R.E.A. HOLDINGS PLC
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Annual Report and Accounts
2016
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 and sale of crude palm
oil and crude palm kernel oil.
Sterilising cages
Steam turbine
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 “$” are to the lawful currency of the United States of America.
R.E.A. Holdings plc Annual Report and Accounts 2016
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Overview
Key statistics
2016
Results ($’000)
Revenue 79,265
Earnings before interest, tax,
depreciation and amortisation 15,933
(Loss) / profit before tax (9,289)
(Loss) / profit for the year (11,308)
(Loss) / profit attributable to
2015* 2014 2013 2012
90,515 125,865 110,547 124,600
15,123 38,797 30,269 38,083
(12,245) 23,744 25,216 30,558
(12,931) 21,981 12,672 17,703
ordinary shareholders (17,800)
Cash generated by operations 25,371
(20,912) 14,153 5,457 11,342
37,286 33,053 19,358 55,110
Returns per ordinary share
(Loss) / earnings (US cents) (48.2)
Dividend (pence) –
(59.0) 40.3 15.8 33.9
– 7.75 7.25 7.0
* Restated - see Accounting policies (group)
Land areas (hectares)
Mature oil palm 31,521
Immature oil palm 11,325
29,367 28,275 27,102 26,688
7,730 6,339 6,960 4,819
Planted areas 42,846
Infrastructure and undeveloped 27,738
37,097 34,614 34,062 31,507
33,487 35,970 36,522 39,077
Fully titled 70,584
Subject to completion of title 37,631
70,584 70,584 70,584 70,584
37,631 37,631 30,043 31,601
Total 108,215 108,215 108,215 100,627 102,185
FFB Harvested (tonnes) **
Group 468,371 600,741 631,728 578,785 597,722
Third party 98,052 138,657 149,002 99,348 64,014
Total 566,423 739,398 780,730 678,133 661,736
Production (tonnes) **
Total FFB processed 560,957 728,871 774,420 677,389 660,954
CPO 127,697 161,844 169,371 147,649 151,516
Palm kernels 26,371
33,877 35,812 30,741 30,734
CPKO 9,840
12,557 12,610 11,393 11,549
CPO extraction rate *** 22.8%
22.2% 21.9% 21.8% 22.9%
Yields (tonnes per mature hectare)
FFB 14.9
20.5 22.3 21.4 22.4
CPO 3.4
CPKO 0.3
4.5 4.9 4.6 5.1
0.3 0.4 0.4 0.4
Average exchange rates
Indonesian rupiah to US dollar 13,369
US dollar to sterling 1.36
13,377 11,908 10,494 9,392
1.53 1.65 1.57 1.59
** 2015 restated - see footnote to table under “Agricultural operations” page 18
*** 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.
02
R.E.A. Holdings plc Annual Report and Accounts 2016
Overview
Highlights
Financial
Stone and coal operations
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Adoption of amended IAS 41, effective 1 January 2016,
on biological assets has impacted 2016 profits due to a
new additional depreciation charge and the elimination of
fair value gains; 2015 comparatives restated to reflect
the change with reduction in results before tax of $23.8
million
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Long term arrangements agreed for purchasing crushed
stone for own use in hardening roads and other
infrastructure and for sale to third parties
Agreements reached for resumption of coal operations at
the coal concession near Kota Bangun
Revenues of $79.3 million (2015: $90.5 million),
reflecting lower production following two year severe dry
period
Firmer CPO prices, continued focus on costs and
exchange gains limiting the impact of lower production:
loss before tax of $9.3 million (2015: $12.2 million)
Net new investment of $31.6 million (2015: $34.8
million)
Permanent capital base to support extension planting
programme strengthened by $27.0 million, net of
expenses, from combination of acquisition by DSN group
of 15 per cent in the REA Kaltim group and cash placing
of 3.7 million new ordinary shares
Debt maturity profile improved by exchange of $13.8
million of 2017 dollar notes for new 2022 dollar notes,
repackaging of Indonesian bank loans and new funding
of $14.4 million to refinance maturing debt from
combination of sale of 2020 sterling notes held in
treasury and loans from the DSN group
Sustainability
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Renewable energy from methane capture plants
supplying 26 local villages and making an increasing
contribution as household take up continues to grow
RSPO recertification audits competed satisfactorily; ISCC
renewals in process
Completion of new estate school and new housing at
KMS
Completion of five village water treatment community
development projects
REA Kaltim awarded Class 1 status by the regional
governor following assessment of local plantation
companies, based on operational, social and
environmental criteria
Agricultural operations
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Crop of FFB 468,371 tonnes (2015: 600,741 tonnes);
CPO production of 127,697 tonnes (2015: 161,844
tonnes)
Extraction rates averaged 22.8 per cent (2015: 22.2 per
cent) despite impact on FFB quality of disruptions to
harvesting and transportation caused by heavy rainfall in
final quarter
Significant progress with new development: over 5,700
hectares of new land planted and a further 1,500
prepared for planting
Reliability of mill operations benefiting from recent
extensive refurbishment programme and enhanced
security systems
New enhanced fertiliser regime targeted at mature areas
initiated
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R.E.A. Holdings plc Annual Report and Accounts 2016
03
Overview
Officers and advisers
Directors
D J Blackett
I Chia
C E Gysin
J C Oakley
R M Robinow
M A St. Clair-George
Secretary and registered office
R.E.A. Services Limited
First Floor
32-36 Great Portland Street
London W1W 8QX
Stockbrokers
Mirabaud Securities LLP
10 Bressenden Place
London SW1E 5DH
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 2016
Overview
Maps
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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.
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 2016
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Overview
Chairman’s statement
The accompanying financial statements for 2016 incorporate
a significant change in accounting policies in accordance with
the amendment of IAS 41 Agriculture effective 1 January
2016. The amendment means that bearer plants are no
longer carried as biological assets at fair value but are instead
accounted for as property, plant and equipment, and are
depreciated. The 2015 financial statements have been
restated to reflect the change.
The effect has been to reduce the previously reported profit
before tax for 2015 by $23.8 million and, whilst the
comparable reduction for 2016 has not been computed, it is
most probably even higher given the likely benefit to the fair
value of what were formerly biological assets from the sizeable
extension planting achieved in 2016. As a result, with margins
already reduced by lower production, and despite improved
crude palm oil (“CPO”) prices, the group incurred a loss before
taxation for the year, albeit reduced from the restated loss of
the preceding year.
Total revenue for the year amounted to $79.3 million,
compared with $90.5 million in 2015; at the operating level,
the group incurred a loss of $5.0 million for the year,
compared with a restated loss of $6.6 million in 2015. Firmer
CPO prices in 2016 as well as continued focus on cost
controls restricted the loss before tax in 2016 to $9.3 million
compared with a restated loss of $12.2 million in 2015.
As previously reported, the group’s lower production mirrored
the production experience reported by many other oil palm
plantations in East Kalimantan and several other areas of
South East Asia and is attributed to the severe dry periods
experienced in both 2014 and 2015. The group’s cropping
rates started to recover from September onwards, but heavy
rainfall in November and December disrupted collection, which
meant that production in the final months of the year fell short
of crop availability as not all crop could be recovered. Oil
quality was also affected. Whilst the change in precipitation is
positive for future productivity, such a dramatic increase after a
prolonged period of drought, with average rainfall in 2016
more than 60 per cent higher than in 2015, had a short term
negative impact on conditions for both harvesting and
transportation. With the easing of the rains, essential repairs
to, and hardening of, estate roads have become feasible and
these should progressively benefit production as the current
year progresses.
Fresh fruit bunches (“FFB”) harvested in 2016 amounted to
some 468,000 tonnes compared with 601,000 tonnes in
2015. Smallholder and other third party FFB purchased by
the group also fell short of 2015 levels at 98,000 tonnes
compared with 139,000 tonnes in the previous year. CPO
production amounted to 128,000 tonnes compared with
162,000 tonnes in 2015, while CPO extraction rates
averaged 22.8 per cent compared with 22.2 per cent in 2015.
Extraction rates in 2016 would have been higher were it not
for the impact on FFB quality of the disruptions to harvesting
and transportation in the last part of the year.
The CPO price, CIF Rotterdam, edged steadily upwards
through 2016 from an opening price of $570 per tonne to
close at $801 per tonne but has since fallen back and
currently stands at $710 per tonne. Whilst there is an
expectation of better CPO production in 2017, soybean oil
production may be constrained by a relatively weak market for
soya meal so that, with vegetable oil and CPO stocks much
depleted following the poor harvests of 2016, there is a
reasonable prospect that prices will stabilise at above the
$700 per tonne level during the second half of 2017.
Through PLN, the Indonesian state electricity company, the
group now supplies power to 26 villages and sub-villages
surrounding the estates. Revenue from electricity generated
from the group’s two methane capture plants amounted to
some $563,000 in 2016, compared with $233,000 in the first
eight months of operation in 2015.
Excellent progress was made with the group's extension
planting programme in 2016, following completion of the
bunding and construction of the water gates to control the
flood prone lower lying areas of PT Putra Bongan Jaya
(“PBJ”). A total of 5,758 hectares were planted during the
year and a further 4,000 hectares of plantings are planned for
2017. The latter programme will require extension of existing
bunding into the northern section of PBJ and new bunding
along the southern boundary of PT Cipta Davia Mandiri
(“CDM”). Work on this additional bunding is already well in
hand.
As reported previously, in December 2016, PT Dharma Satya
Nusantara Tbk ("DSN") completed its acquisition of a 15 per
cent interest in the group’s principal operating subsidiary in
Indonesia, PT REA Kaltim Plantations (“REA Kaltim”). In
addition, the DSN group has provided loans to the REA Kaltim
group. DSN’s investment and provision of loans will help to
finance the group’s extension planting programme and
accords with the long-held intention of increasing Indonesian
participation in the group.
The group successfully addressed several key elements of
funding that were highlighted in the 2015 annual report.
Specifically, the group issued new US dollar denominated
notes maturing in 2022 by way of an exchange offer to
existing 2017 dollar noteholders to extend the maturity of
$13.8 million and latterly issued 3.7 million ordinary shares by
way of a placing to raise some £10.5 million. In addition, £1.5
million of 2020 sterling notes held in treasury were sold by a
group subsidiary and Indonesian bank loans were repackaged
so as to extend the maturities and significantly reduce nearer
term repayments under the existing facilities.
06
R.E.A. Holdings plc Annual Report and Accounts 2016
Looking ahead, the recent return to more normal levels of
rainfall, allowing harvesting rounds gradually to improve and
renovation and repairs to the estate roads to become fully
effective, should see both harvesting and production levels
increase. With extraction rates expected to improve further, an
increasing hectarage of mature plantings and CPO prices that
could well remain around current levels, a significant
improvement in revenues should be possible. This and the
continuing development of the group’s land bank, coupled with
further progress in the stone and coal operations, should lead
to enhanced shareholder value.
DAVID J BLACKETT
Chairman
Under fresh agreements recently reached with third parties,
operations at the group’s coal concession near Kota Bangun
are expected to resume shortly following dewatering of the
concession area. Under these agreements, the group should
receive a steady cash flow based upon the prevailing coal
prices but with an agreed floor. Previously reported
negotiations with another third party in relation to the
Liburdinding concession proved abortive but the group is
continuing to hold discussions regarding this concession with
several potentially interested parties.
The group is also continuing to review options for developing
suitable road access to the group’s andesite stone concession.
This will be a necessary preliminary to commencing extraction
operations. Previous discussions with potential strategic
investors have not been renewed pending the outcome of
such review. Arrangements have been agreed, however, in
respect of a limestone deposit adjacent to PBJ. These
arrangements will provide the group with the crushed stone
required for infrastructure in the agricultural operations and
other construction programmes, as well as for sale to third
parties.
Revenue from these recent developments in the stone and
coal operations will provide a useful addition to the group’s
cash flow. However, depending upon the level of CPO prices
and operational performance during the remainder of 2017,
some further funding may be required to enable the group to
continue its expansion programme at the speed that it would
like. Accordingly, the group is actively engaged in discussions
to obtain new longer term debt financing to replace, or replace
in part, the remaining component of the group’s maturing
sterling and dollar notes that has not yet been refinanced. The
directors are optimistic of a successful outcome to these
discussions.
In view of the financial performance in 2016, the directors
have not declared, or recommended the payment of any
ordinary dividend in respect of the year. Provided that crops
continue to recover as expected and prices for the group’s
produce are maintained around current levels, the directors
will consider recommending the payment of a final ordinary
dividend in respect of 2017.
Following the resignation of Mark Parry, I would like to
welcome Carol Gysin as the company’s new managing
director. Carol has worked for the group for over eight years
and is very familiar with its operations. Further, I also welcome
Michael St Clair-George who joined the board in October
2016 as the senior independent non-executive director and
chairman of both the audit and remuneration committees.
Michael has over 40 years’ experience in the plantation and
agribusiness industries in Malaysia and Indonesia.
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R.E.A. Holdings plc Annual Report and Accounts 2016
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.
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 operations” 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 is principally engaged in the cultivation of oil palms
in the province of East Kalimantan in Indonesia and in the
production and sale 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”).
The group also holds interests in respect of two stone
deposits and two 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 while 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 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 2016
Future direction
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 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.
To this end, in May 2016, the directors concluded a
transaction with a strategic investor in the group’s principal
operating subsidiary, PT REA Kaltim Plantations (“REA
Kaltim”) whereby subsidiary companies of PT Dharma Satya
Nusantara Tbk ("DSN"), acquired, by a combination of
subscription for new shares and the acquisition of existing
shares, a 15 per cent equity interest in REA Kaltim.
DSN is an Indonesian natural resources company listed on the
Indonesia Stock Exchange in Jakarta and engaged in the
business of oil palm plantations and wood products, with
plantation estates based in East, Central and West Kalimantan.
In addition to securing more permanent capital in the local
operations of the group, the directors believe that through this
association with DSN the group will benefit from exchanges of
information on agronomic practices and that there will be
scope for more efficient sourcing of supplies and marketing of
produce.
The group has acknowledged that DSN may increase its
participation in REA Kaltim to an eventual level of 49 per cent
by gradual stages over a period of five years, but on the basis
that each increase will be subject to agreement of the price
and other terms at the time of such increase and to the receipt
of all necessary consents and approvals, including the
approval of the company’s shareholders to the extent required.
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
group’s stone deposits 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 invested.
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 2016 represented some 92
per cent of the group’s total assets and which, in 2016,
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 and developing
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 3.1 per
cent to 208 million tonnes in the year to 30 September 2016
(of which vegetable oils represented 155 million tonnes).
World production of the same group of vegetable oils and fats
during the same period was 206 million tonnes with vegetable
oils accounting for 153 million tonnes and CPO 61 million
tonnes (some 29 per cent of the total). The excess of
consumption over production was reflected in a material
depletion in stocks.
Total vegetable oil production is currently forecast by Oil World
to rise by 2.4 per cent in 2017 to 213 million tonnes, driven
principally by a recovery in CPO production (which was
depressed in the preceding year by weather factors) and
increased production of soybean oil. Total CPO production is
projected to account for approximately 61 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 up to 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. In particular, 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 2016 accounted for
some 15 per cent of global vegetable oil consumption. There
is substantial evidence that over a period of several years
there has been a correlation between vegetable oil and
petroleum oil prices but, following the sharp decline in
petroleum oil prices during 2015, it appears that the
correlation has, for the time being at least, been broken.
There are probably two principal reasons for this: the
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. An increasing element of
biofuel use reflects government mandates. In Indonesia, for
example, a levy on exports of CPO of $50 per tonne
introduced in July 2015 is being used to subsidise biodiesel
production and is leading to increasing amounts of CPO being
converted to biodiesel for internal consumption. The resultant
effect is that the economics of producing biodiesel (which,
subsidies apart, are dependent upon the price of competing
petroleum based diesel) are not currently the determinant of
vegetable oil prices so that those prices no longer correlate
with energy prices. This situation would, of course, change
should petroleum oil prices recover materially from present
levels and restore the economics of manufacturing
unsubsidised biodiesel.
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 $488 per tonne. The monthly average price over the
ten years as a whole has been $844 per tonne.
The CPO price, CIF Rotterdam, edged steadily upwards
through 2016 from an opening price of $570 per tonne to
close at $801 per tonne but has fallen back since then and
currently stands at $710 per tonne. Whilst there is an
expectation of better CPO production in 2017, soybean oil
10
R.E.A. Holdings plc Annual Report and Accounts 2016
Crude palm oil monthly average price
1400
1200
1000
800
600
400
200
0
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
production may be constrained by a relatively weak market for
soya meal so that, with vegetable oil and CPO stocks much
depleted following the poor harvests of 2016, there is a
reasonable expectation that prices will stabilise at above the
$700 per tonne level during the second half of 2017.
The Indonesian context
The Indonesian economy remained relatively stable during
2016 and continued to be one of the best performing global
economies behind India and China. Despite the adverse
impact of continuing low global commodity prices, GDP still
grew by over 5.0 per cent in 2016 (2015: 4.9 per cent)
boosted by a number of government infrastructure projects
throughout Indonesia. The official inflation rate was around 3.0
per cent in 2016 (2015: 3.4 per cent), although real inflation,
particularly in the outer islands, is likely to have been higher
than this as suggested by an average increase of 8.3 per cent
in the minimum wage for 2017 in the three districts in which
the group operates in East Kalimantan.
The Indonesian rupiah strengthened from Rp 13,795 = $1 at
the start of 2016 to Rp 13,436 = $1 by the end of the year
and has strengthened slightly further in the first months of
2017.
The consistently high level of security, in place in Jakarta for
many years, has meant that the police have apparently been
able to prevent or respond swiftly to a number of planned
terrorist incidents. This has helped to maintain international, as
well as domestic, investor confidence in the effectiveness of
the government, an important facilitator of economic growth.
