cash flow of the
first two years.
Non-derivative financial instruments
The following tables detail the contractual maturity of the group’s non-derivative financial liabilities. The tables have been drawn
up based on the undiscounted amounts of the group’s financial liabilities based on the earliest dates on which the group can be
required to discharge those liabilities. The table includes liabilities for both principal and interest.
Weighted Under Between Over 2 Total
average 1 year 1 and 2 years
interest rate years
2014 % $’000 $’000 $’000 $’000
Bank loans 7.1 47,678 33,174 32,439 113,291
US dollar notes 8.5 2,551 2,551 35,286 40,388
Sterling notes 10.4 20,475 22,881 21,096 64,452
Trade and other payables, and customer deposits 8,503 – – 8,503
79,207 58,606 88,821 226,634
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R.E.A. Holdings plc Annual Report and Accounts 2014
21. Financial instruments - continued
Weighted Under Between Over 2 Total
average 1 year 1 and 2 years
interest rate years
2013 % $’000 $’000 $’000 $’000
Bank loans 7.3 40,505 13,617 60,510 114,632
US dollar notes 8.5 9,335 2,551 37,837 49,723
Sterling notes 10.4 5,418 21,677 46,446 73,541
KCC preference shares (see note 25) 39 – – 39
Trade and other payables, and customer deposits 5,376 – – 5,376
60,673 37,845 144,793 243,311
At 31 December 2014, the group’s non-derivative financial assets (other than receivables) comprised cash and deposits of
$16,200,000 (2013: $34,600,000) carrying a weighted average interest rate of 2.7 per cent (2013: 1.7 per cent) all having a
maturity of under one year, and Indonesian stone and coal interests of $31,334,000 (2013: $30,427,000) 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 26. The cash flows are settled gross and, therefore, the table
takes no account of sterling receipts under the CCIRS.
Under Between Over 2 Total
1 year 1 and 2 years
years
$’000 $’000 $’000 $’000
At 31 December 2014 47,484 – – 47,484
At 31 December 2013 5,721 59,857 – 65,578
Fair value of financial instruments
The table below provides an analysis of the book values and fair values of financial instruments, excluding receivables and trade
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 2014 (2013: none).
2014 2014 2013 2013
Book value Fair value Book value Fair value
$’000 $’000 $’000 $’000
Cash and deposits* 16,224 16,224 34,574 34,574
Bank debt - within one year* (40,326) (40,326) (35,033) (35,033)
Bank debt - after more than one year* (60,638) (60,638) (62,281) (62,281)
Preference shares issued by a subsidiary – – (38) –
US dollar notes** (33,472) (34,691) (39,432) (40,274)
Sterling notes** (52,406) (57,090) (55,708) (55,285)
Cross currency interest rate swaps – hedge against principal liabilities (8,567) (8,567) (6,454) (6,454)
Net debt and related engagements (179,185) (185,088) (164,372) (164,753)
Cross currency interest rate swaps – hedge against interest liabilities (1,023) (1,023) (1,438) (1,438)
(180,208) (186,111) (165,810) (166,191)
bearing interest at floating rates
*
** bearing interest at fixed rates
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97
Group financial statements
Notes to the consolidated financial statements
continued
21. 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.
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 2014 at fair value resulted in a loss of $1,283,000 (2013: gain of $1,876,000) which has been
dealt with through the consolidated income statement.
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 $186,000 (2013: $600,000).
22. Bank loans
2014 2013
$’000 $’000
Bank loans 100,964 97,314
The bank loans are repayable as follows:
On demand or within one year 40,326 35,033
Between one and two years 15,140 8,785
After two years 45,498 53,496
100,964 97,314
Amount due for settlement within 12 months (shown under current liabilities) 40,326 35,033
Amount due for settlement after 12 months 60,638 62,281
100,964 97,314
All bank loans are denominated in either US dollars ($74.1 million – 2013: $68.6 million) or Indonesian rupiahs ($26.9 million –
2013: $28.7 million) and are at floating rates, thus exposing the group to interest rate risk. The weighted average interest rate
in 2014 was 7.1 per cent (2013: 8.4 per cent). Bank loans of $70,964,000 (2013: $67,314,000) are secured on the land,
plantations, property, plant and equipment owned by PT REA Kaltim Plantations (“REA Kaltim”) and PT Sasana Yudha Bhakti,
having an aggregate book value of $218 million (2013: $235 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.
Under the terms of its bank facilities, certain plantation subsidiaries are restricted to an extent in the payment of interest on
borrowings from, and on the payment of dividends to, other group companies. The directors do not believe that the applicable
covenants will affect the ability of the company to meet its cash obligations.
At the balance sheet date, the group had undrawn US dollar denominated bank facilities of $nil (2013: $6.4 million) and
undrawn Indonesian rupiah denominated facilities of $39.4 million (2013: $12.4 million).
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R.E.A. Holdings plc Annual Report and Accounts 2014
23. Sterling notes
The sterling notes comprise £34.5 million (2013: £34.5 million) nominal of 9.5 per cent guaranteed sterling notes 2015/17
issued by the company’s subsidiary, REA Finance B.V. 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 nominal
amount of sterling notes purchased and cancelled as at 31 December 2014 amounted to £2.5 million.
The repayment obligation in respect of the sterling notes of £34.5 million ($53.8 million) is carried in the balance sheet net of
the unamortised balance of the note issuance costs and is partly hedged by a forward foreign exchange contract for the
purchase of £22.0 million and for the sale of $42.9 million. Further details of this contract are disclosed in note 26.
If a person or group of persons acting in concert obtains the right to exercise more than 50 per cent of the votes that may
generally be cast at a general meeting of the company, each holder of sterling notes has the right to require that the notes held
by such holder be repaid at 101 per cent of par, plus any interest accrued thereon up to the date of completion of the
repayment.
24. US dollar notes
The US dollar notes comprise $34.0 million (2013: $34.0 million) 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. The 2017 dollar notes are
unsecured obligations of the company and are repayable on 30 June 2017.
As at 31 December 2013 the US dollar notes also included $6.3 million nominal of 7.5 percent dollar notes 2012/14 which
the company repaid on 31 December 2014 at par plus accrued interest.
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99
Group financial statements
Notes to the consolidated financial statements
continued
25. 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 provided a limited participation in the stone and coal interests of the company such that if those interests
achieved 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 retained their notes and shares until redeemed,
would receive an overall compound return of 15 per cent per annum on their total investment. If the required level of earnings
was not achieved, then, except in certain limited circumstances (such as divestment of all or a significant part of the stone and
coal interests or a change in control of the company), no dividends or other distributions would be paid or made on the KCC
preference shares and at 31 December 2014 such shares would be converted into valueless deferred shares. The required
level of earnings in the stone and coal interests was not achieved and accordingly the preference shares were so converted at
31 December 2014.
At 31 December 2014 the company had acquired 149,550 KCC preference shares (2013: 149,550) at a cost of $1,462,000.
Following the conversion of the shares at 31 December 2014 to valueless deferred shares the cost has been written-off in the
company's profit and loss account.
26. Hedging instruments
At 31 December 2012, 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.
The terms of one of these CCIRS contracts for £8.0 million included an option for either party to terminate the contract on 30
September 2013, pursuant to which the contract was closed out on that date at a cash cost to the group of $1.86 million and a
charge to profit and loss in 2013 of $9,000.
The terms of a second CCIRS contract for £7.0 million included an option for either party to terminate the contract on 24
October 2014, pursuant to which the contract was closed out on that date at a cash cost to the group of $41,000 and a charge
to profit and loss in 2014 of $381,800.
