R.E.A. HOLDINGS PLC
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Annual Report and Accounts
2015
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.
PBJ - bunding and water gate
Methane capture plant
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
References to “dollars” and “$” are to the lawful currency of the United States of America.
R.E.A. Holdings plc Annual Report and Accounts 2015
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Overview
Key statistics
Results ($’000)
Revenue
Earnings before interest, tax,
depreciation, amortisation
and biological gain
Profit before tax
Profit for the year
(Loss) / profit attributable to
ordinary shareholders
Cash generated by operations
Returns per ordinary share
(Loss) / 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
2015
2014 2013 2012
90,515 125,865 110,547 124,600
15,269
11,533
4,902
38,797 30,269 38,083
23,744 25,216 30,558
21,981 12,672 17,703
(3,964)
37,286
14,153 5,457 11,342
33,053 19,358 55,110
(11.2)
–
40.3 15.8 33.9
7.0
7.75 7.25
29,367
7,730
37,097
33,487
70,584
37,631
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
108,215 108,215 100,627 102,185
609,389 631,728 578,785 597,722
139,276 149,002 99,348 64,014
748,665 780,730 678,133 661,736
163,880 169,466 147,649 151,516
35,764 30,741 30,734
12,596 11,393 11,549
34,354
12,703
CPO extraction rate *
22.2%
21.9% 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
20.8
22.3 21.4 22.4
4.7
0.4
4.8
0.4
4.6
0.4
5.1
0.4
13,377
1.53
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 processed.
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R.E.A. Holdings plc Annual Report and Accounts 2015
Overview
Highlights
Financial
Sustainability
Second sustainability report published highlighting
success in meeting the group’s targets since 2013
Pioneering arrangement for the sale of renewable
energy generated from the methane capture plants to
distribute to 24 local villages, with 34% out of a total of
13,000 village households already connected
Completion of 2 new estate schools
Completion of 3 village water treatment community
development projects
Mapping project completed to ensure traceability and
optimise the quality of smallholder fruit maximising yields
and profitability and meeting international standards
3 regional awards for corporate and social responsibility
by the plantation sector
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Revenues of $90.5 million (2014: $125.9 million)
Operating profit of $17.2 million (2014: $32.1 million),
reflecting lower revenues partly offset by significant cost
savings
Profit before tax of $11.5 million (2014: $23.7 million)
Net new investment of $34.8 million (2014: $38.2
million)
4.2 million preference shares issued by way of a cash
placing raised $7.8 million net of expenses
1.8 million ordinary shares issued by way of a cash
placing raised $6.8 million net of expenses
Redemption date of £26.2 million nominal of 2015/2017
sterling notes extended to 2020, by way of an exchange
offer and placing to raise $4.1 million net of expenses
2 new bank facilities arranged in Indonesia totalling $22.4
million
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Agricultural operations
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Crop of fresh fruit bunches (“FFB”) 609,389 tonnes
(2014: 631,728 tonnes) and crude palm oil (“CPO”)
163,880 tonnes (2014: 169,466 tonnes)
Steady and continuous improvement in CPO extraction
rates and now averaging close to 24 per cent
Over 4,200 hectares of new land developed of which over
2,200 hectares planted
Completion of the perimeter bunding and water gates to
control flooding at PBJ; installation of water pumping
equipment now being installed
• Major refurbishment of 3 out of 4 boilers in the older mills
now complete ensuring resilience and enhancing both
efficiency and capacity
•
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New jetty constructed at Sungai Mariam
Agreement finalised to swap land held by PT Prasetia
Utama in exchange for land currently held by PT Sasana
Yudha Bhakti with completion expected in 2016
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R.E.A. Holdings plc Annual Report and Accounts 2015
03
Overview
Officers and advisers
Directors
D J Blackett
M A Parry
I Chia
D H R Killick
J C Oakley
R M Robinow
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
Hill House
1 Little New Street
London EC4A 3TR
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 2015
Overview
Maps
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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 2015
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Overview
Chairman’s statement
I would like to take this opportunity to introduce myself as the
new chairman of REA. I took over as chairman at the
beginning of 2016 and, at the same time, Mark Parry
succeeded John Oakley as Managing Director. Both Mark
and I have had a long association with the company: I have
served on the board as the senior independent director for
seven years; Mark joined REA in May 2011 as the group’s
regional director based in Singapore.
FFB yields and the CPO price have presented a number of
challenges this year. However, REA has made good strides in
identifying causes of the FFB yield reduction and these are
currently being addressed. The group has also continued its
drive to reduce costs and to improve extraction rates, making
a number of operational improvements in 2015.
Production levels in 2015 were lower than in 2014. The
volume of the group’s fresh fruit bunches (“FFB”) harvested
amounted to some 609,000 tonnes compared with 632,000
tonnes in 2014, while smallholder FFB processed by the
group amounted to some 139,000 tonnes, compared with
149,000 tonnes in 2014.
Unusual weather patterns and social issues with surrounding
communities (particularly in 2011 and 2012) have had a
negative impact on FFB yields in recent years. Moreover, it is
clear that the El Niño weather phenomenon experienced to an
extent in both 2014 and 2015 is resulting in reduced oil palm
yields in many parts of Malaysia and Indonesia. The group
now believes that weather and relations with the communities
surrounding its estates, which are now much improved, have
not been the only causes of recent lower yields. The group’s
newly installed information systems have permitted more
detailed analysis of estate block results than was previously
possible and, based on these, the group has concluded that
certain areas, particularly those that are hilly or where soils are
poor, will benefit from the application of increased fertiliser
dosages. It is expected that, over time, this will result in an
improvement in crop levels.
Crude palm oil (“CPO”) production amounted to some
164,000 tonnes in 2015, compared with 169,000 tonnes in
2014. This reflected the reduced crop and lower purchases of
fruit from smallholders as noted above, partially offset by
improving extraction rates in the oil mills.
The price of CPO per tonne, CIF Rotterdam, dropped to a low
of $480 per tonne in late August and averaged $612 per
tonne for the year compared with $828 per tonne in 2014.
This price weakness reflected the general collapse in
petroleum prices which in turn led to a decline in the
consumption of CPO for biodiesel. Prices subsequently
recovered to $560 per tonne at the end of 2015 and are
currently standing at $745 per tonne. The impact of the lower
prices was exacerbated by a new levy of $50 per tonne on
CPO exports introduced in July 2015. The average price
realised by the group for its own production in 2015 was
$485 per tonne, compared with $665 in 2014, reflecting in
part regional price differentials which were greater than usual.
Lower production and the weakness of CPO prices
contributed to falls in both revenues and gross profits for
2015 to, respectively, $90.5 million (2014: $125.9) and $17.0
million ($46.3 million). Profit before tax amounted to $11.5
million (2014: $23.7 million), including a $13.1 million gain
arising from changes in the fair value of biological assets
(2014: $3.6 million).
The drive to reduce costs and increase operating efficiencies
yielded positive results in 2015 and these initiatives are
continuing in 2016. The total number of workers on the
estates was reduced significantly from 9,800 at the beginning
of the year to approximately 7,400 at the year end primarily
reflecting a reduction in the number of temporary employees.
Refurbishment of three boilers in the two older mills was
completed during the year and refurbishment of the fourth
boiler will be completed shortly. As a consequence, CPO
extraction rates are steadily being restored to historic levels,
achieving 23.5 per cent by the year end, and currently
averaging close to 24.0 per cent. Installation of a second
boiler at the group’s newest mill at Satria is expected to be
completed in 2017 to increase processing capacity in this mill
to 80 tonnes per hour.
Good progress was made during the year with development of
the group’s newer land areas held by PT Putra Bongan Jaya
(“PBJ”) and PT Cipta Davia Mandiri (“CDM”). In excess of
4,200 hectares were cleared and some 2,200 hectares
planted during the year. Planting of cleared areas has
continued at a good pace in the first few months of 2016 and
represents a significant improvement compared with the
progress of recent years. In PBJ, construction of the
perimeter bunding and installation of water pumping
equipment to control flooding during the wetter months of the
year is now almost complete.
The group also made progress in finalising the legal, financial
and management agreements needed for the smallholder
cooperatives and in completing the field surveys necessary for
the development of the plasma schemes in compliance with
the group’s policy on responsible development of new land,
including high conservation value and carbon stock
assessments.
As previously reported, the company’s pioneering arrangement
with the Indonesian National Electricity company (“PLN”) for
the supply of renewable energy generated by the group’s
methane capture facilities to local villages came to fruition in
April 2015. The majority of the 24 villages and sub villages
are now connected bringing electricity supplies to some
06
R.E.A. Holdings plc Annual Report and Accounts 2015
13,000 households. Revenue from electricity sales amounted
to some $233,000 in 2015 and, with the rate of uptake
accelerating each month, amounted to some $133,000 in the
first three months of 2016.
The group is working towards concluding negotiations with a
third party in respect of the stone quarry. 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.
with a considerable number of potential trade investors and
these have resulted in current active discussions with a limited
shortlist of interested parties primarily directed at securing a
strategic third party investment in the company’s principal
operating subsidiary in Indonesia, PT REA Kaltim Plantations.
Should funding be required pending completion of these
discussions, the group will seek to place for cash a limited
number of new ordinary shares and the necessary authorities
to permit further issues are being sought at the company’s
forthcoming annual general meeting.
Looking ahead, the outlook for the CPO price is encouraging,
with petroleum oil prices making some recovery and expected
growth in general demand for CPO, supported by the recent
increase in Indonesia in the mandated usage for biodiesel
from 15 to 20 per cent. By contrast, the first quarter of the
year has seen lower FFB production and yields compared with
the corresponding period in 2015. Whilst the El Niño weather
event is likely to be a contributory factor, the group is working
to address the recent shortfall with more rigorous harvesting
routines and by adapting the current fertiliser regime, so that
over a period crop levels should start to improve. Combined
with the recent expansion of plantings and steady
improvements in extraction rates, the operations are well
placed to benefit from any further strengthening of the CPO
price.
I would like to conclude my report by thanking both Richard
Robinow, my predecessor, and John Oakley, the company’s
managing director until the end of 2015, for all their work and
efforts in building the company from its first plantings back in
1994 into what it is today. On behalf of the board of directors
I would like to express our gratitude. The company is fortunate
that both Richard and John have agreed to remain on the
board as non-executive directors and to continue to assist the
company, in particular in relation to strategic, financial and
agronomical matters.
There is much to take encouragement from for the year
ahead. Both Mark and I look forward to contributing towards
the company’s success in the coming months and years.
In view of the financial performance in 2015, the directors
have not recommended the payment of any dividend on the
ordinary shares in respect of 2015.
DAVID J BLACKETT
Chairman
Considerable time and effort was devoted in 2015 to
addressing the group’s funding profile. The group issued and
placed for cash both ordinary and preference shares,
extended the maturity of the sterling loan notes, negotiated
and drew two new bank facilities in Indonesia and settled a
long-term sterling-dollar swap. However, the shortening
maturity profile of a significant proportion of the group’s
borrowings remains a concern with some $84 million of term
bank loans and notes repayable during 2016 and 2017 (of
which some $15 million will fall due in 2016) and a further
$35 million of borrowings provided under working capital lines
that revolve annually, although the directors have no reason to
believe that these will not be renewed.
To address this concern, the group is pursuing several
initiatives. Negotiations are at an advanced stage with the
group’s Indonesian bankers with a view to confirming renewal
of the working capital lines and amending term bank loans to
extend their tenor and reduce early repayments. At the same
time, the group has initiated discussions on refinancing the
notes maturing in 2017.
However, the group also would clearly benefit from permanent
capital. Over the last year, exploratory talks have been held
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R.E.A. Holdings plc Annual Report and Accounts 2015
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 these activities, 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 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 good
returns can be achieved.
The knowledge and expertise gained from the group’s long
involvement in the plantation industry represent significant
intangible resources that underpin the group’s credibility. This
is important when sourcing capital, working closely with the
Indonesian authorities in relation to project development and
recruiting a high calibre experienced management team
familiar with Indonesian regulatory processes and social
customs and committed to sustainable practices. Other
resources important to the group are its established base of
operations, large, and uniquely near contiguous, land
concessions, 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 social and economic
progress in the localities of the group’s activities, while
maintaining high standards of sustainability. Achieving these
objectives is dependent upon, among other things, the group’s
ability to generate the operating profits necessary to finance
such achievement.
08
R.E.A. Holdings plc Annual Report and Accounts 2015
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.
An 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 not under
majority local ownership, should not impact the group in the
foreseeable future as the group has significant headroom for
development within this limit. However, the directors still
believe that there would be significant advantages to an
Indonesian listing of the group's principal operating subsidiary,
PT REA Kaltim Plantations (“REA Kaltim”) on the Indonesian
Stock Exchange in Jakarta combined with a public offering of
a minority shareholding in 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.
The group continues to work towards placing itself in a
position in which it is ready to proceed with the planned listing
of REA Kaltim. However, current interest in new issues on the
Indonesian Stock Exchange is limited so that it is unlikely that
this can be successfully undertaken in the near future.
Accordingly the group is actively exploring the possibility of a
transaction with a strategic investor. Ideally, such a transaction
will comprise a subscription of new shares in REA Kaltim with
a view to such investment preceding the planned public
offering. The group is currently in active discussions with
several interested parties.
CPO and CPKO are primary commodities that, as such, are
sold at prices 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, the group will have greater resilience in any
downturn in prices 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 while utilising the group’s
existing agricultural management capacity to manage the
resultant larger business. Secondly, the group strives
continually to improve the productivity and efficiency of its
established agricultural operations.
The stone and coal mining interests represent group
diversifications. The directors believe that quarrying of the
company’s sizeable stone deposit will improve the durability of
infrastructure in its agricultural operations and could also
provide useful additional revenue from the sale of stone to
third parties. Following a decision in 2012 to limit further
capital committed to the coal mining interests, the group’s
strategy for these interests is to maximise the recovery of
capital already committed.
The group’s financial strategy is 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.
The group recognises that its agricultural operations, of which
the total assets at 31 December 2015 represented some 96
per cent of the group’s total assets and which, in 2015,
contributed all of the group’s revenue, 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 3.3 per
cent to 202 million tonnes in the year to 30 September 2015
(of which vegetable oils represented 149.8 million tonnes).
The increased consumption was reflected in increased world
production during the same period of 201.7 million tonnes
with vegetable oils accounting for 149.9 million tonnes and
CPO 60.8 million tonnes (some 30 per cent of the total).
Total vegetable oil production is currently forecast to rise by
1.3 per cent in 2016 from 176.6 million tonnes to 178.3
million tonnes, driven principally by increased production of
soybean oil in South America encouraged by weakening
currencies in the region, with total CPO production accounting
for approximately 62 million tonnes 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.
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 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.
In recent years, biofuel has become an important factor in the
vegetable oil markets. According to Oil World, biofuel
production in the year to 30 September 2015 accounted for
some 13 per cent of global vegetable oil consumption. There
has been a widespread view that vegetable oil and petroleum
oil prices move in tandem and that petroleum oil prices have
created a floor for vegetable oil prices at the level at which
vegetable oils can be converted to biofuel at an overall cost
(net of any available subsidies) that is competitive with the
prevailing price of petroleum oil. Certainly, the sharp downturn
in petroleum oil prices during 2015 was followed by a similar
downturn in CPO prices.
Weakness in CPO prices during 2015 can also be attributed
to plentiful supplies of soya oil with excellent soya crops in
both the US and Brazil exacerbated in August and September
by heightened concern over the Chinese economy.
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 $424 per tonne. The monthly average price over the
ten years as a whole has been $822 per tonne.
The CPO price, CIF Rotterdam, started 2015 at $700 per
tonne and traded in a narrow range for much of the first half
of the year until it weakened sharply in late August to $480
per tonne. There was some recovery from September
onwards with the price reaching $560 per tonne by the end of
2015. The recovery has continued into 2016 and the price
currently stands at $745 per tonne.
The recovery in CPO prices in recent months provides some
evidence of decoupling between petroleum oil and vegetable
oil prices. This has perhaps been driven by continuing growth
in food consumption of vegetable oils and the fact that not all
conversion of vegetable oils to biofuels is dependent upon
market factors because an increasing element of biofuel use
reflects government mandates requiring that a certain
percentage of all fuel be made from biofuel. In the US and
several other countries, that percentage will increase in 2016.
10
R.E.A. Holdings plc Annual Report and Accounts 2015
Crude palm oil monthly average price
1400
1200
1000
800
600
400
200
0
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
In Indonesia, in particular, a levy on exports of CPO of $50 per
tonne introduced in July 2015 is being used to subsidise
biodiesel production. Concurrently with the introduction of this
levy, the Indonesian government announced an increase in the
mandatory biodiesel content in transport diesel from 10 per
cent to 15 per cent. Subsequently for 2016, this has been
increased to 20 per cent. It appears that, whilst taking time to
be fully implemented, this mandate is now beginning to have a
significant impact on Indonesian biodiesel consumption.
An after effect of the El Niño weather phenomenon
experienced in 2015 is that CPO production in Indonesia and
Malaysia in 2016 is now expected to be lower than it would
otherwise have been. A further scaling back may also be
expected as some growers have reduced fertiliser applications
in response to reduced revenues. Reduced production is
already resulting in lower levels of CPO stocks at origin.
The Indonesian context
The economy in Indonesia, along with the whole of South East
Asia and much of the rest of the world, was adversely affected
during 2015 by the slowdown in China, growing by only 6.9
per cent, the slowest rate for 25 years. Yet, despite current
poor external demand for commodities, delayed spending on
infrastructure and tight monetary policy, Indonesian GDP is
forecast to grow on average by 5.5 per cent per annum
between 2016 and 2020, materially ahead of the growth
estimate for global GDP of 2.6 to 2.8 per cent for 2016-17.
The Indonesian rupiah saw a marked depreciation from
Rp12,440 = $1 at the start of 2015 to a low of Rp14,728 =
$1 at the end of September 2015 but subsequently rallied to
Rp13,795 = $1 by the end of the year. The currency
continued to recover into the early part of 2016 but there is
uncertainty as to whether this can be sustained against a
background of low GDP growth and flat commodity prices.
The government of President Joko Widodo (“Jokowi”) is
making slow progress with delivering on election pledges of
reduced unemployment, increased infrastructure investment
and structural reform.
A consistently high level of security, in place in Jakarta for
many years, meant that the police were able to respond swiftly
to a recent terrorist attack, reducing the potential scale and
impact of the damage and, to an extent, helping to ease
concerns about political uncertainty in the wake of this recent
incident.
R.E.A. Holdings plc Annual Report and Accounts 2015
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Strategic report
Introduction and strategic environment
continued
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 2015 with, where
available, comparative figures for 2014 are provided in the
succeeding sections of this report, with each category of
indicators being covered in the corresponding section of the
report.
In East Kalimantan, where the group’s operations are based,
continued low coal prices have led to many coal companies
closing down with associated large-scale redundancies. The
fall in CPO prices has also resulted in plantation companies
reducing headcount in order to cut costs. The East
Kalimantan authorities have responded by increasing the
minimum wage by a mere 0.4 per cent in 2016, following a
number of years of increases that were substantially higher
than the rate of inflation.
Despite the economic challenges facing the Kutai
Kartanegara region in East Kalimantan, the regency head
(”Bupati”) has pressed ahead with important infrastructure
projects. The new Tenggarong Bridge over the Mahakam
River, built to replace the bridge that collapsed three years
ago, opened in December 2015 and road access to the
longstanding bridge over the Mahakam River at Kota Bangun
was eventually completed in November so that it is now
possible to drive direct from Balikpapan or Samarinda to the
group’s mature estates.
Following a change in the electoral system during 2014, all
Bupati elections were held at the same time in 2015, on 9
December. The majority of the elections were completed
without dispute although there are still some appeals by
contesting candidates that are being considered by the
constitutional courts. In Kutai Kartanegara, the incumbent was
re-elected with a resounding majority, signalling continued
stability for the next five-year term in the location of the
group’s mature estates. The group’s principal and oldest
subsidiary company has good relations with the Kutai
Kartanegara Bupati, who recognises that the group provides
significant local employment, local contracts and ancillary
community development benefits.
In Kutai Barat, a new Bupati was elected in December 2015
without incident after the previous incumbent completed his
maximum two terms. In Kutai Timur, an appeal is being
considered but, in any event, a new Bupati will be elected in
due course. These new Bupatis, have the potential to hold
office for ten years and the group companies that own
immature estates in the regions overseen by them will aim to
establish good relations with them similar to those in Kutai
Kartanegara.
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 export levy of $50 per tonne
affects all export sales of CPO and CPKO regardless of
selling price. As the levy is offset against export duties
payable under the established sliding scale and the starting
rate of export duty 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.
12
R.E.A. Holdings plc Annual Report and Accounts 2015
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 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 2015
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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
(“PBJ2”) acquired in 2012 and with additional land allocations
will, upon completion of necessary legal formalities, be owned
as to 95 per cent by the group and as to the balance by a local
investor. As noted under “Land areas” below, an agreement
finalised in 2015 will result in the swap of certain land areas
owned by the group for shares in PT Prasetia Utama (“PU”)
which will be similarly owned.
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 Sasana Yudha Bhakti (“SYB”) area and one
Kartanegara Kumula Sakti (“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 to 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.
Until the end of 2015, the REA Kaltim, SYB, KKS, CDM and
KMS areas were most readily accessed by river. However,
construction was completed towards the end of 2015 of a
new road between Tabang (a town to the north of the REA
Kaltim estates) and Kota Bangun, that passes through the
REA Kaltim estates and connects via a long-standing bridge
over the Mahakam River with an existing road from Kota
Bangun to Samarinda (the capital of East Kalimantan). This
means that, for the first time since the inception of the REA
Kaltim business, the group’s estates can now be accessed by
road from Samarinda, providing alternatives for transport
(particularly when dry weather periods affect river access to
the estates). A replacement for the bridge at Tenggarong, that
collapsed some three years ago, was opened in December
2015 and has reduced road transfer times between the
estates and Balikpapan to less than six hours. 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.
REA Kaltim sub-group
PT REA Kaltim
Plantations
REA Kaltim
PT Cipta Davia
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 2015
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.
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 2015, the overall area of the group’s fully titled
agricultural land remained at 70,584 hectares. In addition, at
31 December 2015, the group held land allocations subject to
completion of titling totalling 37,631 hectares. The areas still
subject to titling include 7,714 hectares that were acquired
during 2014 and for which the process of obtaining full title
has been initiated. These additional areas are adjacent to
existing titled land areas so that when they are eventually fully
planted, the resultant planted areas will form larger and
therefore more efficient contiguous units.
Certain of the land areas held by SYB overlap with mineral
rights held by an Indonesian third party company, PT Ade
Putra Tanrajeng (“APT”). During 2015, agreement was
finalised pursuant to a land swap agreement made in 2011
between SYB and APT whereby 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 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. Survey work is in progress to identify the areas to be
designated for conservation and completion of the swap
arrangements is now expected to occur during 2016.
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.
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
undeveloped land holdings in addition to monitoring its
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15
Strategic report
Agricultural operations
continued
compliance with the 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 2015 amounted in total to
37,097 hectares. Of this total, mature plantings comprised
29,367 hectares having a weighted average age of 13 years.
A further 2,140 hectares planted in 2012 were scheduled to
come to maturity at the start of 2016.
The breakdown by planting year of the total of 37,097 planted
hectares (which exclude 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 648
2010 1,405
2011 860
29,367
Immature areas
2012 2,140
2013 2,555
2014 784
2015 2,251
37,097
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. A total of 232 hectares of flood prone
areas forming part of the 2009 and 2010 plantings at CDM that were previously
abandoned are now expected to be recovered. This may involve construction of
bunding, subject to confirmation that such bunding will not affect the ecology in the
wetlands. These areas are now included in the above table.
There remain some additional areas for planting out in KMS,
where some 4,500 hectares have been planted to date. When
fully planted, hectarage should amount to around 4,800
hectares, of which some 800 hectares will be transferred to
village cooperatives in due course.
Good progress was made during 2015 with the development
of the new land areas held by PBJ and CDM, following
satisfaction, where required, of legislation enacted by the
Ministry of Forestry late in 2014 that 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.
The first phase of construction of the perimeter bunding
required to control flooding in the lower lying areas of PBJ
was completed on target in the middle of the year and the
second phase to shape and compact the bund was completed
by the year end together with construction of three water
gates. By the end of 2015, in excess of 4,200 hectares were
cleared across PBJ and CDM with over 2,200 hectares of this
planted.
Whilst clearing will continue into 2016 only to the extent of
existing contractual commitments or that the group is able to
raise additional equity finance to fund further development, if
such funding is available the group would be well placed to
clear a further 4,000 hectares during 2016 with planting out
of all cleared areas following steadily behind the clearing
programme. In any event, the group expects that by 30 June
2016, the total planted area will exceed 40,000 hectares.
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
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.
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 and in due course can be expanded to double its
capacity to 80 tonnes per hour. So as to ensure greater
resilience in the operation of the third mill and to provide the
steam capacity required to double its capacity, works
commenced in 2015 on the installation of a second boiler in
the third mill. These will be completed during 2016 but,
following a careful review of overall mill capacity and likely
utilisation during 2016, it was decided to postpone until 2017
installation of the other additional equipment that is needed to
double the capacity of the mill.