Against a background of positive macro-economic indicators,
the government of President Joko Widodo (“Jokowi”) has
started to make progress with delivering on key election
pledges of reduced unemployment, increased infrastructure
investment and structural reform.
R.E.A. Holdings plc Annual Report and Accounts 2016
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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 2016 with, where
available, comparative figures for 2015 are provided in the
succeeding sections of this report, with each category of
indicators being covered in the corresponding section of the
report.
The run up to the governor’s elections in Jakarta held in
February 2017, which resulted in the failure of any candidate
to attain the required minimum 50 per cent of the vote and
consequently the need for a second and final round of voting
to be held in April 2017, was tarnished by political tensions
and accusations amongst the candidates. Although this led to
a few mass demonstrations in Jakarta, there has since been a
public reconciliation between the sides supporting each of the
candidates, suggesting that democracy in Indonesia is
maturing and able to weather major political storms that erupt
from time to time. Maintaining investor confidence in the
country is key to its economic growth.
In East Kalimantan, where the group’s operations are based,
the local economy continued to suffer for most of 2016 from
the low coal prices that had previously led to the closure of
many coal mines, as well as from the sharp fall in oil palm
production during the middle of the year associated with the
worst El Niño event on record. The final quarter of 2016 saw
the start of a recovery in coal prices, leading to the reopening
of some mines, as well as improving production in the
plantation sector.
The group continues to maintain excellent relations with the
longstanding regent of Kutai Kartanegara, where the group’s
mature estates are located, and is building good relations with
the newly elected regents of Kutai Timur and Kutai Barat,
where the developing estates are located. The Kutai
Kartanegara regent is seen as a front runner for the elections
for governor of East Kalimantan to be held in 2018.
The export levy of $50 per tonne introduced in July 2015
continues to be applied to all Indonesian export sales of CPO
and CPKO irrespective of selling price. In addition, Indonesia
applies sliding scales of duty on exports of CPO and CPKO at
export prices above certain levels. These scales have been
adjusted so that, at export prices at which export duty was
payable under the previous sliding scales, the combined cost
of export levy and export duty under the new sliding scale is
unchanged from the export duty that would have been payable
under the previous sliding scales. Export duty on CPO now
becomes payable when export prices CIF Rotterdam exceed
$750 per tonne.
12
R.E.A. Holdings plc Annual Report and Accounts 2016
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 by
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 2016
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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 now holds an 85 per cent
economic interest (2015: 100 per cent). 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 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 concluded 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 SYB area and one KKS area are contiguous with
the REA Kaltim areas and together form a single site. All of
these areas fall within the Kutai Kartanegara regency of East
Kalimantan. The PBJ area sits some 70 kilometres to the
south of the REA Kaltim areas in the West Kutai regency of
East Kalimantan while the CDM and KMS areas and a second
KKS area are located in close proximity to each other in the
East Kutai regency of East Kalimantan less than 30
kilometres to the east of the REA Kaltim areas. Two strips of
land held by PBJ2 are adjacent to the land areas held by REA
Kaltim and SYB; a third strip, bordering the PBJ land areas
and formerly held by PBJ2, is being reallocated to PBJ.
Historically, the REA Kaltim, SYB, KKS, CDM and KMS areas
were most readily accessed by river. However, construction in
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), means that the group has alternative transport
options particularly when either excessively dry or wet weather
periods affect river or road access. Transit times between the
estates and Balikpapan can now be as little as six hours by
road. 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 2016
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 have 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.
Pre Post
swap swap
Land areas 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
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 2016, the overall area of the group’s fully titled
agricultural land remained at 70,584 hectares. In addition, at
31 December 2016, the group held, or had previously held
and can potentially renew, land allocations totalling 37,631
hectares.
Certain of the land areas held by SYB overlap with mineral
rights held by an Indonesian third party company, PT Ade
Putra Tanrajeng (“APT”). Pursuant to an agreement concluded
in 2015, it has been agreed that SYB will swap 3,554
hectares of fully titled land and relinquish 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. Areas to be designated for conservation have now
been identified and completion of the swap arrangements is
now being actively progressed with a view to satisfying any
remaining conditions in 2017.
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:
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
* Of the area shown above as held by PBJ2, application has been made
to reallocate to PBJ 2,142 hectares comprising a strip of land adjacent
to the existing PBJ land areas. A proportion of this strip and a
substantial proportion of the balance of the PBJ2 land allocation will be
transferred to smallholder cooperatives. A proportion of the other areas
classified above as “land subject to completion of titling” will also be so
transferred.
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.
Whilst the group continues to maintain its claim to this area
should rezoning occur, the prospect of a favourable decision
on such rezoning appears increasingly unlikely.
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,
deemed unsuitable for oil palm cultivation or allocated for
smallholder cooperatives 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 must 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 planted 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
R.E.A. Holdings plc Annual Report and Accounts 2016
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Strategic report
Agricultural operations
continued
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 managing 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
compliance with the regulations in respect of the limit on
ownership of plantation land as referred to under “Future
direction” in “Introduction and strategic environment” above.
Land development
Areas planted as at 31 December 2016 amounted in total to
42,846 hectares. Of this total, mature plantings comprised
31,521 hectares having a weighted average age of 13 years.
A further 2,555 hectares planted in 2013 were scheduled to
come to maturity at the start of 2017.
The breakdown by planting year of the total of 42,846 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 were resurveyed during 2016 as a result of which the
previously reported planted area was reduced by eight
hectares and certain areas were reallocated between different
planting years.
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 625
2010 1,419
2011 1,073
2012 1,950
31,521
Immature areas
2013 2,555
2014 777
2015 2,236
2016 5,757
42,846
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.
The above table includes a total of 232 hectares of flood prone areas
forming part of the 2009 and 2010 plantings at CDM that were previously
abandoned but are now expected to be recovered following construction
of bunding.
16
R.E.A. Holdings plc Annual Report and Accounts 2016
There remain some additional areas for planting out in KMS,
where some 4,500 hectares have been planted to date. When
fully planted, this hectarage should amount to around 4,800
hectares, of which some 800 hectares that were planted in
2013 will be transferred to village cooperatives in due course.
Rapid progress was made with the group's extension planting
programme in 2016, following completion of bunding and
construction of water gates to control the flood prone lower
lying areas of PBJ. Cumulative development for the year is
detailed below:
PBJ CDM Total
hectares hectares hectares
Cleared, not yet planted at
1 January 2016 2,338 353 2,691
Cleared, during 2016 2,110 2,538 4,648
Cleared, not yet planted at
31 December 2016 (492) (1,089) (1,581)
Planted during the period 3,956 1,802 5,758
The group plans further extension planting in 2017 of not less
than 4,000 hectares again to be split predominantly between
PBJ and CDM. This programme will require extension of the
existing bunding into the northern section of PBJ and new
bunding along the southern boundary of CDM. Work on
bunding is already well in hand and the group is on course to
achieve the planned expansion.
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 but is now being expanded to increase its capacity to
60 tonnes per hour. Installation of a second boiler and the
other equipment needed to achieve this expansion is expected
to be completed during 2017.
Following an extensive programme of refurbishment, all but
one of the four boilers in the group’s older mills have now
been reconditioned; reconditioning of the remaining boiler will
be completed during 2017. Having two boilers in a mill
provides resilience and facilitates downtime for routine
maintenance while retaining the designed throughput.
Breakdown hours were substantially reduced in 2016 and,
with enhanced security systems and flow meters to monitor
throughput, extraction rates improved as noted under “Crops
and extraction rates” below.
Once the recent plantings at KMS and the 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 also 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 for transporting CPO and CPKO is used in
conjunction with tank storage adjacent to the oil mills and a
transhipment terminal owned by the group downstream of the
port of Samarinda. The core river barge fleet, which is
operated under time charter arrangements to ensure
compliance with current Indonesian cabotage regulations,
comprises a number of small vessels, ranging between 750
and 2,000 tonnes. These barges are used for transporting
CPO and CPKO from the estates to the transhipment terminal
for bulking and then either loading to buyers' own vessels on
an FOB basis or for loading to either a 4,000 tonne or 2,400
tonne sea-going barge. The sea-going barges, also operated
under time charter arrangements, make deliveries to
customers on a CIF basis in other parts of Indonesia. On
occasion, 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 on a CIF
basis, buyer’s port, allows the group to make sales without
exposure to the collection delays sometimes experienced with
FOB buyers.
The majority of CPO sales are now made to Indonesian
refineries in Balikpapan, East Kalimantan, and Kota Baru,
South Kalimantan, which can be easily accessed from the
group’s bulking station on the Mahakam River and to which
the voyage time is much shorter than that to East Malaysia
where historically the majority of CIF 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 must be transferred by road
from the mills to a point some 70 kilometres downstream at
Pendamaran where the group has established a permanent
loading facility and the year round loading of barges of up to
2,400 tonnes is possible.
The group maintains its own fleet of trucks to transport CPO
and CPKO from the oil mills either to the usual loading points
on the upper reaches of the Belayan River or to the
downstream loading point at Pendamaran as weather
conditions may dictate.
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
Key agricultural statistics for the year to 31 December 2016
(with restated comparative figures for the corresponding
period of 2015) were as follows:
FFB crops (tonnes) 2016 2015*
Group harvested 468,371 600,741
Third party harvested 98,052 138,657
Total 566,423 739,398
Production (tonnes)
Total FFB processed 560,957 728,871
CPO 127,697 161,844
Palm kernels 26,371 33,877
CPKO 9,840 12,557
Extraction rates (percentage)
CPO 22.8 22.2
Palm kernels 4.7 4.7
CPKO 34.7 35.0
Rainfall (mm)
Average across the estates 3,449 2,141
* The 2015 comparative figures have been restated as the group’s new
information system now allows for data collection in real time so that
operational statistics can be reported on an actual month basis.
As previously reported, the severe dry periods experienced in
both 2014 and 2015 had a significant negative impact on the
group's crop production in 2016, alongside that of other oil
palm plantations in East Kalimantan and in a number of other
areas of South East Asia. Cropping rates started to recover
from September onwards, but heavy rainfall in November and
December disrupted collection, which meant that production in
the final months of the year fell short of crop availability as not
all crop could be recovered. Whilst the change in precipitation
is positive for future productivity, such a dramatic increase
after a prolonged period of drought, with average rainfall in
2016 more than 60 per cent higher than in 2015, had a short
term negative impact on conditions for both harvesting and
transportation.
The substantial recent investment in refurbishment of the
group’s two older mills, a regular programme of mill
maintenance and a drive to improve the quality of third party
FFB from smallholders and nearby estates have all
contributed to the improvements in overall extraction rates
achieved over the last two years, with the CPO extraction rate
averaging close to 23 per cent in 2016. Indeed, the extraction
rate achieved in 2016 would have been higher were it not for
the problems in the closing months of the year with harvesting
and transportation. These reduced the quality of FFB
delivered to the mills and thereby reduced the CPO extraction
potential of the FFB concerned. Third party FFB continues to
provide additional throughput and revenue.
Moving into 2017, the group has instituted a programme to
strengthen the group’s road infrastructure. This will be
assisted by the arrangements now in place for sourcing stone
from the group’s own stone operations as detailed under
“Stone and coal operations” below. This should produce fairly
rapid improvements in production but, having effectively
started only in March 2017, did not improve the harvesting
and transportation situation to any significant extent during
the wetter part of the first quarter of the year. As a result, not
all available crop was harvested in that period and the FFB
crop for the period from the beginning of the year to the end
of March 2017 amounted to 127,636 tonnes, against
124,475 tonnes for the same period in 2016.
In line with a previously announced decision, planned fertiliser
levels in the mature areas were significantly increased for
2016 although a proportion of the planned programme had to
be rolled over into 2017 because of the heavy rainfall at the
end of the year. The group intends to maintain higher
dosages going forward. Fertiliser applications in immature
areas have always been maintained at high levels and
therefore no material changes are planned for those areas.
The group has recently engaged a new agronomy adviser to
provide advice on optimising field disciplines and improving
crop yields. The adviser has confirmed his support for the
group’s planned higher levels of fertiliser application.
Steps are to be taken to bund and resupply mature areas
totalling slightly over 1,000 hectares that have been damaged
over the years by periodic flooding. These areas apart, the
group retains good stands in all of its mature areas. With good
bunch formation being reported, increased fertiliser
applications and work now underway to strengthen the group’s
road infrastructure, the directors are optimistic that monthly
production will steadily improve and that, over the next couple
of years, annual production levels will be restored to the levels
that the group would expect given the normal yield profiles of
the plant varieties that make up the group’s plantings.
Revenues
During 2016, all of the group’s CPO and CPKO was sold in
the local Indonesian market, reflecting continuing strong
demand from easily accessible local refiners and the delivery
efficiencies achievable from selling to this nearby customer
base. The group has established relationships with each of
the four refineries now operating in the region. Competition
between these refineries ensures that prices achieved are
competitive. Local sales do not attract export duty but
arbitrage between the local and international markets means
that the price differential between the markets is normally an
18
R.E.A. Holdings plc Annual Report and Accounts 2016
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 a small number
of 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.
With some revival in the ISCC certified market, the group sold
95,660 tonnes of ISCC certified CPO and a further 2,301
tonnes of RSPO certified CPKO during 2016 at premia of,
respectively, $5 and $35 per tonne. By contrast, there were
no sales of Greenpalm certificates under the RSPO’s book
and claim system as explained under “Certification” in
“Sustainability” below.
As a rule, all CPO and CPKO produced by the group is sold on
the basis of prices prevailing immediately ahead of delivery
but, on occasions when market conditions appear favourable,
the group may make forward sales at fixed prices. The fact
that export duty is levied on prices prevailing at date of
delivery, not on prices realised, does act as a disincentive to
making forward fixed price sales since a rise in CPO prices
prior to delivery of such sales will mean that the group will not
only forego the benefit of a higher price but may also pay
export tax on, and at a rate calculated by reference to, a higher
price than it has obtained. No deliveries were made against
forward fixed price sales of CPO or CPKO during 2016 and
the group currently has no sales outstanding on this basis.
The average prices per tonne realised by the group in respect
of 2016 sales of CPO and CPKO, adjusted to FOB,
Samarinda, and net of export duty were, respectively, $521
(2015: $485) and $1,111 (2015: $744).
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.
The group’s operations lie in an area where average rainfall
levels are high. The group endeavours to capitalise on this
advantage by 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 appropriate husbandry.
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 26 villages and sub-villages
surrounding the group's estates by way of a local grid.
Payment for the power so utilised is made by PLN to the
company and the local 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 continues to
grow and, as further households install prepay meters, power
offtake from the group is projected to increase. Revenue from
electricity sales amounted to some $563,000 in 2016,
compared with $233,000 in the first eight months of
operation in 2015. PLN may, in due course, be able to
increase its power capacity requirement to eight megawatts.
Methane production could be further increased by installing a
third methane capture plant in the group's most recently
constructed mill. There are other potential 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 could reduce diesel consumption in the
group's vehicles by some 70 per cent.
Other cost saving initiatives that have been implemented by
the group in recent years include measures to reduce the use
of pesticides, in-house production of harvester bridges and
manufacture of bricks for housing using a mixture of cement
and boiler ash from the mills.
The group’s new information system, of which the first phase
was implemented in 2015, now provides transparent oversight
of substantially all estate activities involving labour and
production. Work is now in hand on implementing field
inputting of data from handheld devices and integrating the
operational data being recorded with the group’s accounting
records.
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R.E.A. Holdings plc Annual Report and Accounts 2016
19
Strategic report
Stone and coal operations
Concessions
The group holds interests in respect of two stone deposits and
two coal mining concessions, all of which are located in East
Kalimantan in Indonesia.
The stone concessions comprise a substantial deposit of high
grade andesite stone located to the north east of the SYB
northern plantations and a much smaller limestone deposit
adjacent to the PBJ plantations.
The coal mining concessions comprise a high calorific value
deposit near Kota Bangun and the lower grade Liburdinding
concession in the southern part of East Kalimantan. The
rights in respect of the Muser coal concession (in which the
group formerly held an interest acquired together with the
Liburdinding concession) have been allowed to lapse as the
group concluded that the prospects for this concession were
insufficient to justify the costs of extending the Muser
licences.
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 interests are
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 andesite 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
andesite stone concession holding company has guaranteed
the obligations to the group of the coal concession holding
companies.
The limestone concession is held by an independent
Indonesian third party with which the group has indirectly
concluded an exclusive offtake agreement as detailed below.
Operating activities
Pursuant to the arrangements agreed in respect of the
limestone quarry, KCCRI will purchase crushed stone from a
third party contractor who will quarry the stone at the
concession site and then transfer it to a site within the PBJ
property for crushing by the same contractor. The resultant
crushed stone will be sold by KCCRI to PBJ and potentially
other group companies, as well as to third parties. The
crushed stone purchased by PBJ and other group companies
will be utilised for hardening roads. The arrangements agreed
between KCCRI and the third party contractor, and between
that contractor and the concession owner, provide that the
contractor will have exclusive rights to quarry the concession
and that all stone quarried will be transferred to and crushed
at PBJ and then sold to KCCRI. The concession size is
estimated at between 1.2 and 1.5 million tonnes although
there may be scope later to extend into an adjacent area. The
contractor is currently mobilising and production is expected
to start in June 2017.
The operating licence required to establish a simple quarrying
and crushing operation on the andesite 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 review options for developing
suitable road access to the andesite stone concession. This
will be a necessary preliminary to commencing extraction
operations at the concession. A recent study suggests that it
may be sensible to upgrade the existing road to the
concession only to the extent necessary to support smaller
trucks and to limit initial production volumes to the level that
such smaller trucks have the capacity to move. This would
reduce the capital cost of opening the concession and thus
facilitate initial funding, particularly if firm indications of offtake
can be obtained. As cash flow builds, the road could then be
upgraded to support larger trucks and higher production
volumes.