At 31 December 2014 the remaining CCIRS contract provides for the forward purchase of £22.0 million and sale of $42.9
million maturing on 27 December 2015, and is carried in the group balance sheet at its fair value, details of which are set out in
note 21 under the caption “Fair value of financial instruments”.
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27. 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 Biological Income/ Agricultural Tax Total
and equipment assets expenses* produce losses inventory
$’000 $’000 $’000 $’000 $’000 $’000
At 1 January 2013 (22,050) (21,356) 2,784 (566) 2,879 (38,309)
(Charge)/credit to income for the year (2,400) (2,361) (11,412) (137) 5,939 (10,371)
Credit to comprehensive income for the year** – – 48 – – 48
Exchange differences*** (682) (14,574) 1,196 – (1,197) (15,257)
At 31 December 2013 (25,132) (38,291) (7,384) (703) 7,621 (63,889)
(Charge)/credit to income for the year (323) (1,686) (354) 423 888 (1,052)
Credit to comprehensive income for the year** – – 42 – – 42
Exchange differences*** 1,147 (3,217) (1,120) – (193) (3,383)
At 31 December 2014 (24,308) (43,194) (8,816) (280) 8,316 (68,282)
Deferred tax assets 18 – 575 – 8,316 8,909
Deferred tax liabilities (24,326) (43,194) (9,391) (280) – (77,191)
At 31 December 2014 (24,308) (43,194) (8,816) (280) 8,316 (68,282)
Deferred tax assets – – 1,894 – 7,621 9,515
Deferred tax liabilities (25,132) (38,291) (9,278) (703) – (73,404)
At 31 December 2013 (25,132) (38,291) (7,384) (703) 7,621 (63,889)
*
**
***
Includes income, gains or expenses recognised for reporting purposes, but not yet charged to or allowed for tax.
Relating to actuarial losses.
Included in the consolidated statement of comprehensive income.
At the balance sheet date, the group had unused tax losses of $34.2 million (2013: $31.5 million) available to be applied
against future profits. A deferred tax asset of $8,316,000 (2013: $7,621,000) has been recognised in respect of these losses,
which are expected to used in the future based on the group’s projections. A tax loss of $270,000 incurred by the group’s coal
subsidiary in 2014 (2013: $3.8 million) has not been recognised; such tax loss expires after five years.
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 $7,859,000 (2013: $7,651,000). 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 reverse significantly in the foreseeable future.
The timing difference of $43.2 million (2013: $38.3 million) in respect of biological assets arises from their recognition at fair
value in the group accounts, compared with their historic base cost in the local accounts of overseas subsidiaries. This
temporary timing difference would reverse to the extent of any future reduction in their fair value.
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R.E.A. Holdings plc Annual Report and Accounts 2014
101
Group financial statements
Notes to the consolidated financial statements
continued
28. Other loans and payables
2014 2013
$’000 $’000
Retirement benefit obligations (see note 37):
UK 2,383 3,123
Indonesia 5,584 4,644
Other 73 108
8,040 7,875
The amounts are repayable as follows:
On demand or within one year (shown under current liabilities) 1,238 940
In the second year 1,696 801
In the third to fifth years inclusive 2,705 2,172
After five years 2,401 3,962
Amount due for settlement after 12 months 6,802 6,935
8,040 7,875
Amounts of liabilities by currency:
Sterling 2,383 3,165
US dollar 73 108
Indonesian rupiah 5,584 4,602
8,040 7,875
Further details of the retirement benefit obligations are set out in note 37. The directors estimate that the fair value of
retirement benefit obligations and of other loans and payables approximates their carrying value.
29. Trade and other payables
2014 2013
$’000 $’000
Trade purchases and ongoing costs 5,744 3,911
Customer deposits 1,107 566
Other tax and social security 2,801 4,817
Accruals 6,515 6,891
Other payables 1,651 723
17,818 16,908
The average credit period taken on trade payables is 30 days (2013: 26 days).
The directors estimate that the fair value of trade payables approximates their carrying value.
30. Share capital
2014 2013
£’000 £’000
Authorised (in pounds sterling):
65,000,000 – 9 per cent cumulative preference shares of £1 each (2013: 65,000,000) 65,000 65,000
41,000,000 – ordinary shares of 25p each (2013: 41,000,000) 10,250 10,250
75,250 75,250
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R.E.A. Holdings plc Annual Report and Accounts 2014
30. Share capital - continued
2014 2013
Issued and fully paid (in US dollars): $’000 $’000
59,420,232 – 9 per cent cumulative preference shares of £1 each (2013: 52,105,116) 98,775 86,410
35,085,269 – ordinary shares of 25p each (2013: 35,085,269) 15,200 15,200
132,500 – ordinary shares of 25p each held in treasury (2013: 4,967) (1,001) (36)
112,974 101,574
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 1 July 2014, 5,210,000 preference shares were issued, fully paid, by way of a placing at £1.20 a share (total
consideration £6,252,000 - $10,735,000)
on 26 September 2014, 2,105,116 9 per cent cumulative preference shares were issued, credited as fully paid, to
ordinary shareholders by way of capitalisation of share premium account
The table below summarises the changes in ordinary shares held in treasury during the year:
Number of Average (Cost)/ (Cost)/
treasury price per proceeds proceeds
shares share
£ £’000 $’000
Shares acquired November to December 2013 and held at 1 January 2014 4,967 4.43 (22) (36)
Shares acquired January to April 2014 20,033 4.40 (88) (149)
Shares sold May 2014 (25,000) 4.57 114 192
Profit on sale (credited to share premium account) – 4 7
Shares acquired June to December 2014 and held at 31 December 2014 132,500 4.59 (608) (1,010)
Sale in October 2014 of preference shares (scrip) issued September 2014 – (0.05) 6 9
At 31 December 2014 132,500 4.54 (602) (1,001)
31. Share premium account
$’000
At 1 January 2013 18,680
Correction to share premium 7
Issue of new ordinary shares (cash) and preference shares (scrip) 6,474
At 31 December 2013 25,161
Issue of new preference shares (cash) and preference shares (scrip) (1,802)
Profit on disposal of treasury shares 7
At 31 December 2014 23,366
Costs of $171,000 on the issue of preference shares (2013: $384,000) were charged to the share premium account.
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R.E.A. Holdings plc Annual Report and Accounts 2014
103
Group financial statements
Notes to the consolidated financial statements
continued
32. Translation reserve
2014 2013
$’000 $’000
Beginning of year (32,549) (4,854)
Exchange differences on translation of foreign operations (8,429) (12,341)
Exchange differences on deferred tax (3,383) (15,257)
Attributable to non-controlling interests 37 (97)
End of year (44,324) (32,549)
33. Retained earnings
2014 2013
$’000 $’000
Beginning of year 203,225 201,630
Profit for the year after preference dividend 13,983 5,334
Ordinary dividend paid (4,280) (3,739)
End of year 212,928 203,225
34. Non-controlling interests
2014 2013
$’000 $’000
Beginning of year 2,030 2,009
Share of result for the year (312) (76)
Exchange translation differences (37) 97
End of year 1,681 2,030
35. Reconciliation of operating profit to operating cash flows
2014 2013
$’000 $’000
Operating profit 32,116 28,078
Depreciation of property, plant and equipment 9,705 9,482
Decrease / (increase) in fair value of agricultural produce inventory 1,692 (548)
Amortisation of prepaid operating lease rentals 548 457
Amortisation of sterling and US dollar note issue expenses 358 778
Biological gain (3,571) (7,133)
Loss / (profit) on disposal of property, plant and equipment 484 (20)
Operating cash flows before movements in working capital 41,332 31,094
Increase in inventories (excluding fair value movements) (527) (365)
Increase in receivables (5,659) (933)
Decrease in payables (3,123) (10,162)
Exchange translation differences 1,030 (276)
Cash generated by operations 33,053 19,358
Taxes paid (3,401) (7,065)
Tax refund received 8,461 8
Interest paid (13,721) (11,537)
Net cash from operating activities 24,392 764
No additions to property, plant and equipment during the year were financed by new finance leases (2013: $nil).