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R.E.A. Holdings plc Annual Report and Accounts 2015
Improvements to overcome a number of engineering and
operational deficiencies that had been identified in the mills
during 2014 were substantially completed during 2015.
These included refurbishment of three out of the four boilers
at the group's two older mills. Refurbishment of the fourth
boiler is expected to be completed during 2016. This will give
sufficient resilience in both of these mills to allow for routine
boiler maintenance while maintaining the design throughputs.
A programme of regular upgrading and maintenance work in
the mills initiated in 2015, including enhanced security
systems and flow meters to monitor throughput, is continuing
through 2016. As noted under “Crops and extraction rates”
below, extraction rates have recovered to higher levels and the
group expects these levels to be maintained going forward.
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. Early fruit from PBJ is
being sent for processing in the REA Kaltim mills but because
of the distance between PBJ and the group’s other planted
areas, this arrangement will become sub-optimal as the PBJ
production increases. It is therefore planned that, as FFB
production from PBJ grows, a further mill will be built on PBJ.
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.
A fleet of barges is used to transport CPO and CPKO, in
conjunction with tank storage adjacent to the oil mills and a
transhipment terminal owned by the group downstream of the
port of Samarinda. During 2015, the terminal jetty was
refurbished and extended to ensure that it can accommodate
increased traffic flow as the group expands. The core barge
fleet was sold during 2015 to a third party and leased back
under a long term lease arrangement to ensure compliance
with current Indonesian cabotage regulations. The fleet, which
comprises a number of small vessels, ranging between 750
and 2,000 tonnes, is used for transporting CPO and CPKO
from the estates to the transhipment terminal for bulking and
loading to buyers' own vessels. In addition, the group
maintains a time charter over a 4,000 tonne barge and a
2,400 tonne barge, both of which are equipped for sea
voyages to make deliveries to customers in other parts of
Indonesia and East Malaysia. On occasions, the group also
spot charters additional barges for 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.
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
more volatile and CPO and CPKO has to be transferred by
road from the mills to a point some 70 kilometres downstream
at Pendamaran where year round loading of barges of up to
2,400 tonnes is possible and the group has now established a
permanent loading facility on a site acquired some years ago.
The group maintains its own fleet of trucks for this purpose.
The additional resilience provided by this alternative route from
the estates to Pendamaran ensured that the group was able
to continue to evacuate all CPO and CPKO promptly during
the extended dry periods that were experienced during 2015.
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 delta 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. In
due course, a fifth mill at PBJ will have direct access to the
Mahakam and will follow the same route along the Mahakam
as CPO and CPKO from the group’s existing mills.
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17
Strategic report
Agricultural operations
continued
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 2015, together with comparative figures for
2014:
FFB crops (tonnes) 2015 2014
Group 609,389 631,728
External purchases 139,276 149,002
facilitated detailed comparison of crop performance by
individual block against levels of fertiliser applied. Although
these levels are set on the basis of independent agronomic
advice based on foliar analysis, there is strong evidence that
areas with poor soils or subject to greater fertiliser run off
(such as hill tops) will benefit from additional fertiliser. The
group has therefore decided to increase dosages and is
confident that, over a period, this will result in improvements to
crop levels.
Total 748,665 780,730
Revenues
Production (tonnes)
CPO 163,880 169,466
Palm kernels 34,354 35,764
CPKO 12,703 12,596
Extraction rates (percentage)
CPO 22.2 21.9
Palm kernels 4.7 4.6
CPKO 35.0 38.1
Rainfall (mm)
Average across the estates 2,141 2,606
An unusually dry period from July to October 2015, combined
with a knock-on effect from the climatic conditions in 2014,
resulted in generally lower oil palm production throughout East
Kalimantan and East Malaysia during 2015. Rainfall was
consistently below historic monthly averages and substantially
below the average of 3,454 mm for the preceding nine years.
This shortfall is attributed to an El Niño weather phenomenon
and it remains to be seen whether moisture stress will affect
the overall crop in 2016. However, notwithstanding the dry
period, much of the shortfall was attributable to the first half of
2015 and the latter months of the year saw some recovery in
crop levels.
Recent refurbishment and a regular programme of
maintenance in the mills, combined with a drive to improve the
quality of third party FFB from smallholders and other estates
in the vicinity of the group's estates, is contributing to a steady
improvement in extraction rates, with the CPO extraction rate
currently averaging close to 24 per cent. Third party FFB
continues to provide additional throughput and revenue.
The FFB crop for the period from the beginning of 2016 to
the end of March 2016 amounted to 124,475 tonnes, against
134,064 tonnes for the same period in 2015. Whilst it is
widely acknowledged that the El Niño weather phenomenon in
2015 has adversely impacted 2016 CPO production in South
East Asia, the group has been concerned as to whether this is
the sole reason for the lower level of crops that it is currently
achieving. The group’s new information systems have
Most all of the group’s CPO and all CPKO is 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.
CPO and CPKO are widely traded and the group does not
therefore see the concentration of its sales on three
customers as a significant risk. Were there to be problems
with any one customer, the group could readily arrange for
sales to be made further afield and, whilst this could result in
additional delivery costs, the overall impact would not be
material.
There were no sales of ISSC certified CPO during 2015 as
the fall in the price of petroleum oil led to a decline in the
consumption of CPO for biodiesel. However, the group sold
31,526 Greenpalm certificates in respect of RSPO certified
CPO and CPKO (20,000 CPO certificates at $1.50 each and
11,526 CPKO certificates at $44.00 each) using the RSPO
book and claim system as further detailed under “Certification”
in “Sustainability” below. There has been a small revival in the
ISCC market since the beginning of 2016 and 20,000 tonnes
of ISCC certified CPO were sold in the first quarter at a
premium of $7.50 per tonne, with further sales expected to be
made in the coming months.
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
18
R.E.A. Holdings plc Annual Report and Accounts 2015
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 2015 and
the group currently has no sales outstanding on this basis.
The average prices per tonne realised by the group in respect
of 2015 sales of CPO and CPKO, adjusted to FOB,
Samarinda, and net of export duty were, respectively, $485
(2014: $665) and $744 (2014: $951). The group's revenues
and cash flow were adversely impacted both by the overall
level of 2015 crops and by general weakness in the CPO
price throughout the year. In addition, the impact of the lower
prices realisable for the group's CPO production was
exacerbated by an export levy of $50 per tonne payable since
mid-July 2015 and reflected in sales for local delivery as local
and export sales are well arbitraged.
Operating efficiency
The group’s 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.
20 of the agreed villages, with prepay meters installed by PLN
in over a third of all village houses. Payment for the power so
utilised is made by PLN to the company and the district power
company, Perusahaan Daerah Kelistrikan Dan Sumber Daya
Energi Kabupaten Kutai Kartanegara (“Perusda”), at fixed
rates determined by Indonesian state regulations. The rate of
uptake is growing every month and, as further villages are
connected and the installed number of prepay meters
increases, power offtake from the group is projected to
increase. Revenue from electricity sales amounted to some
$233,000 in the first eight months to December 2015 and
some $133,000 in the first three months of 2016. PLN may,
in due course, be able to increase its power capacity
requirement to eight megawatts.
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 explore
opportunities for cost reduction from the use of surplus
methane, such as conversion of the group’s 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. The area in which compost was
substituted for inorganic fertiliser continued to increase during
2015.
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.
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 recent initiatives to
achieve further economies were extended during 2015
including 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).
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.
An additional three megawatts of generating capacity are
dedicated to PLN, the Indonesian state electricity company, to
use in supplying power to 24 villages and sub-villages
surrounding the group's estates by way of a local grid.
Following finalisation of the related licences and an inaugural
ceremony in April 2015, electricity is now being distributed to
The group’s employment costs represent about one third of
the cost of sales attributable to the group’s agricultural
operations. Following substantial above inflation increases in
the minimum wage in East Kalimantan in recent years,
minimum wages are being held more or less flat in 2016.
Whilst the group continues to maintain the differentials for
those of the group’s employees paid at a level above the
minimum wage and must ensure that the group’s wages
remain competitive with the market, the absence of an
increase in the minimum wage, coupled with a significant
reduction in the number of temporary employees during 2015,
should lead to a helpful reduction in costs in 2016. The group
is continuing to seek labour efficiencies wherever possible.
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19
Strategic report
Agricultural operations
continued
Implementation of the first phase of the new information
system, in which the group has been investing for several
years and which integrates the recording and reporting of
operational and accounting information, was completed during
2015. By providing greater insight into estate activities than
has hitherto been possible, the system is facilitating the
identification of potential savings and efficiencies.
20
R.E.A. Holdings plc Annual Report and Accounts 2015
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 stone concession comprises a
substantial deposit of high grade basalt stone and is located
close to the group’s agricultural operations. 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. The group’s stone concession is
therefore managed in conjunction with the group’s coal
interests 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 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.
Recent changes 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 concession holding companies have not
been consolidated, therefore, although the group is confident
that such conditions could over time be successfully
renegotiated without material loss to the group. 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 quarrying
and crushing operation on the group’s stone concession was
obtained in 2014. 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 continuing to seek third party financial
involvement to underpin the investment needed to upgrade
the access road to the group's stone concession which will be
a necessary preliminary to commencing extraction operations
at the concession. Discussions with one potentially interested
party are continuing.
Following a decision by the directors in 2012 to limit further
capital commitments to the coal operations and to concentrate
the group’s efforts on maximising recoveries from the existing
coal concessions and minimising related costs, coal activities
were suspended in 2014.
A project agreement signed in 2013 with a third party relating
to the development and operation of the Kota Bangun
concession, remains in place. Continuing weakness in
international coal prices has had negative consequences for
these arrangements but mining operations could be resumed
when coal prices recover.
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.
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21
Strategic report
KMS - loading ramp
New jetty at Sungai Mariam tank storage facility
Muai village clean water project
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R.E.A. Holdings plc Annual Report and Accounts 2015
Strategic report
Sustainability
Transparency
The group is committed to operating in a responsible and
transparent manner. This commitment is underscored by the
group ranking 7th out of 50 palm oil companies by the
Zoological Society of London’s (“ZSL”) Sustainable Palm Oil
Transparency Toolkit (“SPOTT”) in November 2015. The
SPOTT assessment, which is based solely on publicly available
information, is designed to score palm oil companies on their
level of transparency and commitment to sustainability. Topics
covered by the assessment include progress with achieving
Roundtable on Sustainable Palm Oil (“RSPO”) certification,
availability of information regarding the location and size of
operations, supply chain traceability and environmental policies
and management plans.
The introduction of a biennial sustainability report has been
central to the group’s ability to provide stakeholders with
detailed and quantitative information about the group’s
environmental and social performance. The report allows
stakeholders to monitor the group’s progress and to hold the
group accountable for meeting its sustainability commitments.
In addition, using the internationally recognised Global
Reporting Initiative (“GRI”) standard to produce this report
means that the group’s sustainability performance can be
compared to that of other leading palm oil companies.
In June 2015, the group published its second sustainability
report, which describes the group’s performance in 2013 and
2014. The report is available for download from the group’s
website: www.rea.co.uk and contains more comprehensive
information on all of the environmental and socio-economic
issues covered by this “Sustainability” section of the annual
report.
Policies
Early in 2015 the group adopted a new policy framework. This
framework comprises five policies designed to embrace both
the group’s sustainability standards and applicable regulations.
Together the policies reinforce the group’s commitment to
well-established best practices, such as zero burning, and are
a response to the rapidly evolving expectations of
stakeholders by making commitments to a range of issues,
such as avoiding new planting on peat and reporting on GHG
emissions, including emissions from land use change.
Certification
The group believes that certification is important because it
provides third party verification that international and national
sustainability standards are being implemented throughout its
operations. The group therefore remains committed to
ensuring that all of its plantations and mills achieve and
maintain RSPO and Indonesian Sustainable Palm Oil (“ISPO”)
certification.
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The group has been a member of the RSPO since 2007 and
during this period has actively contributed to strengthening the
RSPO standard and improving its implementation. This has
included piloting the RSPO’s Greenhouse Gas accounting tool
and participating in the task force established to develop a
High Conservation Value (“HCV”) Compensation Procedure,
which was finalised in November 2015.
To date, the group has obtained RSPO certification for its two
longest established mills and the majority of their supply base.
Over the course of 2015, the group has been working to
implement the requirements of the new RSPO standard at its
third, newest mill (Satria oil mill) and the estates that supply it.
Whilst significant progress has been made, the need to obtain
approval for an HCV compensation plan for 20 hectares of
land, which were cleared prior to conducting an HCV
assessment in one of the estates and which supply this mill,
before the RSPO audit can be undertaken has meant that the
original target date of December 2015 could not be met. The
group is now in the process of developing the HCV
compensation plan, which should be completed during the first
half of 2016. Once approved, the mill operations will be
subject to an RSPO audit. The RSPO new plantings procedure
is completed prior to undertaking any land clearing in the
group’s new development areas.
Although the Satria oil mill has not yet achieved RSPO
certification, it was awarded International Sustainability and
Carbon Certification (“ISCC”) in 2015. Obtaining ISCC
certification allows the group to sell the CPO produced from
ISCC certified mills for the production of biodiesel that meets
the requirements of the European Union Renewable Energy
Directive (“EU RED”). Further, all of the group’s three mills
completed the ISPO audit process in 2015.
Further information about the requirements of the RSPO,
ISCC and ISPO standards can be found in the group’s
sustainability report.
In 2015, 72 per cent of the CPO (116,528 tonnes) and 42
per cent of the CPKO (5,274 tonnes) produced by the group
was RSPO certified. Of the CPO that was RSPO certified,
105,199 tonnes was also ISCC certified. 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. However, the RSPO has developed a ‘Book and
Claim’ system that 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
2015, the group sold 20,000 CPO and 11,526 CPKO
Greenpalm certificates.
R.E.A. Holdings plc Annual Report and Accounts 2015
23
Strategic report
Sustainability
continued
Employees
At the end of 2015, the group’s workforce numbered some
7,400, compared to 9,800 at the end of 2014. The
approximately 25 per cent reduction in headcount reflects a
significant reduction in temporary employees and is a
consequence of the drive to improve productivity and to
achieve cost savings and efficiencies during 2015.
A key contributor to increased efficiency has been the
continued roll out of the group’s new information system, the
REA Kaltim Plantation Management System (“RKPMS”). The
introduction of this system means that all human resources
and operational data is now managed centrally and can be
made available to the management team to support decision
making in near real-time.
To improve productivity, the group aims to ensure that
employees at every level within the organisation are rewarded
based on their performance. Performance from assistant to
director level is evaluated annually in relation to a pre-agreed
set of quantitative and objective key performance indicators
(“KPIs”). So that every employee is focused on contributing to
optimising the performance of the group as a whole, for the
first time in 2015 30 per cent of each employee’s score was
linked to the group KPIs such as FFB harvested, CPO
extraction rates and cost per tonne of group FFB.
Performance related pay schemes for both the mills and
transport department has also been introduced to promote
efficiency and motivate staff. In addition to receiving the
minimum wage set by the government, non-staff mill workers
now have the opportunity to earn a bonus determined by the
quarterly performance of each mill against a range of
production and management parameters.
Complementary to efforts to motivate performance has been a
drive to reduce overtime, particularly in the mills and transport
departments, where in the past overtime has been perceived
by some as an entitlement unrelated to hours worked and has
led to incidents of overtime fraud. Measures introduced to
combat this include the installation of fingerprinting
technology in the mills and offices. Tighter controls on
overtime are essential to protect the safety of the group’s
workers, to ensure compliance with Indonesian labour
regulations and to minimise costs. Such measures can be
unpopular amongst some members of the workforce but initial
negative reactions were resolved swiftly and amicably by the
group’s industrial relations officer. Following the success of
the fingerprinting technology in the mills, the company is now
installing fingerprinting systems throughout the local
operations.
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.
24
R.E.A. Holdings plc Annual Report and Accounts 2015
Providing employees at the group’s newer plantations with
high quality housing is a priority and 90 new houses were
completed in 2015, 20 at Satria oil mill, 20 in Satria estate
and 50 in KMS. Although all housing on the group’s estates
has electricity and potable water, these new houses have been
designed to provide more space and better facilities. The use
of bataco bricks (breeze blocks) produced in-house by mixing
boiler ash from the mills with cement, has significantly
reduced both the cost and environmental footprint of these
houses.
In 2015, the group also added two new primary schools (on
the SYB Tepian estate and in KMS) to the existing network of
12 pre-schools, 12 primary schools and 1 secondary school
within the group’s plantations. These schools are managed by
a foundation established by the group. As at December 2015,
190 secondary, 1,769 primary and 482 pre-school children
were enrolled at the group’s schools.
The group’s long established cadet training programme is one
of the key mechanisms by which the group recruits fresh
graduates with the range of skills needed to run its business
and develops existing employees who demonstrate
management potential. The training programme is run from
the group’s central training school, and provides participants
with 12 months of theoretical and practical training in all
aspects of plantation management. Cadets who successfully
complete the training are appointed as assistants on the
group’s estates, in the mills and various other departments.
Over the last ten years, 226 cadets have participated in this
programme, of which 60 per cent are still employed by the
group.
To equip employees at every level with the skills and
knowledge to perform effectively and to advance their careers,
the group also runs an annual training programme. The
programme is designed by the group’s training manager,
based on input received from every department, and consists
of both in-house training and participation in external training
and conferences.
The group takes seriously its duty to protect and respect the
human rights of any person affected by its operations and is
committed to adhering to the core conventions of the
International Labour Organisation’s Fundamental Principles
and Rights at Work, as well as Indonesian labour regulations
and the provisions of the Modern Slavery Act 2015. The
policy on human rights is displayed at every work site in order
to communicate the group’s commitments in this regard to
employees at every level. This policy includes a commitment
to promote diversity and equality in the workplace and states
clearly that discrimination based on age, disability, ethnicity,
gender, marital status, political opinion, race, religion or sexual
orientation will not be tolerated. As at 31 December 2015, 41
ethnicities and five religions were represented in the group’s
workforce.
The group is conscious that the oil palm industry has
traditionally been male-dominated and seeks to improve the
gender balance within its workforce. Free driving training
courses are provided to women already living on the plantation
who are interested in joining the group’s transport department.
In 2015, five women participated in this training scheme, three
of whom are now employed as drivers. At the end of 2015,
women accounted for 22 per cent of the group’s workforce,
including 18 per cent of the management team.
2015 2014
Number of Number of Number of Number of
male staff female staff male staff female staff
Directors 5 1 5 1
Management 60 13 56 15
Rest of workforce 5,398 1,565 7,100 2,627
Total 5,463 1,579 7,161 2,643
Management
Mark Parry has overall local responsibility for the Indonesian
operations. Mr Parry is the president director and the chief
operating officer of REA Kaltim.
The board of REA Kaltim currently comprises, in addition to Mr
Parry, three executive directors, of whom two are Indonesian
nationals and the third a British expatriate. One of the
directors is female. Together, 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.
Following changes to broaden and strengthen the local senior
management team running the Indonesian operations, there is
an experienced management group under the board of
directors comprising departmental heads with responsibility
for, respectively, mature estates, immature estates, mill
operations, biogas and engineering, transport and logistics,
village affairs, information technology, human resources and
sustainability, including health and safety. A second tier of
management has responsibility for sales and marketing,
internal and operations audit, security, accounting, purchasing,
corporate finance, taxation and legal matters.
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 support and advice
that the group obtains from local advisers and from the local
non-controlling investors in, and local commissioners 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. The
recent changes in board positions and responsibilities, as
noted in the “Corporate governance report” below, are
consistent with the group’s intention that, over time, overall
executive responsibility for the management of the group will
progressively be transferred from the UK to Indonesia and
Singapore. To support this transition, the group augmented its
corporate secretarial function in 2015 with the appointment of
an additional senior executive, based in Singapore, who, in
addition to overseeing the regional legal and secretarial
departments, assists in ensuring consistency of investor
activities between Jakarta and London.
Health and safety
Implementing an Occupational Health and Safety
Management System that complies with the internationally
recognised OHSAS 18001 standard remains a high priority
for the group. The major focus of the group’s safety
programme in 2015 was the development and implementation
of measures designed to integrate safety considerations into
the working behaviour of every employee, such as more
rigorous safety inductions for all employees and contractors, a
company driving test and licence for all vehicles, routine
training sessions for high risk tasks (working at height or in
confined spaces) and the introduction of a safety
accountability system for all permanent staff.
It takes time and effort to ensure that these initiatives become
ingrained into the working practices of all employees so that
the management can be confident that the OHSAS 18001
standard will be upheld on a daily basis throughout the group’s
operations. It has been decided, therefore, that the target for
obtaining OHSAS 18001 certification should be delayed until
2016.
The directors deeply regret to report that three employees and
two relatives of employees were involved in fatal accidents
within the boundaries of the group’s operations during 2015.
Two of these fatalities occurred during working hours in the
final quarter of 2015 and accordingly are considered as work-
related. The first of these occurred when an employee
suffered a heart attack in the field and the second when a
contractor fell whilst standing on a trailer, in contravention of
company procedures, and was run over. The group treats any
fatality within its premises extremely seriously and responds in
the same way irrespective of whether the incident is
considered to be work-related or otherwise. In 2015, the
group introduced a more rigorous and inclusive incident
investigation and reporting procedure to ensure that the cause
of any incident is properly identified and the senior
management operations teams understand the remedial
action required to prevent such an incident from recurring.
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Strategic report
Sustainability
continued
Healthcare provision is inevitably limited in the remote
locations of the group’s operations. The group has established
a network of 18 clinics, which treat employees, their families
and also members of the local communities. Medical care is
provided by two doctors, a dentist and a team of paramedics
and midwives.
Community relations
Developing and maintaining good relationships with the
people that are impacted by or influence the group’s
operations is critical to the group’s success. Engaging in
formal and informal dialogue with a wide variety of
representatives of, and groups within, the local communities is
therefore a core component of the daily routine on the estates.
This continuous dialogue is led by a team of village
“ambassadors” and has resulted in a marked improvement in
relations with the surrounding communities over the last few
years. Although it is inevitable that disagreements will
occasionally arise, given that the local population with which
the group interacts comprises over 60,000 people, the
introduction of a more consistent and transparent approach to
resolving any claims of outstanding rights to compensation for
land has contributed to reducing the frequency of villager
claims.
Community development
The group is determined to ensure that its business continues
to make a significant and long-lasting contribution to
improving the socio-economic status of the communities that
live in the vicinity of its operations. The strategy for achieving
this has evolved significantly over the last twenty years, from a
primarily philanthropic approach to the development of
schemes designed to ensure that local communities share in
the benefits generated by the group’s operations. Key
initiatives to achieving this include maximising employment
opportunities for local people, supporting local businesses,
expanding smallholder schemes and investing in infrastructure
projects that will catalyse further development and assist
communities to become self-sufficient.
Prior to the inauguration of the project, the local villages relied
on diesel powered generators for electricity, which were
expensive to run and not environmentally friendly. Access to a
reliable source of green energy will both catalyse socio-
economic development and reduce GHG emissions.
Moreover, the communities which previously relied on
donations of diesel from the group to power their generators
will no longer be beholden to the group for power as they can
purchase electricity from PLN. For every kilowatt hour
purchased by PLN, the group receives some US cents 7.0.
Facilitating access to clean water is another way in which the
group is working to make a tangible long term contribution to
improving the welfare of the people living in the vicinity of its
operations. Over the course of 2015, the group has been
engaged in installing water treatment plants for three villages,
two of which are associated with REA Kaltim (Long Bleh
Modang and Muai) and one of which is associated with SYB
(Buloq Sen). Wherever possible, the group tries to involve the
relevant community in these projects. To ensure that these
villages do not rely on the group to maintain and manage the
new plants, training has been provided to operators of the
plants, whose wages will be covered by the villages’ own
annual budgets. Full responsibility for the management of
these latest water treatment plants was handed over to the
respective villages in February 2016.
The group’s achievements with respect to corporate social
responsibility were recognised in Kutai Kartanegara region’s
biennial cultural festival in 2015, when the group received two
platinum awards and one silver award for providing benefits to
society in infrastructure, health, education and culture, for
helping society to become more efficient and effective and for
its contribution to conservation and the environment.
Smallholders
The group believes that developing smallholder schemes and
purchasing FFB from independent smallholders are vital
mechanisms for ensuring that local communities benefit
financially from the group’s operations.
The evolution of the group’s approach to community
development is epitomised by the pioneering collaboration
with the Indonesian National Electricity company (“PLN”), as
noted under “Operating efficiency” in Agricultural operations
above, which came to fruition in April 2015. Through this
project with PLN, which controls all sales of electricity in
Indonesia, the group can now supply local villages with
electricity generated by the group’s methane capture facilities.
The group has invested in three additional gas engines, whilst
PLN has provided the infrastructure necessary to connect 24
villages and sub villages, comprising some 13,000
households, to this supply of renewable energy.
The group’s work with smallholders began in 2000, when the
group voluntarily established a programme known as “Program
Pemberdayaan Masyarakyat Desa” or “PPMD”. Through this
scheme, 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. As the end of
2015, 15 cooperatives of semi-independent smallholders
cultivating just over 1,500 hectares of oil palm had been
established through this scheme.