The directors decided in 2012 to limit further capital
commitments to the coal operations and to concentrate the
group’s efforts on maximising recoveries of the amounts
already invested. Then in 2014, there was a substantial fall in
international coal prices and coal activities were suspended.
The past twelve months have seen a considerable recovery in
prices and it is now proposed that operations be resumed.
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R.E.A. Holdings plc Annual Report and Accounts 2016
Discussions have recently been concluded on novation of a
project agreement signed in 2013 with a third party relating to
the development and operation of the Kota Bangun
concession. The novation will bring in a second third party to
fund resumption of mining. This will permit dewatering of the
concession area to begin shortly with coal extraction
operations expected to resume shortly thereafter. Under the
novated agreement, the group would receive a steady cash
inflow based upon prevailing coal prices but with an agreed
floor.
Previously reported negotiations with another third party in
relation to the Liburdinding concession proved abortive but the
group is continuing to hold discussion regarding this
concession with several potentially interested parties. The
group’s aim is either to divest the concession in its entirety or
to conclude arrangements similar to those applicable to the
Kota Bangun concession with the group guaranteed a
minimum revenue from the concession.
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R.E.A. Holdings plc Annual Report and Accounts 2016
21
Strategic report
Sustainability
Transparency
The group is committed to operating in a responsible and
transparent manner. The group has made its policy framework
publicly available since early 2015 and publishes biennial
sustainability reports in addition to the sustainability updates
published in the annual strategic reports.
During 2017, the group will publish its third sustainability
report. This report will describe in greater detail the group’s
environmental and social performance as well as the
sustainability challenges faced through 2015 and 2016,
allowing stakeholders to monitor the group's progress in
meeting its sustainability commitments. The report will follow
the internationally recognised Global Reporting Initiative
(“GRI”) standard, allowing the group's sustainability
performance to be compared with that of other palm oil
companies. The report will be available for download from the
group’s website: www.rea.co.uk.
The group continues to be ranked by the Zoological Society of
London’s (“ZSL”) Sustainable Palm Oil Transparency Toolkit
(“SPOTT”). The toolkit uses publicly available information
regarding certification, supply chain traceability and
environmental management policies to generate a score
indicating a company's commitment to sustainability and
transparency. In October 2016, the group was ranked joint
ninth out of 50 palm oil companies. The group gained three
points in 2016 by providing maps of concessions and
encouraging smallholders to adopt policies of zero burning
and no planting on peat soils. Despite this gain, the group’s
2016 ranking was slightly lower than in 2015 (seventh), due
to other companies also improving their overall scores.
Policies
The group continues to follow the policy framework
implemented in early 2015, which incorporates the
requirements of all of the sustainability standards and
regulations to which the group has committed. Together these
policies reinforce the group’s commitment to well-established
best practices, including sustainable development through the
provision of socio-economic benefits for local communities,
the protection of biodiversity and ecosystem functions, zero-
burning, reducing greenhouse gas emissions and a
zero-tolerance approach to bribery and slavery. The policy
framework can be downloaded from the group's website at
www.rea.co.uk/sustainability/policies.
Certification
Certification of the oil palm industry is important. It provides
third party verification that a company is operating according
to national and international standards while encouraging the
improvement of practices across the industry by establishing
higher premia for certified products. The group remains
committed to ensuring that all of its plantations and mills
22
R.E.A. Holdings plc Annual Report and Accounts 2016
achieve and maintain Roundtable for Sustainable Palm Oil
(“RSPO”), International Sustainability and Carbon Certification
(“ISCC”) and Indonesian Sustainable Palm Oil (“ISPO”)
certification.
The group has been a member of the RSPO since 2007. REA
Kaltim's two oldest oil mills, Perdana (“POM”) and Cakra
(“COM”), were first certified in 2011 along with their supply
chains. Each year since, these mills and their supply chains
have undergone assessments to monitor their continued
compliance with the RSPO standard. In 2016, POM, COM and
their supply chains underwent full recertification audits, which
are required every five years under the RSPO certification
system. POM was successfully recertified; and the
recertification process for COM is expected to be completed
in the coming months.
The group's third oil mill, Satria (“SOM”) has not yet achieved
RSPO certification. This is due to an outstanding High
Conservation Value (“HCV”) compensation liability at Satria
estate, which supplies the mill. The compensation liability is for
20 hectares of land that was cleared in 2008 prior to
conducting an HCV assessment. In 2016 a compensation
plan was submitted to the RSPO, including a third party report
indicating the location and extent of land clearing and a
proposal of how the group intends to compensate for the
cleared land. Once the plan has been approved, the mill and its
supply chain can undergo an RSPO audit. The original target
deadline for the RSPO certification of SOM was December
2015, but due to the time required to resolve the
compensation liability this deadline has been extended to
December 2017.
The group has a second outstanding HCV compensation
liability for approximately 968 hectares of land cleared at
Cipta Davia Mandiri (“CDM”). Although there is no mill at CDM,
the group submitted a compensation plan to the RSPO in
order to pursue its commitment of achieving full RSPO
certification for the group in the future. CDM's HCV
compensation plan is currently still under review by the RSPO.
CPO produced from ISCC certified mills can be sold for the
production of biodiesel that meets the requirements of the
European Union Renewable Energy Directive (“EU RED”). In
2016, all three of the group's mills underwent an ISCC
recertification audit. The certifying body issued new
certificates for POM and SOM in 2016 and for COM in March
2017.
For oil palm companies operating in Indonesia it is mandatory
to maintain ISPO certification. POM, COM and SOM all
successfully retained their ISPO certification in 2016. Further
information about the requirements of the RSPO, ISCC and
ISPO standards can be found in the group’s 2015
sustainability report and will be provided in the forthcoming
2017 sustainability report.
In 2016, the group sold 126,012 tonnes of CPO and 10,029
tonnes of CPKO comprising:
CPO CPKO
RSPO certified – 2,301
ISCC certified 95,660 –
Other 30,352 7,728
Total 126,012 10,029
In making sales of CPO that is both RSPO and ISCC certified,
the group has to decide which certification should apply to
each sale.
The reason that little CPO and CPKO is sold under RSPO
certification is that in the context of the overall market for such
oils, the group’s monthly production is relatively small and this
makes the logistics of finding a suitable buyer challenging.
Instead, the group uses the RSPO's “Book and Claim” system.
Until the end of 2016, this allowed end users of palm oil
products to support RSPO certified producers by purchasing
from them Greenpalm certificates, such certificates being
issued on the basis of one certificate for every one tonne of
RSPO certified CPO or CPKO that the producer has elected
to sell in the general market rather than as RSPO or ISCC
certified oil. As of 1 January 2017, the RSPO no longer
endorses Greenpalm certificates but in their place has
launched its own Book and Claim system called “PalmTrace”
which will operate similarly to the former Greenpalm system
but with RSPO “credits” replacing Greenpalm certificates.
During 2016 no sales of Greenpalm certificates were made
due to the delay in the issuance of ISCC and RSPO
certificates for COM, without which the group was unable to
calculate the number of Greenpalm certificates available for
sale in respect of 2016. However, once the final calculations
for 2016 have been made, the group can proceed with the
sale of RSPO credits to which it will be entitled in lieu of
Greenpalm certificates in respect of its non-certified sales of
CPO and CPKO during 2016.
Employees
At the end of 2016, the group’s workforce numbered 8,368,
compared to 7,400 at the end of 2015. The increase in
headcount is due to a rise in the number of harvesters and
casual workers employed by the group towards the end of the
year.
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”). The reward system is under constant review and is
subject to change if more effective methods for improving
productivity are found. For example, in 2016 a new system
was implemented for harvesters. Annual bonuses are now
paid based on the number of days in a year in which the
quantity of FFB harvested by an individual exceeds a set
minimum level. The more days a harvester exceeds the
minimum level, the greater their bonus. A quarterly bonus is
also awarded to the two most productive harvesters at each
estate as an added incentive. This system replaced the
previous scheme where bonuses were calculated based on
attendance. Since the introduction of the new bonus system
there has been a marked improvement in harvester
productivity.
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.
High quality housing and community facilities for employees
are a priority. Houses are now built using bataco blocks, which
are produced in-house by mixing boiler ash from the mills with
cement. Use of this material has significantly reduced both the
cost and environmental footprint of new houses. In 2016,
houses were constructed for 32 workers’ families at the
group's KMS and SYB estates, with a further 26 new houses
planned for SYB in 2017. The group also provides each
worker emplacement with a medical clinic, church, mosque,
sports facilities and a market.
In 2008, the group established a foundation to manage the
network of schools across the estates. The foundation now
manages 28 schools, including 11 pre-schools, 16 primary
schools and one secondary school. As of the end of year
2016, 516 pre-school children, together with 1,624 primary
school and 170 secondary school students, were enrolled in
the group’s school system.
In order for the group's operations to run efficiently, it is
essential to establish and maintain quality management. The
group aims to achieve this by facilitating the upward mobility
of promising employees and by recruiting and training new
graduates. The mechanism for this is the group’s long
established cadet training programme. The 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, 259 cadets have
participated in this programme and almost 70 per cent are still
employed by the group. 33 people enrolled in the 2015/2016
programme, of which 25 successfully graduated and
progressed to positions at the group's mills, the established
and developing estates, the plasma projects and the
conservation department.
Career advancement is not restricted to members of the cadet
training programme. To equip employees at every level with
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Sustainability
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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 2016, 37
ethnicities and 5 religions were represented in the group’s
workforce.
The group pays careful attention to the gender balance within
its workforce. At the end of 2016, women accounted for 28
per cent of the group’s workforce, including 17 per cent of the
management team.
2016 2015
Number of Number of Number of Number of
male staff female staff male staff female staff
Directors 5 1 5 1
Management 58 12 60 13
Rest of workforce 6,007 2,298 5,398 1,565
Total 6,070 2,311 5,463 1,579
Management
Overall responsibility for the Indonesian operations resides
with the group managing director. Following the resignation of
Mark Parry in February 2017 the directors appointed Carol
Gysin as managing director of the group based in London.
Concurrently with Carol’s appointment, George Kapitan, who is
an Indonesian citizen, was appointed president director of
REA Kaltim. The board of REA Kaltim now comprises four
directors, of whom three are Indonesian nationals, including
one female and the fourth is a British expatriate. Together, the
REA Kaltim directors have overall local responsibility for the
group’s affairs in Indonesia, covering the estate operations,
corporate affairs, commercial administration and finance.
behalf of the group’s board to assist in ensuring consistency
and cohesion between London and Indonesia. 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 development of the senior
management team in Singapore is consistent with the group’s
previously stated intention of progressively transferring overall
executive responsibility for the management of the group from
the UK to Indonesia and Singapore.
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.
Health and safety
The group remains committed to implementing the
internationally recognised Operational Health and Safety
Management System (“OHSAS”) 18001. In 2016 a new head
of health and safety joined the company and reviewed the
health and safety standards across the group's operations.
Monthly inspections of the group's mills, estates and biogas
facilities are undertaken to ensure planned health and safety
measures are implemented in order to meet the criteria for
OHSAS 18001 certification.
Regular training sessions are conducted to instil the
importance of safe working practices into all employees and
contractors. Routine training sessions include the appropriate
use of protective equipment, first aid, fire safety and risk
management for high risk tasks (working at height, in confined
spaces or with chemicals). Following the widespread fires in
Kalimantan in 2015, additional emergency response training
courses were conducted for fires, which also included training
for responding to chemical spills, explosions and riots. Roads
in the region of the group's operations can be hazardous,
particularly after heavy rain, therefore drivers of all vehicles are
required to pass a company-set driving test and motorcycle
safety training is provided for employees and their families.
Despite regular and routine training, it takes time for health
and safety practices to become naturalised within a workforce.
It has been decided, therefore, that the target for obtaining
OHSAS 18001 certification should be delayed until the end of
2017.
Day to day execution of the board’s executive responsibilities
is undertaken by a small team of senior managers in Indonesia
together with the group’s chief financial officer and regional
secretary, both of whom are based in Singapore but spend a
substantial proportion of their time in Indonesia acting on
Although measures are taken to minimise the occurrence and
severity of accidents, incidents still occur. In 2016 there were
855 reported accidents, 690 of which resulted in a worker
needing to take at least one day off work. Regretfully there
were three fatalities between January 2016 and January
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R.E.A. Holdings plc Annual Report and Accounts 2016
2017. Of these, one was work related and the other two were
non work-related. 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. The group maintains a rigorous 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.
External healthcare provision is extremely limited in the
remote locations of the group’s operations. The group has
established a network of 16 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. The medical team conducts a
monthly immunisation programme for families, including
collaborations with external medical professionals to
participate in the Indonesian government's polio immunisation
programme. The medical team also conducts blood tests twice
a year to check for chemical exposure in workers who come
into regular contact with pesticides. If workers test positive for
pesticide exposure, they are rotated out of spraying and into
other roles.
Community relations
The group works hard to develop and maintain good
relationships with the people that are impacted by its
operations. Successful relationship building with surrounding
communities is seen as key to the group's ability to operate
efficiently and reduce the frequency of compensation claims
by villages. Relationships with local communities have
improved over the last few years through regular formal and
informal engagement with a wide variety of village groups and
representatives, as well as a transparent approach to resolving
claims of outstanding rights to compensation for land through
the group’s department of village affairs (“DVA”). In 2016, 70
land rights claims were made against the group for a total
area of 1,572 hectares, a reduction from 105 claims over
1,814 hectares of land in 2015. Most of these claims were
successfully resolved by the end of 2016. A large proportion
of the claims were found to be spurious following investigation
by the DVA.
operations without being dependent on them. The initiatives
developed to achieve this include maximising employment
opportunities for local people, supporting and improving local
businesses, expanding smallholder schemes and investing in
infrastructure projects that will catalyse further development.
During 2016, in collaboration PLN, the group expanded the
provision of electricity generated by the group’s methane
capture facilities to two additional local villages. PLN provides
the infrastructure required to connect villages to the electricity
supplied by the group which it purchases from the group at a
price of $0.07 per kilowatt hour. The benefits to local
communities from this project are significant. Prior to the
establishment of this energy scheme, villages relied on diesel-
powered generators for their electricity supply. The switch to
methane-generated electricity not only provides communities
with a cheaper, lower emission and renewable energy source,
but also allows them to be more independent from the group
as they no longer rely on donations of diesel from the group to
run their generators. Renewable energy generated by the
group is now provided to 26 villages, comprising approximately
13,000 households, through the infrastructure established by
PLN.
The group also works to provide an improvement to the
welfare of local communities by facilitating access to clean
water. In 2016, the group completed the installation of five
new water treatment facilities. Training is provided for
treatment plant operators to encourage independence from
the group and allows each village to have full control of the
management and maintenance of their own resources.
The community development department conducts a
mentoring scheme for small businesses and households.
During 2016, members of the department made routine visits
to local communities to provide advice to farmers on improving
their yields and minimising the environmental impact of their
practices. Sessions were also conducted on how to manage
household finances and loans.
Donations in the form of equipment, expertise or money are
provided where necessary to help villages improve their own
roads, schools and other community facilities.
Community development
Smallholders
Over the last 20 years the group has endeavoured to ensure
that its business contributes a significant and long-lasting
improvement to the socio-economic status of the communities
that live in the vicinity of its operations. What began as a
primarily philanthropic approach has evolved into established
schemes designed to ensure that local communities share in
the benefits generated by the group’s operations. The core
principle is to help communities grow and succeed while being
self-sufficient, in other words to benefit from the group’s
Developing smallholder schemes and purchasing FFB from
independent smallholders not only creates mutually beneficial
business relationships, but also results in financial benefits for
local communities and an opportunity to educate local farmers
in more sustainable agricultural practices. The group engages
with smallholders in three ways: through a programme known
as “Program Pemberdayaan Masyarakyat Desa” (“PPMD”),
through “plasma” schemes and by purchasing FFB directly
from independent smallholders. During 2016, the group
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purchased a total of 93,000 tonnes of FFB from PPMD,
plasma and independent smallholders, providing local farmers
with a total revenue equivalent to approximately USD $10.4
million. Although the quantity of FFB purchased in 2016 was
smaller than in 2015 (125,000 tonnes), smallholder FFB still
accounted for 16 per cent of the FFB processed in the
group’s mills, a proportion similar to 2015 (17 per cent).
The group has been working with smallholders since 2000,
when the group established the PPMD programme. 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 costs 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.
The PPMD scheme provides the second largest input of FFB
to the mills after the group's own estates, with a total of
61,000 tonnes produced in 2016 by 15 cooperatives of
smallholders.
Plasma smallholder schemes are established for the benefit of
the surrounding community as part of the group's responsible
development of new land for oil palm, in line with regulations
introduced by the Indonesian government in 2007. Plasma
schemes differ from PPMD in their financing and
management. Plasma schemes established to date have been
financed by loans to the cooperatives from the group and local
development banks. The cooperatives themselves are not
responsible for, or involved in, the management of cultivated
plasma land, rather the group manages these areas in return
for a pre-agreed management fee. Cooperatives therefore
receive an income based on the value of FFB harvested minus
loan repayments and management fees.