104
R.E.A. Holdings plc Annual Report and Accounts 2014
36. Movement in net borrowings
2014 2013
$’000 $’000
Change in net borrowings resulting from cash flows:
(Decrease) / Increase in cash and cash equivalents (18,244) 9,013
Net increase in bank borrowings (4,704) (52,600)
(22,948) (43,587)
Issue of preference shares 10,564 –
Redemption of US dollar notes, net of amortisation of issue expenses 6,310 9,344
Net sale and repurchase of US dollar notes – (1,238)
(6,074) (35,481)
Currency translation differences 1,555 (1,786)
Net borrowings at beginning of year (166,099) (128,832)
Net borrowings at end of year (170,618) (166,099)
37. 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 had been adopted in the previous valuation as at 31 December 2008 and in earlier valuations, 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.
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R.E.A. Holdings plc Annual Report and Accounts 2014
105
Group financial statements
Notes to the consolidated financial statements
continued
37. Retirement benefit obligations - continued
The normal contributions paid by the group in 2014 were £28,000 - $46,000 (2013: £27,000 - $43,000) and represented 36.4
per cent (2013: 36.4 per cent) of pensionable salaries; in addition, a discretionary contribution of £88,000 - $145,000 was made
in 2014 (2013: £70,000 - $110,000) to fund an inflation adjustment to pensions in payment relating to pre-1997 accrued
entitlements (which would not otherwise have been subject to full indexation). The additional contribution applicable to the group’s
share of the recovery plan for 2014 was £407,000 - $671,000 (2013: £396,000 - $624,000). Under the valuation as at 31
December 2011 the normal contributions will continue at the rate of 36.4 per cent of pensionable salaries and the additional
contribution will rise to £418,000 -$651,000 for 2015 and thereafter by 2.75 per cent per annum. A provision of £1,529,000 -
$2,383,000 (2013: £1,885,000 - $3,123,000) for these additional contributions adjusted for the time value of money has been
recognised under retirement benefit obligations (see note 28). The provision is remeasured at each year end to reflect the
passage of time and the additional contributions that have been paid by the group. The resultant net charge to administrative
expenses relating to additional contributions to the Scheme pursuant to the recovery plan was as follows:
2014 2013
$’000 $’000
Release of provision relating to additional contributions paid in the year (357) (352)
Additional contributions paid in the year 671 624
Net charge to administrative expenses (note 5) 314 272
The contributions by the group to fund the recovery plan represent approximately 45 per cent of the aggregate amounts to be
paid by all participating employers towards such plan. There are no agreed allocations of any deficit on either the wind-up of the
Scheme or on any participant's withdrawal from the Scheme.
The sensitivity of the deficit as at 31 December 2011 to variations in certain of the principal assumptions underlying the
actuarial valuation as at that date is summarised below:
Increase in the post-retirement discount rate of 0.1%
Increase in inflation and all associated assumptions including salaries of 0.1%
Mortality base table 90% instead of 85%
Slower improvement in long term rate of mortality (1.25% instead of 1.5%)
The next actuarial valuation will be made as at 31 December 2014.
(Decrease) / increase
in deficit
$’000
(400)
310
(510)
(350)
The company has a contingent liability of $3.0 million (2013: $3.6 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:
2014 2013
Discount rate 8.45% 9.1%
Salary increases per annum 6% 6%
Mortality table (Indonesia) (TM1) 111-2011 111-2011
Retirement age (years) 55 55
Disability rate (% of the mortality table) 10 10
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R.E.A. Holdings plc Annual Report and Accounts 2014
37. Retirement ben efit obligations - continued
The movement in the provision for employee service entitlements was as follows:
2014 2013
$’000 $’000
Balance at 1 January 4,602 4,659
Current service cost 907 838
Interest expense 428 298
Actuarial loss recognised in statement of comprehensive income 170 123
Exchange (139) (1,039)
Paid during the year (384) (277)
Balance at 31 December (see note 28) 5,584 4,602
The amounts recognised in administrative expenses in the consolidated income statement were as follows:
2014 2013
$’000 $’000
Current service cost 907 838
Interest expense 428 298
1,335 1,136
Amount included as additions to biological assets (99) (74)
1,236 1,062
Estimated lump sum payments to Indonesian employees on retirement in 2015 are $531,000 (2014: $103,000).
38. Related party transactions
Transactions between the company and its subsidiaries, which are related parties, have been eliminated on consolidation and
are not disclosed in this note. Transactions between the company and its subsidiaries are dealt with in the company’s individual
financial statements. The remuneration of the directors, who are the key management personnel of the group, is set out below
in aggregate for each of the categories specified in IAS 24 “Related party disclosures”. Further information about the
remuneration of, and fees paid in respect of services provided by, individual directors is provided in the audited part of the
“Directors’ remuneration report”.
2014 2013
$’000 $’000
Short term benefits 2,112 2,008
Post employment benefits – –
Other long term benefits – –
Termination benefits – –
Share based payments – –
2,112 2,008
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R.E.A. Holdings plc Annual Report and Accounts 2014
107
Group financial statements
Notes to the consolidated financial statements
continued
39. Rates of exchange
2014 2014 2013 2013
Closing Average Closing Average
Indonesian rupiah to US dollar 12,440 11,908 12,189 10,494
US dollar to pound sterling 1.5593 1.65 1.6563 1.57
40. Events after the reporting period
An interim dividend of 4p per ordinary share in respect of the year ended 31 December 2014 was paid on 23 January 2015.
In accordance with IAS 10 “Events after the reporting period” this dividend, amounting in aggregate to $2,124,000, has not
been reflected in these financial statements.
In February 2015 a subsidiary company was notified by the Supreme Court of Indonesia that the Indonesian tax authorities had
applied to the Supreme Court of Indonesia for a judicial review of the decision of the Jakarta Tax Court in May 2014 in favour
of the subsidiary (see note 9).
41. 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 2014 to $8.6 million (2013: $8.7
million), comprising prepaid operating lease rentals of $2.6 million (2013: $2.8 million) and biological assets of $6.0 million
(2013: $6.0 million). 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 23) which was obtained on 14 March 2012.
Completion had been delayed by a need to obtain comfort as to the continuing validity of the land titles held by PU. During
2014, necessary confirmation was obtained and the documentation to complete the swap is now being progressed.
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R.E.A. Holdings plc Annual Report and Accounts 2014
42. Contingent liabilities
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
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 ($12.6 million) with amounts
borrowed repayable over 14 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 2014 the aggregate outstanding balances owing by the three cooperatives to Bank BPD amounted to
Indonesian rupiah 121 billion ($9.7 million) (2013: Indonesian rupiah 111 billion - $9.1 million).