26
R.E.A. Holdings plc Annual Report and Accounts 2015
In 2007, the Indonesian government introduced a new
regulation that requires companies who acquire new land for
oil palm development to facilitate the establishment of
“plasma” smallholder schemes for the benefit of the
surrounding community. The area of oil palm developed under
such schemes must be no less than 20 per cent of the area
developed for the benefit of the company. In contrast to the
PPMD schemes, the start-up costs for the plasma schemes
established to date have been financed by loans to the
cooperatives concerned from REA Kaltim or local
development banks. A further difference is that members of
the cooperatives are not involved in managing the land
cultivated with oil palm. Instead this is done by the group, in
return for a pre-agreed management fee.
The development of plasma smallholder schemes has been a
significant focus of the group’s expansion programme in
recent years. In addition to working to establish 13 plasma
schemes for the newer concessions where this is mandatory,
in the interests of equitable treatment, the group has
voluntarily committed to develop six plasma cooperatives for
the villages whose land overlaps with the group’s long
established REA Kaltim concession.
At the end of 2015, the group had developed some 3,400
hectares (2014: 3,100 hectares) under its plasma schemes.
Although this represents limited progress since 2014 in terms
of expansion of the planted area, the group has made steady
progress in finalising the legal, financial and management
agreements needed by each cooperative. The group’s plasma
team has also invested significant time and energy in trying to
ensure that the members of each cooperative fully understand
how the plasma schemes work, including the cost of
cultivating oil palm, the terms of the financial agreements with
the group and bankers to the schemes, and the predicted
income over time to the members of each cooperative. Over
the course of 2015, progress has also been made in
completing the field surveys necessary for the development of
the plasma schemes to comply with the group’s policy on
responsible development of new land, including HCV and
carbon stock assessments.
During 2015, the group purchased over 125,000 tonnes of
FFB from plasma, PPMD and independent smallholders
(2014: 119,000 tonnes), providing these local farmers with
revenue equivalent to a total of some US$13.3 million (2014:
$19.7 million). As well as being an important source of
income for the local population, smallholder fruit represents a
significant portion of the group’s supply base, accounting for
some 17 per cent of the FFB processed in REA’s mills in
2015. Developing good relations with these farmers and
investing in measures to maximise the yield and quality of the
fruit that they produce is to the benefit of all parties
concerned.
The ability to trace all of the fruit purchased from smallholders
to a specific farmer and plot of oil palm is critical to the group’s
ability to improve practices among its suppliers. In 2015, the
group completed the process of mapping and creating a
comprehensive database of all the smallholder land within its
current supply base. This was a complex and time consuming
process covering some 1,500 independent smallholders who
together are cultivating some 7,700 hectares of land
dispersed over a wide area. Having completed this exercise,
the group has, since 1 July 2015, only accepted FFB from
farmers who have participated in this mapping process, which
means that the group’s FFB supply chain is now fully
traceable.
To improve the practices of the smallholders who manage their
own land (both PPMD and independent farmers), during 2015
the group worked with the international development NGO
SNV to pilot a ‘train the trainer’ programme. This involved
training the group’s smallholder team and the management
teams from five cooperatives in the techniques necessary to
provide effective training in best agricultural practices and
cooperative management. Once these ‘master trainers’ have
proven their ability to convey the training materials to others
effectively, they can then go on to train others to become
‘trainers’ with the objective that each cooperative within the
group’s supply base will eventually have the capability to
provide training to all of its members on a regular basis.
Greenhouse Gas (“GHG”) emissions reduction
2015 is the fifth 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 2015, a continued decline is seen using
the planted area intensity measure. The slight increase in the
per tonne measure is a reflection of the inclusion of the KMS
concession, which is fully planted but largely still immature, in
the scope of the carbon footprint for the first time in 2014.
Lower yields achieved by the group’s older established
plantations in 2015 compared to 2014 also contributed to the
increase.
GHG emissions from land use change continue to account for
the largest component, some 65 per cent, of the group’s
carbon footprint. 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, being 15 per cent, a 50 per cent reduction has
been achieved in the annual GHG emissions from POME
between 2011 and 2015. This is almost entirely attributable to
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Sustainability
continued
the installation of methane capture facilities at the 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.
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.
In 2015, the group continued to represent the Indonesian
growers in the RSPO’s GHG Emissions Reduction Working
Group.
Conservation
The group is conscious that the longevity of its business is
wholly dependent on ecosystem services, such as nutrient
cycling, climate regulation and pollination, which are critical for
productive agriculture. It is therefore imperative that measures
are in place to avoid and mitigate the negative environmental
impacts that can be associated with oil palm cultivation in the
tropics.
To ensure that everyone, including contractors, involved in the
process of planning and developing new areas of land is
aware of these requirements and their specific responsibilities,
a new policy and standard operating procedure for responsible
development was adopted by the group at the beginning of
2015.
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, an HCV assessment and,
from 2015, a carbon stock assessment. The results of these
surveys are used to designate 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.
The area designated as conservation reserves within the
group’s titled land bank totals some 18,250 hectares,
accounting for some 25 per cent of the group’s titled land
area. 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
At the end of 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 535
species, including 87 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”. During 2015, REA Kon detected the presence
of two species which had not previously been recorded by the
group, a Clouded leopard (Neofelis nebulosi), which is listed as
Vulnerable on the IUCN Red List, and a White headed weasel
(Mustela nudipes), which were photographed during camera
trap surveys in KMS.
The group considers the presence of the Endangered Borneo
orangutan within four of its concessions to be both a great
privilege and a huge responsibility. REA Kon therefore
monitors the orangutan population on a monthly basis by
conducting nest surveys along permanent transects. The
group is conscious that the risk of human-orangutan conflict
will increase as the landscape becomes increasingly
fragmented as a result of oil palm development. During 2015,
the group was involved in a case where people from a local
village discovered a baby orangutan alone and far from the
forest and felt compelled to rescue it. Although this orangutan
was not found within one of REA’s concessions, REA Kon was
contacted by the villagers to ask for assistance in caring for it.
Since the orangutan was an infant, it was feared that it might
not survive if simply released into the nearest area of forest,
which would have been the group’s conservation reserves.
REA Kon therefore arranged for the Department for the
Conservation of Natural Resources (“BKSDA”) to collect the
orangutan from the villagers and take it to a rehabilitation
centre in East Kalimantan. In response to this incident, the
group has developed a formal collaboration with the BKSDA,
outlined by a memorandum of understanding, which includes
the provision of training in effective management of human-
wildlife conflict for the REA Kon team.
Protecting through active management the areas of natural
habitat which the group has set-aside within its concessions is
extremely challenging. The group is aware that a significant
portion of the conservation reserves within its longest
established plantations have been impacted by logging and
clearing for agriculture by local communities. Identifying and
mapping the encroachment on the extensive areas designated
for conservation is a huge task which must be completed with
some urgency. The group therefore engaged the remote
sensing experts, SarVision, to produce high resolution maps of
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R.E.A. Holdings plc Annual Report and Accounts 2015
the conservation reserves using drones. These maps were
completed in November 2015 and indicate that some 352
hectares, or 6.6 per cent of the 5,324 hectares designated as
conservation reserves within the REA Kaltim concession may
have been impacted by encroachment.
conservation reserves were burnt in 2015. In response to
widespread concern about the environmental and social
impact of the fires, the RSPO has introduced a fire alert and
reporting system for all members with which process the
group has fully participated.
The group is now in the process of visiting each location of
potential encroachment to gather detailed information about
the precise extent of the area affected, the perpetrators and
the existence of legal or customary rights. As part of this
exercise, REA Kon is also assessing the risk of further
encroachment of each area, the ecological, social and legal
feasibility of restoring the natural vegetation and the cost of
doing so. Based on this information, REA Kon has developed
an action plan for each location where encroachment has
occurred. By the end of 2015, this process had been
completed for 360 hectares in REA Kaltim and 30 hectares
within SYB. Whilst the ideal would be to restore all locations
with natural vegetation, the group’s ability to do so depends on
obtaining the free, prior and informed consent of any
legitimate legal or customary land use rights holders to
change the use of these areas.
At the same time as working to mitigate the impact of
encroachment in the older estates belonging to REA Kaltim
and SYB, implementing measures to protect the conservation
reserves set-aside in the newer developments is also a high
priority. Critical to achieving this is the policy to ensure that, in
future, all legal and customary land use rights to the
conservation reserves are identified and acquired in the same
way as for the land designated for oil palm cultivation, which
was not the case when REA Kaltim and SYB were developed
many years ago. This should facilitate the group’s ability to
prevent and tackle any clearance of these future reserves. In
addition to this change in group policy, a new standard
operating procedure has been developed to ensure that the
plantation, conservation, villager affairs and security teams
fully understand their respective responsibilities and can
respond quickly and effectively if logging or land clearing is
detected within the conservation reserves.
Responsible agricultural practices
The onset of El Niño conditions in Borneo during the last
quarter of 2015, which resulted in the group’s operations
being subject to several months of drought, emphasised the
importance of implementing responsible agricultural practices.
The fires which raged across Borneo during the El Niño
resulted in huge tracts of forest being burnt and both humans
and wildlife being subjected to dangerously poor air quality for
several months. Despite strict adherence to a zero burn policy
within its own concessions and the best efforts of the group’s
fire-fighting teams, the group’s operations were impacted both
directly and indirectly by the fires. As a consequence of this,
379 hectares of oil palm and 282 hectares of the
The severe droughts experienced during the El Niño serve as
a reminder that access to an adequate supply of clean, fresh
water is critical to both the group’s ability to operate and the
livelihoods of the surrounding communities. It is therefore
imperative that this precious resource is used efficiently and
equitably and does not become polluted.
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.
Since 2012, a significant portion of the POME produced by
Camera trap photo from KMS
the group’s two longest established mills has been treated in
conservation reserve 2015
the methane capture facilities, as opposed to the open pond
system that has traditionally been used by 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 it is below the legal limit for land
application in Indonesia, being 5,000 milligrams per litre.
The group aims to use inorganic fertilisers prudently in order
to achieve maximum yields at minimum cost and reduce the
risk of water pollution from run-off or leaching. To achieve this,
the group works closely with independent agronomists, who
design the group’s inorganic fertiliser regimes based on
analysis of the nutrient content of systematically selected oil
palm frond samples. Over the last five years the group has
substituted organic compost for significant quantities of
inorganic fertiliser. The organic compost is produced on site
from POME and empty fruit bunches at all three of the group’s
oil mills. As the volume of organic compost produced will
never be sufficient to fertilise the whole supply base, it is
applied at a fixed dosage to a different area of oil palm within
the supply base each year in order to spread the benefits in
terms of soil improvement.
Company birthday celebrations 2014
Despite precautions to prevent water pollution, over the
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R.E.A. Holdings plc Annual Report and Accounts 2015
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Strategic report
Sustainability
continued
course of 2015 there were four occasions when
representatives of local communities claimed that the group’s
operations had caused water pollution. For each incident
reported, a full investigation was conducted, involving
representatives of the affected communities and the local
environment department, which determined that two of the
incidents were caused by minor spillages during the transfer
of CPKO and POME respectively, while the other two claims
were invalid. Remedial action was taken to clear the two
minor spillages and to prevent further incident and both
matters are now closed.
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
that 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.
30
R.E.A. Holdings plc Annual Report and Accounts 2015
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REA 20th birthday celebrations
REA 20th birthday celebrations
R.E.A. Holdings plc Annual Report and Accounts 2015
31
Strategic report
Finance
Accounting policies
The group and the company continue to report in accordance
with International Financial Reporting Standards (“IFRS”) and
to present their financial statements in dollars. 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 2015 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 2015 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 2015 were 15 per cent for
the estates owned by REA Kaltim, SYB and KMS and 18 per
cent for all other group companies. These discount rates are
the same as those applied in 2014, except that, in the case of
KMS, the rate has been reduced from 16.5 per cent per
annum in 2014. 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.
As previously reported, the standard which determined that
biological assets have to be stated at fair value, IAS 41
Agriculture, was amended in 2014 in a way that, for plantation
companies growing so called “bearer plants”, requires the
reversion 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. At the same time IAS 16 Property, Plant and
Equipment was amended to accommodate this change. The
EU endorsed the amendments to IAS 41 and IAS 16 in
December 2015 and these will be applied by the group in
2016. The directors expect to adopt the December 2015 fair
32
R.E.A. Holdings plc Annual Report and Accounts 2015
value of the biological assets as their deemed cost of plant
and equipment as at 1 January 2016, being the effective date
of the IFRS amendments. 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.
The amendment of IAS 41 has introduced a new requirement
for plantation companies to account for “growing produce”, but
only if this can be reliably measured. In the case of the group,
growing produce will mean FFB in formation on the group’s oil
palms. Such growing produce will, if measured, be treated as
a separate asset with changes in the value of the asset from
year to year being taken to the income statement. The
directors are discussing with the group’s auditor and other
companies in the oil palm sector whether FFB in formation
can be reliably measured and, if so, the measurement
methodology that should be applied.
The biological assets in the group balance sheet at 31
December 2015 amounted to $339.1 million. An increase or
reduction of $5 per tonne in the estimated profit margin used
for the purpose of the valuation (namely $63.9 per tonne of
FFB) would increase or reduce the valuation by approximately
$27.2 million.
Group results
Revenue, operating profit and profit before tax reported by the
group for 2015, with comparative figures for 2014, were as
follows:
2014
$’m $’m
2015
Revenue 90.5 125.9
Operating profit 17.2 32.1
Profit before tax 11.5 23.7
The significantly lower revenue and profit before tax reported
for 2015 as compared with 2014 were principally the result of
the lower CPO price prevailing during 2015 with an average
price of CPO, CIF Rotterdam, in 2015, of $612 per tonne,
against $816 in 2014. In consequence, the average price
realised by the group for its own CPO production was $485
per tonne against $665 per tonne in 2014. The results reflect
net overall mark to market gains on produce inventory and
biological assets of $11.9 million, some $10.0 million higher
than the $1.9 million recorded in 2014 and an increase in
gains from exchange rate movements of $4.7 million as
compared with the preceding year.
During 2015, improvements in cost control were maintained
and extended, including the streamlining of the workforce to
reduce dependence on temporary employees. The Indonesian
rupiah continued to weaken during the year, mitigating the
effect of inflation on rupiah denominated costs. The cost of
sales fell by $5.5 million to $72.4 million, compared with
$77.9 million in 2014, largely due to a reduction in the cost of
third party fruit purchased.
Cost of sales reported for 2015, compared with 2014, was as
follows:
2014
$’m $’m
2015
Supreme Court reviews is known. None of this potential
interest receivable, amounting to some $4 million, has been
recognised in the 2015 financial statements.
Purchase of external FFB 13.3 19.7
Estate operating costs 48.1 47.9
Depreciation and amortisation 11.0 10.3
The group’s target long term average annual return on
adjusted equity is 20 per cent. The return achieved for 2015
was 1.5 per cent (2014: 7.4 per cent).
72.4 77.9
Dividends
Further development of the group’s plantations contributed to
a net gain from changes in the fair value of biological assets
of $13.1 million (2014: $3.6 million), while the movement in
the fair value of agricultural produce inventory yielded a loss of
$1.1 million (2014: loss of $1.7 million) reflecting lower
values of closing inventory than those of 2014.
Administrative expenses for 2015 amounted to $11.7 million
(2014: $16.4 million) benefiting from a one-off write back of a
$2.2 million provision in respect of future UK pension
contributions no longer required, some cost savings in
Indonesia and the general weakening of the rupiah.
Finance costs for 2015 amounted to $6.0 million, compared
with $8.8 million in 2014, reflecting changes in the value of
foreign currency monetary net assets yielding a gain of $6.0
million compared with a net gain in 2014 of $1.3 million (thus
resulting in the increase in gains from exchange rate
movements of $4.7 million referred to above). There was also
a $1.6 million benefit from a higher capitalisation rate applied
to interest costs, but this was partly offset by an increase in
interest on bank loans of $3.3 million.
Tax charged against profit for 2015 amounted to $6.6 million
against $1.8 million in 2014, the latter having been reduced
by a one-off write back of a prior period $8.4 million provision
following a 2014 Jakarta Tax Court decision in favour of REA
Kaltim in relation to a disputed assessment with respect to
mark-to-market losses recorded in 2008 on cross currency
interest rate swaps.
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. The Indonesian tax authorities
have also appealed to the Supreme Court of Indonesia for
judicial review of the Jakarta Tax Court’s 2014 decision in
favour of REA Kaltim referred to above.
Refunds of disputed tax were received following the Jakarta
Tax Court’s decisions in 2012 and 2014 but it has been the
practice of the tax authorities to withhold any interest due on
such refunds until after the outcome of any Supreme Court
review. A new regulation issued in late 2015 now permits
taxpayers to apply for interest immediately following receipt of
disputed tax refunds. REA Kaltim is discussing with its local
tax office the exact interpretation of this regulation with a view
to agreeing a release of interest before the outcome of the
The fixed semi-annual dividends on the 9 per cent cumulative
preference shares that fell due on 30 June and 31 December
2015 were duly paid. In view of the difficult conditions that
faced the group during 2015 and in light of the 2015 results,
the directors have concluded that, as previously announced,
they should not declare or recommend the payment of any
dividend on the ordinary shares in respect of 2015.
The development of the group’s agricultural operations
continues to require major capital expenditure and the need to
fund this expenditure will continue to constrain the rates at
which the directors feel that they can prudently declare, or
recommend the payment of, ordinary dividends until such time
as the development of the group’s remaining plantable land
bank has been completed.
Capital structure
The group is financed by a combination of debt and
shareholder funds. Total shareholder funds less non-
controlling interests at 31 December 2015 amounted to
$309.1 million as compared with $304.9 million at 31
December 2014. Non-controlling interests at 31 December
2015 amounted to $2.5 million (2014: $1.7 million).
In July 2015, 4,221,000 new preference shares were issued
for cash at a price of 120p per share by way of a placing to
raise $7.8 million net of expenses. This issue was followed in
October 2015 by the issue of 1,754,260 new ordinary shares
for cash at a price of 260p per share by way of a placing to
raise $6.8 million net of expenses.
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. To date, 132,500 ordinary shares have been
acquired pursuant to this authority and are currently held in
treasury.
On 3 September 2015 REA Finance issued, by way of an
exchange offer and cash placing at par, £26.6 million nominal
of new 8.75 per cent sterling notes 2020 (the “2020 sterling
notes”) and concurrently acquired and subsequently cancelled
£26.2 million nominal of outstanding 9.5 per cent sterling
notes 2015/2017 (the “2017 sterling notes”) (together, the
“sterling notes”). Thereafter, on 10 September 2015 a further
£0.3 million nominal of 2020 sterling notes were issued by
R.E.A. Holdings plc Annual Report and Accounts 2015
33
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Strategic report
Finance
continued
way of a cash placing at par and on 22 December 2015 a
further £5.0 million nominal of 2020 sterling notes were
issued by way of a cash placing at a price of £0.97 per £1.00.
Of these latter notes, £1.5 million nominal were subscribed by
a subsidiary of the company.
Following these transactions, group indebtedness at 31
December 2015 amounted to $212.4 million against which
the group held cash and cash equivalents of $15.7 million.
The composition of the resultant net indebtedness of $196.7
million was as follows:
$’m
7.5 per cent dollar notes 2017
(“2017 dollar notes”) ($34.0 million nominal) 33.6
9.5 per cent guaranteed sterling notes 2015/17
(“2017 sterling notes”) (£8.3 million nominal) 10.6
8.75 per cent guaranteed sterling notes 2020
(“2020 sterling notes”) (£31.9 million nominal) 45.3
Indonesian term bank loans 87.4
Drawings under working capital lines 35.5
212.4
Cash and cash equivalents (15.7)
Net indebtedness 196.7
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 2015 was equivalent to $9.8 million.
The 2017 dollar notes are unsecured obligations of the
company and repayable on 30 June 2017. The sterling notes
are issued by REA Finance B.V., a wholly owned subsidiary of
the company, are guaranteed by the company and another
wholly owned subsidiary of the company, R.E.A. Services
Limited (“REAS”), and are secured almost wholly on
unsecured loans made by REAS to Indonesian plantation
operating subsidiaries of the company. The 2017 sterling
notes, save to the extent previously redeemed or cancelled,
were repayable in three equal annual instalments commencing
on 31 December 2015. However, the instalments due on 31
December 2015 and 2016 having been satisfied by the
cancellation of £26.2 million nominal of such notes in
September 2015 following the exchange offer referred to
above, the 2017 sterling notes are now repayable in a single
instalment on 31 December 2017. The 2020 sterling notes
are repayable in a single instalment on 31 August 2020.
The outstanding long-term sterling dollar swap to hedge
against dollars the sterling liability for principal and interest
payable in respect of £22 million nominal of the 2017 sterling
notes terminated on 24 December 2015 at a cash cost of
some $10.2 million and a charge to profit and loss account of
$595,000. The group has no plans to enter into further 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 each of REA Kaltim,
SYB, PBJ and KMS and a US dollar amortising term loan to
REA Kaltim. The REA Kaltim loans are provided by PT Bank
DBS Indonesia (“DBS”) and are secured on certain assets of
REA Kaltim and guaranteed by the company. The outstanding
balance of such loans at 31 December 2015 was the
equivalent of $45.0 million repayable as follows: 2016: $10.6
million, 2017: $15.9 million and 2018: $18.5 million.
The SYB loan, also provided by DBS, is secured on assets of
SYB and is guaranteed jointly by the company and REA
Kaltim. The outstanding balance of the loan at 31 December
2015 was the equivalent of $17.1 million repayable as
follows: 2016: $4.8 million, 2017: $6.7 million and 2018: $5.6
million.
The PBJ loan is provided by PT Bank UOB Indonesia (“UOB”),
is secured on the assets of PBJ and is guaranteed jointly by
the company and REA Kaltim. The outstanding balance of the
loan at 31 December 2015 was the equivalent of $7.4 million
repayable as follows: 2018 and thereafter: $7.4 million.
The KMS facility is provided by PT Bank Mandiri (Persero) Tbk
(“Mandiri”), is secured on the assets of KMS and is
guaranteed by the company. The outstanding balance of the
loan at 31 December 2015 was the equivalent of $17.9
million repayable by instalments commencing in 2018.
At 31 December 2015, unutilised facilities available to the
group comprised the equivalent of $21.6 million available to
be drawn from UOB as an addition to the existing amortising
term loan to PBJ.
Group cash flow
Group cash inflows and outflows are analysed in the
consolidated cash flow statement. Cash and cash equivalents
decreased over 2015 from $16.2 million to $15.7 million.
As noted under “Group results” above, operating profit for
2015 amounted to $17.2 million as compared with $32.1
million in the preceding year.
A $7.2 million positive adjustment for the non-cash
components of operating profit reflected depreciation of $9.1
million, $9.0 million arising on reversal of prior year provisions
on the hedging contract terminated in the year and a decrease
in inventory fair value of $1.1 million, partially offset by
movements in the valuations of biological assets of $13.1
million. A $12.9 million decrease in working capital was
principally the result of an increase in payables of $6.8 million,
largely due to prepayments received in respect of CPO sales.
34
R.E.A. Holdings plc Annual Report and Accounts 2015
As a result cash generated by operations for 2015 amounted
to $37.3 million against the $33.1 million reported for 2014.
Taxes paid in the year of $5.4 million were largely offset by tax
refunds received of $4.6 million, and interest paid was $16.4
million. The overall result was that cash from operating
activities for 2015 amounted to $20.1 million against $24.4
million for 2014.
Investing activities for 2015 involved a net outflow of $34.8
million (2014: $38.2 million). This represented new
investment totalling $37.6 million (2014: $38.6 million), offset
by inflows from proceeds on disposal of property, plant and
equipment and interest and minor items totalling $2.8 million
(2014: $0.4 million). The new investment comprised
expenditure of $32.3 million (2014: $33.4 million) on further
development of the group's agricultural operations, $1.3
million (2014: $4.3 million) on land rights and titling, and $4.0
million (2014: $0.9 million) on the stone and coal operations
(primarily on the stone operations and arising mainly from the
refinancing of debts incurred by those operations in previous
years).
The net cash inflow from financing activities amounted to
$14.4 million (2014: outflow of $4.4 million) made up as
follows:
2014
$’m $’m
2015
Issue of new ordinary shares 6.8 –
Issue of new preference shares 7.8 10.6
Issue of new sterling notes 4.1 –
Purchase of treasury shares – (1.0)
Purchase of sterling notes (2.2) –
Payment to close out hedging contract (10.2) –
Net increase / (reduction) in
borrowings 20.7 (1.6)
Dividend payments (12.6) (12.4)
14.4 (4.4)
Liquidity and financing adequacy
With the recovery in CPO prices from their low point in late
August 2015 continuing to date in 2016 (the reasons for
which are discussed under “The vegetable oil market context”
in “Introduction and strategic environment” above), the group
can reasonably expect a higher average price for its CPO
sales in 2016. Sales revenues for 2016 will further benefit
from the higher oil extraction rates now being consistently
achieved by the group’s mills. In addition, the group expects
that that the steps it is taking in response to its recent findings
on fertiliser will lead to higher crop volumes although the
impact of higher fertiliser applications will not be immediate.