Due to the more complex nature of the funding and
management of plasma areas, their development into oil palm
can take longer to organise than the development of PPMD or
group-owned estates. It is critical that, before development
begins, members of each cooperative fully understand how
plasma schemes work, including the cost of cultivating oil
palm, the terms of the financial agreements with the group or
bankers to the schemes and the predicted income over time to
the members of each cooperative. The group is currently
working towards developing 13 plasma schemes for newer
concessions, as well as 6 additional plasma schemes around
the established estates. The plasma schemes at the
established estates are not required under the 2007
government legislation as the estates were developed prior to
2007, but in the interests of equitable treatment the group has
committed to develop these plasma cooperatives for villages
whose land overlaps with the group’s concessions. By the end
of 2016, 3,567 hectares of plasma land had been developed,
increasing from 3,400 hectares by the end of 2015. Four
plasma areas are currently producing FFB with a total of just
over 9,680 tonnes delivered to two of the group's mills in
2016.
The group purchased 19,760 tonnes of FFB from
independent smallholders in 2016. Since 2015, FFB has only
been accepted from smallholders who have participated in the
group’s smallholder mapping process. The aim of this process
is to create a map and comprehensive database of all
smallholder land within the group’s supply base in order to
make the group's FFB supply chain fully traceable. Traceability
of 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. The group remains committed
to achieving RSPO certification for independent smallholders
that make up part of the supply base.
Greenhouse Gas (“GHG”) emissions reduction
2016 is the sixth year for which the group has calculated and
publicly reported its carbon footprint using the RSPO’s
PalmGHG methodology. In 2016 the group reduced its gross
carbon dioxide emissions from 2015 levels by 6.7 per cent
and net GHG emissions by 17.1 per cent. The reduction in net
GHG emissions is largely due to the increase in credits gained
in 2016 from the provision of renewable energy to workers'
housing and local communities by the group's two methane
capture facilities. Provision of electricity increased markedly in
2016, up by 73.8 per cent from 2015 following the
completion of PLN's infrastructure in 2015.
Net GHG emissions per tonne of CPO and CPKO increased
slightly from 2015 to 2016 due to an overall reduction in the
production of crude oil palm products in 2016, resulting from
the lower FFB yields across the group's and third party
plantations. Net GHG emissions per planted hectare
decreased in 2016, due to an increase in the group’s total
planted area following 2016 plantings in PBJ and CDM in
conjunction with the group's overall reduction in net GHG
emissions.
The largest individual component of GHG emissions is land
use change, which accounted for 65.8 per cent of the group's
gross GHG emissions. The second largest contributor was
palm oil mill effluent (“POME”), accounting for 8.8 per cent of
the gross GHG emissions, although gross CO2 emissions
from POME have been reduced by 29.5 per cent from 2015
as a result of the increased quantity of POME used by the
methane capture facilities to produce electricity.
Conservation
Development of land for agriculture can result in a loss of
biodiversity and natural ecosystem function. For an agricultural
business to be productive over the long term, it is essential
that natural ecosystem services are maintained, including
nutrient cycling, pollination, erosion defence and climate
regulation. It is therefore important to understand how oil palm
cultivation affects the environment and put measures in place
to avoid or mitigate negative environmental impacts.
26
R.E.A. Holdings plc Annual Report and Accounts 2016
Aware of the importance of minimising the environmental
impact of its operations, the group incorporated a strategy for
responsible development into the policy framework adopted at
the beginning of 2015. This was to ensure that everyone, from
in-house teams to third party contractors, involved in the
process of planning and developing new land is aware of their
responsibility to mitigate the negative impacts of development.
As dictated by the group's policy for responsible development
and the RSPO's new planting procedure, on which the group's
policy is based, the process of developing new land begins
with a series of surveys and assessments typically conducted
by external experts. These assessments include environmental
and social impact assessments, land use change analyses,
assessments of high conservation value (“HCV”) constraints,
soil surveys and carbon stock assessments. Once collated, the
results of these surveys and assessments inform the
development teams as to the areas to be set aside for
conservation. Conservation zones include areas of cultural
significance or valuable biodiversity, steep areas, riparian
zones and peat soils, 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 approximately 23,950 hectares,
accounting for some 23 per cent of the group’s titled areas.
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. Using scientific
research, education and active field projects, 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 conducts routine biodiversity surveys, camera
trapping and water quality monitoring to gain a scientific
understanding of the biodiversity present in, and
environmental state of, conservation areas. As of December
2016, biodiversity surveys revealed a total of 551 species of
mammals, birds, amphibians, reptiles, fish and invertebrates, of
which 94 species are classed as “Near Threatened”,
“Vulnerable”, “Endangered” or “Critically Endangered”
according to the International Union for the Conservation of
Nature’s (“IUCN”) Red List of Threatened Species. In 2016, 4
species of bird not previously recorded within the group's
conservation areas were found: the crested goshawk
(Accipiter trivirgatus), sooty-capped babbler (Malacopteron
affine), garnet pitta (Pitta granatina) and rufous-winged
philentoma (Philentoma pyrhoptera).
Conservation areas in four of the group's concessions also
support a population of the Endangered Borneo orangutan.
REA Kon monitors the orangutan population on a monthly
basis by conducting nest surveys along permanent transects.
Surveys conducted in 2016 confirmed the continued use of
the group's conservation areas by orangutans, revealing
evidence of recent feeding activity and the establishment of
26 new orangutan nests.
An important aspect of REA Kon's work to protect the habitat
and biodiversity within conservation areas is regular
engagement with surrounding communities and REA's
workforce. Frequent engagement not only allows REA Kon to
educate communities and workers about the importance and
benefits of conserving biodiversity and natural ecosystem
services, but also results in the formation of closer bonds with
local villages and independent farmers. Throughout 2016,
REA Kon conducted regular visits to schools in REA
emplacements and local villages to educate children about the
need for conservation. These education programmes are
extended into community education camps, which provide
more hands-on learning about environmental issues to a wider
age range within local communities. REA Kon also conducts
visits to villages to meet with senior members of communities
to promote positive environmental action by villages, including
HCV protection and proper waste management. REA Kon
often conducts these visits in collaboration with the
Indonesian Government's Natural Resources Conservation
Agency (“BKSDA”).
Education can help to promote a positive attitude towards
conservation amongst local communities and the workforce,
but the message needs to be reinforced through the active
management of conservation areas. Following feedback from
village leaders, during 2016 REA Kon marked the boundaries
of conservation areas with visible posts and signboards to
clearly delineate HCV land within the group's concessions.
REA Kon also routinely patrols the edges of conservation
areas to monitor for signs of human disturbance and to map
areas damaged through human activity or fire. Despite REA
Kon's continued engagement with local communities, there
are still cases of encroachment into REA's conservation areas
by loggers or independent farmers.
Managing the encroachment of conservation reserves is
arguably the greatest sustainability challenge faced by the
group. The problem is exacerbated by Indonesia's complicated
land rights system. A standard operating procedure has been
developed to ensure that the plantation, conservation, village
affairs and security teams fully understand their respective
responsibilities in tackling encroachment and can respond
quickly and effectively if logging or land clearing is detected
within the conservation reserves. When an area of
encroachment is reported by plantation teams or found during
patrols, REA Kon visits the location to determine the extent of
the affected area, the person or group responsible and the
existence of any legal or customary rights. The matter is then
passed to the group's department of village affairs, which is
responsible for determining whether a case requires
compensation or prosecution and for proceeding with the
appropriate action.
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In addition to gathering information regarding each case of
encroachment, REA Kon also assesses the risk of further
encroachment for each area and establishes the ecological,
social and legal feasibility of restoring the natural vegetation
as well as the cost of doing so. Based on this information,
REA Kon develops an action plan for each location where
encroachment has occurred.
REA Kon manages a nursery area of native species for the
purpose of restoring the natural vegetation, but whilst it would
be ideal 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. To
protect the conservation areas set-aside in newer
developments, 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. The
group acknowledges the importance of free, prior and
informed consent for conservation and, although this was not
the group's policy when REA Kaltim and SYB were developed
many years ago, adhering to this policy going forward should
facilitate the group’s ability to prevent and address any
clearance of future reserves.
A benefit of the better rainfall received during 2016 was a
reduction in the frequency of forest fires in the region, with no
loss of oil palm or conservation reserves suffered by the group
in 2016.
Responsible agricultural practices
Maintaining fresh water resources is vitally important for the
group's operations, both for use in the mills and for the
provision of clean water for homes in the group villages. The
group's mills operate a zero effluence policy, whereby no by-
products resulting from the production of CPO or CPKO are
expelled into local water courses. A significant proportion of
the palm oil mill effluent ("POME") that is produced at POM
and COM is diverted to the methane capture facilities at each
mill to be used in generating renewable energy. Other POME
from these mills, as well as POME produced at SOM, is
sprayed over empty FFB discarded from each mill in order to
produce organic compost. Any POME that is not used for
methane production and composting, and the digested POME
residue of methane production is treated in the traditional
manner by being pumped through a series of open ponds to
reduce its biological oxygen demand (“BOD”) and then used
for land application in flat beds between rows of oil palm,
allowing 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 (5,000mg/l).
In recent years, the group has applied reduced quantities of
inorganic fertiliser and has supplemented inorganic fertiliser
applications with organic compost produced at each mill. The
group's inorganic fertiliser regime is designed by independent
agronomy consultants, based on analysis of the nutrient
content of systematically selected oil palm frond samples. In
2016, the total annual quantity of inorganic fertiliser applied
was over twice the quantity used in 2015. This was in part in
response to a decline in FFB yields that the group had
experienced over several years but also reflected the fact that
2015 was a very dry year and inorganic fertiliser is not applied
during drought periods as moisture is required to mobilise the
nutrients in the fertiliser and make them available to the palms.
Furthermore, the defence mechanism employed by palms
against the stress caused by prolonged drought is to become
less active and reduce the uptake of nutrients. Consequently,
fertiliser application during drought conditions is both costly
and a waste of resources. The increased quantity applied
during 2016 took advantage of the wetter conditions and was
designed to provide a boost to the nutrient supply base and
improve FFB yields.
Following the completion of the collaboration with PLN in
2015 to supply electricity to local villages, the POME demand
of the methane capture facilities has been very high. To meet
the demand, the majority of POME from POM and COM is
now directed to the biogas facilities rather than composting.
POME that has already passed through biogas facilities does
not create good conditions for composting as the digestion
process cools the POME, resulting in compost with reduced
nutrient levels. Given that this situation is likely to continue, the
group has concluded that it should cease composting
operations, utilise all POME for land application and adjust the
level of inorganic fertiliser applications appropriately.
Every effort is taken to prevent POME polluting water courses
or neighbouring land. In 2016, however, there were three
cases of pollution where prolonged periods of heavy rainfall
caused POME ponds or flat beds to overflow into
neighbouring land belonging to local communities. The group
responded by constructing bunding around ponds and
embankments around flat beds to accommodate any future
POME overflow during extended periods of rain. Communities
are always compensated for damage to the extent appropriate.
In March 2016, an outbreak of the leaf-eating caterpillar,
Setora nitens, was detected at Cakra estate over an area of
approximately 200 hectares. Further outbreaks were recorded
at Perdana, Senteken, Lestari and Berkat estates in the
second quarter of 2016, with a total of 1,200 hectares
affected. Treatment to combat the outbreak began in April,
consisting of the injection of systemic insecticides into the
trunks of oil palms. Trunk injection is a preferable method of
pest management, compared to spraying, as the method is
more targeted to the problem species and does not involve the
blanket application of harmful chemicals to the environment
28
R.E.A. Holdings plc Annual Report and Accounts 2016
that can affect non-target species or be leached into
waterways. The outbreak of caterpillars was brought under
control by the end of September 2016, but insecticide
application continued into the fourth quarter to prevent a
recurrence.
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Camera trap photo from KMS
conservation reserve 2015
Company birthday celebrations 2014
R.E.A. Holdings plc Annual Report and Accounts 2016
29
Strategic report
Finance
Accounting policies
Group results
The group and the company continue to report in accordance
with International Financial Reporting Standards (“IFRS”) and
to present their financial statements in dollars. However, as
stated in the 2016 half yearly report published in September
2016, in accordance with the amendment of IAS 41
Agriculture effective 1 January 2016, the financial statements
incorporate a significant change in accounting policy. The
amendment means that bearer plants are no longer to be
carried as biological assets but are instead accounted for as
property, plant and equipment. The financial statements for
2015 have been restated to reflect this change in accounting
policy.
Whilst the change has no effect on the group’s cash flows, it
means that the reported profits for 2016 and restated 2015
profits are lower than they would have been, or were, applying
the previous accounting provisions of IAS 41. The reason for
this is that the group’s income statement no longer reflects
any movement in the fair value of the group’s biological assets
(other than growing produce as detailed below) but instead
includes a charge for the depreciation of those assets. This
charge is based on the fair value of such biological assets at 1
January 2015 which the group has, as permitted by the
revisions to IAS 41, adopted as the deemed cost of the assets
in question.
While the group continues to expand, it could reasonably
expect that the periodic movements in the fair value of its
biological assets under the previous provisions of IAS 41
would be positive whereas the depreciation charges that
replace these movements will be negative. Specifically, in
2015, the net gain from changes in the value of biological
assets (excluding growing produce) amounted to $13.1 million
whereas, on restatement, this gain has been replaced by a
depreciation charge of $10.6 million, resulting in a net
reduction in 2015 reported profit before tax of $23.7 million.
The amendment of IAS 41 still requires plantation companies
to account for growing produce as biological assets. In the
case of the group, growing produce will mean FFB in
formation on the group’s oil palms. Such ripening FFB is
therefore treated as a separate asset with changes in the
value of the asset from year to year being taken to the income
statement. There is no market for ripening FFB, so the group,
in common with other oil palm companies, has adopted a
formulaic methodology for deriving fair value of this growing
produce based on the estimated value of the oil content of the
FFB in question. Movements from year to year in this value
are unlikely to have a material impact on the group’s profits.
Applying the changed accounting principles, group revenue,
operating loss and loss before tax for 2016, with restated
comparative figures for 2015, were as follows:
2015
(restated)
$’m $’m
2016
Revenue 79.3 90.5
Operating loss (5.0) (6.6)
Loss before tax (9.3) (12.2)
The significant revenue reduction in 2016 reflected the fall in
the group’s own crop and a mirroring fall in purchases of FFB
from third party growers as compared with the preceding year.
The reasons for these falls are covered under “Crops” in
“Agricultural operations” above. Revenue was also negatively
impacted by the harvesting and transportation issues in the
closing months of the year adversely affecting CPO quality.
Despite the lower revenue, the operating loss was reduced as
a consequence of the improved CPO prices during 2016 and
continued focus by the group on cost control with particular
attention to the management of overtime.
Cost of sales reported for 2016, with restated comparative
figures for 2015, was made up as follows:
2015
(restated)
$’m $’m
2016
Depreciation and amortisation 21.0 21.7
Purchase of external FFB 9.1 13.3
Estate operating costs 41.7 48.1
71.8 83.1
As noted under “Accounting policies” above, the change in IAS
41 has eliminated the previous movement in the fair value of
biological assets (other than growing produce) and has
replaced it with a new additional depreciation charge. Fair
value gains are no longer reflected in profits or assets for any
enhancements to the value of the group’s assets generated by
the continuing development programme.
The valuation of closing agricultural produce inventory at end
2016 at higher prices than at 31 December 2015 resulted in
a positive movement on such inventory of $0.6 million (2015:
$1.1 million loss).
Whilst total administrative expenses at $12.0 million for 2016
were not dissimilar from those of the preceding year ($11.7
million), the latter benefited from a non-recurring credit in
relation to pension funding of $2.3 million. Overheads in both
Indonesia and externally showed a reduction, in the latter case
assisted by the weakness of sterling.
30
R.E.A. Holdings plc Annual Report and Accounts 2016
The substantial increase in investment revenues ($1.7 million
against $0.3 million) arises from the inclusion of interest of
$1.1 million received in respect of certain tax amounts
previously refunded as a result of Jakarta Tax Court decisions
that remain subject to Supreme Court review. Such interest
was previously only paid on completion of such review but a
new regulation now permits taxpayers to apply for earlier
payment. The tax authorities are disputing the group’s
entitlement to further interest of some $2.8 million on that
balance of tax refunded that was originally paid voluntarily. No
credit for such further interest has been taken in the group
financial statements.
Finance costs totalled $6.0 million (2015: $6.0 million). There
was an increase in the interest charge relating to Indonesian
rupiah denominated bank loans but this was offset by
favourable exchange rate movements in sterling liabilities and
increased capitalisation of interest charges incurred.
Tax charged against profit for 2016 amounted to $2.0 million
against $0.7 million in 2015. A significant component of the
2016 charge reflected the introduction of new regulations in
Indonesia limiting interest deductions for tax purposes in some
circumstances. Planned restructuring of Indonesian subsidiary
capitals should mitigate the negative impact of these
regulations in future years.
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 for review of a
decision by the Jakarta Tax Court in 2014 in favour of REA
Kaltim allowing deduction for tax purposes of mark to market
losses recorded in 2008 on cross currency interest rate
swaps.
The group’s previously published target of a long term average
20 per cent annual return on equity took into account the
expected benefit to group profits from movements in the fair
value of biological assets as previously defined prior to the
recent change to IAS 41. Following that change, such a target
is no longer appropriate and the directors are renewing an
appropriate revision of the target once group profitability has
been restored. The negative return for 2016 was 7.6 per cent
(2015: negative 10.5 per cent)
Dividends
The fixed semi-annual dividends on the 9 per cent cumulative
preference shares that fell due on 30 June and 31 December
2016 were duly paid. In view of the difficult conditions that
faced the group during 2016, 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 2016.
The group’s programme of planting its land bank remains
ongoing. This will continue to require major capital expenditure
and constrain the rates at which the directors feel that they
can prudently declare, or recommend the payment of, ordinary
dividends over the next few years. Nevertheless, the directors
will consider recommending the payment of a final ordinary
dividend in respect of 2017, although this will necessarily
depend upon crops and CPO prices over the balance of 2017.