43. Operating lease commitments
The group leases premises under operating leases in London, Jakarta, Samarinda and Singapore. 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:
2014 2013
$’000 $’000
Within one year 344 380
In the second to fifth year inclusive 249 656
After five years – –
593 1,036
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R.E.A. Holdings plc Annual Report and Accounts 2014
109
Company financial statements
Company balance sheet
as at 31 December 2014
2014 2013
Note $’000 $’000
Non-current assets
Investments (iii) 255,013 261,958
Deferred tax assets (iv) 978 979
Total non-current assets 255,991 262,937
Current assets
Trade and other receivables (v) 25,714 29,903
Cash 728 1,156
Total current assets 26,442 31,059
Total assets 282.433 293,996
Current liabilities
Trade and other payables (vi) (756) (5,986)
US dollar notes (vii) – (5,964)
Amount owed to group undertaking (viii) (19,478) –
Total current liabilities (20,234) (11,950)
Non-current liabilities
US dollar notes (vii) (33,472) (33,472)
Amount owed to group undertaking (viii) (38,957) (62,065)
Total non-current liabilities (72,429) (95,537)
Total liabilities (92,663) (107,487)
Net assets 189,770 186,509
Equity
Share capital (ix) 112,974 101,574
Share premium account (x) 23,366 25,161
Exchange reserve (x) (4,300) (4,300)
Profit and loss account (x) 57,730 64,074
Total equity 189,770 186,509
Approved by the board on 23 April 2015 and signed on behalf of the board.
RICHARD M ROBINOW
Chairman
110
R.E.A. Holdings plc Annual Report and Accounts 2014
Company financial statements
Company statement of changes in equity
for the year ended 31 December 2014
Share Share Exchange Profit Total
capital premium reserve and loss
Note $’000 $’000 $’000 $’000 $’000
At 1 January 2013 97,565 18,687 (4,333) 11,916 123,835
Total comprehensive income (x) – – – 63,188 63,188
Issue of new ordinary shares (cash) (ix) 641 9,878 – – 10,519
Issue of new preference shares (scrip) (x) 3,404 (3,404) – – –
Purchase of treasury shares (ix) (36) – – – (36)
Dividends to preference shareholders (ii) – – – (7,291) (7,291)
Dividends to ordinary shareholders (ii) – – – (3,739) (3,739)
Exchange adjustment deferred tax (x) – – 33 – 33
At 31 December 2013 101,574 25,161 (4,300) 64,074 186,509
Total comprehensive income (x) – – – 6,076 6,076
Issue of new preference shares (cash) (ix) 8,946 1,618 – – 10,564
Issue of new preference shares (scrip) (x) 3,420 (3,420) – – –
Purchase of treasury shares (ix) (966) 7 – – (959)
Dividends to preference shareholders (ii) – – – (8,140) (8,140)
Dividends to ordinary shareholders (ii) – – – (4,280) (4,280)
At 31 December 2014 112,974 23,366 (4,300) 57,730 189,770
There are no gains or losses other than those recognised in the profit and loss account.
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111
Company financial statements
Company cash flow statement
for the year ended 31 December 2014
2014 2013
Note $’000 $’000
Net cash outflow from operating activities (xii) (11,131) (23,855)
Investing activities
Interest received 7,406 3,248
Dividends and other distributions received from subsidiaries (xiv) 10,944 86,433
Repayment of loans by subsidiary companies * 3,050 33,530
New loans made to subsidiary companies * (543) (91,871)
Shares acquired in subsidiary companies – (16)
Further investment in Indonesian stone and coal interests (897) (1,615)
Net cash used in investing activities 19,960 29,709
Financing activities
Preference dividends paid (ii) (8,140) (7,291)
Ordinary dividends paid (ii) (4,280) (3,739)
Proceeds of issue of ordinary shares – 10,519
Proceeds of issue of preference shares 10,564 –
Purchase of treasury shares, net of sales (959) (36)
Redemption of US dollar notes (vii) (6,310) (9,678)
Net sale and repurchase of US dollar notes – 1,238
Net cash from financing activities (9,125) (8,987)
Cash and cash equivalents
Net decrease in cash and cash equivalents (296) (3,133)
Cash and cash equivalents at beginning of year 1,156 4,415
Effect of exchange rate changes (132) (126)
Cash and cash equivalents at end of year (xi) 728 1,156
* Excluding amounts dealt with within “Further investment in Indonesian stone and coal interests”
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R.E.A. Holdings plc Annual Report and Accounts 2014
Company financial statements
Accounting policies (company)
The accounting policies of R.E.A. Holdings plc (the “company”)
are the same as those of the group, save as modified below.
Financial risk
The company’s financial risk is managed as part of the group’s
strategy and policies as discussed in note 21 to the
consolidated financial statements.
Taxation
Current tax including UK corporation tax and foreign tax is
provided at amounts expected to be paid (or recovered) using
the tax rates and laws that have been enacted or substantially
enacted by the balance sheet date. Deferred tax is calculated
on the liability method. Deferred tax is provided on a non
discounted basis on timing and other differences which are
expected to reverse, at the rate of tax likely to be in force at
the time of reversal. Deferred tax is not provided on timing
differences which, in the opinion of the directors, will probably
not reverse. 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.
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.
Basis of accounting
Separate financial statements of the company are required by
the Companies Act 2006, and these have been prepared in
accordance with International Financial Reporting Standards
(IFRS) as endorsed for use by the European Union as at the
date of approval of the financial statements and therefore
comply with Article 4 of the EU IAS Regulation. The
statements are prepared under the historic cost convention
except where otherwise stated in the accounting policies.
By virtue of section 408 of the Companies Act 2006, the
company is exempted from presenting a profit and loss
account.
Presentational currency
The financial statements of the company are presented in
US dollars which is also considered to be the currency of the
primary economic environment in which the company
operates. References to “$” or “dollar” in these financial
statements are to the lawful currency of the United States
of America.
Investments
The company’s investments in its subsidiaries are stated at cost
less any provision for impairment. Impairment provisions are
charged to the profit and loss account. Dividends received from
subsidiaries are credited to the company’s profit and loss
account.
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Company financial statements
Notes to the company financial statements
(i)
Auditor’s remuneration
The remuneration of the company’s auditor is disclosed in note 5 to the company’s consolidated financial statements as
required by section 494(4)(a) of the Companies Act 2006.
(ii) Dividends
2014 2013
$’000 $’000
Amounts recognised as distributions to equity holders:
Preference dividends of 9p per share 8,140 7,291
Ordinary dividends of 7.25p per share (2013: 7p per share) 4,280 3,739
12,420 11,030
An interim dividend of 4.0p per ordinary share in respect of the year ended 31 December 2014 was paid on 23 January 2015.
In accordance with IAS10 “Events after the reporting period”, this dividend, amounting in aggregate to $2,124,000, has not
been included in the 2014 financial statements.
Investments
(iii)
2014 2013
$’000 $’000
Shares in subsidiaries 91,775 93,237
Loans 163,238 168,721
255,013 261,958
The movements were as follows:
Shares Loans
$’000 $’000
At 1 January 2013 93,221 142,615
Additions to shares in subsidiaries and loans 16 26,106
At 31 December 2013 93,237 168,721
Impairment loss recognised (1,462) –
Repayment of loans – (3,286)
Additions to loans – 1,676
Effect of exchange – (3,873)
At 31 December 2014 91,775 163,238
The impairment loss recognised relates to KCC Resources Limited's preference shares. These provided a limited participation
in the coal interests of the group if a certain average annual level of earnings was achieved by those interests by June 2014.
As the required level of earnings was not achieved, the shares converted at 31 December 2014 to valueless deferred shares
and the cost has been written off in the company's profit and loss account.