With the group continuing to exercise good control over costs
and further cost efficiencies in prospect, the directors are
confident that the group’s operations will remain cash
generative.
As noted under “Capital structure” above, at 31 December
2015, the group held cash and cash equivalents of $15.7
million and had undrawn facilities equivalent to a total of
$21.6 million under the UOB amortising term loan facility. In
addition, the group is currently at an advanced stage in
negotiations with its bankers to amend the $62.1 million of
amortising term loan facilities provided by DBS to REA Kaltim
and SYB, with a view to extending the tenor of the loans to
mid- 2020 and reducing from their present levels the quarterly
instalments payable during the early life of the rebased
facilities. The directors have no reason to believe that the
group’s working capital facilities of $35.5 million, which are
also provided by DBS and are also renewable annually, will not
be rolled over at the end of July 2016 when the term of the
existing facilities expires.
Whilst improving cash flows from operations and amending
the terms of the amortising term loan facilities with DBS will
improve the group’s liquidity, the group requires further long
term capital.
For the reasons explained under “Future direction” in
“Introduction and strategic environment” above, the group has
for some time been planning that it should raise capital by way
of a public offering to Indonesian investors of a minority
shareholding in REA Kaltim combined with a listing of the
shares of REA Kaltim shares on the Indonesia Stock
Exchange. However, market conditions and the group’s recent
performance have not been conducive to such a public
offering. The group has therefore, in recent months, been
actively exploring the possibility of raising capital from a
strategic investor ideally by way of a subscription of new
shares in REA Kaltim with a view to such investment being
later followed by the planned public offering.
Discussions with a short list of potential strategic investors are
now at an advanced stage. If, as is expected, such discussions
can be successfully concluded, the outcome would be likely to
resolve or significantly reduce the group’s requirement for
additional liquidity. Should funding be required pending
completion of these discussions, the group will seek to place
for cash a limited number of new ordinary shares and the
necessary authorities to permit further issues are being
sought at the forthcoming annual general meeting of the
company.
The directors intend that the undrawn balance of the UOB
amortising term loan facility will be used to fund development
expenditure on PBJ. Beyond that, the directors intend to
commit to discretionary 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 in 2017, no further expenditure
on milling capacity will be required until work commences on
the construction of a fourth mill now projected to be brought
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R.E.A. Holdings plc Annual Report and Accounts 2015
35
Strategic report
Finance
continued
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
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 can 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, could be funded with
separate bank finance and that such finance could be rapidly
repaid. Alternatively, the group may enter into arrangements
for a third party to operate the quarry on terms that the third
party funds all costs of opening operations, pays the group a
royalty and supplies the group with an agreed volume of stone
for its own use at a concessionary price. Discussions to this
end are continuing with one interested party. If coal prices
recover and mining of the group’s coal concessions again
becomes economic so that operations on those concessions
can be resumed, the directors expect that the coal
concessions will also start returning cash to the group.
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, UOB
and Mandiri 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.
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R.E.A. Holdings plc Annual Report and Accounts 2015
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 would prefer 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.
Whilst the directors consider that the group’s existing capital
structure was, when put in place, consistent with these policy
objectives, the subsequent passage of time and some delays
in the original plans for expansion of the group’s planted
hectarage have meant that the group is now too dependent on
shorter term debt. As noted above, the group is already
taking steps to raise additional permanent capital while
negotiations with the group’s bankers are well advanced to
amend their term loans to extend their tenor and reduce early
repayment. The directors have also initiated discussions to
refinance with longer term debt, the 2017 sterling notes and
the 2017 dollar notes that will fall due for repayment in 2017.
The directors intend to retain their existing policy of replacing
shorter dated debt with preference share capital when market
conditions permit.
Net debt at 31 December 2015 was 63.1 per cent of total
shareholder funds against a level of 58.4 per cent at 31
December 2014. 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
oridnary shareholders, prior ranking capital will, over time, fall
as a percentage of ordinary shareholder funds. A successful
concluson of the current discussions with strategic investors
or further replacement of debt with ordinary and preference
capital would mean that net debt as a percentage of
shareholder funds would fall to a greater extent.
The 2017 sterling notes, the 2020 sterling notes and the
2017 dollar notes carry interest at fixed rates of, respectively,
9.5, 8.75 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 PBJ under the UOB term
loan, at floating rates equal to Jakarta Inter Bank Offered Rate
plus a margin and by KMS under the Mandiri loan at a variable
rate currently 11.5 per cent. 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 2015 would have
resulted in an additional annual cost to the group of
approximately $1.2 million (2014: additional $1.0 million).
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 (now
terminated), referred to under “Capital structure” above, were
arranged originally for this reason but 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 called into question the wisdom of
entering into currency hedges and the group decided not to
enter into any new hedges pending the outcome of its appeal
against the assessment in question.
In the light of the decision by the Jakarta Tax Court in 2014 in
REA Kaltim’s favour regarding the disputed losses, the
directors have considered whether the group should revert to
its previous policy of hedging non-dollar exposures against the
dollar. They continue to believe that, given that tax law in
Indonesia is uncertain and that precedent is often not taken
into account in 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. Whilst interest rates payable
on Indonesian rupiah borrowings are higher than on dollar
borrowings, the directors believe that such higher rates reflect
the fact that the Indonesian rupiah is a weak currency and that
the higher cost that such borrowings entail is likely over time
to be more than offset by exchange gains on the borrowings
concerned.
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 rupiah.
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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”, “Country exposure” and
“Funding”. Funding is now perceived to be a significant risk as
the combination of weak produce prices and the imminence of
certain debt repayments have increased its importance.
Risk
Agricultural operations
Climatic factors
Potential impact
Mitigating or other
relevant considerations
Material variations from the norm in climatic
conditions
A loss of crop or reduction in the
quality of harvest resulting in loss of potential
revenue
Over a long period, crop levels should
be reasonably predictable
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 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
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)
Operations are located in an area of
high rainfall. Notwithstanding some seasonal
variations, annual rainfall is usually adequate
for normal development
Normal sunshine hours in the location
of the operations are well suited to the
cultivation of oil palm
The group has established a permanent
downstream loading facility, where the river is
tidal. In addition, road access between the
ports of Samarinda and Balikpapan and the
estates now offers a viable alternative route
for transport and any associated additional
cost is more than outweighed by the
potential negative impact of disruption to the
business cycle by any delay in evacuating
CPO
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
38
R.E.A. Holdings plc Annual Report and Accounts 2015
Risk
Potential impact
Mitigating or other
relevant considerations
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
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
Other operational factors
A hiatus in collection or processing of
FFB crops
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
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
extension of this sliding scale to incorporate
a $50 per tonne export levy to fund biodiesel
subsidies is supporting the local price of
CPO and CPKO
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
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Strategic report
Risks and uncertainties
continued
Risk
Expansion
A shortfall in achieving the group’s planned
extension planting programme impacting
negatively the annual revaluation of the
group’s biological assets
Potential impact
Mitigating or other
relevant considerations
A reduction in reported profit and a possible
adverse effect on market perceptions as to
the value of the company’s securities
Movements on the annual revaluation of the
group’s biological assets do not affect the
group’s underlying cash flow
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
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
40
R.E.A. Holdings plc Annual Report and Accounts 2015
Risk
Stone operations
Operational factors
Potential impact
Mitigating or other
relevant considerations
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
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
Local 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
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 operations to meet the
expected standards
Reputational and financial damage
General
Currency
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
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 once operations have
commenced
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 of any extraction
programme and taking expert geological
advice on the results
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 operations
Geological assessments ahead of
commencement of extraction operations
should have identified any material variations
in quality
The area of the stone concession is
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 areas
on completion of extraction operations
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
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41
Strategic report
Risks and uncertainties
continued
Risk
Funding
Bank debt repayment instalments and other
debt maturities coincide with periods of
adverse trading and negotiations with
bankers and investors are not successful in
rescheduling instalments, extending
maturities or otherwise concluding
satisfactory refinancing arrangements
Potential impact
Mitigating or other
relevant considerations
Inability to meet liabilities as they fall due
Counterparty risk
Default by a supplier, customer or financial
institution
Loss of any prepayment, unpaid sales
proceeds or deposit
The group maintains good relations with its
bankers and other holders of debt who have
generally been receptive to reasonable
requests to moderate debt profiles when
circumstances require; moreover, the
directors believe that the fundamental
profitability of the group’s business will
facilitate divestment of assets or
procurement of additional equity capital
should this prove necessary
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
Regulatory exposure
Failure to renegotiate the existing
arrangements relating to the stone interests
Limitation of the group’s return from these
interests to the loans advanced
Current regulations in Indonesia limit foreign
investment in mining concessions
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)
Restriction on the group’s ability to retain its
current structure or to continue operating as
currently
Breach of the various continuing conditions
attaching to the group’s land rights and the
stone quarry concession (including
conditions requiring utilisation of the rights
and concessions) or failure to maintain all
permits and licences required for the group’s
operations
Failure by the group to meet the standards
expected in relation to bribery and corruption
Civil sanctions and, in an extreme case, loss
of the affected rights or concessions
Reputational damage and criminal sanctions
Save as noted above regarding interests in
stone, the directors are not aware of any
specific changes that would adversely affect
the group to a material extent; current
regulations restricting 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 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
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R.E.A. Holdings plc Annual Report and Accounts 2015
Mitigating or other
relevant considerations
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 and/or
by a transaction with a local investor
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
Risk
Potential impact
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
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 22 April 2016 and signed on behalf of the board by
DAVID J BLACKETT
Chairman
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43
Governance
Board of directors
David Blackett
David Killick, FCIS
Chairman (independent) (65)
Senior independent non-executive director (78)
Committees: audit, nomination, remuneration
Committees: audit (chairman), nomination (chairman),
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. Mr
Blackett was appointed chairman on 1 January 2016
following the retirement of Mr Robinow from that position.
Mark Parry
Executive director (55)
Mr Parry was appointed an executive director in January
2013. Mr Parry joined the group in 2011 as the group’s
regional director based in Singapore and Indonesia 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.
Mr Parry is also chief operating officer of REA Kaltim with
responsibility for all of the group’s operations and on 1
January 2016 assumed the role of managing director on
retirement of Mr Oakley from that role.
Irene Chia
Independent non-executive director (75)
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.
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. Mr Killick intends to retire from the board with effect
from the end of June 2016.
John Oakley
Non-executive director (67)
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, retired as managing
director on 1 January 2016 but remains on the board as a
non-executive director to undertake for a transitional period
some additional responsibilities, in particular to oversee
completion of the group’s new information systems.
Richard Robinow
Non-executive director (70)
Mr Robinow was appointed a director in 1978 and became
chairman in 1984. Following his seventieth birthday, he retired
from the chairmanship on 1 January 2016. He remains on the
board as a non-executive director and, for a transitional period,
will undertake some additional responsibilities particularly as
respects the financing of the group. After early investment
banking experience, he has been involved for over 40 years in
the plantation industry. 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 a Kenyan
plantation company, REA Vipingo Plantations Limited
(substantially all of the shares in which are indirectly owned by
his family).
44
R.E.A. Holdings plc Annual Report and Accounts 2015
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 2015. The
“Corporate governance report” below forms part of this report.
Details of significant events since 31 December 2015 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.
Information about the use of financial instruments by the
company and its subsidiaries is given in note 22 to the
consolidated financial statements.
Results and dividends
The results are presented in the consolidated income
statement and notes thereto.
The fixed dividends on the 9 per cent cumulative preference
shares that fell due on 30 June and 31 December 2015 were
duly paid. In view of the difficult conditions that faced the
group during 2015 and in light of the 2015 results, the
directors have concluded that, as previously announced, they
should not declare or recommend the payment of any dividend
on the ordinary shares in respect of 2015.
Viability statement
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 addition, note 22 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 policies and exposures to credit and liquidity
risks. The “Risks and uncertainties” section of the Strategic
report describes the steps taken by the group to manage risk.
In particular there are risks associated with the group’s local
operating environment and the group is materially dependent
upon selling prices for crude palm oil (“CPO”) and crude palm
kernel oil over which it has no control.
As respects funding risk, the group has material indebtedness,
in the form of bank loans and listed notes. Some $15.4 million
of bank term indebtedness falls due for repayment during
2016 and a further $35.5 million of revolving working capital
lines fall due for renewal during the same period. Thereafter, in
the period to 31 December 2017, a further $22.6 million of
bank term indebtedness and $46.4 million of listed notes will
be repayable. In view of the material proportion of the group’s
indebtedness falling due in the period to 31 December 2017,
as described above, the directors have chosen this period for
their assessment of the long-term viability of the group.
The group is at an advanced stage in negotiations with its
bankers in Indonesia to extend the tenor and reduce nearer
term repayments on bank term loans totalling $62.1 million
(being the bank loans in respect of which repayments are due
in 2016 and 2017). In addition, the group has initiated
discussions to refinance with longer term debt the listed notes
falling due for repayment in 2017. The directors have no
reason to believe that the revolving working capital facilities
will not be rolled over when the existing facilities expire.
In addition the group has, in recent months, been actively
exploring the possibility of raising additional permanent capital
from a transaction with a strategic investor. Discussions with a
short list of potential strategic investors are now at an
advanced stage. If such discussions can be successfully
concluded, the outcome would be likely to resolve or
significantly reduce the group’s requirement for additional
liquidity. Should funding be required pending completion of
these discussions, the group will seek to place for cash a
limited number of ordinary shares and the necessary
authorities to permit further issues are being sought at the
forthcoming annual general meeting of the company. Flexibility
also exists in making decisions on the rate of extension
planting which may be accelerated or scaled back in the light
of available finance.
The directors fully expect that the foregoing measures will
refinance, or permit the group to repay, the group
indebtedness falling due for repayment during 2016 and
2017. Moreover, as the benefits of recent improvements in
operational efficiencies start to flow through and CPO prices
gradually improve, the group’s operations can be expected to
generate increasing cash flows going forward.
Based on the foregoing and after making enquiries, the
directors therefore have a reasonable expectation that the
company and the group have adequate resources to continue
in operational existence for the period to 31 December 2017.
Moreover, the directors consider that, taking into consideration
the maturity profile of the group’s debt and given the operating
resilience of the business, the group will remain viable
thereafter at least until 2020, being a period of four years.
Going concern
The business risks are set out on pages 38-43 with an
indication of those risks regarded by the directors to be
potentially significant together with mitigating and other
relevant considerations for the management of risks. The
financing policies are described on page 36 of the strategic
report and the 2015 developments relating to capital structure
are contained in the ‘Finance’ section of the strategic report
under ‘Capital Structure’. The directors have set out their
assessment of liquidity and financing adequacy on pages 35-
36 of the strategic report including the actions either in
progress or contemplated in order to ensure adequate liquidity
for the next twelve months.
R.E.A. Holdings plc Annual Report and Accounts 2015
45
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Governance
Directors’ report
continued
Accordingly, having made due enquiries, the directors
reasonably expect that the company and the group have
adequate resources to continue in operational existence for at
least twelve months from the date of approval of the financial
statements, and therefore they continue to adopt the going
concern basis of accounting in preparing the financial
statements.
Greenhouse gas emissions (“GHG”)
GHG emissions data for the period 1 January 2012 to
31 December 2015 is as shown below:
Tonnes of CO2e 2015 2014 2013 2012
Gross emissions associated
with oil palm operations
in Indonesia1 767,177 706,579 627,799 686,208
Net emissions associated
with oil palm operations
in Indonesia 370,718 392,109 346,438 407,656
Net emissions per tonne
of CPO produced 2.00 1.95 1.91 2.30
Net emissions per
planted hectare 7.30 10.94 11.19 13.17
Electricity, heat, steam
and cooling purchased
for own use 4.4 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 are
described in full in the 2014 Sustainability Report published in June 2015.
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 2012 and 2015. 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
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
46
R.E.A. Holdings plc Annual Report and Accounts 2015
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.
result in restrictions on the transfer of securities or on voting
rights.
Control and structure of capital
Details of the company’s share capital and changes in share
capital during 2015 are set out in note 30 to the company’s
financial statements. At 31 December 2015, the preference
share capital and the ordinary share capital represented,
respectively, 87.4 and 12.6 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
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
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 and 8.75 per cent guaranteed sterling notes
2020 (respectively the “2017 sterling notes” and the “2020
sterling notes” and, together, the “sterling notes”) that have
been issued by REA Finance B.V. and 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, in the case of
the 2017 sterling notes, of £1,000 and, in the case of the
2020 sterling notes, of £100,000 and integral multiples of
£1,000 in excess thereof. There is no maximum limit on the
size of any holding in each case.
Substantial holders
On 31 December 2015, 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 held by them as holders
of ordinary shares of the company:
Number Percentage
of of
ordinary voting
Substantial holders of ordinary shares shares rights
Emba Holdings Limited 10,311,420 28.1
Prudential plc and certain subsidiaries* 6,043,129 16.5
Alcatel Bell Pensioenfonds VZW 4,167,049 11.4
Artemis UK Smaller Companies 3,563,620 9.7
First State Investments (UK) Limited 1,476,858 4.0
*
The company has been notified that the interest of Prudential plc group of
companies includes 6,021,116 ordinary shares (16.4 per cent) in which
M&G Investment Funds 3 is also interested.
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R.E.A. Holdings plc Annual Report and Accounts 2015
47
Governance
Directors’ report
continued
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 2015 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 2015 were as follows:
Dollar Sterling Sterling
notes
Preference notes notes
2020
shares 2017 2017
Substantial holders of securities ’000 $’000 £’000
£’000
The Bank of New York
(Nominees) Limited – – –
Chase Nominees Limited 3,264 4,608 519
The Bank of New York
(Nominees) Limited AHIF account – – 2,028
Euroclear Nominees Limited
EOC01 account – 3,253 –
Ferlim Nominees Limited
pooled account – – 1,161
HSBC Global Custody Nominees
(UK) Limited 641898 account 3,667 – –
HSBC Global Custody Nominees
(UK) Limited 888624 account – – 500
HSBC Global Custody Nominees
(UK) Limited 993791 account 4,226 – –
KBC Securities NV Client account – 11,016 –
Lynchwood Nominees Limited
2006420 account 4,129 – –
Rulegale Nominees Limited
JAMSCLT account 5,753 – –
Securities Services Nominees
Limited 2300001 account – – 1,295
State Street Nominees Limited
2300001 account – – –
Vidacos Nominees Limited
CLRLux account – 4,866 –
Vidacos Nominees Limited
CLRLux2 account – 2,000 –
9,582
2,876
–
–
–
4,667
–
–
–
–
–
–
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 24 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.
Directors
The directors, all of whom served throughout 2015, are listed
under “Board of directors” above which is incorporated by
reference in this Directors’ report.
Mr Oakley and Mr Robinow retire at the forthcoming annual
general meeting and, being eligible, offer themselves 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 for more than nine years. Resolutions 3 and 4, which
are set out in the 2016 Notice and will be proposed as
ordinary resolutions, deal with the re-election of Messrs
Oakley and Robinow.
Mr Parry and Ms Chia 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 5 and 6, which are set out in the 2016 Notice and
will be proposed as ordinary resolutions, deal with the re-
election of Mr Parry and Ms Chia.
As noted in the “Corporate governance report” below, Mr
Oakley and Mr Robinow relinquished their positions as,
respectively, managing director and chairman of the company
with effect from 31 December 2015. They remain on the
board as non-executive directors and, for a limited transitional
period, are continuing to oversee certain executive matters to
the extent necessary to ensure a smooth transfer of their
responsibilities. Mr Oakley remains committed to the success
of the group which will continue to benefit from his knowledge
of agronomical practices as well as his essential oversight of
the development and implementation of the new information
technology systems. Specifically as respects Mr Robinow, his
significant family shareholding in the company will continue to
support the development of the group, particularly with regard
to current strategic initiatives.
Mr Parry, who joined the company in 2011 and is based in
Indonesia and Singapore, has served as president director
of REA Kaltim since 2012 and as the group’s chief
operating officer since 2014. He has developed a deep
understanding of the company’s business and the local
operating environment which can be used to good
advantage following his succession to Mr Oakley as
managing director with effect from 1 January 2016.
Ms Chia, who is based in Singapore, has extensive
experience of commercial and financial investment in SE
Asia and is in a position to offer informative insights into
regional matters, making regular visits to the group’s
operations in East Kalimantan.
Mr Killick, who has been a non-executive director since
2006, has indicated his intention to step down as non-
executive director with effect from the end of the
48
R.E.A. Holdings plc Annual Report and Accounts 2015
forthcoming annual general meeting. It is intended that an
appointment to the board of a new non-executive
independent director will be made in due course.
The new authority, if provided, will expire on the date of the
annual general meeting to be held in 2017 or on 30 June
2017 (whichever is the earlier).
The chairman confirms that, following a formal performance
evaluation, the performance of each of the non-executive
directors, Ms Chia, Mr Oakley and Mr Robinow, continues to
be effective. The chairman particularly welcomes their
respective valuable commitment and experience and
recommends each of them for re-election.
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 2015 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 (commonly known as a
“buy-back”), 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.
The company currently holds 132,500 of its ordinary shares of
25p each, representing 0.4 per cent of the called up ordinary
share capital, 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 referred to below will
be transferred to any person.
The directors are seeking renewal at the forthcoming annual
general meeting (resolution 9 set out in the 2016 Notice) of
the buy-back authority granted in 2015 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 renewed buy-back 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) the higher 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
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 10 set out in the Notice) to increase the
authorised share capital of the company from £85,250,000 to
£97,500,000 by the creation of 9,000,000 ordinary shares of
25 pence each and 10,000,000 9 per cent cumulative
preference shares of £1 each, in each case ranking pari passu
in all respects with the existing ordinary and preference shares
and representing, respectively, 24.4 per cent and 15.7 per
cent of the existing authorised ordinary and preference share
capitals.
R.E.A. Holdings plc Annual Report and Accounts 2015
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Governance
Directors’ report
continued
As noted above the company may seek to raise additional
equity capital by way of a placing. The proposed increase in
the authorised ordinary share capital is designed to ensure
that the company has sufficient authorised but unissued
ordinary share capital to implement a placing and/or provide a
reserve for possible future issues of further new ordinary
shares.
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 11 June 2015,
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 2016 AGM (resolutions 11 and 12 set out in the 2016
Notice) to authorise the directors (a) to allot and to grant
rights to subscribe for, or to convert any security into, ordinary
shares in the capital of the company (other than 9 per cent
cumulative preference shares) up to an aggregate nominal
amount of £3,058,919 (including the additional £2,250,000
ordinary share capital proposed to be created at the
forthcoming annual general meeting), representing 33.3 per
cent of the issued ordinary share capital (excluding treasury
shares) at the date of this report), and (b) 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 £21,358,768
(including the additional £10,000,000 preference share
capital proposed to be created at the forthcoming annual
general meeting), representing 33.6 per cent of the issued
preference share capital of the company at the date of this
report.
Authority to disapply pre-emption rights
Fresh powers are also being sought at the forthcoming
annual general meeting under the provisions of sections
571 and 573 of the Companies Act 2006 to enable the
board to make a rights issue or open offer of ordinary
shares to existing ordinary shareholders without being
obliged to comply with certain technical requirements of the
Companies Act 2006 which can create problems with
regard to fractions and overseas shareholders.
In addition, the resolution to provide these powers
(resolution 13 set out in the 2016 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 £917,675 (representing
10 per cent of the issued ordinary share capital of the
company (excluding treasury shares) at the date of this
report). It is intended that this power be used for the
purpose of placing shares as discussed in the Chairman’s
statement and under “Liquidity and financing adequacy” in
the “Finance” section of the “Strategic report” above.
The foregoing powers (if granted) will expire on the date of
the annual general meeting to be held in 2017 or on 30
June 2017 (whichever is the earlier).
General meeting notice period
At the 2016 AGM a resolution (resolution 14 set out in the
2016 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 2017 or on 30 June 2017
(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 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 convene general meetings
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 new authorities, if provided, will expire on the date of the
annual general meeting to be held in 2017 or on 30 June
2017 (whichever is the earlier). Save as indicated under
“Increase in share capital” above, the directors have no
present intention of exercising these authorities.
The board considers that increasing the authorised share
capital of the company by the creation of the additional
ordinary and preference shares proposed as detailed under
“Increase in share capital”, granting the directors the
50
R.E.A. Holdings plc Annual Report and Accounts 2015
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 9 to 14 as set out in the 2016
Notice.
Directors’ remuneration report
Resolution 2 as set out in the 2016 Notice provides for
approval of the company’s remuneration report regarding the
remuneration of directors as detailed in the Directors’
remuneration report below.
Listing
Rule
9.8.4(4)
9.8.4(5)
9.8.4(6)
9.8.4(7)
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 2016 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)
Disclosure requirement
The amount of interest capitalised
during the year with an indication of
the amount and treatment of any
related tax relief
9.8.4(2)
Any information required by Listing
Rules 9.2.18 R (publication of
unaudited financial information)
Disclosure in
annual report
Note 8 to the
consolidated
financial
statements
Not applicable
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Disclosure requirement
Details of long-term incentive scheme
as required under LR 9.4.3R (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
Disclosure in
annual report
Not applicable
Not applicable
Not applicable
Note 30 to the
consolidated
financial
statements
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
9.8.4(11) Contracts for the provision of services
to the company or any of its
subsidiary undertakings by a
controlling shareholder
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
22 April 2016
R.E.A. Holdings plc Annual Report and Accounts 2015
51
Governance
Corporate governance report
Throughout the year ended 31 December 2015, the company
was in compliance with the provisions set out in the 2014 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.