DSN transaction
Discussions with a short list of potential strategic investors
culminated in an initial conditional agreement between the
group and PT Dharma Satya Nusantara Tbk (“DSN”) on 16
May 2016. This was followed on 16 August 2016 by detailed
implementing agreements. Regulatory approval was granted
on 2 December 2016.
As a result, two wholly owned subsidiaries of DSN have
acquired a 15 per cent interest in the group’s principal
operating subsidiary in Indonesia, PT REA Kaltim Plantations
(“REA Kaltim”). The overall consideration amounted to $15.0
million in cash with up to a further $850,000 payable on a
deferred basis depending upon the recovery by REA Kaltim of
certain overpaid tax amounts prior to 1 January 2018.
Concurrently with this acquisition, a subsidiary of DSN
provided dollar and sterling loans to REA Kaltim of,
respectively, $10.0 million and £3.9 million on terms mirroring
the terms of existing dollar and sterling loans from the
company to REA Kaltim. Subsequent to the end of 2016, the
same subsidiary has provided loans to subsidiaries of REA
Kaltim totalling $11.7 million and £3.9 million again on terms
mirroring loans by the company and a UK subsidiary to those
subsidiaries.
Capital structure
The group is financed by a combination of debt and
shareholder funds. Total shareholder funds less non-
controlling interests at 31 December 2016 amounted to
$286.7 million as compared with $292.2 million at 31
December 2015. Non-controlling interests at 31 December
2016 amounted to $22.8 million (2015: $1.7 million).
In July 2016, the group raised some £1.46 million from the
sale of £1.5 million nominal of 8.75 per cent guaranteed
sterling notes 2020 held by a subsidiary of the company.
Then, in August 2016, discussions with the group’s principal
Indonesian bankers, PT Bank DBS Indonesia (“DBS”), were
successfully concluded, as a result of which borrowings,
denominated in a combination of Indonesian rupiah and US
dollars and totalling the equivalent of $88.6 million, were
replaced with new increased borrowings, denominated in
Indonesian rupiah and totalling the equivalent of $95.5 million.
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R.E.A. Holdings plc Annual Report and Accounts 2016
31
Strategic report
Finance
continued
The new borrowings incorporate a reduced annual revolving
credit facility (committed until July 2017) of the equivalent of
$26.0 million against the previous annual revolving credit
facilities of $35.5 million. The balance of the new borrowings
is repayable over five years.
In November 2016, the group issued $24.0 million nominal of
7.5 per cent dollar notes 2022 the (“2022 dollar notes”). Of
these new notes, $14.0 million nominal was issued pursuant
to an exchange offer to holders of 7.5 per cent dollar notes
2017 (the “2017 dollar notes”). The balance of the new notes,
being $10.0 million, was issued to R.E.A. Services Limited
(”REAS”), a wholly owned subsidiary of the group. $13.8
million nominal of 2017 dollar notes were acquired pursuant
to the exchange offer and were cancelled.
In December 2016, 3,670,000 new ordinary shares,
representing some 10 per cent of the ordinary shares in issue,
were issued for cash at a price of 295p per share by way of a
placing to raise £10.5 million ($13.0 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.
Following these transactions, group indebtedness at 31
December 2016 amounted to $229.7 million against which
the group held cash and cash equivalents of $24.6 million.
The composition of the resultant net indebtedness of $205.1
million was as follows:
$’m
7.5 per cent dollar notes 2017
(“2017 dollar notes”) ($20.2 million nominal) 20.0
7.5 per cent dollar notes 2022
(“2022 dollar notes”) ($24.0 million nominal) 23.6
9.5 per cent guaranteed sterling notes 2015/17
(“2017 sterling notes”) (£8.3 million nominal) 10.1
8.75 per cent guaranteed sterling notes 2020
(“2020 sterling notes”) (£31.9 million nominal) 37.1
Loans from non-controlling shareholder 12.5
Indonesian term bank loans 69.6
Drawings under working capital lines 56.8
229.7
Cash and cash equivalents (24.6)
Net indebtedness 205.1
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 $9.0 million.
The 2017 dollar notes are unsecured obligations of the
company and repayable in a single instalment on 30 June
2017. The 2022 dollar notes are unsecured obligations of the
company and are repayable in a single instalment on 30 June
2022. The sterling notes are issued by REA Finance B.V., a
wholly owned subsidiary of the company, are guaranteed by
the company and REAS, and are secured almost wholly on
unsecured loans made by REAS to Indonesian plantation
operating subsidiaries of the company. The 2017 sterling
notes are repayable in a single instalment on 31 December
2017. The 2020 sterling notes are repayable in a single
instalment on 31 August 2020.
Following the repackaging of the group’s facilities with DBS
referred to above, Indonesian bank borrowings at 31
December 2016 comprised Indonesian rupiah denominated
amortising term loans and working capital loans to each of
REA Kaltim, SYB, PBJ and KMS.
The REA Kaltim loans are provided by DBS, are secured on
certain assets of REA Kaltim and are guaranteed by the
company. The outstanding balance of such loans at 31
December 2016 was the equivalent of $76.6 million
comprising term loans of $ 25.5 million and working capital
loans of $51.1 million. The term loans are repayable as
follows: 2017: $2.2 million, 2018: $3.5 million and thereafter
$19.8 million. The working capital loans fall due for renewal in
2017 - $19.8 million and in 2019 - $31.3 million.
The SYB loans are also provided by DBS, are secured on
certain assets of SYB and are guaranteed jointly by the
company and REA Kaltim. The outstanding balance of the
loans at 31 December 2016 was the equivalent of $15.9
million, comprising a term loan of $10.2 million and a working
capital loan of $5.7 million. The term loan is repayable as
follows: 2017: $0.9 million, 2018: $1.4 million and thereafter
$7.9 million. The working capital loan falls due for renewal in
2017.
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 2016 was the equivalent of $15.5
million repayable as follows: 2018 $0.8 million and thereafter:
$14.7 million.
The KMS loan 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 2016 was the equivalent of $18.4
million repayable as follows: 2018: $0.3 million and thereafter
$18.1 million.
32
R.E.A. Holdings plc Annual Report and Accounts 2016
At 31 December 2016, unutilised facilities available to the
group comprised the equivalent of $14.3 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
increased over 2016 from $15.8 million to $24.6 million.
As noted under “Group results” above, operating loss for 2016
amounted to $5.0 million compared to a loss of $6.6 million in
the prior year. After adjusting for depreciation, amortisation
and other non-cash items ($21.2 million) and a reduction in
working capital ($9.2 million) cash generated by operations
was $25.4 million (2015: $37.3 million). The decrease in
working capital was primarily due to careful management of
trade payables and an increase in customer deposits.
Taxes paid net of refunds at $2.1 million were slightly higher
than in 2015 ($0.8 million) because of the lower level of
refunds due. Interest amounted to $20.7 million (2015: $16.4
million) reflecting the fact that a greater proportion of
borrowings than in the past was denominated in Indonesian
rupiah for which interest rates are higher than for dollars and
sterling.
Investing activities for 2016 involved a net outflow of $31.6
million (2015: $34.8 million). This represented new investment
of $33.4 million (2015: $37.6 million) offset by interest
received and a small amount received from the disposal of
property, plant and equipment together amounting to $1.8
million (2015: $2.8 million including $2.5 million proceeds
from the disposal of property, plant and equipment). The new
investment comprised expenditure of $31.1 million (2015:
$32.3 million) on further development of the group’s
agricultural operations, $0.4 million (2015: $1.3 million) on
land rights and titling and $1.9 million (2015: $4.0 million) on
the stone and coal operations.
The net cash inflow from financing activities amounted to
$37.8 million (2015: inflow of $14.5 million) made up as
follows:
2015
$’m $’m
2016
Issue of new ordinary shares 13.1 6.8
Issue of new preference shares – 7.8
Reorganisation of dollar notes (0.1) –
Issue / sale of new sterling notes 1.9 4.1
Purchase of sterling notes – (2.2)
Payment to close out hedging contract – (10.2)
Transaction with DSN 14.0 –
Borrowings from DSN 12.4 –
Net increase in borrowings 3.9 20.8
Dividend payments (7.4) (12.6)
37.8 14.5
Liquidity and financing adequacy
As explained under “Group results” above, the recovery in
CPO prices and improved extraction rates achieved by the
group’s mills during 2016 were offset by the low level of crop
harvested during the year. However, going forward,
continuation of the revised fertiliser regime, an increasing
hectarage of mature plantings and more normal levels of
precipitation should ensure that crops recover. With extraction
rates expected to improve further and CPO prices likely to
remain at current better levels, this will mean significant
increases in revenue. With continued focus on cost control,
the directors are therefore confident that the group’s
operations will remain cash generative and at higher levels.
As noted under “Capital structure” above, as at 31 December
2016, the group held cash of $24.6 million and had undrawn
facilities equivalent to a total of $14.3 million under the UOB
amortising term loan facility. This facility will continue to be
used to fund the development of PBJ.
The repackaging of the DBS facility resulted in a much
improved profile of term loan repayments. As at 31 December
2016, bank debt due within one year reduced to $28.6 million
from $50.9 million at 31 December 2015. Moreover, of such
$28.6 million, $25.5 million represented drawings under the
group’s revolving working capital facilities. The directors have
no reason to believe that these facilities will not be rolled over
at the end of July 2017 when the facilities fall due for
renewal.
The 2016 exchange offer for the group’s 2017 dollar notes
(referred to under “Capital structure” above) has reduced the
nominal amount of such notes outstanding and falling due for
redemption in June 2017 to $20.2 million. In addition, £8.3
million nominal of 2017 sterling notes fall due for redemption
in December 2017. The directors are confident that the group
will have the cash resources to meet these commitments and
the capital expenditure needed to maintain existing immature
plantings and for other routine capital requirements. However,
depending upon the level of CPO prices and operational
performance during the remainder of 2017, some further
funding may be required to enable the group to continue its
expansion programme at the level that it would like.
Accordingly, the group is actively engaged in discussions to
obtain new longer term debt financing to replace, or replace in
part, the maturing notes. The directors are optimistic of a
successful outcome to these discussions.
Limited further capital expenditure will be required on mills
until the group commences construction of its fourth mill. This
is scheduled for 2018 but could be postponed if cash
constraints so require as FFB production in excess of the
capacity of the group’s existing mills can, if necessary, be sold
to third party mills. The agreements recently reached or
imminently expected to be reached in relation to the group’s
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R.E.A. Holdings plc Annual Report and Accounts 2016
33
Strategic report
Finance
continued
stone and coal interests should not involve the group in any
material cash outlay and should lead to the interests in
question becoming rapidly cash generative.
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.
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.
As respects group borrowings, the directors believe that the
group’s interests are best served if 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 group’s borrowings were, when put in place
substantially consistent with the above objectives, subsequent
events and in particular some delays in the original plans for
expansion of the group’s planted hectarage, meant that by the
end of 2014, the group had become too dependent on short
term debt. To address this, the group raised some $27.7
million from issues of ordinary and preference shares during
2015 and 2016 and a further $15 million from the transaction
with DSN detailed above. Additionally, as noted under
“Liquidity and financing adequacy” above, the directors have
completed various steps to improve the repayment profile of
the group’s debt. As a result, the financing position of the
group is now much improved although, as noted above, the
directors are still endeavouring to obtain additional longer
term financing to replace maturing debt. The directors retain
their existing policy of replacing debt with preference share
capital when market conditions permit.
Net debt at 31 December 2016 was 66.3 per cent of total
shareholder funds against a level of 66.9 per cent at 31
December 2015. Whilst the directors intend to maintain the
overall amount of the group’s prior ranking capital, they expect
that with growth in the net assets attributable to ordinary
shareholders, the percentage of ordinary shareholder funds
represented by prior ranking capital will, over time, fall.
The 2017 sterling notes, the 2020 sterling notes and the
2017 and 2022 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 by 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 2016 would have resulted in an additional annual
cost to the group of approximately $1.4 million (2015:
additional $1.2 million).
The group regards the dollar as the functional currency of
most of its operations. The directors believe that the group will
be best served going forward by simply maintaining a balance
between its borrowings in different currencies and avoiding
currency hedging transactions.
Accordingly, the group regards 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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Bornean langur monkey
Storm’s storks
Orangutan
R.E.A. Holdings plc Annual Report and Accounts 2016
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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.
Risks assessed by the directors as being of particular
significance are those detailed below under climatic and other
operational factors, produce prices and funding. In the case of
climatic and other operational factors and produce prices, the
directors’ assessment reflects the negative impact on
revenues that could be caused by adverse climatic conditions
or operational circumstances and, in the case of funding, the
possibility that the group’s expansion programme might have
to be curtailed.
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 has
established biogas plants to improve its self-
reliance in relation to fuel and fertiliser
36
R.E.A. Holdings plc Annual Report and Accounts 2016
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 designed to support 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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Risks and uncertainties
continued
Risk
Expansion
Potential impact
Mitigating or other
relevant considerations
A shortfall in achieving the group’s planned
extension planting programme impacting
negatively the continued growth of the group
A possible adverse effect on market
perceptions as to the value of the company’s
securities
The group maintains flexibility in its planting
programme to be able to respond to changes
in circumstances
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
38
R.E.A. Holdings plc Annual Report and Accounts 2016
Risk
Potential impact
Stone and coal operations
Operational factors
Failure by external contractors to achieve
agreed production volumes
Loss of prospective revenue
External factors, in particular weather,
delaying or preventing delivery of extracted
stone and coal
Delays to receipt or loss of revenue
Geological assessments, which are
extrapolations based on statistical sampling,
proving inaccurate
Unforeseen extraction complications causing
cost overruns and production delays
Prices
Local competition reducing stone prices and
volatility of international coal prices
Reduced revenue and a consequent
reduction in cash flow and profit
Imposition of additional royalties or duties on
the extraction of stone or coal
Reduced revenue and a consequent
reduction in cash flow and profit
Unforeseen variations in quality of deposits
Inability to supply product within the
specifications that are, at any particular time,
in demand with consequent loss of revenue
Environmental, social and governance practices
Failure by the stone and coal operations to
meet the expected standards
Reputational and financial damage
Mitigating or other
relevant considerations
The group endeavours to use experienced
contractors, to supervise them closely and to
take care to ensure that they have equipment
of capacity appropriate for the planned
production volumes 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 deposits and the
cost of transporting stone should restrict
competition. In relation to coal, the
cooperation arrangement negotiated for the
mining of the group’s main coal concession
provides a floor price for the coal mined
The Indonesian government has not to date
imposed measures that would seriously
affect the viability of Indonesian stone
quarrying or coal mining operations
Geological assessments ahead of
commencement of extraction operations
should have identified any material variations
in quality
The area of the stone and coal
concessions are relatively small and should
not be difficult to supervise. The group is
committed to international standards of
best environmental and social practice and,
in particular, to proper management of
waste water and reinstatement of quarried
and mined areas on completion of
extraction operations
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R.E.A. Holdings plc Annual Report and Accounts 2016
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Strategic report
Risks and uncertainties
continued
Risk
General
Currency
Potential impact
Mitigating or other
relevant considerations
Strengthening of sterling or the Indonesian
rupiah against the dollar
Adverse exchange movements on those
components of group costs and funding that
arise in Indonesian rupiah or sterling and are
not hedged against the dollar
Inability to meet liabilities as they fall due
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
Counterparty risk
Default by a supplier, customer or financial
institution
Loss of any prepayment, unpaid sales
proceeds or deposit
As respects costs and sterling denominated
shareholder capital, the group considers that
this risk is inherent in the group’s business
and structure and must simply be accepted.
As respects borrowings, where efficient the
group seeks to borrow in dollars but, when
borrowing in another currency, considers it
better to accept the resultant currency risk
than to hedge that risk with hedging
instruments
The group maintains 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
40
R.E.A. Holdings plc Annual Report and Accounts 2016
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
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
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. Moreover, the group has
recently increased local participation 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
The directors have also considered the implications of the notice given to terminate UK membership of the European Union in the
context of the group and its operations. Any ensuing weakness of sterling will positively impact the group as its operations are
essentially dollar denominated and costs incurred and liabilities recognised in sterling will be reduced in dollar terms. Any reduction in
UK interest rates may negatively impact the level of the technical provisions of the REA Pension Scheme by, given the Scheme’s
estimated funding position and having regard to the performance of the assets, the directors do not expect that the impact will be
material in the context of the group.
Approved by the board on 27 April 2017 and signed on behalf of the board by
DAVID J BLACKETT
Chairman
R.E.A. Holdings plc Annual Report and Accounts 2016
41
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Governance
Board of directors
David Blackett
Chairman (independent) (66)
Committees: audit, nomination (chairman), remuneration
David 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. He was
appointed chairman on 1 January 2016 following the
retirement of Richard Robinow from that position.
Irene Chia
Independent non-executive director (76)
Irene Chia was appointed a non-executive director in January
2013. She 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, she 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.
Carol Gysin
Executive director (59)
Carol Gysin was appointed to the board as managing director
on 21 February 2017. Based in London, she has worked for
the group for over eight years as group company secretary,
with increasing involvement in the operational areas of the
business, including making regular visits to the group’s offices
and plantation estates in Indonesia. Prior to joining the group,
Carol worked as company secretary to a telecommunications
company, Micadant plc (formerly, Ionica Group plc, listed on
NASDAQ and in London), to a medical devices company,
Weston Medical plc, as well as to a number of early-stage
technology companies, following an initial career in investment
banking.
John Oakley
Non-executive director (68)
After early experience in investment banking and general
management, John 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
in the early 1990s he took 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. He retired as managing director on 1 January
2016 but remains on the board as a non-executive director
and for a transitional period undertaking some additional
responsibilities, in particular overseeing completion of the
group’s new information systems as well as making twice
yearly visits to the group’s estate operations to advise on
agronomic matters.