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R.E.A. Holdings plc Annual Report and Accounts 2014
The principal subsidiaries at the year end, together with their countries of incorporation, are listed below. Details of UK dormant
subsidiaries are not shown.
Class of Percentage
Subsidiary Activity shares owned
Makassar Investments Limited (Jersey) Sub holding company Ordinary 100
PT Cipta Davia Mandiri (Indonesia) Plantation agriculture Ordinary 95
PT Kartanegara Kumala Sakti (Indonesia) Plantation agriculture Ordinary 95
PT KCC Resources Indonesia (Indonesia) Stone and coal operations Ordinary 95
PT Kutai Mitra Sejahtera (Indonesia) Plantation agriculture Ordinary 95
PT Persada Bangun Jaya (Indonesia) Plantation agriculture Ordinary 95
PT Putra Bongan Jaya (Indonesia) Plantation agriculture Ordinary 95
PT REA Kaltim Plantations (Indonesia) Plantation agriculture Ordinary 100
PT Sasana Yudha Bhakti (Indonesia) Plantation agriculture Ordinary 95
KCC Resources Limited (England and Wales) Sub holding company Ordinary 100
REA Finance B.V. (Netherlands) Group finance Ordinary 100
R.E.A. Services Limited (England and Wales) Group finance and services Ordinary 100
REA Services Private Limited (Singapore) Group services Ordinary 100
The entire shareholdings in Makassar Investments Limited, KCC Resources 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.
Covenants contained in credit agreements between certain of the company’s plantation subsidiaries and banks restrict the
amount of dividend that may be paid to the UK without the consent of the banks to certain proportions of the relevant
subsidiaries’ pre-tax profits. The directors do not consider that such restrictions will have any significant impact on the liquidity
risk of the company.
A dormant UK subsidiary, Jentan Plantations Limited, company registration number 6662767, has taken advantage of the
exemption pursuant to Companies Act 2006 s394A from preparing individual accounts.
(iv) Deferred tax asset
$’000
At 1 January 2013 703
Credit to income for the year 342
Effect of change in tax rate (93)
Effect of exchange 27
At 31 December 2013 979
Charge to income for the year (1)
Effect of change in tax rate –
Effect of exchange –
At 31 December 2014 978
There were no deferred tax liabilities at 1 January 2013, 31 December 2013 or 31 December 2014.
At the balance sheet date, the company had unused tax losses of $4.9 million (2013: $2.9 million) available to be applied
against future profits. A deferred tax asset of $978,000 (2013: $979,000) has been recognised in respect of these losses as
the company considers, based on financial projections, that these losses will be utilised.
The aggregate amount of temporary differences associated with undistributed earnings of subsidiaries for which tax liabilities
have not been recognised are disclosed in note 27 to the consolidated financial statements.
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115
Company financial statements
Notes to the company financial statements (continued)
Trade and other receivables
(v)
2014 2013
$’000 $’000
Trade debtors – 37
Amount owing by group undertakings 25,166 29,319
Other debtors 530 542
Prepayments and accrued income 18 5
25,714 29,903
The directors consider that the carrying amount of trade and other receivables approximates their fair value.
(vi) Trade and other payables
2014 2013
$’000 $’000
Amount owing to group undertakings 527 5,616
Other creditors 30 125
Accruals 199 245
756 5,986
The directors consider that the carrying amount of trade and other payables approximates their fair value.
(vii) US dollar notes
The US dollar notes comprise $34.0 million (2013: $34.0 million) 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. The 2017 dollar notes are
unsecured obligations of the company and are repayable on 30 June 2017.
As at 31 December 2013 the US dollar notes also included $6.3 million nominal of 7.5 per cent dollar notes 2012/14 which
the company repaid on 31 December 2014 at par plus accrued interest.
(viii) Amount owed to group undertaking
Amount owed to group undertaking comprises an unsecured interest-bearing loan from REA Finance BV, repayable in equal
annual instalments commencing 31 December 2015.
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R.E.A. Holdings plc Annual Report and Accounts 2014
(ix) Share capital
2014 2013
£’000 £’000
Authorised (in pounds sterling):
65,000,000 – 9 per cent cumulative preference shares of £1 each (2013: 65,000,000) 65,000 65,000
41,000,000 – ordinary shares of 25p each (2013: 41,000,000) 10,250 10,250
75,250 75,250
$’000 $’000
Issued and fully paid (in US dollars):
59,420,232 – 9 per cent cumulative preference shares of £1 each (2013: 52,105,116) 98,775 86,410
35,085,269 – ordinary shares of 25p each (2013: 35,085,269) 15,200 15,200
132,500 – ordinary shares of 25p each held in treasury (2012: 4,967) (1,001) (36)
112,974 101,574
The preference shares entitle the holders thereof to payment, out of the profits of the company available for distribution and re-
solved 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 wind-
ing up of the company, in any surplus assets available for distribution among the members.
Changes in share capital:
•
•
on 1 July 2014, 5,210,000 preference shares were issued, fully paid, by way of a placing at £1.20 a share (total
consideration £6,252,000 - $10,735,000)
on 26 September 2014, 2,105,116 9 per cent cumulative preference shares were issued, credited as fully paid, to
ordinary shareholders by way of capitalisation of share premium account
The table below summarises the changes in ordinary shares held in treasury during the year.
Number of Average (Cost)/ (Cost)/
treasury price per proceeds proceeds
shares share
£ £’000 $’000
Shares acquired November to December 2013 and held at 1 January 2014 4,967 4.43 (22) (36)
Shares acquired January to April 2014 20,033 4.40 (88) (149)
Shares sold May 2014 (25,000) 4.57 114 192
Profit on sale 4 7
Shares acquired June to December 2014 and held at 31 December 2014 132,500 4.59 (608) (1,010)
Sale in October 2014 of preference shares issued by way of a
scrip issue in September 2014 6 9
At 31 December 2014 132,500 4.54 (602) (1,001)
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117
Company financial statements
Notes to the company financial statements (continued)
(x) Movement in reserves
Share Exchange Profit
premium reserve and loss
account account
$’000 $’000 $’000
At 1 January 2013 18,687 (4,333) 11,916
Total comprehensive income – – 63,188
Dividends to preference shareholders – – (7,291)
Dividends to ordinary shareholders – – (3,739)
Issue of preference shares (cash) 10,262 – –
Issue of preference shares (scrip) (3,404) – –
Costs of issues (384) – –
Exchange adjustment deferred tax – 33 –
At 31 December 2013 25,161 (4,300) 64,074
At 1 January 2014 25,161 (4,300) 64,074
Total comprehensive income – – 6,076
Dividends to preference shareholders – – (8,140)
Dividends to ordinary shareholders – – (4,280)
Issue of preference shares (cash) 1,789 – –
Issue of preference shares (scrip) (3,420) – –
Costs of issues (171) – –
Profit on disposal of treasury shares 7 – –
At 31 December 2014 23,366 (4,300) 57,730
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 $6.1 million (2013: profit $63.2 million).
(xi) 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 hierarchy for determining and disclosing the fair value of financial instruments is set
out in note 21 to the consolidated financial statements. The table below provides an analysis of the book and fair values of
financial instruments excluding debtors and creditors at balance sheet date.
2014 2014 2013 2013
Book value Fair value Book value Fair value
$’000 $’000 $’000 $’000
Cash and cash equivalents 728 728 1,156 1,156
US dollar notes (33,472) (34,691) (39,436) (40,274)
Net debt (32,744) (33,963) (38,280) (39,118)
The fair value of the US dollar notes reflects the last price at which transactions in those notes were effected prior to the
balance sheet dates.