At the performance evaluation conducted in 2015, 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 considered that each director brings separate valuable
insights into, variously, 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.
The chairman, Ms Chia and Mr Killick, 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-executive 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 2015 in compliance with the Code requirement to
carry such insurance.
Composition of the board
The board currently comprises one executive director, Mark
Parry, and five non-executive directors (including the
chairman). Mr Parry, who is based in Indonesia and Singapore,
is managing director with overall responsibility for the group’s
operations. Mr Parry is also the president director and 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, Mr Parry succeeded
Mr Oakley as group managing director with effect from
1 January 2016. Although Mr Oakley has ceased to be an
executive director, he remains on the board in a non-executive
capacity and also continues to discharge certain executive
responsibilities, in particular in relation to the installation of the
group’s new information technology systems, to ensure
continuity and a smooth hand over.
Concurrently with Mr Oakley’s retirement as managing
director, Mr Robinow stepped down from the chairmanship of
the company but, as intended, he too remains on the board as
a non-executive director. For a transitional period sufficient to
ensure a satisfactory conclusion of the current strategic
initiatives described under “Future direction” in the “Strategic
report” above, Mr Robinow devotes such additional time to the
affairs of the group as are appropriate for that purpose. Upon
Mr Robinow’s retirement as chairman, Mr Blackett was
appointed chairman with effect from 1 January 2016.
With effect from Mr Blackett’s appointment as chairman, Mr
Killick has been designated the senior independent director.
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R.E.A. Holdings plc Annual Report and Accounts 2015
Mr Killick has indicated his intention to step down from the
board at the end of the forthcoming annual general meeting
and it is intended that the appointment of an independent
non-executive director to succeed Mr Killick will be made in
due course.
The recent changes in board positions and responsibilities are
consistent with the group’s 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 is expected that a consequence of this will be
that 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.
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.
Directors’ conflicts of interest
Board evaluation
In connection with the statutory provisions regarding the
avoidance by directors of situations which conflict 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 do so. No other conflicts or potential
conflicts have been notified by directors.
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 2015, the board
concluded that it performs effectively as constituted and that
the directors communicate and work well together as a team.
R.E.A. Holdings plc Annual Report and Accounts 2015
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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.
There is an executive committee of the board, currently
comprising any two of Mr Blackett, Mr Robinow and Mr
Oakley, to deal with various matters of a routine or executory
nature.
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.
The attendance of individual directors, who served during
2015, at the regular and “ad hoc” board meetings held in
2015 was as follows:
Regular Ad hoc
meeting meeting
D J Blackett 4 1
M A Parry 4 1
I Chia 4 1
D H R Killick 4 1
J C Oakley 4 1
R M Robinow 4 1
In addition, during 2015 there were three meetings of the
audit committee, two meetings of the remuneration committee
and one meeting of the nomination committee. All committee
meetings were attended by all of the committee members
appointed at the time of each meeting.
Whilst all formal decisions are taken at board meetings, the
directors have frequent informal discussions between
themselves and with management and most decisions at
board meetings reflect a consensus that has been reached
ahead of the meetings. Some directors reside permanently, or
for part of each year, in the Asia Pacific region and most of the
UK based directors travel extensively. Since the regular board
meetings are fixed to fit in with the company’s budgeting and
reporting cycle and ad hoc meetings normally have to be held
at short notice to discuss specific matters, it may not always
be practical to fix meeting dates to ensure that all directors
are able to attend each meeting. Instead, if a director is
unable to attend 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.
Board proceedings
Risk management and internal control
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 managing
director, unless travelling, is 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 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) and considering any such
risks in the context of the group’s overall strategic objectives.
The board regularly reviews the process and internal control
systems, which were in place throughout 2015 and up to the
date of approval of this report, in accordance with the
Financial Reporting Council (“FRC”) Guidance on Risk
Management, Internal Control and Related Financial and
Business Reporting.
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R.E.A. Holdings plc Annual Report and Accounts 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, including
those with respect to slavery as set out in the policy on human
rights. The board is conscious of the provisions of the Modern
Slavery Act 2015 and intends to respond appropriately.
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 2015 and April 2016, 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
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 managing director.
Management reports to the audit committee and the board on
a regular basis by way of the circulation of progress reports,
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. Directors and managers
based in London make periodic visits to the overseas
operations each year. The managing director has a continuing
dialogue with the chairman 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.
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 other directors 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 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.
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R.E.A. Holdings plc Annual Report and Accounts 2015
55
Governance
Corporate governance report
continued
In accordance with Rule 4.2.2R (1) of the Disclosure and
Transparency Rules of the Financial Conduct Authority, the
company intends to publish the 2016 half yearly report in
September 2016, rather than in August as in previous years.
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 22 April 2016 and signed on behalf
of the board by
DAVID J BLACKETT
Chairman
56
R.E.A. Holdings plc Annual Report and Accounts 2015
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 and
internal audit function in the context of the company’s
overall risk management system, as well as
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, removal, remuneration and
terms of engagement of the external auditor, and
overseeing the relationship with and reviewing the audit
findings of the external auditor; 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 2015, 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.
The members of the audit committee discharge their
responsibilities by formal meetings and informal discussions
between themselves, meetings with the external auditor, with
the internal auditor in Indonesia and with management in
Indonesia and London and 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 Killick (chairman)
and Mr Blackett both of whom are considered by the directors
to have relevant financial and professional experience, as well
as experience of the business sector and region in which the
company operates, in order to be able to fulfil their specific
duties with respect to the audit committee. Mr Blackett was
chairman of the audit committee until his appointment to the
role of chairman of the board of directors with effect from 1
January 2016.
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 2015 (on which the auditor did not report) and the
full year consolidated financial statements for 2015 (the
“2015 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.
In relation to the group’s audited 2015 financial statements,
the committee considered the significant accounting and
judgement issues set out below.
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R.E.A. Holdings plc Annual Report and Accounts 2015
57
Governance
Audit committee report
continued
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.
Indonesian tax balances: from time to time the group finds
itself in dispute with the Indonesian tax authorities over the
interpretation of Indonesian tax legislation. 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.
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 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.
Each year the group prepares an evaluation of items that may
be disputed and adjusts tax balances as required. Two long
disputed cases which had been found in the group’s favour in
past years remain subject to judicial review by the Supreme
Court of Indonesia, which may take some years. Meanwhile, in
response to a recent ruling from the Director General of
Taxation in Indonesia, which permits successful litigants to
apply for interest following favourable Tax Court decisions, the
Group has applied to the regional tax office to secure
payments of interest of up to some $4 million. Pending the
outcome of these applications, such interest has not been
recognised.
The group has made some further progress towards
commencement of quarrying operations on the stone deposit.
Commencement of operations will depend on funding, and the
group has opened negotiations with parties who are interested
in participating in the venture. Feasibility studies continue to
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. 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.
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. Any
forward sales made by the group are priced relevant to
benchmarks at the time of delivery and so are not at fixed
prices.
58
R.E.A. Holdings plc Annual Report and Accounts 2015
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. In accordance with the EU Audit Directive and
Audit Regulation, consideration will be given to tendering for
future audits in due course.
Colin Rawlings succeeded Mark McIlquham as the company’s
audit engagement partner following the annual general
meeting in June 2015. Mr McIlquham, who had been the
audit partner since November 2010, stepped down under the
standard rotation procedure of his firm.
During the year, the company’s plantation subsidiaries
changed their auditor to the local affiliate of Deloitte LLP, the
company’s auditor. The group expects to benefit from
improvements in communication and alignment of procedure
between the company auditor and this component auditor.
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 possibility of the
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 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 a key component of the control systems, and keeps the
systems of financial, operational and compliance controls
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 22 April 2016 and
signed on behalf of the committee by:
DAVID H R KILLICK
Chairman
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R.E.A. Holdings plc Annual Report and Accounts 2015
59
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 current policy report took effect immediately upon approval at the 2015 Annual General Meeting (the “2015
AGM”). The annual report on remuneration provides details on remuneration during 2015 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 2016 Annual General Meeting (the “2016 AGM”).
The Companies Act 2006 requires the auditors to report to the shareholders on certain parts of the directors’ remuneration
report and to state whether, in their 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 in that report. The
statement by the chairman of the remuneration committee and the policy report are not subject to audit.
Statement by Mr D Killick, the chairman of the remuneration committee
The succeeding sections of this directors’ remuneration report cover the activities of the remuneration committee during 2015
and provide information regarding the remuneration of executive and non-executive directors. 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 the managing director, who is the sole executive director of the company, the company’s
sustainability objectives as well as its commercial goals and achievements.
In considering bonuses in respect of 2015, the committee confirmed the importance of striking an appropriate balance
between positive and negative factors. In particular, the committee took note of the external factors that are beyond the control
of management which impacted the performance of the company during 2015, such as continuing weakness of commodity
prices, impacting sales and costs per tonne and a second successive El Niño affecting production and transportation.
Whilst these factors depressed the results for 2015, the executive management achieved successes on a number of fronts.
Specific achievements in respect of the company’s operational objectives include commencing development of the group’s
newer land areas, near completion of the refurbishment of the two older mills and supplying renewable energy to the
Indonesian state electricity company, in addition to furthering a number of sustainability initiatives. The executive has built a
strong regional management team and has worked to achieve cost reductions and administrative efficiencies which in due
course should reap significant benefits for the group.
The committee has reflected these factors in 2015 bonuses and the remuneration awarded for 2016. 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 2016, considers that it
struck an appropriate balance between reward and incentive. In particular with respect to Mr Parry, the remuneration award for
2016 reflects the greater responsibilities associated with his promotion to the role of managing director and the fact that he is
based overseas with a significant travel commitment. The remuneration awarded for 2016 is consistent with the current policy
on remuneration.
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.
60
R.E.A. Holdings plc Annual Report and Accounts 2015
Single total figure of remuneration for each director
The remuneration of the executive and non-executive directors for 2014 and 2015 was as follows:
Salary All taxable Annual Long term
and fees benefits * bonus incentive Total
2015 £’000 £’000 £’000 £’000 £’000
Chairman and executive directors
R M Robinow 205.0 7.2 – – 212.2
J C Oakley 344.0 17.9 99.6 – 461.5
M A Parry 295.2 111.1 119.0 – 525.3
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 930.2 136.2 218.6 – 1,285.0
Salary All taxable Annual Long term
and fees benefits* bonus incentive Total
2014 £’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 89.6** 129.2 – 487.7
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 890.9 114.2 237.2 – 1,242.3
Types of benefit: company car, medical insurance, overseas rental accommodation
*
** The figure in respect of Mr Parry for 2015 is provisional and includes certain estimates; the 2014 comparative for Mr Parry has been restated to reflect the final agreed
taxable benefit
Fees paid to Mr Blackett and Mr Killick in respect of 2014 and 2015 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 67 at 31 December 2015) is a pensioner member of the scheme. Details of Mr Oakley’s annual
pension entitlement are set out below.
£
In payment at beginning of year 73,992
Increase during the year 1,002
In payment at end of year 74,994
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R.E.A. Holdings plc Annual Report and Accounts 2015
61
Governance
Directors’ remuneration report
continued
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 2015, 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 – 10,311,420
D J Blackett 250,600 10,000
I Chia – 1,000
D H R Killick – 40,000
J C Oakley – 442,493
M A Parry 42,155 25,822
Following further purchases in January 2016 of, in aggregate, 40,981 9 per cent cumulative preference shares of £1 each, Mr
Parry and persons connected with Mr Parry hold in total 83,136 9 per cent cumulative preference shares of £1 each in the
company at the date of this report.
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.
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.
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R.E.A. Holdings plc Annual Report and Accounts 2015
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 2015 of 264p, there would have been no gain under
the plan.
Following shareholder approval of the revised remuneration policy at the 2015 AGM, in response to impact of the prolonged
weakness in the CPO price on the market price of the company’s ordinary shares, a replacement incentive arrangement was
put in place during 2015 for Mr Parry and, as and when appropriate, for certain other members of the senior management team
in Indonesia and Singapore. Mr Parry may elect to switch to the new incentive plan in due course, subject to further approval by
the remuneration committee.
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R.E.A. Holdings plc Annual Report and Accounts 2015
63
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
2015
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 2015.
Long term
incentive
Annual bonus vesting rates
Single figure of pay-out against
total against maximum
remuneration maximum opportunity
Managing director’s remuneration £’000 % %
2015 461.5 60 N/A
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
2009 358.6 40 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 2015
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 2014 and 2015. 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 2014 remuneration of the selected comparator
employee group has been restated to reflect only the remuneration in that year of those employees comprising the 2015
selected comparator employee group. The 2014 remuneration of the selected group 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.
2015 2014 change
Percentage change in managing director’s remuneration £’000 £’000 %
Salary 344.0 336.0 2
Benefits 17.9 17.7 1
Annual bonus 99.6 108.0 (8)
Total 461.5 461.7 –
2015 2014 change
Percentage change in selected employee group remuneration £’000 £’000 %
Salary 183.9 170.4 8
Benefits 16.4 17.8 (8)
Annual bonus 84.2 73.1 15
Total 284.5 261.3 9
Relative importance of spend on pay
The graph below shows the movements between 2014 and 2015 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
-7%
-6%
2014
2015
Total employee remuneration
2014
2015
Cost of goods sold
2014
2015
Ordinary and preference dividends
+(cid:17)%
R.E.A. Holdings plc Annual Report and Accounts 2015
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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 H R Killick (chairman) and Mr
D J Blackett. 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
Ms Chia and Messrs Oakley, Robinow and Parry are proposed for re-election at the forthcoming annual general meeting. Each
of the non-executive directors, being Ms Chia Mr Oakley and Mr Robinow, has a contract for services to the company which is
terminable at will by either party. Continuation of their appointment depends upon satisfactory performance and re-election at
annual general meetings in accordance with the articles of association of the company.
Mr Parry’s service agreement may be terminated by either party by giving notice to the other party of not less than three
months. At 31 December 2015, the unexpired term under Mr Parry’s contract remained as three months.
Statement of voting at general meeting
At the AGM held on 11 June 2015, 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 22,408,141 99.99 128 0.01 22,408,269 310
Voting on remuneration policy 22,407,493 99.99 128 0.01 22,407,621 958
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.
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 R.E.A. Holdings 2015 long term incentive plan.
66
R.E.A. Holdings plc Annual Report and Accounts 2015
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 2015
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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.
68
R.E.A. Holdings plc Annual Report and Accounts 2015
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 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 2015, 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
Fixed pay Annual bonus
£’000
700
6
600
500
400
300
200
100
0
482.(cid:22)
542.9
361.9
25%
33%
100%
75%
67%
M
£’000
700
600
500
400
300
200
100
0
0
609.6
541.8
406.4
25%
33%
100%
75%
67%
Minimum
M
remuneration
receivable
In line with
expectations
Maximum
remuneration
receivable
Minimum
remuneration
receivable
In line with
expectations
Maximum
remuneration
receivable
The figures reflected in the chart above have been calculated against the policies that were applicable throughout 2015 and on
the basis of remuneration paid or payable in respect of 2015.
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 2015
69
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 22 April 2016 and
signed on behalf of the board by
DAVID J BLACKETT
Chairman
70
R.E.A. Holdings plc Annual Report and Accounts 2015
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
22 April 2016
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
for that period.
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 2015
71
Governance
Independent auditor’s report to
the members of R.E.A. Holdings plc
going concern. The financial statements do not include the
adjustments that would result if the company was unable to
continue as a going concern.
We describe below how the scope of our audit has responded
to this risk. Our opinion is not modified in respect of this
matter.
Going concern and the directors’ assessment of the
principal risks that would threaten the solvency or
liquidity of the group
As required by the Listing Rules we have reviewed the
directors’ statement regarding the appropriateness of the
going concern basis of accounting contained within the
accounting policies note to the financial statements and the
directors’ statement on the longer-term viability of the
company contained on page 45-46.
Aside from the matters disclosed in the emphasis of matter
paragraph above, we have nothing else material to add or
draw attention to in relation to:
•
the directors' confirmation on page 38 that they have
carried out a robust assessment of the principal risks
facing the group, including those that would threaten its
business model, future performance, solvency or
liquidity;
the disclosures on pages 38-43 that describe those
risks and explain how they are being managed or
mitigated;
the directors’ statement in the accounting policies note
to the financial statements about whether they
considered it appropriate to adopt the going concern
basis of accounting in preparing them and their
identification of any material uncertainties to the group’s
ability to continue to do so over a period of at least
twelve months from the date of approval of the financial
statements;
the directors’ explanation on pages 45-46 as to how
they have assessed the prospects of the group, over
what period they have done so and why they consider
that period to be appropriate, and their statement as to
whether they have a reasonable expectation that the
group will be able to continue in operation and meet its
liabilities as they fall due over the period of their
assessment, including any related disclosures drawing
attention to any necessary qualifications or
assumptions.
Independence
We are required to comply with the Financial Reporting
Council’s Ethical Standards for Auditors and we confirm that
we are independent of the group and we have fulfilled our
Opinion on financial statements of R.E.A. Holdings plc
In our opinion:
•
the financial statements give a true and fair view of the
state of the group’s and of the parent company’s affairs
as at 31 December 2015 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 parent 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 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 xix to the Company financial
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.
Emphasis of matter - Going concern
As described in the Directors’ Report on page 45, the group
has material indebtedness, in the form of term bank loans,
revolving working capital facilities renewable annually and
listed notes. The equivalent of some $15 million of bank
indebtedness falls due for repayment over the next twelve
months and the equivalent of a further $69 million thereafter
in the period to 31 December 2017 (of which the equivalent
of some $46 million relates to listed notes).
The directors have also assessed the impact of this matter
when assessing the principal risks and how they have been
managed and in their explanation of how they have assessed
the prospects of the group.
Whilst we have concluded that the directors’ use of the going
concern basis of accounting in the preparation of the financial
statements is appropriate, these conditions indicate the
existence of a material uncertainty which may give rise to
significant doubt over the group’s ability to continue as a
72
R.E.A. Holdings plc Annual Report and Accounts 2015
other ethical responsibilities in accordance with those
standards. We also confirm we have not provided any of the
prohibited non-audit services referred to in those standards.
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 tested the accuracy and integrity of management’s
model, including identifying if any key changes from the prior
year were made to the model in terms of inputs and
assumptions, and performed sensitivity analysis over the key
assumptions used within the model. We performed the
following procedures to challenge management’s key
assumptions:
•
We 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;
Production of CPO and CPKO is arrived at by applying
extraction rates to existing crops. We have audited the
extraction rates by comparing the current and historical
extraction rates to other market participants and internal
reports;
We agreed the prices to CIF Rotterdam, and performed
a year-on-year analysis of the forecasted variable and
fixed costs; and
We have assessed discount rates applied within the
calculation by comparing to other market participants,
and evaluated whether any change is required due to
risk and local economic issues.
•
•
•
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; assumed
extraction rates for Crude Palm Oil (“CPO”) and Crude Palm
Kernel Oil (“CPKO”); buffering assumptions applied; and the
discount rate (for mature and juvenile estates).
The forecasted profit margin is derived from the price of CPO
and CPKO and subtracting forecasted variable and fixed
costs. The forecasted profit margin of CPO is then determined
by assessing whether the margin will increase or decrease
based on the year-on-year movement in the 20 year historical
average. The current year’s average margin is then adjusted up
to a maximum of +/- 5%. The changes in price are tapered
as the development of a palm oil plantation is a long term
undertaking and the value of plantations do not swing
markedly in response to short term price fluctuations. By
tapering the changes in the price this more accurately reflects
the value of the biological assets.
If the future actual performance varies from projections, or
management’s assumptions and estimates of future
profitability change, the calculated fair values could change
materially. As such, it is critical that the Board and
management maintain and execute established policies and
procedures to continually reassess the appropriateness of key
assumptions upon which judgements and estimates are
based.
Biological assets are valued at $339m as at 31 December
2015 (2014: $310m), 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.
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R.E.A. Holdings plc Annual Report and Accounts 2015
73
Governance
Independent auditor’s report to
the members of R.E.A. Holdings plc continued
Going concern
As explained above in the “Emphasis of matter – Going
concern” section, the equivalent of some $15 million of bank
indebtedness falls due for repayment over the next twelve
months and the equivalent of a further $69 million thereafter
in the period to 31 December 2017 (of which the equivalent
of some $46 million relates to listed notes). Given the group’s
ongoing funding requirements for sufficient working capital to
continue trading, we considered going concern to be a key
risk.
Further detail of management’s assessment of this risk is
contained in the Directors’ Report on pages 45-46.
We have reviewed management’s working capital model,
particularly to assess whether any critical assumptions for the
future profitability of the operations are consistent with the
assumptions made in valuing the biological assets.
We reviewed the group’s banking facilities, both at the
individual and aggregate level, and agreed the terms and
conditions (including covenants) and future repayment
schedules to the assumptions relating to financing contained
in the working capital model.
We have obtained evidence of discussions between
management and banks to refinance certain facilities.
We have also considered other factors, such as the
development and capital expenditure plans in relation to the
plantations and the stone quarry as well as external factors
such as the recent palm oil price and future forecasts.
We critically assessed the adequacy of the disclosures related
to the going concern assumption in the notes to the financial
statements.
We include above the conclusion of our review of the
directors’ statement in respect of the group’s ability to
continue as a going concern.
The assessment of the carrying value of Indonesian stone and coal loans
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 2015 the
carrying value of the loans was $35.3m, compared to $31.3m
at 31 December 2014. The loan agreement between REAH
and ATP has been extended to 31 December 2016 and
increased from $15m to $20m. 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.”
We have challenged management’s revised plans and cash
flow forecasts in relation to the mining operations to support
the value of investments in the coal and quarry interests. We
have noted that in the current year, management has not
prepared a discounted cash flow analysis for the coal mine
concessions as the price of coal is too low for these to be
economically viable for the foreseeable future. Our work on
the discounted cash flow forecast for the stone operations has
included:
•
Agreement of total stone reserves to external third party
evidence.
Testing the accuracy and integrity of management’s
discounted cash flow calculation including identifying
key changes made to the model in terms of inputs and
assumptions, and performing sensitivity analysis over the
key assumptions used within the model. These
assumptions are the selling price of stone and the
discount rate used.
Challenge over expected price of stone to be used in the
valuation, and the profit margin per year used within the
calculation
Challenge of the discount rates used by management,
terminal growth rates and the forecast figures used and
the assumptions in the discounted cash flow calculation.
•
•
•
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R.E.A. Holdings plc Annual Report and Accounts 2015
Taxation matters arising in Indonesia
Tax legislation in Indonesia can be complex and issues can
take a significant number of years to resolve.
Furthermore, significant deferred tax balances (31 December
2015: assets of $15.8m, liabilities of $92.2m, (31 December
2014: assets of $8.9m, liabilities of $77.2m)) 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. This gives 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 challenged group and local management in respect of the
treatment of open tax positions and the recognition of
deferred tax assets by utilising tax experts in the UK in order
to help 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 assessed the tax disclosures for consistency
with the status of open queries, and independently re-
computed temporary differences on those assets and liabilities
which were expected to give rise to significant deferred tax.
Finally, we reviewed forecasts to assess the recoverability of
the assets, including assessing those forecasts for
consistency with biological assets valuation and the going
concern status.
Last year our report included one other risk which is not
included in our report this year, relating to accounting for
cross currency swaps which have been settled during the
course of 2014 and 2015.
Revenue recognition was identified by us at the planning
stage as being a significant risk due to the potential for
material advance sales. As the total advance sales at 31
December 2015 amounted to approximately $6m, and there
were no contractual agreements giving rise to derivatives in
existence at that date, the further work undertaken in respect
of these matters was limited to reviewing the workpapers of
the component auditor. Accordingly, we do not consider this
risk needs separate consideration above.
The description of risks above should be read in conjunction
with the significant issues considered by the Audit Committee
discussed on page 58.
These matters were addressed in the context of our audit of
the financial statements as a whole, and in forming our
opinion thereon, and we do not provide a separate opinion on
these 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.
We determined materiality for the group to be $6.4m (2014:
$3.1m), which is approximately 2% of biological assets. This
represents a change in the benchmark used in the current
year from a normalised profit before tax basis to one based
upon biological assets. We consider that the valuation of
biological assets is a key indicator of the current and future
performance of the company. It is the KPI of critical interest
to users of the financial statements of R.E.A. Holdings Plc as
it is the key measure of the company’s success in developing
its palm oil plantations. It has also been chosen as it gives a
more stable balance than profit before tax due to the large
fluctuations on the price of crude palm oil.
We agreed with the Audit Committee that we would report to
the Committee all audit differences in excess of $128k
(2014: $62k), 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 of 12 active legal entities
(2014: 13 active legal entities). 12 (2014:12) of these were
subject to a full audit, whilst in the prior year one legal entity
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 that location. These 12 entities represent the
principal business activities and account for 95% (2014:
96%) of the group’s net assets, 100% (2014: 100%) of the
group’s revenue and 100% (2014: 100%) 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 12 active legal entities was executed at levels of
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75
Governance
Independent auditor’s report to
the members of R.E.A. Holdings plc continued
materiality applicable to each individual entity which were
lower than group materiality and ranged from $3.2m to
$5.4m (2014: $1.55m to $2.9m).