Richard Robinow
Non-executive director (71)
Richard 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, is undertaking 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).
Michael St. Clair-George
Senior independent non-executive director (74)
Committees: audit (chairman), nomination, remuneration
(chairman)
Michael St. Clair-George was appointed to the board on 24
October 2016. He is a fellow of the Institute of Chartered
Accountants in England & Wales. He has over 40 years'
experience in the plantation and agribusiness industries in
Malaysia and Indonesia, having worked for some 25 years with
Harrisons & Crosfield and Harrisons Malaysian Plantations
Berhad, as finance director, and then as president director of
Sipef NV's Indonesian operations. He then spent 10 years as
managing director of Sipef NV, based in Belgium. Retiring
from this position in 2007 and returning to London, he served
until 2013 as senior non-executive director and chairman of
the audit committee of New Britain Palm Oil Limited, a
company then listed in London.
Former directors
David Killick, FCIS (retired 6 June 2016)
Senior independent non-executive director (78)
Committees: audit (chairman), nomination (chairman),
remuneration (chairman)
David Killick was appointed a non-executive director in 2006
and retired from that position in 2016 having served on the
board for over nine years.
Mark Parry (resigned 20 February 2017)
Executive director (55)
Mark Parry joined the group in 2011 as the group’s regional
director based in Singapore and Indonesia. He was appointed
as an executive director in January 2012, as president director
of PT REA Kaltim Plantations in July 2012, and as group
managing director in January 2016.
42
R.E.A. Holdings plc Annual Report and Accounts 2016
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 2016. The
“Corporate governance report” below forms part of this report.
There are no significant events since 31 December 2016 to
be disclosed. 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 23 to the
consolidated financial statements.
Results and dividends
The results are presented in the consolidated income
statement and notes thereto.
The fixed semi-annual dividends on the 9 per cent cumulative
preference shares that fell due on 30 June and 31 December
2016 were duly paid. In view of the difficult conditions that
faced the group during 2016, 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 2016.
The group’s programme of planting its land bank remains
ongoing. This will continue to require major capital expenditure
and constrain the rates at which the directors feel that they
can prudently declare, or recommend the payment of, ordinary
dividends over the next few years. Nevertheless, the directors
will consider recommending the payment of a final ordinary
dividend in respect of 2017, although this will necessarily
depend upon crops and CPO prices over the balance of 2017.
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 23 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 material risks faced by the group and
actions taken to mitigate those risks. 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 $3.1 million
of bank term indebtedness falls due for repayment during
2017, and a further $25.5 million of revolving working capital
lines fall due for renewal during the same period. In addition,
$20.2 million of dollar notes fall due for repayment in June
2017 and £8.3 million of sterling notes in December 2017. In
2018 and 2019 bank term loans of $6.0 million and $12.9
million respectively fall due for repayment and $31.3 million of
a committed revolving bank line falls due for renewal. A
further £31.9 million ($38.9 million) sterling notes will become
repayable in August 2020. In view of the material proportion
of the group’s indebtedness falling due in the period to 31
December 2020, as described above, the directors have
chosen this period for their assessment of the long-term
viability of the group.
In April 2017, PT Dharma Satya Nusantara Tbk, the non-
controlling shareholder in PT REA Kaltim Plantations (“REA
Kaltim”), provided further loans of $16.6 million to REA
Kaltim’s plantation subsidiaries. The group continues in
discussions to refinance, with longer term debt, indebtedness
falling due in 2017 and 2018. Furthermore, the directors
have no reason to believe that the revolving working capital
facilities falling due in 2017 and 2019 will not be rolled over
when these facilities fall due for renewal.
Limited further capital expenditure will be required on the
group’s mills until construction is commenced on the fourth
mill. This is scheduled for 2018 but could be postponed if
cash constraints so require.
In 2020 consideration will be given to proposals to the holders
of the sterling notes to refinance these with securities of
longer duration. The group holds in treasury $9.9 million of
dollar notes 2022 which it acquired in the placing in
December 2016; the group plans to sell these over time as
market conditions permit. Should funding be required pending
completion of any of the debt financing initiatives, the group
will seek to place for cash a limited number of ordinary and/or
preference shares, authority for which will be sought as and
when appropriate.
The directors fully expect that the foregoing measures will
refinance, or permit the group to repay, the group
indebtedness falling due for repayment during the period of
assessment. As the benefits of recent improvements in
operational efficiencies start to flow through, with CPO prices
likely to remain at current better levels, the group’s plantation
operations can be expected to generate increasing cash flows
going forward. Operations are expected to restart shortly at
one of the group’s coal concessions and to commence at a
new stone deposit. Together these are expected to result in
increasing cash flow.
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
R.E.A. Holdings plc Annual Report and Accounts 2016
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in operational existence for the period to 31 December 2020
and to remain viable during that period.
takes into account all Scope 2 emissions and some Scope 3 GHG
emissions.
Going concern
The business risks are set out on pages 36 to 41 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 pages 34 of the strategic
report and the 2016 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 33
to 34 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.
Greenhouse gas emissions (“GHG”)
GHG emissions data for the period 1 January 2015 to
31 December 2016 is as shown below:
Tonnes of CO2e 2016 2015
Gross emissions associated
with oil palm operations
in Indonesia1 1,033,340 1,107,127
Net emissions associated
with oil palm operations
in Indonesia 466,939 563,167
Net emissions per tonne
of CPO produced 3.66 3.48
Net emissions per
planted hectare 10.81 15.05
Electricity, heat, steam
and cooling purchased
for own use 57.3 57.6
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
The group has used the PalmGHG tool (v. 3.0.1), developed by
the Roundtable on Sustainable Palm Oil (“RSPO”), to calculate
the carbon footprint of its oil palm operations in Indonesia
2016 and to restate its previously calculated carbon footprint
for 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. As of 31 December
2016, all RSPO member palm oil producers have been
required to report publicly their GHG emissions using the
PalmGHG tool, so it is expected that this methodology will
become industry best practice. Following the change in the
methodology of the most recent version of PalmGHG, the data
presented above is not directly comparable with that for the
years 2012 to 2015 presented in previous Directors’ reports
which was computed in accordance with an earlier version of
the PalmGHG tool.
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 (N2O)) 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. The boundary of calculation includes
all three of the group’s palm oil mills and their supply bases.
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 and conserved set-
aside forest 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
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R.E.A. Holdings plc Annual Report and Accounts 2016
electricity from the group’s methane capture facilities to
domestic buildings and local communities that were previously
supplied with electricity by diesel powered generators.
The group’s net GHG emissions have been expressed per
tonne of CPO produced and per planted hectare (immature
and mature). It is deemed necessary to consider both
measures 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 CPO.
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 to ensure
that the methodology used to calculate the intensity of the
group’s GHG emissions is consistent with what is likely to
become the standard oil palm industry methodology for
reporting GHG emission intensity.
Control and structure of capital
Details of the company’s share capital and changes in share
capital during 2016 are set out in note 30 to the company’s
financial statements. At 31 December 2016, the preference
share capital and the ordinary share capital represented,
respectively, 86.3 and 13.7 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
Euroclear UK & Ireland 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
result in restrictions on the transfer of securities or on voting
rights.
No person holds securities carrying special rights with regard
to control of the company and there are no arrangements in
which the company co-operates by which financial rights
carried by shares are held by a person other than the holder of
the shares.
The articles of association provide that the business of the
company is to be managed by the directors and empower the
directors to exercise all powers of the company, subject to the
provisions of such articles (which include a provision
specifically limiting the borrowing powers of the group) and
prevailing legislation and subject to such directions as may be
given by the company in general meeting by special resolution.
The articles of association may be amended only by a special
resolution of the company in general meeting and, where such
amendment would modify, abrogate or vary the class rights of
any class of shares, with the consent of that class given in
accordance with the company’s articles of association and
prevailing legislation.
The 7.5 per cent dollar notes 2017 and the 7.5 per cent dollar
notes 2022 (respectively, the “2017 dollar notes” and the
“2022 dollar notes” and, together, the “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. Transfers
may be in any usual or common form duly executed in
amounts and multiples: in the case of the 2017 dollar notes of
$1; in the case of the 2022 dollar notes, of $120,000 and
R.E.A. Holdings plc Annual Report and Accounts 2016
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Directors’ report
continued
integral multiples of $1 in excess thereof; 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 2016, 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 11,082,420 27.4
Prudential plc and certain subsidiaries* 6,043,129 15.0
Alcatel Bell Pensioenfonds VZW 4,167,049 10.3
Artemis UK Smaller Companies 3,563,620 8.8
First State Investments (UK) Limited 1,476,858 3.7
* The company has been notified that the interest of Prudential plc group
of companies includes 6,021,116 ordinary shares (14.9 per cent) in
which M&G Investment Funds 3 is also interested.
The shares held by Emba Holdings Limited (“Emba”) are
included as part of the interest of Richard Robinow shown
under “Statement of directors’ shareholdings” in the Directors’
remuneration report.
Pursuant to notifications received in the period from 31
December 2016 to the date of this report, substantial
shareholders were as set out below:
Number Percentage
of of
ordinary voting
shares rights
Emba Holdings Limited 11,082,420 27.4
Prudential plc and certain subsidiaries 6,043,129 15.0
Alcatel Bell Pensioenfonds VZW 4,167,049 10.3
Artemis UK Smaller Companies 3,563,620 8.8
Aberforth LLP 2,946,902 7.3
The Capital Group Companies, Inc 2,162,000 5.4
Significant holdings of dollar notes and sterling notes shown
by the respective registers of members and noteholders at 31
December 2016 are set out below. There were no significant
holders of preference shares at 31 December 2016.
Dollar Dollar Sterling Sterling
notes
notes notes notes
2020
2017 2022 2017
Substantial holders of securities $’000 $’000 £’000
£’000
The Bank of New York
(Nominees) Limited – – 7,800
The Bank of New York
(Nominees) Limited AHIF account – – –
Euroclear Nominees Limited
EOC01 account 2,958 – –
Ferlim Nominees Limited
pooled account – – –
–
2,028
–
842
Dollar Dollar Sterling Sterling
notes
notes notes notes
2020
2017 2022 2017
Substantial holders of securities $’000 $’000 £’000
£’000
HSBC Global Custody Nominees
(UK) Limited 641898 account – – 5,967
KBC Securities NV Client account 6,080 4,690 –
R.E.A. Services Limited – 9,880 –
Securities Services Nominees
Limited 2300007 account – – –
State Street Nominees Limited
OM04 account – – 5,300
State Street Nominees Limited
OU61 account 2,566 – 8,816
Vidacos Nominees Limited
CLRLux account 3,910 – –
Vidacos Nominees Limited
CLRLux2 account – 2,264 –
–
–
–
1,595
-
-
–
–
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 25 to the consolidated financial
statements.
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 who served during 2016 or were appointed
subsequent to the end of 2016 are listed under “Board of
directors” above, which is incorporated by reference in this
Directors’ report. Biographical details of each of the directors
proposed for election or re-election are also set out under
“Board of directors”. David Killick retired as a non-executive
director on 6 June 2016 and Mark Parry resigned as
managing director on 20 February 2017.
Carol Gysin and Michael St. Clair-George, who were appointed
on 21 February 2017 and 24 October 2016, respectively,
retire at the forthcoming annual general meeting and being
eligible, offer themselves for election, such retirement being in
compliance with the company’s articles of association
providing for the rotation of directors. Resolutions 4 and 5,
which are set out in the 2017 notice of annual general
meeting (the “2017 Notice”) and will be proposed as ordinary
resolutions, deal with the election of Carol Gysin and Michael
St. Clair-George.
John Oakley and Richard 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 6 and 7, which
are set out in the 2017 Notice and will be proposed as
ordinary resolutions, deal with the re-election of John Oakley
and Richard Robinow.
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R.E.A. Holdings plc Annual Report and Accounts 2016
John Oakley and Richard Robinow relinquished their positions
as, respectively, managing director and chairman of the
company at the end of 2015. However they remain on the
board as non-executive directors and continue to oversee
certain executive matters to the extent necessary to ensure a
smooth transfer of their responsibilities. The group continues
to benefit from John Oakley’s knowledge of agronomical
practices as well as his essential oversight of the development
and implementation of the new information technology
systems. As respects Richard Robinow, his significant family
shareholding in the company will continue to support the
development of the group, particularly with regard to current
strategic initiatives.
The chairman confirms that, following a formal evaluation, the
performance of each of the non-executive directors continues
to be effective and recommends each of John Oakley, Richard
Robinow and Michael St. Clair-George for re-election or
election as a non-executive director. Further, the chairman
recommends for election Carol Gysin as sole executive
director. The chairman particularly welcomes the valuable
commitment and extensive experience of all of the directors.
Companies Act 2006, the detailed terms of the arrangements
agreed between the company and Mark Parry in relation to the
latter’s resignation are available on the company’s website at
www.rea.co.uk and will remain so available until the company’s
2018 annual general meeting. In addition and in accordance
with section 226D of the Companies Act 2006, such terms
are available for inspection at the registered office of the
company, First Floor, 32-26 Great Portland Street, London
W1W 8QX, will so remain until the conclusion of the
company’s forthcoming annual general meeting and will be
available for inspection at the place of that meeting at least 15
minutes prior to and during the meeting.
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 2016 and remain in force
at the date of this report.
Political donations
Resignation of Mark Parry
No political donations were made during the year.
Mark Parry's directorships with the company and all
subsidiaries of the group ceased with effect from 20 February
2017. His employment with the company's Singapore
subsidiary will end on 20 May 2017. Mark Parry decided to
offer his resignation following concerns expressed by the
authorities in East Kalimantan that, in his position as president
director of PT REA Kaltim Plantations, he might have
undertaken various tasks that were outside the scope of his
work permits. The tasks in question involved matters relating
to human resources and personnel management (which are
reserved by Indonesian law to Indonesian nationals) and
conducting business at group locations not specifically
covered by the work permits.
On 20 February 2017, the directors resolved unanimously that
it was in the best interests of the company and its
shareholders for the company to pay to Mark Parry the sum of
£200,000 as compensation for his loss of office as a director
of the company (the “Loss of Office Payment”), such payment
to be subject to the approval of shareholders at the next
annual general meeting of the company.
The remuneration policy of the company contemplates
directors being paid their contractual notice entitlement and, in
respect of expatriate executive directors, reasonable
repatriation costs upon termination of their appointments.
However, the remuneration policy does not contemplate any
other loss of office payments. The Loss of Office Payment,
therefore, is inconsistent with the company’s current
remuneration policy. Accordingly, a resolution will be proposed
at the forthcoming general meeting to approve the Loss of
Office Payment to Mark Parry (resolution 3 set out in the
2017 Notice). In accordance with section 430(2b) of the
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 0.33 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 10 set out in the 2017 Notice) of
the buy-back authority granted in 2016 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
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continued
back ordinary shares into treasury with the expectation that
the shares bought back will be re-sold within a limited period.
The new authority, if provided, will expire on the date of the
annual general meeting to be held in 2018 or on 30 June
2018 (whichever is the earlier).
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.
into, ordinary shares in the capital of the company (other
than 9 per cent cumulative preference shares) up to an
aggregate nominal amount of £3,364,752 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 representing 33.6 per cent of the issued
preference share capital of the company at the date of this
report.
The new authorities, if provided, will expire on the date of
the annual general meeting to be held in 2018 or on 30
June 2018 (whichever is the earlier). The directors have no
present intention of exercising these authorities.
Authority to disapply pre-emption rights
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.
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 2017 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 £1,009,425 (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 should the need arise as
discussed in the viability statement above.
The foregoing powers (if granted) will expire on the date of
the annual general meeting to be held in 2018 or on 30
June 2018 (whichever is the earlier).
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.
Authorities to allot share capital
At the annual general meeting held on 6 June 2016,
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 2017 annual general meeting (resolutions 11 and 12 set
out in the 2017 Notice) to authorise the directors (a) to allot
and to grant rights to subscribe for, or to convert any security
General meeting notice period
At the 2017 annual general meeting a resolution (resolution
14 set out in the 2017 Notice) will be proposed to
authorise the directors to convene a general meeting (other
than an AGM) 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 2018 or on 30 June 2018
(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
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R.E.A. Holdings plc Annual Report and Accounts 2016
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.
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.
Recommendation
The board considers that the proposed Loss of Office
Payment to Mark Parry as detailed under “Resignation of Mark
Parry” above that the proposals to grant the directors the
authorities and powers as detailed under “Acquisition of the
company’s own shares”, “Authorities to allot share capital” and
“Authority to disapply pre-emption rights” above 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 resolution 3 and resolutions 10
to 14 as set out in the 2017 Notice.
Directors’ remuneration report
Resolution 2 as set out in the 2017 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(1)
9.8.4(2)
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 2017 Notice
proposes their re-appointment.