Risks
The main risks arising from the company’s financial instruments are liquidity risk, interest rate risk, credit 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.
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R.E.A. Holdings plc Annual Report and Accounts 2014
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 2014, the company had outstanding $34 million nominal (2013: $34 million) of 7.5
per cent dollar notes 2017 and on that date repaid $6.3 million nominal of 7.5 percent dollar notes 2012/14 at par plus
accrued interest.
The policy for liquidity risk management is disclosed in note 21 to the consolidated financial statements together with the
contractual maturity of the company’s dollar notes.
Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the
company. The directors consider that the company is not exposed to any major concentrations of credit risk. At 31 December
2014, all bank deposits were held with banks with a Moody’s prime rating of P1. 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 company’s financial assets at 31 December 2014 and 31 December 2013 equal the amounts
reported under the corresponding balance sheet headings.
A limited degree of interest rate risk is accepted. A substantial proportion of the company’s financial instruments at
31 December 2014 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 (2013: $nil) in the company’s interest revenues in its profit and loss
account.
Non-derivative financial instruments
The following table details the contractual maturity of the group’s non-derivative financial liabilities. The table has 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.
Weighted Under Between Over 2 Total
average 1 year 1 and 2 years
interest rate years
2014 % $’000 $’000 $’000 $’000
US dollar notes 8.5 2,551 2,551 35,286 40,388
2013
US dollar notes 8.5 9,335 2,551 37,837 49,723
(xii) Reconciliation of operating profit to operating cash flows
2014 2013
$’000 $’000
Operating loss (105) (414)
Amortisation of US dollar note issue expenses 346 331
Operating cash inflows / (outflows) before movements in working capital 241 (83)
Decrease / (increase) in receivables 3,642 (13,800)
(Decrease) / increase in payables (5,189) 69
Exchange translation differences 178 (57)
Cash outflow from operations (1,128) (13,871)
Taxes paid (941) (481)
Interest paid (9,062) (9,503)
Net cash outflow from operating activities (11,131) (23,855)
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119
Company financial statements
Notes to the company financial statements (continued)
(xiii) 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 IAS 19
basis, the company 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 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.
There are no agreed allocations of any deficit on either the wind-up of the Scheme or on any participant’s withdrawal from the
Scheme.
The next actuarial valuation will be made as at 31 December 2014.
The subsidiary company that is a participating employer and other participating employers in the scheme have entered into an
agreement with the Scheme to make special contributions to the Scheme to cover the deficit shown by the 31 December 2011
valuation. The company made no payments to the Scheme in 2014 (2013: $nil). The company has a contingent liability for
special contributions payable by other participating employers in the Scheme; such liability will only arise if such other
participating employers do not pay their contributions. There is no expectation of this at the present time and, therefore, no
provision has been made by the company.
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R.E.A. Holdings plc Annual Report and Accounts 2014
(xiv) Related party transactions
2014 2013
Loans to subsidiaries $’000 $’000
PT Cipta Davia Mandiri 11,770 14,820
PT KCC Resources Indonesia 12,700 12,935
Makassar Investments Limited 425 425
REA Finance BV 3,836 4,074
PT REA Kaltim Plantations 77,255 79.388
R.E.A. Services Limited 24,130 25,631
130,116 137,273
2014 2013
Dividends received from subsidiaries $’000 $’000
Cairnhill Investments Limited – 7,548
Kutai Plantations Limited – 34,677
Makassar Investments Limited 8,550 8,080
REA Finance BV – 247
R.E.A. Services Limited 2,394 6,346
Rengat Investments Limited – 8,375
Sandan Investments Limited – 6,621
10,944 71,894
2014 2013
Interest received from subsidiaries $’000 $’000
PT Cipta Davia Mandiri 686 18
REA Finance BV 340 332
PT REA Kaltim Plantations 6,115 2,637
7,141 2,987
Remuneration of key management personnel
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”.
2014 2013
$’000 $’000
Short term benefits 2,112 2,008
Post employment benefits – –
Other long term benefits – –
Termination benefits – –
Share based payments – –
2,112 2,008
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121
Company financial statements
Notes to the company financial statements (continued)
(xv) Rates of exchange
See note 39 to the consolidated financial statements.
(xvi) Contingent liabilities and commitments
Sterling notes
The company has guaranteed the obligations for both principal and interest relating to the outstanding £34.54 million nominal
(2013: £34.54 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 $111 million (2013:
$105 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 (xiii) above.
Operating leases
The company has an annual commitment under an operating lease of $167,000 (2013: $184,000). The commitment expires
after two years. The lease does not contain any contingent rentals or an option to purchase the property.
The future minimum lease payments under the operating lease are as follows:
2014 2013
$’000 $’000
Within one year 167 167
In the second to fifth year inclusive 167 354
After five years – –
334 529
(xvii) Post balance sheet event
A first interim dividend of 4p per ordinary share in respect of the year ended 31 December 2014 was paid on 23 January
2015. In accordance with IAS10 “Events after the reporting period” this dividend, amounting in aggregate to $2,124,000, has
not been reflected in these financial statements.
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R.E.A. Holdings plc Annual Report and Accounts 2014
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R.E.A. Holdings plc Annual Report and Accounts 2014
123
Notice of annual general meeting
This notice is important and requires your immediate attention. If
8.
To re-appoint Deloitte LLP, chartered accountants, as auditor of
you are in any doubt as to what action to take, you should
the company to hold office until the conclusion of the next
consult your stockbroker, solicitor, accountant or other
annual general meeting of the company at which accounts are
appropriate independent professional adviser authorised under
laid before the meeting.
the Financial Services and Markets Act 2000 if you are resident
in the United Kingdom or, if you are not so resident, another
9.
To authorise the directors to fix the remuneration of the auditor.
appropriately authorised independent adviser. If you have sold or
otherwise transferred all your ordinary shares in R.E.A. Holdings
10.
That, conditional upon the passing of resolution 14 set out in the
plc, please forward this document and the accompanying form of
notice of the 2015 annual general meeting , the company is
proxy to the person through whom the sale or transfer was
generally and unconditionally authorised for the purposes of
effected, for transmission to the purchaser or transferee.
section 701 of the Companies Act 2006 to make market
purchases (within the meaning of section 693(4) of the
Notice is hereby given that the fifty-fifth annual general meeting of
Companies Act 2006) of any of its ordinary shares on such
R.E.A. Holdings plc will be held at the London office of Ashurst LLP at
terms and in such manner as the directors may from time to time
Broadwalk House, 5 Appold Street, London EC2A 2HA on 11 June
determine provided that:
2015 at 10.00 am to consider and, if thought fit, to pass the following
resolutions. Resolutions 14 and 15 will be proposed as special
(a)
the maximum number of ordinary shares which may be
resolutions; all other resolutions will be proposed as ordinary
purchased is 5,000,000 ordinary shares;
resolutions.
1.
To receive the company’s annual accounts for the financial year
may be paid for each ordinary share is £1.00;
ended 31 December 2014, together with the accompanying
statements and reports including the auditor’s report.
(c)
the maximum price (exclusive of expenses, if any) that
(b)
the minimum price (exclusive of expenses, if any) that
2.