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.
Matters on which we are required to report by exception
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.
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.
76
R.E.A. Holdings plc Annual Report and Accounts 2015
Corporate Governance Statement
Under the Listing Rules we are also required to review part of
the Corporate Governance Statement relating to the
company’s compliance with certain 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.
Respective responsibilities of directors and auditor
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). 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.
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/or those further matters we have expressly agreed to
report to them in our engagement letter. 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.
COLIN RAWLINGS FCA (Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London
22 April 2016
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R.E.A. Holdings plc Annual Report and Accounts 2015
77
Group financial statements
Consolidated income statement
for the year ended 31 December 2015
2015 2014
Note $’000 $’000
Revenue 2 90,515 125,865
Net loss arising from changes in fair value of agricultural produce inventory 4 (1,147) (1,692)
Cost of sales (72,406) (77,914)
Gross profit 16,962 46,259
Net gain arising from changes in fair value of biological assets 13 13,060 3,571
Other operating income 2 2 2
Distribution costs (1,097) (1,325)
Administrative expenses 5 (11,702) (16,391)
Operating profit 17,225 32,116
Investment revenues 2, 7 259 398
Finance costs 8 (5,951) (8,770)
Profit before tax 5 11,533 23,744
Tax 9 (6,631) (1,763)
Profit for the year 4,902 21,981
Attributable to:
Ordinary shareholders (3,964) 14,153
Preference shareholders 10 8,461 8,140
Non-controlling interests 34 405 (312)
4,902 21,981
(Loss) / earnings per 25p ordinary share 11 (11.2 cents) 40.3 cents
All operations for both years are continuing
78
R.E.A. Holdings plc Annual Report and Accounts 2015
Group financial statements
Consolidated balance sheet
as at 31 December 2015
2015 2014
Note $’000 $’000
Non-current assets
Goodwill 12 12,578 12,578
Biological assets 13 339,091 310,175
Property, plant and equipment 14 155,642 151,172
Prepaid operating lease rentals 15 34,295 33,879
Indonesian stone and coal interests 16 35,338 31,334
Deferred tax assets 27 15,787 8,909
Non-current receivables 1,395 2,749
Total non-current assets 594,126 550,796
Current assets
Inventories 18 11,190 16,180
Investments 19 2,158 –
Trade and other receivables 20 29,103 25,487
Cash and cash equivalents 21 15,758 16,224
Total current assets 58,209 57,891
Total assets 652,335 608,687
Current liabilities
Trade and other payables 29 (27,025) (17,818)
Current tax liabilities (3,406) (2,581)
Bank loans 23 (50,906) (40,326)
Sterling notes 24 – (14,693)
Hedging instruments 26 – (9,590)
Other loans and payables 28 (93) (1,238)
Total current liabilities (81,430) (86,246)
Non-current liabilities
Bank loans 23 (72,034) (60,638)
Sterling notes 24 (55,853) (37,713)
US dollar notes 25 (33,637) (33,472)
Deferred tax liabilities 27 (92,168) (77,191)
Other loans and payables 28 (5,558) (6,802)
Total non-current liabilities (259,250) (215,816)
Total liabilities (340,680) (302,062)
Net assets 311,655 306,625
Equity
Share capital 30 120,288 112,974
Share premium account 31 30,683 23,366
Translation reserve 32 (46,282) (44,324)
Retained earnings 33 204,429 212,928
309,118 304,944
Non-controlling interests 34 2,537 1,681
Total equity 311,655 306,625
Approved by the board on 22 April 2016 and signed on behalf of the board.
DAVID J BLACKETT
Chairman
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R.E.A. Holdings plc Annual Report and Accounts 2015
79
Group financial statements
Consolidated statement of comprehensive income
for the year ended 31 December 2015
2015 2014
Note $’000 $’000
Profit for the year 4,902 21,981
Other comprehensive income
Items that may be reclassified to profit or loss:
Actuarial losses (489) (212)
Deferred tax on actuarial losses 27 122 42
(367) (170)
Items that will not be reclassified to profit and loss:
Exchange differences on translation of foreign operations 32 3,575 (8,429)
Exchange differences on deferred tax 27 (5,082) (3,383)
(1,874) (11,982)
Total comprehensive income for the year 3,028 9,999
Attributable to:
Ordinary shareholders (5,838) 2,171
Preference shareholders 8,461 8,140
Non-controlling interests 405 (312)
3,028 9,999
Consolidated statement of changes in equity
for the year ended 31 December 2015
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 2014 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
Total comprehensive income – – (1,958) 4,130 2,172 856 3,028
Issue of new preference shares (cash) 6,639 1,199 – – 7,838 – 7,838
Issue of new ordinary shares (cash) 675 6,118 – – 6,793 – 6,793
Dividends to preference shareholders – – – (8,461) (8,461) – (8,461)
Dividends to ordinary shareholders – – – (4,168) (4,168) – (4,168)
At 31 December 2015 120,288 30,683 (46,282) 204,429 309,118 2,537 311,655
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R.E.A. Holdings plc Annual Report and Accounts 2015
Group financial statements
Consolidated cash flow statement
for the year ended 31 December 2015
2015 2014
Note $’000 $’000
Net cash from operating activities 35 20,063 24,392
Investing activities
Interest received 259 398
Proceeds from disposal of property, plant and equipment 2,512 –
Purchases of property, plant and equipment (15,785) (14,892)
Expenditure on biological assets * (16,563) (18,522)
Expenditure on prepaid operating lease rentals (1,250) (4,261)
Investment in Indonesian stone and coal interests (4,004) (897)
Net cash used in investing activities (34,831) (38,174)
Financing activities
Preference dividends paid (8,461) (8,140)
Ordinary dividends paid (4,168) (4,280)
Repayment of borrowings (9,620) (30,715)
Proceeds of issue of ordinary shares 6,793 –
Proceeds of issue of sterling notes, less costs of issue 4,086 –
Proceeds of issue of sterling notes, by exchange 39,921 –
Purchase of treasury shares, net of sales – (959)
Proceeds of issue of preference shares 7,838 10,564
Redemption of US dollar notes – (6,310)
Redemption of sterling notes, by exchange (39,921) –
Payment on termination of hedging contract (10,184) (41)
Purchase of sterling notes (2,158) –
New bank borrowings drawn 30,326 35,419
Net cash from / (used in) financing activities 14,452 (4,462)
Cash and cash equivalents
Net decrease in cash and cash equivalents 36 (316) (18,244)
Cash and cash equivalents at beginning of year 16,224 34,574
Effect of exchange rate changes (150) (106)
Cash and cash equivalents at end of year 21 15,758 16,224
* Net of capitalised depreciation and amortisation (see notes 14 and 15)
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81
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 78
to 111 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.
The directors acknowledge in the “Viability statement” in the
Directors’ report that there exists a material uncertainty
relating to events or conditions that may cast significant
doubt on the company’s ability to remain as a going concern
and that it, therefore, may be unable to realise its assets and
discharge its liabilities in the normal course of business. The
directors have set out their assessment of liquidity and
financing adequacy on pages 35 and 36 of the strategic
report, including the actions either in progress or
contemplated in order to ensure adequate liquidity for the
next twelve months. Accordingly, having made due enquiries,
the directors reasonably expect that the company and the
group have adequate resources to continue in operational
existence for at least twelve months from the date of
approval of the financial statements and, therefore, they
continue to adopt the going concern basis of accounting in
preparing the financial statements.
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 2015, as follows:
IAS 19 (amendments): Defined benefit plans:
•
employee contributions
82
R.E.A. Holdings plc Annual Report and Accounts 2015
•
•
Annual improvements to IFRSs: 2010-2012 cycle
Annual improvements to IFRSs: 2011-2013 cycle
Their adoption has not had any significant impact on the
amounts reported in these financial statements, although
disclosures have been amended to reflect the new
requirements.
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 not been applied in these
financial statements), are 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 2018
IFRS 16: Leases 1 January 2019
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 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:
2012-2014 cycle 1 January 2016
IFRS 10, IFRS 12 and IAS 28 (amendments):
Investment entities: applying the
consolidation exception 1 January 2016
IFRS 9 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 2016.
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 bears.
In 2014 the IASB 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, amendments to IAS 16 and IAS 41 (issued
on 30 June 2014, and now endorsed by the EU) 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 the amended IAS 41 which now requires plantation
companies to account for “growing produce”, but only if this
can be reliably measured. In the case of the group, growing
produce will mean FFB in formation on the group’s oil palms.
Such growing produce will, if measured, be treated as a
separate asset with changes in the value of the asset from
year to year being taken to the income statement. The
directors are discussing with the group’s auditor and other
companies in the oil palm sector whether FFB in formation
can be reliably measured (within the meaning of IAS 41)
and if so the measurement methodology that should be
applied.
The directors are considering the impact on the group’s
financial statements of these changes. On transition on 1
January 2016 it is probable that the directors will decide to
adopt the values under IAS 41 as the cost under IAS 16,
and this will result in 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.
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
standards listed above other than the modifications to
IAS16 and IAS41 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
R.E.A. Holdings plc Annual Report and Accounts 2015
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Group financial statements
Accounting policies (group)
continued
standards then in force, has not been reinstated and is not
included in determining any subsequent profit or loss on
disposal.
Revenue recognition
Revenue is measured at the fair value of the consideration
received or receivable in respect of goods and services
provided in the normal course of business, net of VAT and
other sales related taxes. Sales of goods are recognised
when the significant risks and rewards of ownership of the
goods are transferred to the buyer and include contracted
sales in respect of which the contracted goods are available
for collection by the buyer in the accounting period. Income
from services is accrued on a time basis by reference to the
rate of fee agreed 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
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for exchange differences arising on non-monetary assets
and liabilities, including foreign currency loans, which, to the
extent that such loans relate to investment in overseas
operations or hedge the group’s investment in such
operations, are recognised directly in equity.
For consolidation purposes, the assets and liabilities of any
group entity with a functional currency other than the US
dollar are translated at the exchange rate at the balance
sheet date. Income and expenses are translated at the
average rate for the period unless exchange rates fluctuate
significantly. Exchange differences arising are classified as
equity and transferred to the group’s translation reserve.
Such exchange differences are recognised as income or
expenses in the period in which the entity is sold.
Goodwill and fair value adjustments arising on the
acquisition of an entity with a functional currency other than
the US dollar are treated as assets and liabilities of that
entity and are translated at the closing rate of exchange.
Borrowing costs
Borrowing costs incurred in financing construction or
installation of qualifying property, plant or equipment are
added to the cost of the qualifying asset, until such time as
the construction or installation is substantially complete and
the asset is ready for its intended use. Borrowing costs
incurred in financing the planting of extensions to the
developed agricultural area are treated as expenditure
relating to biological assets until such extensions reach
maturity. All other borrowing costs are recognised in the
consolidated income statement of the period in which they
are incurred.
Operating profit
Operating profit is stated after any gain or loss arising from
changes in the fair value of biological assets (net of
expenditure relating to those assets up to the point of
maturity) but before investment income and finance costs.
Pensions and other post-employment benefits
United Kingdom
Certain existing and former UK employees of the group are
members of a defined benefit scheme. The estimated
regular cost of providing for benefits under this scheme is
calculated so that it represents a substantially level
percentage of current and future pensionable payroll and
is charged as an expense as it is incurred.
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 substantively 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 buffering reflects the opinion of the directors
that movements in the market price of crude palm oil may
only become reflected in the market value of oil palm
plantations if sustained over a period of time. 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
R.E.A. Holdings plc Annual Report and Accounts 2015
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Group financial statements
Accounting policies (group)
continued
profit or loss as appropriate, with no depreciation being
provided on such assets.
revalued amount, in which case the impairment loss is
treated as a revaluation decrease.
Property, plant and equipment
All property, plant and equipment (including, with effect from
1 January 2007, additions to plantation infrastructure) is
carried at original cost less any accumulated depreciation
and any accumulated impairment losses. Depreciation is
computed using the straight line method so as to write off
the cost of assets, other than property and plant under
construction, over the estimated useful lives of the assets as
follows: buildings - 20 years; plant and machinery - 5 to 16
years.
Assets held under finance leases are depreciated over their
expected useful lives on the same basis as owned assets or,
where shorter, over the terms of the relevant leases. The
gain or loss on the disposal or retirement of an asset is
determined as the difference between the sales proceeds,
less costs of disposal, and the carrying amount of the asset
and is recognised in the consolidated income statement.
Prepaid operating lease rentals
Payments to acquire leasehold interests in land are treated
as prepaid operating lease rentals and amortised over the
periods of the leases.
Impairment of tangible and 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
Where, with respect to assets other than goodwill, an
impairment loss subsequently reverses, the carrying amount
of the asset (or cash-generating unit) is increased to the
revised estimate of its recoverable amount, but so that the
increased carrying amount does not exceed the carrying
amount that would have been determined had no
impairment loss been recognised for the asset (or cash-
generating unit) in prior years. A reversal of an impairment
loss is recognised as income immediately, unless the
relevant asset is carried at a revalued amount, in which case
the reversal of the impairment loss is treated as a
revaluation increase.
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
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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 22. Derivatives
are initially recognised at fair value at the date of the
contract and remeasured to their fair value at the balance
sheet date. The resulting gain or loss is recognised
immediately in profit or loss, through finance costs (note 8),
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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87
Group financial statements
Notes to the consolidated financial statements
1. Critical accounting judgements and key sources of
estimation uncertainty
Key sources of estimation uncertainty
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).
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).
Indonesian stone and coal interests
In view of the fluctuations in the market prices for stone and
coal to be extracted from the group’s concessions, the
carrying value of the stone and coal interests in Indonesia
may differ from their realisable value.
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).
Capitalisation of interest and other costs
Provisions
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.
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
2015 2014
$’000 $’000
Sales of goods 87,824 124,538
Revenue from services 2,691 1,327
90,515 125,865
Other operating income 2 2
Investment revenue 259 398
Total revenue 90,776 126,265
In 2015, three customers accounted for respectively 59 per cent, 16 per cent and 15 per cent of the group’s sales of
agricultural goods (2014: three customers, 48 per cent, 15 per cent and 14 per cent). As stated in note 22 “Credit risk”,
substantially all sales of goods are made on the basis of cash against documents or letters of credit and accordingly the
directors do not consider that these sales result in a concentration of credit risk to the group.
The crop of oil palm fresh fruit bunches for 2015 amounted to 609,389 tonnes (2014: 631,728 tonnes). The fair value of the
crop of fresh fruit bunches was $46,164,000 (2014: $87,647,000), 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 2015 and 2014, the latter did not meet the quantitative thresholds set out in IFRS 8 “Operating
segments” and, accordingly, no analyses are provided by business segment.
2015 2014
$’m $’m
Sales by geographical destination:
Indonesia 90.5 125.9
Rest of Asia – –
90.5 125.9
Carrying amount of net assets by geographical area of asset location:
UK, Continental Europe and Singapore 58.0 58.0
Indonesia 253.7 248.6
311.7 306.6
4. Agricultural produce inventory movement
The net loss arising from changes in fair value of agricultural produce inventory represents the movement in the fair value of
that inventory less the amount of the movement in such inventory at historic cost (which is included in cost of sales).
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R.E.A. Holdings plc Annual Report and Accounts 2015
89
Group financial statements
Notes to the consolidated financial statements
continued
5. Profit before tax
2015 2014
$’000 $’000
Salient items charged / (credited) in arriving at profit before tax
Administrative expenses (see below) 11,702 16,391
Movement in inventories (at historic cost) 1,937 (706)
Amounts provided against inventories 497 –
Operating lease rentals 234 412
Depreciation of property, plant and equipment 10,526 9,704
Amortisation of prepaid operating lease rentals 578 548
Administrative expenses
Net foreign exchange losses / (gains) 818 (391)
Net (credit) / charge for additional pension contributions (see note 37) (2,267) 314
Loss on disposal of fixed assets 49 484
Indonesian operations 11,556 13,794
Head office 6,160 5,587
16,316 19,788
Amount included as additions to biological assets (4,614) (3,397)
11,702 16,391
Amounts payable to the company’s auditor
The amount payable to Deloitte LLP for the audit of the company’s financial statements was $180,000 (2014: $174,000).
Amounts payable to Deloitte LLP for the audit of accounts of subsidiaries of the company pursuant to legislation were $24,000
(2014: $21,000).
Amounts payable to Deloitte LLP for other services were $10,000 (2014: $6,000) 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), for the issue of consent letters in connection with the placing of the sterling notes (see note 24) and
for group accountancy services.
Amounts payable to affiliates of Deloitte LLP for the audit of subsidiaries’ financial statements were $195,000 (2014:
$29,000) and for other services to subsidiaries were $95,000 (2014: $nil).
2015 2014
$’000 $’000
Earnings before interest, tax, depreciation and amortisation and net biological gain
Operating profit 17,225 32,116
Depreciation and amortisation 11,104 10,252
Net biological gain (13,060) (3,571)
15,269 38,797
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R.E.A. Holdings plc Annual Report and Accounts 2015
6. Staff costs, including directors
2015 2014
Number Number
Average number of employees (including executive directors):
Agricultural – permanent 5,333 5,909
Agricultural – temporary 2,991 3,545
Head office 9 11
8,333 9,465
$’000 $’000
Their aggregate remuneration comprised:
Wages and salaries 35,893 36,994
Social security costs 807 963
Pension costs (728) 370
35,972 38,327
Details of the remuneration of directors are shown in the “Directors’ remuneration report”.
7. Investment revenues
2015 2014
$’000 $’000
Interest on bank deposits 62 398
Other interest income 197 –
259 398
8. Finance costs
2015 2014
$’000 $’000
Interest on bank loans and overdrafts 8,130 4,869
Interest on US dollar notes 2,716 3,438
Interest on sterling notes 5,042 5,414
Change in value of sterling notes arising from exchange fluctuations (4,946) (3,350)
Movements relating to derivative financial instruments 1,685 2,404
Change in value of loans arising from exchange fluctuations (2,694) (354)
Other finance charges 887 (402)
10,820 12,019
Amount included as additions to biological assets (4,869) (3,249)
5,951 8,770
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 27.3 per cent (2014: 16.8 per cent); there is no directly related tax
relief.
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R.E.A. Holdings plc Annual Report and Accounts 2015
91
Group financial statements
Notes to the consolidated financial statements
continued
9. Tax
2015 2014
$’000 $’000
Current tax:
UK corporation tax – –
Overseas withholding tax 1,467 –
Foreign tax 50 7,711
Foreign tax - prior year 1,778 (7,000)
Total current tax 3,295 711
Deferred tax:
Current year 2,958 2,063
Prior year 378 (1,011)
Total deferred tax 3,336 1,052
Total tax 6,631 1,763
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 (2014: 25 per cent) and for the United Kingdom, the taxation provision reflects a
corporation tax rate of 20.25 per cent (2014: 21.5 per cent) and a deferred tax rate of 20 per cent (2014: 20 per cent).
The tax charge for the year can be reconciled to the profit per the consolidated income statement as follows:
2015 2014
$’000 $’000
Profit before tax 11,533 23,744
Notional tax at the UK standard rate of 20.25 per cent (2014: 21.5 per cent) 2,335 5,105
Tax effect of the following items:
Expenses not deductible 897 1,476
Non taxable income (27) (384)
Overseas tax rates above UK standard rate 493 944
Overseas withholding taxes, net of relief 608 1,752
Tax credit on loss in overseas subsidiary not recognised 178 902
Deferred tax credit for underlying local tax loss – (23)
Tax losses in overseas subsidiaries time expired – 496
Release of provisions following appeal to Jakarta Tax Court – (8,418)
Prior year adjustments (including change in rate of tax) 2,156 (89)
Additional tax (credits) / provisions (9) 2
Tax expense at effective tax rate for the year 6,631 1,763
The company’s principal subsidiary in Indonesia has been involved for several years in two tax disputes with the tax authorities.
The principal case 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. In May 2014 the Jakarta Tax Court found in favour of the subsidiary, following which the
disputed tax amounting to some IDR 103 billion ($7.4 million) 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 February 2015 within the
prescribed time limit. 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.
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R.E.A. Holdings plc Annual Report and Accounts 2015
9. Tax - continued
The second tax dispute relates to a disputed 2006 assessment and was decided by the Jakarta Tax Court in 2012. Those
elements of the judgement in favour of the subsidiary have been appealed by the tax authorities to the Supreme Court for judicial
review.
The subsidiary is entitled, following the Tax Court decisions, to interest of up to 48 per cent of the disputed tax that had been
refunded. This amounts to some IDR 52 billion (some $4 million) in aggregate. It has been the practice of the tax authorities to
withhold interest on refunds of disputed tax until the outcome of judicial review by the Supreme Court has been handed down.
However, a regulation issued in late 2015 now permits tax payers to apply for such interest following receipt of the disputed tax
refunds. The subsidiary is discussing with the local tax office the exact interpretation of this regulation with a view to agreeing the
proportion of the interest refund due that can now be released before the outcome of the Supreme Court review is known.
Meanwhile none of this potential interest receivable has been recognised in these financial statements.
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 accordingly decided in 2014 to release in full the provisions previously made.
10. Dividends
2015 2014
$’000 $’000
Amounts recognised as distributions to equity holders:
Preference dividends of 9p per share 8,461 8,140
Ordinary dividends of 7.75p per share (2014: 7.25p per share) 4,168 4,280
12,629 12,420
11. (Loss) / earnings per share
2015 2014
$’000 $’000
(Loss) / earnings for the purpose of earnings per share * (3,964) 14,153
* being net (loss) / profit attributable to ordinary shareholders
’000 ’000
Weighted average number of ordinary shares for the purpose of (loss) / earnings per share 35,455 35,085
12. Goodwill
2015 2014
$’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 REA Kaltim, 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
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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93
Group financial statements
Notes to the consolidated financial statements
continued
13. Biological assets
2015 2014
$’000 $’000
Beginning of year 310,175 288,180
Opening balance adjustment (363) –
Additions to planted area and costs to maturity including finance costs (see note 8) 24,766 20,617
Transfers to property, plant and equipment (see note 14) (8,202) (2,095)
Transfers to current receivables (345) (98)
Net biological gain 13,060 3,571
End of year 339,091 310,175
Net biological gain comprises:
Fair value of crops harvested during the year (see note 2) (46,164) (87,647)
Gain arising from movement in fair value attributable to other physical changes 43,933 76,808
Gain arising from movement in fair value attributable to price changes 15,291 14,410
13,060 3,571
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 REA Kaltim, SYB and KMS and 18 per cent in the case of
all other group companies (2014: 15 per cent in the case of REA Kaltim and SYB, 16.5 per cent in the case of KMS and 18
per cent in the case of all other group companies) and a standard unit margin of $63.9 per tonne of oil palm FFB (2014:
standard unit margin of $60.9 per tonne of FFB).
The valuation of the group’s biological assets would have been reduced by $17,340,000 (2014: $10,370,000) if the crops
projected for the purposes of the valuation had been reduced by 5 per cent; by $15,830,000 (2014: $9,030,000) if the
discount rates assumed had been increased by 1 per cent and by $27,160,000 (2014: $20,650,000) 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 22. At 31 December 2015, the group had no outstanding forward sale contracts at fixed prices (2014: none).
At the balance sheet date, biological assets of $212.4 million (2014: $164.0 million) had been charged as security for bank
loans (see note 23) but there were otherwise no restrictions on titles to the biological assets (2014: none). Expenditure
approved by the directors for the development of immature areas in 2016, subject to availability of funding, amounts to $27
million (2014: $26 million).
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R.E.A. Holdings plc Annual Report and Accounts 2015
14. Property, plant and equipment
Buildings Plant, Construction Total
and structures equipment in progress
and vehicles
$’000 $’000 $’000 $’000
Cost:
At 1 January 2014 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
Opening balance adjustment 363 – – 363
Additions 274 1,897 5,412 7,583
Exchange differences – (36) – (36)
Disposals – (2,530) – (2,530)
Transfers from biological assets 8,202 – – 8,202
Transfers to / (from) construction in progress 1,708 6,281 (7,989) –
Transfers to current receivables – – (2) (2)
At 31 December 2015 94,943 110,044 9,929 214,916
Accumulated depreciation:
At 1 January 2014 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
Opening balance adjustment 1,682 – – 1,682
Charge for year 2,178 6,898 – 9,076
Exchange differences – (29) – (29)
Eliminated on disposals – (1,619) – (1,619)
At 31 December 2015 20,151 39,123 – 59,274
Carrying amount:
End of year 74,792 70,921 9,929 155,642
Beginning of year 68,105 70,559 12,508 151,172
The depreciation charge for the year includes $233,000 (2014: $421,000) 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 (2014: $nil).
At the balance sheet date, the group had entered into contractual commitments for the acquisition of property, plant and
equipment amounting to $1,155,000 (2014: $3,873,000).
At the balance sheet date, property, plant and equipment of $66.1 million had been charged as security for bank loans.