Disclosure requirement
The amount of interest capitalised dur-
ing the year with an indication of the
amount and treatment of any
related tax relief
Any information required by Listing
Rules 9.2.18 R (publication of
unaudited financial information)
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
Note 8 to the
consolidated
financial
statements
Not applicable
Not applicable
Not applicable
Not applicable
Note 30 to the
consolidated
financial
statements
Note 34 to the
consolidated
financial
statements
Not applicable
9.8.4(8)
Allotments of shares for cash by a
major subsidiary of the company
9.8.4(9)
Participation by a parent company in
any placing made by the company
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
R.E.A. Holdings plc Annual Report and Accounts 2016
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Governance
Directors’ report
continued
Listing
Rule
Disclosure requirement
9.8.4(11) Contracts for the provision of services
to the company or any of its
subsidiary undertakings by a
controlling shareholder
Disclosure in
annual report
Not applicable
9.8.4(12) Arrangements under which a
Not applicable
shareholder has waived or agreed to
waive any dividends
9.8.4(13) Where a shareholder has agreed to
waive future dividends
Not applicable
9.8.4(14) Board statement in respect of
Not applicable
relationship agreement with the
controlling shareholder
By order of the board
R.E.A. SERVICES LIMITED
Secretary
27 April 2017
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R.E.A. Holdings plc Annual Report and Accounts 2016
Governance
Corporate governance report
Throughout the year ended 31 December 2016, the company
was in compliance with the provisions set out in the 2016 UK
Corporate Governance Code issued by the Financial
Reporting Council (the “Code”) save for an interim period from
June to October 2016 as respects code provision C.3.1
regarding audit committees for the reasons explained under
‘Composition of the audit committee’ in the Audit committee
report below. 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 2016, 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.
Irene Chia and Michael St. Clair-George, are considered by the
board to be independent directors. Further, the Chairman on
appointment was considered to meet the board of directors’
criteria for independence. There is a regular and robust
dialogue, both formal and informal, between all directors and
senior management and communication is open and
constructive and non-executive directors are able to express
their views, speak frankly and raise 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 2016 in compliance with the Code requirement to
carry such insurance.
Composition of the board
The board currently comprises one executive director and five
non-executive directors (including the chairman). Throughout
2016 and up to the date of his resignation on 20 February
2017, Mark Parry, who was based in Singapore and Indonesia,
was managing director with overall responsibility for the
Indonesian operations. Mark was also president director and
the chief operating officer of the company’s principal operating
subsidiary, PT REA Kaltim Plantations (“REA Kaltim”).
Following Mark’s resignation, Carol Gysin, who is based in
London, was appointed managing director on 21 February
2017. At the same time, George Kapitan, who is an
Indonesian citizen, relinquished his position as chairman of
REA Kaltim’s board of commissioners, and was appointed
president director of REA Kaltim, in place of Mark Parry.
In line with his previously stated intention, David Killick retired
as a director on 6 June 2016. Michael St. Clair-George was
appointed to succeed David Killick on 24 October 2016.
Biographical information concerning each of the directors of
the company 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.
The recent changes in board positions and responsibilities do
not alter 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
R.E.A. Holdings plc Annual Report and Accounts 2016
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Governance
Corporate governance report
continued
managing the company’s London listing and liaising with its
European shareholders.
Information and support
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 or herself for re-election.
It is the policy of the company that the board should be
refreshed on the basis that independent non-executive
directors will not normally be proposed for reappointment if, at
the date of reappointment, they have served on the board for
more than nine years.
Directors’ conflicts of interest
In connection with the statutory 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
Richard Robinow, who absented himself from the discussion in
this respect. Such notifications relate to Richard 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.
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.
Quarterly operational and financial reports are issued to all
directors following the end of each quarter for their review and
comment. These reports are augmented by monthly
management reports, annual budgets and positional papers on
matters of a non routine nature and by prompt provision of
such other information as the board periodically decides that it
should have to facilitate the discharge of its responsibilities.
Board evaluation
A formal internal evaluation of the performance of the board,
the committees and individual directors is undertaken annually.
Balance of powers, contribution to strategy, efficacy and
accountability to stakeholders are reviewed by the board as a
whole and the performance of the chairman is appraised by
the independent non-executive directors led by the senior
independent director. The appraisal process includes
assessments against a detailed set of criteria covering a
variety of matters from the commitment and contribution of
the board in developing strategy and enforcing disciplined risk
management, pursuing areas of concern, if any, and setting
appropriate commercial and social responsibility objectives to
the adequacy and timeliness of information made available to
the board.
At the performance evaluation conducted in 2016, the board
concluded that it performs effectively as constituted and that
the directors communicate and work well together as a team.
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 David Blackett, Carol Gysin and Richard
Robinow, 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 David Blackett
(chairman) and Michael St. Clair-George. 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,
52
R.E.A. Holdings plc Annual Report and Accounts 2016
including gender and race, and takes into consideration the
ethos of the company and the specific nature and location of
the group operations. Experience and understanding of the
plantation industry and business in Indonesia is an important
factor in considering a potential appointment.
Remuneration committee
The remuneration committee reports on its composition and
activities in the “Directors’ remuneration report” below. This
also provides information concerning the remuneration of the
directors and includes details of the basis upon which such
remuneration is determined.
Board proceedings
Four meetings of the board are scheduled each year. Other
board meetings are held as required to consider corporate and
operational matters with all directors consulted in advance
regarding significant matters for consideration and provided
with relevant supporting information. Minutes of board
meetings are circulated to all directors. The 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 attendance of individual directors, who served during
2016, at the regular board meetings held in 2016 is set out
below. There were no ad hoc meetings held in 2016.
Regular
meeting
David Blackett 4
Irene Chia 4
David Killick (retired 6 June 2016) 2
John Oakley 4
Mark Parry (resigned 20 February 2017) 4
Richard Robinow 4
Michael St. Clair-George (appointed 24 October 2016) 1
In addition, during 2016 there were three meetings of the
audit committee, three 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 some 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. In the event that 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.
Risk management and internal control
The board is responsible for the group’s system of internal
control and for reviewing its effectiveness. The system is
designed to manage, rather than eliminate, the risk of failure
to achieve business objectives and can only provide
reasonable and not absolute assurance against material
misstatement or loss.
The board has established a continuous process for
identifying, evaluating and managing the principal risks which
the group faces (including risks arising from environmental,
social and governance matters) 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 2016 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.
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 in compliance with the Modern Slavery
Act 2015 and has a statement on its website in relation to
modern slavery.
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
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53
Governance
Corporate governance report
continued
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 October 2016 and April 2017, 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 in London and Indonesia
and regular meetings are held between the two offices by way
of conference calls. Directors and managers based in London
make periodic visits to the overseas operations each year. The
managing director has a continuous 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.
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 27 April 2017 and signed on behalf
of the board by
DAVID J BLACKETT
Chairman
54
R.E.A. Holdings plc Annual Report and Accounts 2016
Governance
Audit committee report
Summary of the role of the audit committee
Composition of the audit committee
The audit committee currently comprises Michael St. Clair-
George (chairman) and David 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.
David Killick was chairman of the audit committee until his
retirement on 6 June 2016. Following his retirement, for an
interim period between June 2016 and October 2016, the
company no longer had a sufficient number of independent
and qualified directors who were eligible to be members of the
audit committee. Pending the appointment of a suitable
successor to David Killick, responsibility for matters that were
normally reserved for consideration by the audit committee
was assumed by the full board.
Meetings
Three audit meetings are scheduled each year 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 2016 (on which the auditor did not report) and the
full year consolidated financial statements for 2016 (the
“2016 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 2016 financial statements,
the committee considered the significant accounting and
judgement issues set out below.
The terms of reference of the audit committee are available
for download from the company’s website at www.rea.co.uk.
The audit committee is responsible for:
•
•
•
•
monitoring the integrity of the financial statements,
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 2016, 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 were 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.
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R.E.A. Holdings plc Annual Report and Accounts 2016
55
Governance
Audit committee report
continued
Significant accounting and judgement issues
Issues
Biological assets: compliance with the amended provisions of
IAS 41 Agriculture requiring that produce growing on bearer
plants, if capable of reliable measurement, be treated as a
separate asset and carried at fair value and that the balance of
what was formerly accounted for as biological assets be
reclassified as property, plant and equipment and depreciated.
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 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 $3.0 million was
booked in the 2012 consolidated financial statements.
Relevant considerations
The group has applied a formulaic methodology for valuing
growing produce based on oil content in growing fresh fruit
bunches. It has concluded that this provides “reliable
measurement” based on its understanding of how that phrase
has to be interpreted in the context of Accounting Standards,
notwithstanding that a different and still reasonably justifiable
formulaic methodology could give a materially different result.
As permitted by the amended provisions of IAS 41, the group
decided to adopt the fair value ascribed to biological assets
(other than growing produce) at 31 December 2014 (the
transition date for the purposes of the provisions) as deemed
cost. The assets concerned comprise individual oil palm
trees, nurseries and the field infrastructural improvements that
accompanied the planting of the trees. The group concluded
that a component of deemed cost could be specifically
attributed to nurseries. The balance of deemed cost was then
allocated by separating the infrastructural improvement at
estimated depreciated current cost at 31 December 2014 and
treating the remaining balance as attributable to the oil palm
trees.
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 2015 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 $4.0 million. During
discussions in 2016 with the local tax office, the tax officials
rejected the subsidiary’s claim for interest on that part of the
repayment which represented a refund to the subsidiary of the
tax that had been voluntarily paid at the time of the disputed
assessment. The subsidiary disagrees with this interpretation
and is considering an appeal. In the meanwhile, only
undisputed interest received in 2016 has been credited to
income and no other disputed interest has been recognised in
the financial statements.
The group has made further progress towards resumption of
its stone and coal extraction activities. Discussions have
recently been concluded on re-opening the Kota Bangun
concession which should permit coal extraction to resume
shortly following dewatering of the concession area.
Arrangements have been concluded for the extraction of
limestone from a deposit close to the group’s plantations. The
group continues to review options for developing suitable road
access to the andesite stone concession. Meanwhile, current
feasibility studies indicate that the value of such operations
significantly exceeds the loan values, and support the
conclusion that no further impairment charge is required.
56
R.E.A. Holdings plc Annual Report and Accounts 2016
Significant accounting and judgement issues
Issues
Revenue recognition: compliance with the “bill and hold” sale
revenue recognition requirements of IAS18 “Revenue” and
those relating to forward sales.
In its review of the annual report and the consolidated
financial statements, the committee 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 has been the company’s audit engagement
partner since June 2015 succeeding Mark McIlquham, who
had been the audit partner since November 2010 and
stepped down under the standard rotation procedure of his
firm.
The audit committee has recommended to the board that it
should seek the approval of the company’s shareholders for
the reappointment of the company’s current auditor. That
recommendation reflects an assessment of the qualifications,
expertise, resources and independence of the auditor based
upon reports produced by the auditor, the committee’s own
dealings with the auditor and feedback from management.
The committee took into account the 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.
Relevant considerations
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.
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 judgements, 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.
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Approved by the audit committee on 27 April 2017 and
signed on behalf of the committee by:
MICHAEL A ST. CLAIR-GEORGE
Chairman
R.E.A. Holdings plc Annual Report and Accounts 2016
57
Governance
Directors’ remuneration report
This report has been prepared in accordance with Schedule 8 of The Large and Medium-sized Companies and Groups
(Accounts and Reports) Regulations 2008 (the “Regulations”) as amended in August 2013. The report is split into three main
sections: the statement by the chairman of the remuneration committee, the annual report on remuneration and the policy
report. The current policy report took effect immediately upon approval at the 2015 AGM (the “2015 AGM”). The annual
report on remuneration provides details on remuneration during 2016 and certain other information required by the
Regulations. The overall report, excluding the policy report, will be subject to an advisory shareholder vote at the 2017 annual
general meeting.
The Companies Act 2006 requires the auditors to report to shareholders on certain parts of the annual report on remuneration
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 Michael St. Clair-George, chairman of the remuneration committee
The succeeding sections of this directors’ remuneration report cover the activities of the remuneration committee during 2016
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 executive directors takes account
of the company’s commercial goals and achievements as well as its sustainability objectives.
In considering bonuses in respect of 2016, the committee considered it important to strike 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 and that impacted the performance of the company during 2016, specifically the knock on effect of the 2015 El
Niño on production and transportation.
Whilst harvesting and production levels were less than expected in 2016, the rate of development in the group’s newer land
areas and some improvement in extraction rates were positive outcomes. Other successes of the executive management in
respect of the company’s operational objectives include: completion of the flood control systems allowing for acceleration of
development in PT Putra Bongan Jaya; enhanced security, data and administration systems; relocation of the Jakarta and
Samarinda offices to improve efficiencies and reduce costs and commencement of the expansion of the mill operations at
Satria Oil Mill. In addition a number of sustainability initiatives were achieved, including: construction of a new school and
housing in Kutai Mitra Sejahtera; a more rigorous training programme for cadets; the introduction of tenancy agreements for
staff housing; reorganisation of the three original plasma cooperatives in order to achieve a more equitable division of the land
in accordance with the now agreed village boundaries; and three new clean water projects for local villages.
The committee reflected these factors in awarding bonuses in respect of 2016 and setting the executive remuneration for
2017.
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 remuneration packages for
2017, considers that it struck an appropriate balance between reward and incentive.
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.
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R.E.A. Holdings plc Annual Report and Accounts 2016
Single total figure of remuneration for each director
The remuneration of the executive and non-executive directors for 2015 and 2016 was as follows (stated in sterling as all the
directors with the exception of Mark Parry are remunerated in sterling):
Salary All taxable Annual Long term
and fees benefits * bonus** incentive Total
2016 £’000 £’000 £’000 £’000 £’000
Managing director
M A Parry (resigned 20 February 2017) 404.0 124.2 101.0 – 629.2
Chairman and non-executive directors
D J Blackett 100.0 – – – 100.0
I Chia 27.0 – – – 27.0
D H R Killick (retired 6 June 2016) 14.8 – – – 14.8
J C Oakley 90.0 19.3 – – 109.3
R M Robinow 100.0 7.2 – – 107.2
M A St. Clair-George (appointed 24 October 2016) 5.6 – – – 5.6
Total 741.4 150.7 101.0 – 993.1
Salary All taxable Annual Long term
and fees benefits * bonus** incentive Total
2015 £’000 £’000 £’000 £’000 £’000
Executive directors
J C Oakley (managing director) 344.0 17.9 112.0 – 473.9
M A Parry 295.2 111.1 135.3 – 541.6
Chairman and non-executive directors
D J Blackett 29.5 – – – 29.5
I Chia 27.0 – – – 27.0
D H R Killick 29.5 – – – 29.5
R M Robinow 205.0 7.2 – – 212.2
Total 930.2 136.2 247.3 – 1,313.7
* Types of benefit: company car, medical insurance, overseas rental accommodation
** In respect of current year
Fees paid to David Blackett and David Killick in respect of 2015 and 2016 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 68 at 31 December 2016) 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 74,994
Increase during the year 101
In payment at end of year 75,095
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R.E.A. Holdings plc Annual Report and Accounts 2016
59
Governance
Directors’ remuneration report
continued
Scheme interests awarded during the financial year
The table below sets out scheme interests awarded to directors. Only one director was awarded a scheme interest during the
year. As noted below, this award has subsequently lapsed.
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 631,044 33.33 1 January 2016 to Up to 50 per cent of the maximum
incentive plan acquire 234,589 31 December 2019 aggregate amount will be payable
ordinary shares at dependent on the annual total
269p 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 average share price (269p) for the period 1 January 2016 up to and
including the day immediately preceding the date of grant (16 December 2016) being the price at which the award was initially exercisable.
** Assuming minimum performance against all performance conditions.
Payment for loss of office
Mark Parry resigned from the company following concerns expressed by the authorities in East Kalimantan that, in his position as
president director of PT REA Kaltim Plantations, Mark might have undertaken various tasks that were outside the scope of his
work permits. The tasks in question involved matters relating to human resources and personnel management (which are
reserved by Indonesian law to Indonesian nationals) and conducting business at group locations not specifically covered by the
work permits.
Accordingly, Mark ceased to be an executive director of the company on 20 February 2017. Mark's employment with the
company’s Singapore subsidiary will terminate at the end of his three-month notice period on 20 May 2017. Mark is on garden
leave for his three-month notice period during which period Mark receives his normal base salary and contractual entitlements.
Mark is not entitled to any bonus or commission during his garden leave.
Pursuant to the company’s remuneration policy, Mark's service agreement and the terms of Mark’s settlement agreement, the
company will pay the reasonable costs of relocation for Mark and his spouse back to the UK from Singapore, provided that they
relocate by 20 November 2017, up to a maximum of S$30,000 (approximately £17,500) plus the cost of one-way flights for
each of Mark and his spouse from Singapore to the UK.
In addition, Mark will receive an ex gratia payment of £200,000 and a contribution of £15,000 plus VAT towards the reasonable
legal fees incurred by Mark with regard to these arrangements, the ex gratia payment being conditional upon the approval of the
company’s shareholders as noted under “Resignation of Mark Parry” in the Director’s report above.
In considering the ex gratia payment to Mark Parry, the committee took account of the company’s policy with regard to directors’
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R.E.A. Holdings plc Annual Report and Accounts 2016
notice periods being for no more than one year and noted that the service contract for Mark’s predecessor as managing director
provided for a notice period of six months. It was further noted that, in accordance with the rules of the 2015 LTIP, Mark’s award
granted under the 2015 LTIP will lapse on the date of his termination. It was agreed, therefore, that the sum of £200,000, being
approximately equivalent to Mark’s salary and benefits for four months, is fair and reasonable.
Other than as disclosed above, Mark is not eligible for any pay in lieu of notice or severance as a result of his resignation.
Directors’ shareholdings
There is no requirement for directors to hold shares in the company.
At 31 December 2016, 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
D J Blackett 250,600 10,000
I Chia – 1,000
C E Gysin (appointed 21 February 2017) 91,957 1,132
J C Oakley – 442,493
M A Parry (resigned 20 February 2017) 83,186 37,343
R M Robinow – 11,082,420
M A St. Clair-George (appointed 24 October 2016) 2,108 10,149
There have been no changes in the interests of the directors between 31 December 2016 and 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 Mark Parry up until his resignation on 20 February 2017. No director currently holds any
scheme interests in ordinary shares.