To approve the directors’ remuneration report for the financial
the higher of: (i) 105 per cent of the average of the
year ended 31 December 2014 (other than directors’
middle market quotations for the ordinary shares in the
remuneration policy component of the report which is to be dealt
capital of the company as derived from the Daily Official
with by resolution 3 set out in the notice of the 2015 annual
List of the London Stock Exchange for the five business
may be paid for each ordinary share is an amount equal to
general meeting.
days immediately preceding the day on which such share
is contracted to be purchased and (ii) that stipulated by
3.
To approve the revised directors’ remuneration policy to take
article 5(1) of the EU Buyback and Stabilisation
effect immediately following the annual general meeting.
Regulation 2003 (No. 2273/2003); and
4.
To declare a final dividend in respect of the year ended
(d)
unless previously renewed, revoked or varied, this
31 December 2014 of 3¾p per ordinary share to be paid on
authority shall expire at the conclusion of the annual
24 July 2015 to ordinary shareholders on the register of
general meeting of the company to be held in 2016 (or, if
members at the close of business on 3 July 2015.
earlier, on 30 June 2016)
5.
To re-elect as a director Mr R M Robinow, who, having been a
provided further that:
non-executive director for more than nine years, retires as
required by the UK Corporate Governance Code and submits
(i)
notwithstanding the provisions of paragraph (a) above,
himself for re-election.
the maximum number of ordinary shares that may be
bought back and held in treasury at any one time is
6.
To re-elect as a director Mr D J Blackett, who, having been a
400,000 ordinary shares; and
director at each of the two preceding annual general meetings
and who was not re-appointed by the company in general
(ii)
notwithstanding the provisions of paragraph (d) above, the
meeting at or since either such meetings, retires in accordance
company may, before this authority expires, make a
with the articles of association and submits himself for
contract to purchase ordinary shares that would or might
re-election.
be executed wholly or partly after the expiry of this
authority, and may make purchases of ordinary shares
7.
To re-elect as a director Mr J C Oakley, who, having been a
pursuant to it as if this authority had not expired.
director at each of the two preceding annual general meetings
and who was not re-appointed by the company in general
11.
That the authorised share capital of the company (being the
meeting at or since either such meetings, retires in accordance
maximum amount of shares in the capital of the company that
with the articles of association and submits himself for
the company may allot) be and is hereby increased from
re-election.
£75,250,000 to £85,250,000 by the creation of 10,000,000 9
per cent cumulative preference shares of £1 each ranking pari
124
R.E.A. Holdings plc Annual Report and Accounts 2014
passu in all respects with the existing 9 per cent cumulative
ordinary shares and to the sale of treasury shares by way
preference shares of £1 each in the capital of the company.
of an invitation made by way of rights to holders of
12.
That the directors be and are hereby generally and
ordinary shares, in each case in proportion (as nearly as
practicable) to the respective numbers of ordinary shares
unconditionally authorised for the purposes of section 551 of
held by them on the record date for participation in the
the Companies Act 2006 (the “Act”) to exercise all the powers of
rights issue, open offer or invitation (and holders of any
the company to allot, and to grant rights to subscribe for or to
other class of equity securities entitled to participate
convert any security into, shares in the capital of the company
therein or, if the directors consider it necessary, as
(other than 9 per cent cumulative preference shares) up to an
permitted by the rights of those securities) but subject in
aggregate nominal amount (within the meaning of sub-sections
each case to such exclusions or other arrangements as
(3) and (6) of section 551 of the Act) of £1,478,682.75; such
the directors may consider necessary or appropriate to
authorisation to expire at the conclusion of the next annual
deal with fractional entitlements, treasury shares (other
general meeting of the company (or, if earlier, on 30 June 2016),
than treasury shares being sold), record dates or legal,
save that the company may before such expiry make any offer or
regulatory or practical difficulties which may arise under
agreement which would or might require shares to be allotted, or
the laws of any territory or the requirements of any
rights to be granted, after such expiry and the directors may allot
regulatory body or stock exchange in any territory
shares, or grant rights to subscribe for or to convert any security
whatsoever; and
into shares, in pursuance of any such offer or agreement as if
the authorisations conferred hereby had not expired.
(ii)
otherwise than as specified at paragraph (i) of this
13.
That the directors be and are hereby generally and
resolution, to the allotment of equity securities and the
sale of treasury shares up to an aggregate nominal
unconditionally authorised for the purposes of section 551 of
amount (calculated, in the case of the grant of rights to
the Companies Act 2006 (the “Act”) to exercise all the powers of
subscribe for, or convert any security into, shares in the
the company to allot, and to grant rights to subscribe for or to
capital of the company, in accordance with sub-section
convert any security into, 9 per cent cumulative preference
(6) of section 551 of the Act) of £438,565 and shall
shares in the capital of the company (“preference shares”) up to
expire at the conclusion of the next annual general
an aggregate nominal amount (within the meaning of
sub-sections (3) and (6) of section 551 of the Act) of
meeting of the company (or, if earlier, on 30 June 2016),
save that the company may before such expiry make any
£5,579,768.00, such authorisation to expire at the conclusion of
offer or agreement which would or might require equity
the next annual general meeting of the company (or, if earlier, on
securities to be allotted, or treasury shares to be sold,
30 June 2016), save that the company may before such expiry
after such expiry and the directors may allot equity
make any offer or agreement which would or might require
securities or sell treasury shares, in pursuance of any
preference shares to be allotted or rights to be granted, after
such offer or agreement as if the power conferred hereby
such expiry and the directors may allot preference shares, or
had not expired.
grant rights to subscribe for or to convert any security into
preference shares, in pursuance of any such offer or agreement
15.
That a general meeting of the company other than an annual
as if the authorisations conferred hereby had not expired.
general meeting may be called on not less than 14 clear days’
14.
That the directors be and are hereby given power:
notice.
(a)
for the purposes of section 570 of the Companies Act
2006 (the “Act”) and subject to the passing of resolution
12 set out in the notice of the 2015 annual general
meeting, 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 the
said resolution 12; 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
By order of the board
R.E.A. SERVICES LIMITED
Secretary
23 April 2015
Registered office:
First Floor
32 – 36 Great Portland Street
London W1W 8QX
the Act) in the capital of the company held by the
Registered in England and Wales no: 00671099
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
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125
Notice of annual general meeting
continued
Notes
CREST members may register the appointment of a proxy or proxies for
the annual general meeting and any adjournment(s) thereof through
The sections of the accompanying Directors’ report entitled
the CREST electronic proxy appointment service by using the
“Results and dividends”, “Directors”, “Acquisition of company’s
procedures described in the CREST Manual (available via
own shares”, “Increase in share capital”, “Authorities to allot
www.euroclear.com/CREST) subject to the company’s articles of
share capital”, “Authority to disapply pre-emption rights”,
association. CREST personal members or other CREST sponsored
“General meeting notice period” and “Recommendation” contain
members, and those CREST members who have appointed (a) voting
information regarding, and recommendations by the board of the
service provider(s), should refer to their CREST sponsor or voting
company as to voting on, resolutions 5 to 7 and resolutions 10 to
service provider(s), who will be able to take the appropriate action on
15 set out above in this notice of the 2015 annual general
their behalf.
meeting of the company (the “2015 Notice”).