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R.E.A. Holdings plc Annual Report and Accounts 2015
95
Group financial statements
Notes to the consolidated financial statements
continued
15. Prepaid operating lease rentals
2015 2014
$’000 $’000
Cost:
Beginning of year 37,286 33,063
Additions 1,250 4,261
Exchange differences – (38)
End of year 38,536 37,286
Accumulated amortisation:
Beginning of year 3,407 2,609
Opening balance adjustment 112 –
Exchange differences – 100
Charge for year 722 698
End of year 4,241 3,407
Carrying amount:
End of year 34,295 33,879
Beginning of year 33,879 30,454
The amortisation charge for the year includes $143,000 (2014: $150,000) 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 2015, certificates of HGU had been obtained in respect of areas covering
70,584 hectares (2014: 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.
At the balance sheet date, prepaid operating lease rentals of $14.7 million had been charged as security for bank loans (see
note 23.)
16. Indonesian stone and coal interests
2015 2014
$’000 $’000
Stone company 17,435 14,100
Coal companies 20,903 20,234
Provision against loan to coal companies (3,000) (3,000)
End of year 35,338 31,334
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 2015 consolidated income statement (2014:
$nil).
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R.E.A. Holdings plc Annual Report and Accounts 2015
17. Subsidiaries
A list of the subsidiaries, including the name, country of incorporation and proportion of ownership is given in note (iv) to the
company’s individual financial statements.
18. Inventories
2015 2014
$’000 $’000
Agricultural produce 4,221 7,912
Engineering and other operating inventory 6,969 8,268
11,190 16,180
Agricultural produce inventory is carried at fair value less selling costs. Engineering and other operating inventory is carried at
cost less any amounts provided against which approximates its fair value. Inventory with a carrying value of $625,000 is subject
to a floating charge as security for a bank loan.
At the balance sheet date, inventories of £1.1 million had been charged as security for bank loans (see note 23).
19. Investments
2015 2014
$’000 $’000
REA Finance B.V. 8.75 per cent guaranteed sterling notes 2020 2,158 –
Pursuant to a placing on 22 December 2015 of £5 million nominal of REA Finance B.V. 8.75 per cent guaranteed sterling
notes 2020 (“sterling notes”), R.E.A. Services Limited (a wholly-owned subsidiary of the company) acquired £1,500,000
nominal of sterling notes. The company intends to on-sell these notes as and when purchasers can be found.
The company has designated its holding of sterling notes as an available-for-sale investment which is carried at fair value.
20. Trade and other receivables
2015 2014
$’000 $’000
Due from sale of goods 5,233 6,817
Prepayments and advance payments 7,035 6,962
Advance payment of taxation 9,883 3,660
Deposits and other receivables 6,952 8,048
29,103 25,487
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 (2014: 7 days). The directors consider that the carrying amount of trade
and other receivables approximates their fair value.
At the balance sheet date, trade and other receivables of $4.7 million had been charged as security for bank loans (see note
23).
21. Cash and cash equivalents
Cash and cash equivalents comprise cash held by the group and short-term bank deposits. The Moody’s prime rating of short
term bank deposits amounting to $15.8 million (2014: $16.2 million) is set out in note 22 under the heading “Credit risk”. At 31
December 2015, $1.1 million of total bank deposits were subject to charges.
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97
Group financial statements
Notes to the consolidated financial statements
continued
22. Financial instruments
Capital risk management
The group manages as capital its debt, which includes the borrowings disclosed in notes 23 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:
2015 2014
$’000 $’000
Debt and related engagements * 212,430 195,409
Cash and cash equivalents (15,758) (16,224)
Net debt and related engagements 196,672 179,185
*
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) 311,655 306,625
Net debt to equity ratio 63.1% 58.4%
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 2015 comprised loans, investments and receivables (including Indonesian
stone and coal interests) and cash and cash equivalents amounting to $67,090,000 (2014: $61,608,000).
Non-derivative financial liabilities as at 31 December 2015 comprised liabilities at amortised cost amounting to $201,071,000
(2014: $195,626,000).
Derivative financial instruments at 31 December 2015 comprised instruments not in designated hedge accounting
relationships at fair value representing a liability of $nil (2014: $9,590,000).
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 2015
22. 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 2015/17 sterling
notes, the 2020 sterling notes and the US dollar notes carry interest at fixed rates of, respectively, 9.5, 8.75 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 varying between 3.8 per cent and 4.8 per cent (2014:
4.5 per cent) above the Jakarta Inter Bank Offer Rate. In addition, the interest rate formula on certain loans includes an allowance
for the bankers’ cost of funds.
Interest is payable on drawings under US dollar short-term facilities at floating rates of 3.8 per cent above the relevant Inter Bank
Offer Rate (2014: between 3.0 per cent and 3.8 per cent). In addition, the interest rate formula includes an allowance for bankers’
cost of funds.
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 2015 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 $1,072,000 (2014: pre-tax profit (and equity) decrease of $847,000).
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.
In the light of the decision by the Jakarta Tax Court in 2014 in REA Kaltim’s favour regarding the disputed losses, the directors
have considered whether the group should revert to its previous policy of hedging non-dollar exposures against the dollar. They
continue to believe that, given that tax law in Indonesia is uncertain and that precedent is often not taken into account in
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. Whilst interest rates payable on Indonesian rupiah borrowings are higher than on dollar
borrowings, the directors believe that such higher rates reflect the fact that the Indonesian rupiah is a weak currency and that the
higher cost that such borrowings entail is likely over time to be offset by exchange gains on the borrowings concerned.
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 rupiah.
R.E.A. Holdings plc Annual Report and Accounts 2015
99
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Group financial statements
Notes to the consolidated financial statements
continued
22. Financial instruments - continued
At the balance sheet date, the group had non US dollar monetary items denominated in pounds sterling and Indonesian rupiah. A
5 per cent strengthening of the pound sterling against the US dollar would have resulted in a loss dealt with in the consolidated
income statement and equity of $2,237,000 on the net sterling denominated non-derivative monetary items (2014: $799,000). 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 $5,011,000 on the net Indonesian rupiah denominated, non-derivative monetary
items (2014: loss of $4,808,000).
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 2015, 72 per
cent of bank deposits were held with banks with a Moody’s prime rating of P1, 28 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 2015 and 31 December 2014 equal the amounts reported under the corresponding balance
sheet headings.
Liquidity risk
Ultimate responsibility for liquidity risk management rests with the board of directors of the company, which has established an
appropriate framework for the management of the group’s short, medium and long-term funding and liquidity requirements.
Within this framework, the board continuously monitors forecast and actual cash flows and endeavours to maintain adequate
liquidity in the form of cash reserves and borrowing facilities while matching the maturity profiles of financial assets and
liabilities. Undrawn facilities available to the group at balance sheet date are disclosed in note 23.
The board reviews the cash forecasting models for the operation of the plantations and compares these with the forecast
outflows for debt obligations and projected capital expenditure programmes for the plantations, applying sensitivities to take
into account perceived major uncertainties. In their review, the directors place the greatest emphasis on the cash flow of the
first two years.
Non-derivative financial instruments
The following tables detail the contractual maturity of the group’s non-derivative financial liabilities. The tables have been drawn
up based on the undiscounted amounts of the group’s financial liabilities based on the earliest dates on which the group can be
required to discharge those liabilities. The table includes liabilities for both principal and interest.
Weighted Under Between Over 2 Total
average 1 year 1 and 2 years
interest rate years
2015 % $’000 $’000 $’000 $’000
Bank loans 7.3 59,316 27,432 48,068 134,816
US dollar notes 8.5 2,551 35,286 – 37,837
Sterling notes - repayable 2015-2017 10.4 1,175 13,532 – 14,707
Sterling notes - repayable 2020 10.1 4,140 4,138 58,370 66,648
Trade and other payables, and customer deposits 15,966 – – 15,966
83,148 80,388 106,438 269,974
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R.E.A. Holdings plc Annual Report and Accounts 2015
22. Financial instruments - continued
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
At 31 December 2015, the group’s non-derivative financial assets (other than receivables) comprised cash and deposits of
$15,800,000 (2014: $16,200,000) carrying a weighted average interest rate of 1.4 per cent (2014: 2.7 per cent) all having a
maturity of under one year, and Indonesian stone and coal interests of $35,338,000 (2014: $31,334,000) 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 as at 31 December 2014.
These arose under the cross currency interest rate swap (“CCIRS”) described in note 26, which was terminated on 24
December 2015. 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 2015 – – – –
At 31 December 2014 47,484 – – 47,484
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 that
were classified as level 2. No reclassifications between levels in the fair value hierarchy were made during 2015 (2014: none).
2015 2015 2014 2014
Book value Fair value Book value Fair value
$’000 $’000 $’000 $’000
Cash and deposits* 15,758 15,758 16,224 16,224
Bank debt - within one year* (50,906) (50,906) (40,326) (40,326)
Bank debt - after more than one year* (72,034) (72,034) (60,638) (60,638)
US dollar notes** (33,637) (31,290) (33,472) (34,691)
2017 Sterling notes** (10,623) (12,346) (52,406) (57,090)
2020 Sterling notes** (45,230) (45,826) – –
Cross currency interest rate swaps – hedge against principal liabilities – – (8,567) (8,567)
Net debt and related engagements (196,672) (196,644) (179,185) (185,088)
Cross currency interest rate swaps – hedge against interest liabilities – – (1,023) (1,023)
(196,672) (196,644) (180,208) (186,111)
bearing interest at floating rates
*
** bearing interest at fixed rates
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R.E.A. Holdings plc Annual Report and Accounts 2015
101
Group financial statements
Notes to the consolidated financial statements
continued
22. Financial instruments - continued
The fair values of cash and deposits and bank debt approximate their carrying values since these carry interest at current
market rates. The fair values of the US dollar notes and sterling notes are based on the latest prices at which those notes were
traded prior to the balance sheet dates.
The fair value of the CCIRS as at 31 December 2014 was 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 CCIRS was terminated on 24 December 2015 as set out in note 26. The valuation of the CCIRS at 31
December 2014 at fair value resulted in a loss of $1,283,000 which has been dealt with through the 2014 consolidated
income statement.
23. Bank loans
2015 2014
$’000 $’000
Bank loans 122,940 100,964
The bank loans are repayable as follows:
On demand or within one year 50,906 40,326
Between one and two years 22,575 15,140
After two years 49,459 45,498
122,940 100,964
Amount due for settlement within 12 months (shown under current liabilities) 50,906 40,326
Amount due for settlement after 12 months 72,034 60,638
122,940 100,964
All bank loans are denominated in either US dollars ($73.7 million – 2014: $74.1 million) or Indonesian rupiah ($49.2 million –
2014: $26.9 million) and are at floating rates, thus exposing the group to interest rate risk. The weighted average interest rate
in 2015 was 7.3 per cent (2014: 7.1 per cent). Bank loans of $92,940,000 (2014: $70,964,000) are secured on the land,
plantations, property, plant and equipment and certain current assets owned by REA Kaltim, SYB, PBJ and KMS having an
aggregate book value of $300 million (2014: $218 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 (2014: $nil) and undrawn
Indonesian rupiah denominated facilities of $21.6 million (2014: $39.4 million).
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R.E.A. Holdings plc Annual Report and Accounts 2015
24. Sterling notes
The sterling notes comprise £8.3 million (2014: £34.5 million) nominal of 9.5 per cent guaranteed sterling notes 2015/17 (the
“2017 sterling notes”) and £31.9 million (2014: nil) nominal of 8.75 per cent guaranteed sterling notes 2020 (the “2020
sterling notes”), in each case issued by the company’s subsidiary, REA Finance B.V. (“REAF”). The sterling notes are guaranteed
by the company and another wholly owned subsidiary of the company, R.E.A. Services Limited (“REAS”), and are secured
principally on unsecured loans made by REAS to Indonesian plantation operating subsidiaries of the company. Unless
previously redeemed or purchased and cancelled by the issuer, the sterling notes are repayable in two instalments, £8.3 million
on 31 December 2017 and £31.9 million on 31 August 2020.
Pursuant to proposals made in August 2015 to holders of the 2017 sterling notes, £26.2 million of such notes were
exchanged on 3 September 2015 for a like amount of 2020 sterling notes, and concurrently £636,000 nominal of 2020
sterling notes were issued for cash at 100 per cent of their principal amount. On 24 December 2015, a further £5 million of
2020 sterling notes were issued for cash at a price of £0.97 per £1.00 nominal.
The repayment obligation in respect of the sterling notes of £40.2 million ($59.6 million) is carried in the balance sheet net of
the unamortised balance of the note issuance costs. At 31 December 2014, the repayment obligation was partly hedged by a
forward foreign exchange contract for the purchase of £22.0 million and for the sale of $42.9 million which matured on 24
December 2015. 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.
25. US dollar notes
The US dollar notes comprise $34.0 million (2014: $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.
26. Hedging instruments
At 31 December 2014, the group had outstanding one cross currency interest rate swap (“CCIRS”) for the forward purchase of
£22.0 million and sale of $42.9 million, maturing on 24 December 2015, which was carried in the group balance sheet at its fair
value. The contract terminated in December 2015 at a cash cost to the group of $10.2 million and a charge to profit and loss in
2015 of $594,700.
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R.E.A. Holdings plc Annual Report and Accounts 2015
103
Group financial statements
Notes to the consolidated financial statements
continued
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/ Inventory Tax Total
and equipment assets expenses* losses
$’000 $’000 $’000 $’000 $’000 $’000
At 1 January 2014 (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)
Credit/(charge) to income for the year 24 (3,884) (8,069) 401 8,192 (3,336)
Credit to comprehensive income for the year** – – 122 – – 122
Transfers (23) – 197 – 23 197
Exchange differences*** (662) (4,018) 583 (3) (982) (5,082)
At 31 December 2015 (24,969) (51,096) (15,983) 118 15,549 (76,381)
Deferred tax assets 1 – 119 118 15,549 15,787
Deferred tax liabilities (24,970) (51,096) (16,102) – – (92,168)
At 31 December 2015 (24,969) (51,096) (15,983) 118 15,549 (76,381)
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)
*
**
***
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 $63.2 million (2014: $34.2 million) available to be applied
against future profits. A deferred tax asset of $15,549,000 (2014: $8,316,000) has been recognised in respect of these
losses, which are expected to be used in the future based on the group’s projections. A tax loss of $122,000 incurred by the
group’s coal subsidiary in 2015 (2014: $270,000) has not been recognised and at the balance sheet date, tax losses
aggregating $9.9 million incurred by the group’s coal subsidiary have not been recognised; these tax losses expire 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 $5,572,000 (2014: $7,859,000). 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 temporary difference of $51.1 million (2014: $43.2 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 difference would reverse to the extent of any future reduction in their fair value.
104
R.E.A. Holdings plc Annual Report and Accounts 2015
28. Other loans and payables
2015 2014
$’000 $’000
Retirement benefit obligations (see note 37):
UK – 2,383
Indonesia 5,651 5,584
Other – 73
5,651 8,040
The amounts are repayable as follows:
On demand or within one year (shown under current liabilities) 93 1,238
In the second year 186 1,696
In the third to fifth years inclusive 280 2,705
After five years 5,092 2,401
Amount due for settlement after 12 months 5,558 6,802
5,651 8,040
Amounts of liabilities by currency:
Sterling – 2,383
US dollar – 73
Indonesian rupiah 5,651 5,584
5,651 8,040
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
2015 2014
$’000 $’000
Trade purchases and ongoing costs 7,763 5,744
Customer deposits 6,852 1,107
Other tax and social security 2,810 2,801
Accruals 8,249 6,515
Other payables 1,351 1,651
27,025 17,818
The average credit period taken on trade payables is 33 days (2014: 30 days).
The directors estimate that the fair value of trade payables approximates their carrying value.
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R.E.A. Holdings plc Annual Report and Accounts 2015
105
Group financial statements
Notes to the consolidated financial statements
continued
30. Share capital
2015 2014
£’000 £’000
Authorised (in pounds sterling):
75,000,000 – 9 per cent cumulative preference shares of £1 each (2014: 65,000,000) 75,000 65,000
41,000,000 – ordinary shares of 25p each (2014: 41,000,000) 10,250 10,250
85,250 75,250
$’000 $’000
Issued and fully paid (in US dollars):
63,641,232 – 9 per cent cumulative preference shares of £1 each (2014: 59,420,232) 105,414 98,775
36,839,529 – ordinary shares of 25p each (2014: 35,085,269) 15,875 15,200
132,500 – ordinary shares of 25p each held in treasury (2014: 132,500) (1,001) (1,001)
120,288 112,974
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 2015, 4,221,000 9 per cent cumulative preference shares were issued, fully paid, by way of a placing at £1.20
a share (total consideration £5,065,000 - $7,970,000)
on 15 October 2015, 1,754,260 ordinary shares were issued, credited as fully paid, by way of placing at £2.60 per share
(total consideration £4,561,000 - $7,023,000) to Mirabaud Pereire Nominees Limited, Emba Holdings Limited, P Byrom,
J Landon and M Goodliffe. The middle market price at close of business on 2 October 2015 (being the date at which the
terms of issue were fixed) was £2.67
There have been no changes in ordinary shares held in treasury during the year.
31. Share premium account
$’000
At 1 January 2014 25,161
Issue of new preference shares (cash) 1,789
Issue of new preference shares (scrip) (3,420)
Cost of issues (171)
Profit on disposal of treasury shares 7
At 31 December 2014 23,366
Issue of new preference shares (cash) 1,328
Issue of new ordinary shares (cash) 6,347
Cost of issues (358)
At 31 December 2015 30,683
106
R.E.A. Holdings plc Annual Report and Accounts 2015
32. Translation reserve
2015 2014
$’000 $’000
Beginning of year (44,324) (32,549)
Exchange differences on translation of foreign operations 3,575 (8,429)
Exchange differences on deferred tax (5,082) (3,383)
Attributable to non-controlling interests (451) 37
End of year (46,282) (44,324)
33. Retained earnings
2015 2014
$’000 $’000
Beginning of year 212,928 203,225
Loss/ (profit) for the year after preference dividend (4,331) 13,983
Ordinary dividend paid (4,168) (4,280)
End of year 204,429 212,928
34. Non-controlling interests
2015 2014
$’000 $’000
Beginning of year 1,681 2,030
Share of result for the year 405 (312)
Exchange translation differences 451 (37)
End of year 2,537 1,681
35. Reconciliation of operating profit to operating cash flows
2015 2014
$’000 $’000
Operating profit 17,225 32,116
Depreciation of property, plant and equipment 9,076 9,705
Decrease in fair value of agricultural produce inventory 1,147 1,692
Amortisation of prepaid operating lease rentals 722 548
Amortisation of sterling and US dollar note issue expenses 275 358
Biological gain (13,060) (3,571)
Loss on disposal of property, plant and equipment 49 484
Cumulative loss on termination of hedging contract * 9,002 –
Operating cash flows before movements in working capital 24,436 41,332
Decrease / (increase) in inventories (excluding fair value movements) 3,844 (527)
Decrease / (increase) in receivables 3,585 (5,659)
Increase / (decrease) in payables 6,818 (3,123)
Exchange translation differences (1,397) 1,030
Cash generated by operations 37,286 33,053
Taxes paid (5,427) (3,401)
Tax refunds received 4,601 8,461
Interest paid (16,397) (13,721)
Net cash from operating activities 20,063 24,392
* The cumulative loss on termination of hedging contract represents the cumulative prior year mark-to-market losses on the terminated hedging contract, and is
a cash flow offset against the $10,184,000 payment on termination of the contract treated as an outflow under Financing activities.
No additions to property, plant and equipment during the year were financed by new finance leases (2014: $nil).
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R.E.A. Holdings plc Annual Report and Accounts 2015
107
Group financial statements
Notes to the consolidated financial statements
continued
36. Movement in net borrowings
2015 2014
$’000 $’000
Change in net borrowings resulting from cash flows:
Decrease in cash and cash equivalents (316) (18,244)
Net increase in bank borrowings (20,706) (4,704)
(21,022) (22,948)
Issue of preference shares – 10,564
Amortisation of US dollar notes expenses (165) –
Issue of sterling notes, net of amortisation of issue expenses (4,195) –
Redemption of US dollar notes, net of amortisation of issue expenses – 6,310
(25,382) (6,074)
Currency translation differences (2,686) 1,555
Net borrowings at beginning of year (170,618) (166,099)
Net borrowings at end of year (198,686) (170,618)
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. 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.
A non-IAS 19 valuation of the Scheme was last prepared, using the attained age method, as at 31 December 2014. This
method had been adopted in the previous valuation as at 31 December 2011 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 2014 the
Scheme had an overall marginal surplus of assets, when measured against the Scheme’s technical provisions, of £202,000 -
$315,000. The technical provisions were calculated using assumptions of an investment return of 4.35 per cent pre-retirement
and 2.80 per cent post-retirement and annual increases in pensionable salaries of 3.20 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 3.20 per cent and 2.45 per cent respectively. It was further assumed that both non-retired and retired
members’ mortality would reflect S2PXA tables (light version) at 100 per cent and that non-retired members would take on
retirement the maximum cash sums permitted from 1 January 2015. Had the Scheme been valued at 31 December 2014
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 normal contributions paid by the group in 2015 were £29,500 - $45,100 (2014: £28,000 - $46,000) and represented 37.4
per cent (2014: 36.4 per cent) of pensionable salaries; in addition, a discretionary contribution of £41,700 - $67,300 was made
in 2015 (2014: £88,000 - $145,000) 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). Under the valuation as at 31 December 2014 the
normal contributions will continue at the increased rate of 40.2 per cent of pensionable salaries.
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R.E.A. Holdings plc Annual Report and Accounts 2015
37. Retirement benefit obligations - continued
The Scheme had also agreed a recovery plan with participating employers which provided 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. Of the additional contributions applicable to the group’s share of that previous recovery plan for 2015
£313,400 - $475,000 was paid (2014: £407,000 - $671,000). No further additional contributions applicable to the group’s
share of the previous recovery plan will be made and the remaining provision for such contributions has been credited to the
group’s income statement for the year.
The resultant net (credit)/charge to administrative expenses relating to additional contributions to the Scheme pursuant to the
recovery plan was as follows:
2015 2014
$’000 $’000
Release of provision relating to additional contributions paid in the year (475) (357)
Additional contributions paid in the year 475 671
Release of balance of provision relating to additional contributions no longer required (2,267) –
Net (credit) / charge to administrative expenses (note 5) (2,267) 314
The sensitivity of the deficit as at 31 December 2014 to variations in certain of the principal assumptions underlying the
actuarial valuation as at that date is summarised below:
Decrease in post-retirement investment returns by 0.1%
Increase in base table mortality rates by 10%
Increase in long term rate of mortality by 0.25%
The next actuarial valuation will be made as at 31 December 2017.
(Decrease) / increase
in surplus
$’000
(651)
1,439
(617)
The company is responsible for 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:
2015 2014
Discount rate 9.14% 8.45%
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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109
Group financial statements
Notes to the consolidated financial statements
continued
37. Retirement ben efit obligations - continued
The movement in the provision for employee service entitlements was as follows:
2015 2014
$’000 $’000
Balance at 1 January 5,584 4,602
Current service cost 883 907
Interest expense 439 428
Actuarial loss recognised in statement of comprehensive income 489 170
Exchange (569) (139)
Paid during the year (1,175) (384)
Balance at 31 December (see note 28) 5,651 5,584
The amounts recognised in administrative expenses in the consolidated income statement were as follows:
2015 2014
$’000 $’000
Current service cost 883 907
Interest expense 439 428
1,322 1,335
Amount included as additions to biological assets (110) (99)
1,212 1,236
Estimated lump sum payments to Indonesian employees on retirement in 2016 are $93,000 (2015: $531,000).
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”.
2015 2014
$’000 $’000
Short term benefits 2,111 2,112
Post employment benefits – –
Other long term benefits – –
Termination benefits – –
Share based payments – –
2,111 2,112
39. Rates of exchange
2015 2015 2014 2014
Closing Average Closing Average
Indonesian rupiah to US dollar 13,795 13,377 12,440 11,908
US dollar to pound sterling 1.4832 1.53 1.5593 1.65
40. Events after the reporting period
There have been no material post balance sheet events that would require disclosure or adjustment to these financial
statements.
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R.E.A. Holdings plc Annual Report and Accounts 2015
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.
The book value of the assets to be relinquished by SYB amounted as at 31 December 2015 to $8.6 million (2014: $8.6
million), comprising prepaid operating lease rentals of $2.6 million (2014: $2.6 million) and biological assets of $6.0 million
(2014: $6.0 million).
Completion had been delayed by a need to obtain comfort as to the continuing validity of the land titles held by PU. Survey
work is in progress to identify the areas to be designated for conservation and completion of the swap arrangements is now
expected to occur during 2016.
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 2015 the aggregate outstanding balances owing by the three cooperatives to Bank BPD amounted to
Indonesian rupiah 122.6 billion ($8.9 million) (2014: Indonesian rupiah 121 billion - $9.7 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 34 months, and do not include contingent rentals, or options to purchase
the properties.
The future minimum lease payments under operating leases are as follows:
2015 2014
$’000 $’000
Within one year 147 344
In the second to fifth year inclusive 111 249
After five years – –
258 593
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111
Company financial statements
Company balance sheet
as at 31 December 2015
2015 2014
Note $’000 $’000
Non-current assets
Investments (iv) 270,489 255,013
Deferred tax assets (v) 978 978
Non-current receivables 51 –
Total non-current assets 271,518 255,991
Current assets
Trade and other receivables (vi) 15,859 25,714
Cash and cash equivalents (vii) 278 728
Total current assets 16,137 26,442
Total assets 287,655 282,433
Current liabilities
Trade and other payables (viii) (1,069) (756)
Amount owed to group undertaking (x) – (19,478)
Total current liabilities (1,069) (20,234)
Non-current liabilities
US dollar notes (ix) (33,637) (33,472)
Amount owed to group undertaking (x) (63,944) (38,957)
Total non-current liabilities (97,581) (72,429)
Total liabilities (98,650) (92,663)
Net assets 189,005 189,770
Equity
Share capital (xi) 120,288 112,974
Share premium account (xii) 30,683 23,366
Exchange reserve (xii) (4,300) (4,300)
Profit and loss account (xii) 42,334 57,730
Total equity 189,005 189,770
Approved by the board on 22 April 2016 and signed on behalf of the board.
DAVID J BLACKETT
Chairman
112
R.E.A. Holdings plc Annual Report and Accounts 2015
Company financial statements
Company statement of changes in equity
for the year ended 31 December 2015
Share Share Exchange Profit Total
capital premium reserve and loss
Note $’000 $’000 $’000 $’000 $’000
At 1 January 2014 101,574 25,161 (4,300) 64,074 186,509
Total comprehensive income (xii) – – – 6,076 6,076
Issue of new preference shares (cash) (xi) 8,946 1,618 – – 10,564
Issue of new preference shares (scrip) (xi) 3,420 (3,420) – – –
Purchase of treasury shares (xi) (966) 7 – – (959)
Dividends to preference shareholders (iii) – – – (8,140) (8,140)
Dividends to ordinary shareholders (iii) – – – (4,280) (4,280)
At 31 December 2014 112,974 23,366 (4,300) 57,730 189,770
Total comprehensive income (xii) – – – (2,767) (2,767)
Issue of new preference shares (cash) (xi) 6,639 1,199 – – 7,838
Issue of new ordinary shares (cash) (xi) 675 6,118 – – 6,793
Dividends to preference shareholders (iii) – – – (8,461) (8,461)
Dividends to ordinary shareholders (iii) – – – (4,168) (4,168)
At 31 December 2015 120,288 30,683 (4,300) 42,334 189,005
There are no gains or losses other than those recognised in the profit and loss account.
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113
Company financial statements
Company cash flow statement
for the year ended 31 December 2015
2015 2014
Note $’000 $’000
Net cash inflow / (outflow) from operating activities (xiv) 427 (11,131)
Investing activities
Interest received 6,952 7,406
Dividends and other distributions received from subsidiaries (xvi) – 10,944
Repayment of loans by subsidiary companies * 5,242 3,050
New loans made to subsidiary companies * (19,787) (543)
Further investment in Indonesian stone and coal interests (3,968) (897)
Net cash used in investing activities (11,561) 19,960
Financing activities
Preference dividends paid (iii) (8,461) (8,140)
Ordinary dividends paid (iii) (4,168) (4,280)
Proceeds of issue of ordinary shares 6,793 –
Proceeds of issue of preference shares 7,838 10,564
Purchase of treasury shares, net of sales – (959)
Redemption of US dollar notes (ix) – (6,310)
New loans from subsidiary company 8,709 –
Net cash from financing activities 10,711 (9,125)
Cash and cash equivalents
Net decrease in cash and cash equivalents (423) (296)
Cash and cash equivalents at beginning of year 728 1,156
Effect of exchange rate changes (27) (132)
Cash and cash equivalents at end of year (vii) 278 728
* Excluding amounts dealt with within “Further investment in Indonesian stone and coal interests”
114
R.E.A. Holdings plc Annual Report and Accounts 2015
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
Basis of accounting
The company’s financial risk is managed as part of the group’s
strategy and policies as discussed in note 22 to the
consolidated financial statements.
The company financial statements are set out on pages 112
to 124.
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.
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.
Adoption of new and revised standards
The directors do not expect that the adoption of the standards
listed on page 82 in Accounting policies (group) will have a
material impact on the financial statements of the company in
future periods.
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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115
Company financial statements
Notes to the company financial statements
(i)
Critical accounting judgements and key sources of estimation uncertainty
In the application of the company’s accounting policies, which are described on page 115, the directors are required to make
judgements, estimates and assumptions; these are based on historical experience and other factors that are considered to be
relevant, and are reviewed on a regular basis. Actual values of assets and amounts of liabilities may differ from estimates.
Revisions to estimates are recognised in the period in which the estimates are revised.
In the opinion of the directors, all critical accounting judgements and key sources of estimation uncertainty relate to the group’s
operations as disclosed in note 1 to the consolidated financial statements and no such judgements or estimates apply to the
company’s financial statements
(ii)
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.
(iii) Dividends
2015 2014
$’000 $’000
Amounts recognised as distributions to equity holders:
Preference dividends of 9p per share 8,461 8,140
Ordinary dividends of 7.75p per share (2014: 7.25p per share) 4,168 4,280
12,629 12,420
Investments
(iv)
2015 2014
$’000 $’000
Shares in subsidiaries 91,775 91,775
Loans 178,714 163,238
270,489 255,013
The movements were as follows:
Shares Loans
$’000 $’000
At 1 January 2014 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
Repayment of loans – (5,316)
Additions to loans – 23,833
Effect of exchange – (3,041)
At 31 December 2015 91,775 178,714
KCC Resources Limited's preference shares provided a limited participation in the coal interests of REA 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 was written-off in the company's profit and
loss account.
116
R.E.A. Holdings plc Annual Report and Accounts 2015
The 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 06662767, has taken advantage of the
exemption pursuant to Companies Act 2006 s394A from preparing and filing individual accounts.
Deferred tax asset
(v)
$’000
At 1 January 2014 979
Credit to income for the year (1)
Effect of change in tax rate –
Effect of exchange –
At 31 December 2014 978
Charge to income for the year –
Effect of change in tax rate –
Effect of exchange –
At 31 December 2015 978
There were no deferred tax liabilities at 1 January 2014, 31 December 2014 or 31 December 2015.
At the balance sheet date, the company had unused tax losses of $4.9 million (2014: $4.9 million) available to be applied
against future profits. A deferred tax asset of $978,000 (2014: $978,000) 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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117
Company financial statements
Notes to the company financial statements (continued)
Trade and other receivables
(vi)
2015 2014
$’000 $’000
Trade debtors – –
Amount owing by group undertakings 15,267 25,166
Other debtors 567 530
Prepayments and accrued income 25 18
15,859 25,714
The directors consider that the carrying amount of trade and other receivables approximates their fair value.
(vii) Cash and cash equivalents
Cash and cash equivalents comprise short-term bank deposits. The Moody’s prime ratings of these deposits amounting to
$278,000 (2014: $728,000) is set out in note 22 to the consolidated financial statements under the heading “Credit risk”.
(viii) Trade and other payables
2015 2014
$’000 $’000
Amount owing to group undertakings 651 527
Other creditors 90 30
Accruals 328 199
1,069 756
The directors consider that the carrying amount of trade and other payables approximates their fair value.
(ix) US dollar notes
The US dollar notes comprise $34.0 million (2014: $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.
(x)
Amount owed to group undertaking
Amount owed to group undertaking comprises two unsecured interest-bearing loans from REA Finance B.V.. One loan of
£11.3 million ($16.7 million) is repayable in December 2017, the second loan of £31.9 million ($47.2 million) is repayable in
August 2020.
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R.E.A. Holdings plc Annual Report and Accounts 2015
(xi) Share capital
2015 2014
£’000 £’000
Authorised (in pounds sterling):
75,000,000 – 9 per cent cumulative preference shares of £1 each (2014: 65,000,000) 75,000 65,000
41,000,000 – ordinary shares of 25p each (2014: 41,000,000) 10,250 10,250
85,250 75,250
$’000 $’000
Issued and fully paid (in US dollars):
63,641,232 – 9 per cent cumulative preference shares of £1 each (2014: 59,420,232) 105,414 98,775
36,839,529 – ordinary shares of 25p each (2014: 35,085,269) 15,875 15,200
132,500 – ordinary shares of 25p each held in treasury (2014: 132,500) (1,001) (1,001)
120,288 112,974
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 2015, 4,221,000 9 per cent cumulative preference shares were issued, fully paid, by way of a placing at £1.20
a share (total consideration £5,065,000 - $7,970,000)
on 15 October 2015, 1,754,260 ordinary shares were issued, credited as fully paid, by way of placing at £2.60 per share
(total consideration £4,561,000 - $7,023,000) to Mirabaud Pereire Nominees Limited, Emba Holdings Limited, P Byrom,
J Landon and M Goodliffe. The middle market price at close of business on 2 October 2015 (being the date at which the
terms of issue were fixed) was £2.67
There have been no changes in ordinary shares held in treasury during the year.
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119
Company financial statements
Notes to the company financial statements (continued)
(xii) Movement in reserves
Share Exchange Profit
premium reserve and loss
account account
$’000 $’000 $’000
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
At 1 January 2015 23,366 (4,300) 57,730
Total comprehensive income – – (2,767)
Dividends to preference shareholders – – (8,461)
Dividends to ordinary shareholders – – (4,168)
Issue of preference shares (cash) 1,328 – –
Issue of ordinary shares (cash) 6,347 – –
Costs of issues (358) – –
At 31 December 2015 30,683 (4,300) 42,334
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 loss before dividends recognised in the company’s profit and loss account for the year is
$2.8 million (2014: profit $6.1 million).
(xiii) 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 22 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.
2015 2015 2014 2014
Book value Fair value Book value Fair value
$’000 $’000 $’000 $’000
Cash and cash equivalents 278 278 728 728
US dollar notes (33,637) (31,290) (33,472) (34,691)
Net debt (33,359) (31,012) (32,744) (33,963)
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 2015
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 2015, the company had outstanding $34 million nominal (2014: $34 million) of 7.5
per cent dollar notes 2017.
The policy for liquidity risk management is disclosed in note 22 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
2015, 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 2015 and 31 December 2014 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 2015 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 (2014: $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 company’s non-derivative financial liabilities. The table has been
drawn up based on the undiscounted amounts of the company’s financial liabilities based on the earliest dates on which the
company 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
2015 % $’000 $’000 $’000 $’000
US dollar notes 8.5 2,551 35,286 - 37,837
2014
US dollar notes 8.5 2,551 2,551 35,286 40,388
At 31 December 2015, the company’s non-derivative financial assets (other than receivables) comprised cash and deposits of
$278,000 (2014: $728,000) carrying a weighted average interest rate of nil per cent (2104: nil per cent) all having a maturity
of under one year and loans (including Indonesian stone and coal interests) of $37,200,000 (2014: $33,100,000).
(xiv) Reconciliation of operating loss to operating cash flows
2015 2014
$’000 $’000
Operating loss (57) (105)
Amortisation of US dollar note issue expenses 166 346
Operating cash inflows before movements in working capital 109 241
Decrease in receivables 8,754 3,642
Increase / (decrease) in payables 313 (5,189)
Exchange translation differences 246 178
Cash outflow from operations 9,422 (1,128)
Taxes paid (903) (941)
Interest paid (8,092) (9,062)
Net cash inflow / (outflow) from operating activities 427 (11,131)
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121
Company financial statements
Notes to the company financial statements (continued)
(xv) 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. 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.
A non-IAS 19 valuation of the Scheme was last prepared, using the attained age method, as at 31 December 2014. This
method had been adopted in the previous valuation as at 31 December 2011 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 2014 the
Scheme had an overall marginal surplus of assets, when measured against the Scheme’s technical provisions, of £202,000. The
technical provisions were calculated using assumptions of an investment return of 4.35 per cent pre-retirement and 2.80 per
cent post-retirement and annual increases in pensionable salaries of 3.2 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 3.20 per cent and 2.45 per cent respectively. It was further assumed that both non-retired and retired members’ mortality
would reflect S2PXA tables (light version) at 100 per cent and that non-retired members would take on retirement the
maximum cash sums permitted from 1 January 2015. Had the Scheme been valued at 31 December 2014 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 had also agreed a recovery plan with participating employers which provided 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.
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 2017.
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 2015 (2014: $nil).
The company is responsible for 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.
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R.E.A. Holdings plc Annual Report and Accounts 2015
(xvi) Related party transactions
2015 2014
Loans to subsidiaries $’000 $’000
PT Cipta Davia Mandiri 6,528 11,770
PT KCC Resources Indonesia 12,622 12,700
Makassar Investments Limited 425 425
REA Finance BV 3,649 3,836
PT REA Kaltim Plantations 89,101 77,255
R.E.A. Services Limited 29,220 24,130
141,545 130,116
2015 2014
Dividends received from subsidiaries $’000 $’000
Makassar Investments Limited – 8,550
R.E.A. Services Limited – 2,394
– 10,944
2015 2014
Interest received from subsidiaries $’000 $’000
PT Cipta Davia Mandiri 410 686
REA Finance BV 322 340
PT REA Kaltim Plantations 5,951 6,115
6,683 7,141
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”.
2015 2014
$’000 $’000
Short term benefits 2,111 2,112
2,111 2,112
There is no remuneration other than short term benefits.
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R.E.A. Holdings plc Annual Report and Accounts 2015
123
Company financial statements
Notes to the company financial statements (continued)
(xvii) Rates of exchange
See note 39 to the consolidated financial statements.
(xviii) Contingent liabilities and commitments
Sterling notes
The company has guaranteed the obligations for both principal and interest relating to the outstanding £8.3 million nominal
(2014: £34.54 million) 9.5 per cent guaranteed sterling notes 2017 and the outstanding £31.9 million nominal 8.75 per cent
guaranteed sterling notes 2020 issued by REA Finance B.V.. The directors consider the risk of loss to the company from these
guarantees to be remote.
Bank borrowings
The company has given, in the ordinary course of business, guarantees in support of subsidiary company borrowings from, and
other contracts with, banks amounting in aggregate to $122.9 million (2014: $111.0 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 (xiv) above.
Operating leases
The company has an annual commitment under an operating lease of $157,000 (2014: $167,000). The commitment expires
after one year. 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:
2015 2014
$’000 $’000
Within one year 157 167
In the second to fifth year inclusive – 167
After five years – –
157 334
(xix) Post balance sheet event
There have been no material post balance sheet events that would require disclosure or adjustment to these financial
statements.
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R.E.A. Holdings plc Annual Report and Accounts 2015
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R.E.A. Holdings plc Annual Report and Accounts 2015
125
Notice of annual general meeting
This notice is important and requires your immediate attention. If
you are in any doubt as to what action to take, you should
consult your stockbroker, solicitor, accountant or other
8.
9.
To authorise the directors to fix the remuneration of the auditor.
That, conditional upon the passing of resolution 13 set out in the
appropriate independent professional adviser authorised under
notice of the 2016 annual general meeting, the company is
the Financial Services and Markets Act 2000 if you are resident
generally and unconditionally authorised for the purposes of
in the United Kingdom or, if you are not so resident, another
section 701 of the Companies Act 2006 to make market
appropriately authorised independent adviser. If you have sold or
purchases (within the meaning of section 693(4) of the
otherwise transferred all your ordinary shares in R.E.A. Holdings
Companies Act 2006) of any of its ordinary shares on such
plc, please forward this document and the accompanying form of
terms and in such manner as the directors may from time to time
proxy to the person through whom the sale or transfer was
determine provided that:
effected, for transmission to the purchaser or transferee.
Notice is hereby given that the fifty-sixth annual general meeting of
purchased is 5,000,000 ordinary shares;
R.E.A. Holdings plc will be held at the London office of Ashurst LLP at
Broadwalk House, 5 Appold Street, London EC2A 2HA on 6 June
(b)
the minimum price (exclusive of expenses, if any) that
2016 at 10.00 am to consider and, if thought fit, to pass the following
may be paid for each ordinary share is £1.00;
resolutions. Resolutions 13 and 14 will be proposed as special
resolutions; all other resolutions will be proposed as ordinary
(c)
the maximum price (exclusive of expenses, if any) that
(a)
the maximum number of ordinary shares which may be
resolutions.
may be paid for each ordinary share is an amount equal to
the higher of: (i) 105 per cent of the average of the
1.
To receive the company’s annual accounts for the financial year
middle market quotations for the ordinary shares in the
ended 31 December 2015, together with the accompanying
capital of the company as derived from the Daily Official
statements and reports including the auditor’s report.
List of the London Stock Exchange for the five business
days immediately preceding the day on which such share
2.
To approve the directors’ remuneration report for the financial
is contracted to be purchased and (ii) the higher of the
year ended 31 December 2015.
3.
To re-elect as a director Mr J C Oakley, who, having recently
last independent trade and the current highest
independent bid on the London Stock Exchange; and
been appointed as a non-executive director and having served
(d)
unless previously renewed, revoked or varied, this
for more than nine years as an executive director, retires as
authority shall expire at the conclusion of the annual
required by the UK Corporate Governance Code and submits
general meeting of the company to be held in 2017 (or, if
himself for re-election.
earlier, on 30 June 2017)
4.
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, the
himself for re-election.
maximum number of ordinary shares that may be bought
back and held in treasury at any one time is 400,000
5.
To re-elect as a director Mr M A Parry, who, having been a
ordinary shares; and
director at each of the two preceding annual general meetings
and who was not reappointed 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 re-
contract to purchase ordinary shares that would or might
election.
be executed wholly or partly after the expiry of this
authority, and may make purchases of ordinary shares
6.
To re-elect as a director Ms I Chia, who, having been a director at
pursuant to it as if this authority had not expired.
each of the two preceding annual general meetings and who
was not re-appointed by the company in general meeting at or
10.
That the articles of association of the company be and are
since either such meetings, retires in accordance with the
hereby amended by increasing the maximum amount of shares
articles of association and submits herself for re-election.
that may be allotted by the company from £85,250,000 to
£97,500,000 by the addition of 9,000,000 ordinary shares of
7.
To re-appoint Deloitte LLP, chartered accountants, as auditor of
25p each and 10,000,000 9 per cent cumulative preference
the company to hold office until the conclusion of the next
shares of £1, in each case ranking pari passu in all respects with
annual general meeting of the company at which accounts are
the existing ordinary and preference shares in the capital of the
laid before the meeting.
company.
126
R.E.A. Holdings plc Annual Report and Accounts 2015
11.
That the directors be and are hereby generally and
ordinary shares, in each case in proportion (as nearly as
unconditionally authorised for the purposes of section 551 of
practicable) to the respective numbers of ordinary shares
the Companies Act 2006 (the “Act”) to exercise all the powers of
held by them on the record date for participation in the
the company to allot, and to grant rights to subscribe for or to
rights issue, open offer or invitation (and holders of any
convert any security into, shares in the capital of the company
other class of equity securities entitled to participate
(other than 9 per cent cumulative preference shares) up to an
therein or, if the directors consider it necessary, as
aggregate nominal amount (within the meaning of sub-sections
permitted by the rights of those securities) but subject in
(3) and (6) of section 551 of the Act) of £3,058,919; such
each case to such exclusions or other arrangements as
authorisation to expire at the conclusion of the next annual
the directors may consider necessary or appropriate to
general meeting of the company (or, if earlier, on 30 June 2017),
deal with fractional entitlements, treasury shares (other
save that the company may before such expiry make any offer or
than treasury shares being sold), record dates or legal,
agreement which would or might require shares to be allotted, or
regulatory or practical difficulties which may arise under
rights to be granted, after such expiry and the directors may allot
the laws of any territory or the requirements of any
shares, or grant rights to subscribe for or to convert any security
regulatory body or stock exchange in any territory
into shares, in pursuance of any such offer or agreement as if
whatsoever; and
the authorisations conferred hereby had not expired.
12.
That the directors be and are hereby generally and
resolution, to the allotment of equity securities and the
(ii)
otherwise than as specified at paragraph (i) of this
unconditionally authorised for the purposes of section 551 of
sale of treasury shares up to an aggregate nominal
the Companies Act 2006 (the “Act”) to exercise all the powers of
amount (calculated, in the case of the grant of rights to
the company to allot, and to grant rights to subscribe for or to
subscribe for, or convert any security into, shares in the
convert any security into, 9 per cent cumulative preference
capital of the company, in accordance with sub-section
shares in the capital of the company (“preference shares”) up to
(6) of section 551 of the Act) of £917,675 and shall
an aggregate nominal amount (within the meaning of sub-
expire at the conclusion of the next annual general
sections (3) and (6) of section 551 of the Act) of £21,358,768,
meeting of the company (or, if earlier, on 30 June 2017),
such authorisation to expire at the conclusion of the next annual
save that the company may before such expiry make any
general meeting of the company (or, if earlier, on 30 June 2017),
offer or agreement which would or might require equity
save that the company may before such expiry make any offer or
securities to be allotted, or treasury shares to be sold,
agreement which would or might require preference shares to be
after such expiry and the directors may allot equity
allotted or rights to be granted, after such expiry and the
securities or sell treasury shares, in pursuance of any
directors may allot preference shares, or grant rights to
such offer or agreement as if the power conferred hereby
subscribe for or to convert any security into preference shares, in
had not expired.
pursuance of any such offer or agreement as if the
authorisations conferred hereby had not expired.
14.
That a general meeting of the company other than an annual
general meeting may be called on not less than 14 clear days’
13.
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
11 set out in the notice of the 2016 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 11; and
(b)
for the purposes of section 573 of the Act, to sell ordinary
shares (as defined in sub-section (1) of section 560 of
the Act) in the capital of the company held by the
By order of the board
R.E.A. SERVICES LIMITED
Secretary
22 April 2016
Registered office:
First Floor
32 – 36 Great Portland Street
London W1W 8QX
company as treasury shares for cash.
Registered in England and Wales no: 00671099
as if section 561 of the Act did not apply to the allotment or sale,
provided that such powers shall be limited:
(i)
to the allotment of equity securities for cash in connection
with a rights issue or open offer in favour of holders of
ordinary shares and to the sale of treasury shares by way
of an invitation made by way of rights to holders of
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R.E.A. Holdings plc Annual Report and Accounts 2015
127
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 the
procedures described in the CREST Manual (available via
company’s own shares”, “Increase in share capital”, “Authorities
www.euroclear.com/CREST) subject to the company’s articles of
to allot 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 3 to 6 and 9 to 14 set out
service provider(s), who will be able to take the appropriate action on
above in this notice of the 2016 annual general meeting of the
their behalf.
company (the “2016 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 4 June 2016 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 4 June 2016. 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 4 June 2016.
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 4 June 2016) 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.
Any corporation which is a member can appoint one or more corporate
representatives who may exercise on its behalf all of its powers as a
member provided that they do not do so in relation to the same shares.
128
R.E.A. Holdings plc Annual Report and Accounts 2015
Any member attending the annual general meeting has the right to ask
Shareholders may not use any electronic address (within the meaning
questions. The company must cause to be answered any such question
of sub-section 4 of section 333 of the Companies Act 2006) provided
relating to the business being dealt with at the meeting but no such
in this 2016 Notice (or any other related document including the form
answer need be given if (a) to do so would interfere unduly with the
of proxy) to communicate with the company for any purposes other
preparation for the meeting or involve the disclosure of confidential
than those expressly stated.
information, (b) the answer has already been given on a website in the
form of an answer to a question, or (c) it is undesirable in the interests
Under section 338 and section 338A of the Companies Act 2006,
of the company or the good order of the meeting that the question be
members meeting the threshold requirements in those sections have
answered.
the right to require the company (i) to give, to members of the company
entitled to receive notice of the annual general meeting, notice of a
Copies of the executive directors’ service agreements and letters
resolution which may properly be moved and is intended to be moved at
setting out the terms and conditions of appointment of non-executive
the meeting and/or (ii) to include in the business to be dealt with at the
directors are available for inspection at the company's registered office
meeting any matter (other than a proposed resolution) which may be
during normal business hours from the date of this 2016 Notice until
properly included in the business. A resolution may properly be moved
the close of the annual general meeting (Saturdays, Sundays and public
or a matter may properly be included in the business unless (a) (in the
holidays excepted) and will be available for inspection at the place of
case of a resolution only) it would, if passed, be ineffective (whether by
the annual general meeting for at least 15 minutes prior to and during
reason of inconsistency with any enactment or the company’s
the meeting.
constitution or otherwise), (b) it is defamatory of any person, or (c) it is
frivolous or vexatious. Such a request may be in hard copy form or
A copy of this 2016 Notice, and other information required by section
electronic form, must identify the resolution of which notice is to be
311A of the Companies Act 2006, may be found on the company's
given or the matter to be included in the business, must be authorised
website www.rea.co.uk.
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
Under section 527 of the Companies Act 2006, members meeting the
case of a matter to be included in the business only) must be
threshold requirements set out in that section have the right to require
accompanied by a statement setting out the grounds for the request.
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 2016 Notice, the issued share capital of the
company comprises 36,839,529 ordinary shares, of which 132,500 are
held as treasury shares, and 63,641,232 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 36,707,029 as at the date of this 2016
Notice.
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R.E.A. Holdings plc Annual Report and Accounts 2015
129
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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)