In order for a proxy appointment or instruction regarding a proxy
The company specifies that in order to have the right to attend and vote
appointment made or given using the CREST service to be valid, the
at the annual general meeting (and also for the purpose of determining
appropriate CREST message (a “CREST proxy instruction”) must be
how many votes a person entitled to attend and vote may cast), a
properly authenticated in accordance with the specifications of
person must be entered on the register of members of the company at
Euroclear UK and Ireland Limited (“Euroclear”) and must contain the
6.00 pm on 9 June 2015 or, in the event of any adjournment, at 6.00
required information as described in the CREST Manual (available via
pm on the date which is two days before the day of the adjourned
www.euroclear.com/CREST). The CREST proxy instruction, regardless
meeting. Changes to entries on the register of members after this time
of whether it constitutes a proxy appointment or an instruction to
shall be disregarded in determining the rights of any person to attend or
amend a previous proxy appointment, must, in order to be valid be
vote at the meeting.
transmitted so as to be received by the company’s registrars (ID: RA10)
by 10.00 am on 9 June 2015. For this purpose, the time of receipt will
Only holders of ordinary shares are entitled to attend and vote at the
be taken to be the time (as determined by the time stamp applied to the
annual general meeting. A holder of ordinary shares may appoint
another person as that holder’s proxy to exercise all or any of the
message by the CREST applications host) from which the company’s
registrars are able to retrieve the message by enquiry to CREST in the
holder’s rights to attend, speak and vote at the annual general meeting.
manner prescribed by CREST. The company may treat as invalid a
A holder of ordinary shares may appoint more than one proxy in relation
CREST proxy instruction in the circumstances set out in Regulation
to the meeting provided that each proxy is appointed to exercise the
35(5) (a) of the Uncertificated Securities Regulations 2001.
rights attached to (a) different share(s) held by the holder. A proxy need
not be a member of the company. A form of proxy for the meeting is
CREST members and, where applicable, their CREST sponsors or
enclosed. To be valid, forms of proxy and other written instruments
voting service provider(s) should note that Euroclear does not make
appointing a proxy must be received by post or by hand (during normal
available special procedures in CREST for particular messages. Normal
business hours only) by the company’s registrars, Capita Asset Services,
system timings and limitations will therefore apply in relation to the
PXS, 34 Beckenham Road, Beckenham BR3 4TU by no later than
input of CREST proxy instructions. It is the responsibility of the CREST
10.00 am on 9 June 2015.
member concerned to take (or, if the CREST member is a CREST
personal member or sponsored member or has appointed (a) voting
Alternatively, appointment of a proxy may be submitted electronically by
service provider(s), to procure that such member’s CREST sponsor or
using either Capita’s share portal at www.capitashareportal.com (and so
voting service provider(s) take(s)) such action as shall be necessary to
that the appointment is received by the service by no later than 10.00
ensure that a message is transmitted by means of the CREST system
am on 9 June 2015) or the CREST electronic proxy appointment
by any particular time. In this connection, CREST members and, where
service as described below. Shareholders who have not already
applicable, their CREST sponsors or voting service provider(s) are
registered for Capita’s share portal may do so by registering as a new
referred, in particular, to those sections of the CREST Manual
user at www.capitashareportal.com and giving the investor code shown
concerning practical limitations of the CREST system and timings.
on the enclosed proxy form (as also shown on their share certificate).
Completion of a form of proxy, or other written instrument appointing a
The rights of members in relation to the appointment of proxies
proxy, or any appointment of a proxy submitted electronically, will not
described above do not apply to persons nominated under section 146
preclude a holder of ordinary shares from attending and voting in
of the Companies Act 2006 to enjoy information rights (“nominated
person at the annual general meeting if such holder wishes to do so.
persons”) but a nominated person may have a right, under an
agreement with the member by whom such person was nominated, to
be appointed (or to have someone else appointed) as a proxy for the
annual general meeting. If a nominated person has no such right or
does not wish to exercise it, such person may have a right, under such
an agreement, to give instructions to the member as to the exercise of
voting rights.
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R.E.A. Holdings plc Annual Report and Accounts 2014
Any corporation which is a member can appoint one or more corporate
Shareholders may not use any electronic address (within the meaning
representatives who may exercise on its behalf all of its powers as a
of sub-section 4 of section 333 of the Companies Act 2006) provided
member provided that they do not do so in relation to the same shares.
in this 2015 Notice (or any other related document including the form
of proxy) to communicate with the company for any purposes other
Any member attending the annual general meeting has the right to ask
than those expressly stated.
questions. The company must cause to be answered any such question
relating to the business being dealt with at the meeting but no such
Under section 338 and section 338A of the Companies Act 2006,
answer need be given if (a) to do so would interfere unduly with the
members meeting the threshold requirements in those sections have
preparation for the meeting or involve the disclosure of confidential
the right to require the company (i) to give, to members of the company
information, (b) the answer has already been given on a website in the
entitled to receive notice of the annual general meeting, notice of a
form of an answer to a question, or (c) it is undesirable in the interests
resolution which may properly be moved and is intended to be moved at
of the company or the good order of the meeting that the question be
the meeting and/or (ii) to include in the business to be dealt with at the
answered.
meeting any matter (other than a proposed resolution) which may be
properly included in the business. A resolution may properly be moved
Copies of the executive directors’ service agreements and letters
or a matter may properly be included in the business unless (a) (in the
setting out the terms and conditions of appointment of non-executive
case of a resolution only) it would, if passed, be ineffective (whether by
directors are available for inspection at the company's registered office
reason of inconsistency with any enactment or the company’s
during normal business hours from the date of this 2015 Notice until
constitution or otherwise), (b) it is defamatory of any person, or (c) it is
the close of the annual general meeting (Saturdays, Sundays and public
frivolous or vexatious. Such a request may be in hard copy form or
holidays excepted) and will be available for inspection at the place of
electronic form, must identify the resolution of which notice is to be
the annual general meeting for at least 15 minutes prior to and during
given or the matter to be included in the business, must be authorised
the meeting.
by the person or persons making it, must be received by the company
not later than the date 6 clear weeks before the meeting, and (in the
A copy of this 2015 Notice, and other information required by section
case of a matter to be included in the business only) must be
311A of the Companies Act 2006, may be found on the company's
accompanied by a statement setting out the grounds for the request.
website www.rea.co.uk.
Under section 527 of the Companies Act 2006, members meeting the
threshold requirements set out in that section have the right to require
the company to publish on a website (in accordance with section 528
of the Companies Act 2006) a statement setting out any matter that
the members propose to raise at the relevant annual general meeting
relating to (i) the audit of the company's annual accounts that are to be
laid before the annual general meeting (including the auditor’s report
and the conduct of the audit); or (ii) any circumstance connected with
an auditor of the company having ceased to hold office since the last
annual general meeting of the company. The company may not require
the members requesting any such website publication to pay its
expenses in complying with section 527 or section 528 of the
Companies Act 2006. Where the company is required to place a
statement on a website under section 527 of the Companies Act 2006,
it must forward the statement to the company's auditor by not later than
the time when it makes the statement available on the website. The
business which may be dealt with at the annual general meeting
includes any statement that the company has been required under
section 527 of the Companies Act 2006 to publish on a website.
As at the date of this 2015 Notice, the issued share capital of the
company comprises 35,085,269 ordinary shares, of which 132,500 are
held as treasury shares, and 59,420,232 9 per cent cumulative
preference shares. Only holders of ordinary shares (and their proxies)
are entitled to attend and vote at the annual general meeting.
Accordingly, the voting rights attaching to shares of the company
exercisable in respect of each of the resolutions to be proposed at the
annual general meeting total 34,952,769 as at the date of this 2015
Notice.
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127
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R.E.A. HOLDINGS PLC
R.E.A. Holdings plc
First Floor
32-36 Great Portland Street
London
W1W 8QX
www.rea.co.uk
Registered number
00671099 (England and Wales)
.
R
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