With Without
performance performance
Scheme interests in ordinary shares conditions conditions
M A Parry 234,589 Nil
In December 2016 Mark Parry surrendered his award under the 2013 long term incentive plan approved by shareholders and
put in place in June 2013, so as to receive a new award under the 2015 long term incentive plan (the “2015 plan”) approved
by shareholders in June 2015. In accordance with the rules of the 2015 plan, an award was granted to Mark on 21 December
2016.
The 2015 plan 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 in respect of the award granted to Mark
commenced on 1 January 2016 and was to end on 31 December 2019 (the “performance period”). 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. Upon Mark’s resignation in February 2017, the award granted to Mark lapsed on the
cessation of his employment, in accordance with the rules of the 2015 plan.
Under the 2015 plan, participants are 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, a 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 the price at which the entitlement
was granted, subject to adjustment for subsequent variations in the share capital of the company in accordance with the rules
of the plan.
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R.E.A. Holdings plc Annual Report and Accounts 2016
61
Governance
Directors’ remuneration report
continued
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. For
the initial award to Mark Parry under the 2015 plan, there were threshold, target and maximum levels of performance
determining the extent of vesting in relation to each performance target. The three key performance targets set for the award
and the respective thresholds for determining the extent of vesting under the plan are set out in the table showing the scheme
interests awarded during the year. Targets under the 2015 plan are subject to adjustment at the discretion of the remuneration
committee where, in the committee’s opinion, warranted by actual performance.
In the event of a change in control of the company as a result of a takeover offer or similar corporate event, vested entitlements
would 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).
On the basis of the market price of the ordinary shares at 31 December 2016 of 352.5p, there would have been an 83.5p gain
under the 2015 plan.
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
2016
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 2016.
Long term
incentive
Annual bonus vesting rates
Single figure of pay-out against
total against maximum
remuneration maximum opportunity
Managing director’s remuneration £’000 % %
2016 M A Parry 629.2 92 N/A
2015 M A Parry 541.7 88 N/A
2015 J C Oakley 473.9 60 N/A
2014 J C Oakley 453.3 67 N/A
2013 J C Oakley 488.8 65 N/A
2012 J C Oakley 499.5 71 N/A
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R.E.A. Holdings plc Annual Report and Accounts 2016
(cid:0)
(cid:0)
(cid:0)
(cid:0)(cid:0)
(cid:0)(cid:0)
(cid:0)(cid:0)
(cid:0)
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 2015 and 2016. 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 2015 remuneration of the selected comparator
employee group has been restated to reflect only the remuneration in that year of those employees comprising the 2016
selected comparator employee group. The 2015 remuneration of the selected group has also been restated at prevailing
average exchange rates for 2016 so as to eliminate distortions based on exchange rate movements of the Indonesian rupiah,
US dollar and Singapore dollar against sterling.
2016 2015 change
Percentage change in managing director’s remuneration £’000 £’000 %
Salary 404.0 295.2 37
Benefits 124.2 111.1 12
Annual bonus 101.0 135.3 (25)
Total 629.2 541.6 16
2016 2015 change
Percentage change in selected employee group remuneration £’000 £’000 %
Salary 174.2 150.5 16
Benefits 6.8 3.3 106
Annual bonus 53.6 50.6 6
Total 234.6 204.4 15
Relative importance of spend on pay
The graph below shows the movements between 2015 and 2016 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
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
-14%
-5%
2015
2016
Total employee remuneration
2015
2016
Cost of goods sold
2015
2016
Ordinary and preference dividends
-41%
R.E.A. Holdings plc Annual Report and Accounts 2016
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Governance
Directors’ remuneration report
continued
Functions of the remuneration committee
The remuneration committee currently comprises two independent non-executive directors, Michael St. Clair-George (chairman)
and David 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 chairman plays no part in the
discussion of his own remuneration.
Service contracts of directors standing for re-election
John Oakley, Richard Robinow, Michael St. Clair-George and Carol Gysin are proposed for re-election or election, as applicable,
at the forthcoming annual general meeting. All the non-executive directors have 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.
Carol Gysin’s service agreement, effective from 1 February 2017, states that the appointment shall continue until it
automatically terminates on 31 January 2021 without the need for notice unless it is previously terminated by either party
giving the other at least 12 months' prior written notice expiring before 31 January 2021. As at the date of this report, the
unexpired term under Carol Gysin’s contract was 12 months.
Statement of voting at general meeting
At the AGM held on 6 June 2016, 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 25,188,202 99.99 168 0.01 25,188,370 0
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 2015 long term incentive plan.
64
R.E.A. Holdings plc Annual Report and Accounts 2016
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 2016
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Governance
Directors’ remuneration report
continued
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.
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.
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R.E.A. Holdings plc Annual Report and Accounts 2016
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.
The service agreement of Mark Parry, who resigned on 20 February 2017, stated that it may be terminated by either party by
giving notice to the other party of not less than three months. At 31 December 2016, the unexpired term under Mark Parry’s
contract was three months.
Details of Carol Gysin’s service agreement are noted under “Service contracts of directors standing for re-election” above.
Illustration of application of remuneration policy
The charts below provide estimates of the potential remuneration receivable pursuant to the remuneration policy by the
managing director (being the only 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 2016 will be nil.
Managing director
C
500
400
300
200
100
0
366
406
325
11%
20%
100%
89%
80%
Minimum
remuneration
receivable
In line with
expectations
Maximum
remuneration
receivable
Fixed pay
Annual bonus
The figures reflected in the chart above have been calculated against the policies that were applicable throughout 2016 and on
the basis of remuneration payable in respect of 2017.
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.
On 20 February 2017, in connection with the resignation of Mark Parry described under the Directors’ report above, the Loss
of Office Payment does not constitute a variation to the current remuneration policy.
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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67
Governance
Directors’ remuneration report
continued
Consideration of employment conditions elsewhere in the company
In setting the remuneration of executive directors, regard will be had to the levels of remuneration of expatriate employees
overseas and to the increments granted to employees operating in the same location as the relevant director. Employee views
are not specifically sought in determining this policy. Employee salaries will normally be subject to the same inflationary
adjustment as the salaries of executive directors in their respective locations.
Shareholder views
Shareholders are not specifically consulted on the remuneration policy of the company. Shareholders who have expressed
views on remuneration have supported the company’s policies and the application of those policies to date. Were a significant
shareholder to express a particular concern regarding any aspect of the policy, the views expressed would be carefully weighed.
Approved by the board on 27 April 2017 and
signed on behalf of the board by
MICHAEL A ST. CLAIR-GEORGE
Chairman
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R.E.A. Holdings plc Annual Report and Accounts 2016
Responsibility statement
To the best of the knowledge of each of the directors:
•
•
•
the financial statements, prepared in accordance with
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
27 April 2017
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 is 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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69
Governance
Independent auditor’s report to
the members of R.E.A. Holdings plc
Opinion on financial statements of R.E.A. Holdings plc
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 2016 and of the group’s loss 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 that we have audited comprise:
•
•
•
•
•
•
the Consolidated Income Statement;
the Consolidated and Parent Company Balance Sheets;
the Consolidated and Parent Company Cash Flow Statements;
the Consolidated and Parent Company Statements of Changes in Equity;
the Statement of Accounting Policies; and
the related notes 1 to 44 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.
Summary of our audit approach
Key risks
Materiality
Scoping
The key risks that we identified in the current year were:
•
•
•
Valuation of biological assets
Valuation of loans to stone and coal interests
Taxation matters arising in Indonesia
The materiality that we used in the current year was $6.5m which was determined on the basis of
2% of biological assets
The scope of our audit of the group remains unchanged from the previous year. We continue to
focus our group audit scope primarily on the audit work of 12 active legal entities, all of which were
subject to full scope audits
Significant changes in
our approach
We do not consider going concern to be a key risk for the current year as the material uncertainties
that existed in the prior year are no longer present, due to the sale of 15% of R.E.A Kaltim and an
agreed bank facility in Indonesia.
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R.E.A. Holdings plc Annual Report and Accounts 2016
Separate opinion in relation to IFRSs as issued by the IASB
As explained in the basis of accounting section of the Accounting policies (group), in addition to complying with its legal
obligation to apply IFRSs as adopted by the European Union, the group has also applied IFRSs as issued by the International
Accounting Standards Board (IASB).
In our opinion the group financial statements comply with IFRSs as issued by the IASB.
Going concern and the directors’ assessment of the principal risks that would threaten the solvency or liquidity of the
group
We confirm that we have nothing material to add or
draw attention to in respect of these matters.
We agreed with the directors’ adoption of the going
concern basis of accounting and we did not identify any
such material uncertainties. However, because not all
future events or conditions can be predicted, this
statement is not a guarantee as to the group’s ability to
continue as a going concern.
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 basis
of accounting section of the Accounting policies (group) and
the directors’ statement on the longer-term viability of the
group contained within the Directors’ report.
We are required to state whether we have anything material
to add or draw attention to in relation to:
•
the directors' confirmation on page 44 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 36 to 41 that describe those
risks and explain how they are being managed or
mitigated;
the directors’ statement in basis of accounting section
of the Statement of Accounting Policies to the group
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; and
the directors’ explanation on pages 43 and 44 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 confirm that we
are independent of the group and we have fulfilled our other
ethical responsibilities in accordance with those standards.
We confirm that we are independent of the group and
we have fulfilled our 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.
R.E.A. Holdings plc Annual Report and Accounts 2016
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Governance
Independent auditor’s report to
the members of R.E.A. Holdings plc continued
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 al-
location of resources in the audit and directing the efforts of the engagement team.
We do not consider going concern to be a significant risk for the current year end as the material uncertainties that existed in the
prior year are no longer present, due to the sale of 15% of R.E.A Kaltim and an agreed bank facility in Indonesia.
Valuation of biological assets
Risk description
Under the revised IAS 41 standard, effective for periods beginning on or after 1 January 2016,
biological assets are no longer carried at fair value but are instead accounted for as property, plant
and equipment.
The amendment also introduced a requirement for plantation companies to account for “growing
produce” (for the group developing fresh fruit bunches (“FFB”)), but only if this can be reliably
measured. The group has concluded that developing FFB can be reliably measured.
We identified two key risks around the valuation of biological assets:
•
•
The valuation of growing produce. This calculation is considered judgmental and it is the first
year it has been prepared. There is no historical approach to base the valuation on and the
industry has yet to agree upon a standard valuation methodology.
The split of deemed cost between asset classes. The biological assets valuation has been
split into plantings, relating to the actual palms, and buildings and structures. The split
between the two will have a material impact on the current and future reporting of the
company’s results because these are depreciated over different useful economic lives. The
calculation of the split is complex and the methodology judgmental. The revised standard
allows management to take the plantings’ valuation as at 31st December 2014 as the
deemed cost of the asset. The buildings and structures have been brought in at depreciated
cost.
At the 31 December 2016 a total of $323m (2015: $330m) was recognised, which included;
plantings of $168m (2015: $185m), buildings and structures of $153m (2015: $143m) and
biological assets of $2m (2015: $2m).
Further information is provided in the Audit Committee report on page 57, note 14 to the financial
statements, as well as in the accounting policy note and note 1, “Critical accounting judgements
and key sources of estimation uncertainty.”
How the scope of our
audit responded to the
risk
Our work on the split of deemed cost between asset classes has included:
•
Reviewing the nature of the costs which have been capitalised to assess whether they are
appropriate.
Challenging the split of costs between plantings and buildings and structures, by reference to
our audit work, our knowledge of the business and our interpretation of the revised standard.
Challenging if the plantings and buildings and structures are being depreciated over
appropriate useful economic lives, by comparing to scientific literature, the licensing
agreements and future land rights.
Assessing the carrying value of plantings and buildings and structures for impairment as
required by IAS 16.
•
•
•
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R.E.A. Holdings plc Annual Report and Accounts 2016
During our work on the valuation of growing produce we identified and challenged:
•
The amount of palm oil and palm kernel oil developed in the average fresh fruit bunch in the
last month before harvest. This has been compared to papers published in scientific journals.
The fair value of palm oil and palm kernel oil at the mill. This has been compared to market
derived prices.
The amount of palm oil produced by the mill in January 2017. This has been compared to
internal management reports. Growing produce is the value of oil in the fruit at year end, this
is extracted from the fruit in the mill over the 4 week period after year end.
The costs associated with production and distribution have been flexed to analyse the impact
on the growing produce calculation.
•
•
•
Key observations
Based on the audit evidence obtained from the work performed above, we conclude that the
valuation of growing produce and the split of cost between the plantings and buildings and
structures asset classes is appropriate.
Valuation of loans to stone and coal interests
Risk description
How the scope of our
audit responded to the
risk
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 2016 the carrying value of the loans increased to
$37.2m due to additional drawdowns ($35.3m at 31 December 2015). In 2014 it was decided by
management to guarantee the value of the coal loans using the andesite stone concession. This
meant no impairment was taken even though the coal operations remained suspended in 2016.
The coal price has now recovered sufficiently such that mining operations are expected to resume
in the first half of 2017, as evidenced by a proposal from third party contractors.
Whilst mining of the stone quarry has yet to commence, management remains committed to
funding this at the earliest opportunity. Should activity not commence during the near future on
either stone or coal sites, the likelihood of impairment of the loans in future periods will increase.
Further information is provided in the Audit Committee report on page 56, 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 challenged management’s plans and cash flow forecasts in relation to the mining operations to
support the value of investments in the stone and coal interests. Our work on the discounted cash
flow forecasts for the operations included:
•
•
Agreement of total stone and coal 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 prices to be used in the valuation with reference to third party
sources, and the profit margin per year used within the calculation.
Challenge of the discount rates used by management by comparing to others in the
plantation industry, terminal growth rates and the forecast figures used and the assumptions
in the discounted cash flow calculation.
•
•
Key observations
Based on the audit evidence obtained from the work performed above, we conclude that the
valuation of loans to stone and coal interests is appropriate.
R.E.A. Holdings plc Annual Report and Accounts 2016
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Governance
Independent auditor’s report to
the members of R.E.A. Holdings plc continued
Taxation matters arising in Indonesia
Risk description
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 2016: assets of $12.8m, liabilities of
$80.8m, (31 December 2015: assets of $15.7m, liabilities of $86.1m)) 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 including consideration of rules relating to the expiry of losses in
Indonesia.
Notes 1, 9 and 27 and the Audit Committee report on page 56 contain more disclosure relating to
the status of tax issues.
How the scope of our
audit responded to the
risk
Our work included:
•
Challenging 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.
Reviewing the status of open queries with the Indonesian tax authorities and tax advice
obtained by the Group’s external tax advisors in Indonesia.
Assessing 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.
Reviewing forecasts to assess the recoverability of the assets, including assessing those
forecasts for consistency with the going concern status.
•
•
•
Key observations
Based on the audit evidence obtained from the work performed above, we conclude that the
deferred tax assets have been appropriately recognised and the open tax positions have been
appropriately accounted for in the balance sheet.
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.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Group materiality
$6.5m (2015: $6.4m)
Basis for determining
materiality
2% of biological assets (2015: 2% of biological assets), which includes growing produce, plantings
and infrastructure.
Rationale for the
benchmark applied
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.
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R.E.A. Holdings plc Annual Report and Accounts 2016
We agreed with the Audit Committee that we would report to the committee all audit differences in excess of $250k (2015:
$138k), as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. The change in
the reporting threshold has been made following our reassessment of what matters require communicating. 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 on the full scope audit
work of 12 active legal entities (2015: 12 active legal entities), all of which were subject to full scope audits. These 12 entities
represent the principal business activities and account for 98% (2015: 95%) of the group’s net assets, 100% (2015: 100%) of
the group’s revenue and 98% (2015: 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 materiality applicable to each individual
entity which were lower than group materiality and ranged from $3.2m to $4.5m (2015: $3.2m to $5.4m).
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 appropriately qualified
members of the group audit team visit the group’s operations and component auditors in Indonesia annually and visit the planta-
tion estates at least once every three years, with the most recent visit to the plantation being in April 2017.
Opinion on other matters prescribed by the Companies Act 2006
In our opinion, based on the work undertaken in the course of the audit:
• the part of the Directors’ remuneration report to be audited has been properly prepared in accordance with the Companies
Act 2006;
• 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; and
• the Strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the company and its environment obtained in the course of the audit, we have
not identified any material misstatements in the Strategic report and the Directors’ report.
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R.E.A. Holdings plc Annual Report and Accounts 2016
75
Governance
Independent auditor’s report to
the members of R.E.A. Holdings plc continued
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
We have nothing to report in respect of these matters.
We have nothing to report arising from these matters.
We have nothing to report arising from our review.
We confirm that we have not identified any such
inconsistencies or misleading statements.
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.
•
•
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.
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.
Our duty to read other information in the Annual Report
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.
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R.E.A. Holdings plc Annual Report and Accounts 2016
Respective responsibilities of directors and auditor
As explained more fully in the Directors’ responsibilities statement, the directors are responsible for the preparation of the finan-
cial 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 for no other purpose. To the fullest extent permitted by law, we do not accept or assume
responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for
the opinions we have formed.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable
assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an
assessment of: whether the accounting policies are appropriate to the group’s and the parent company’s circumstances and have
been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the
directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial
information in the annual report to identify material inconsistencies with the audited financial statements and to identify any
information that is apparently materially incorrect based on, or materially inconsistent with, the knowledge acquired by us in the
course of performing the audit. If we become aware of any apparent material misstatements or inconsistencies we consider the
implications for our report.
Colin Rawlings, FCA (Senior statutory auditor)
for and on behalf of Deloitte LLP
Chartered Accountants and Statutory Auditor
London
27 April 2017
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R.E.A. Holdings plc Annual Report and Accounts 2016
77
Group financial statements
Consolidated income statement
for the year ended 31 December 2016
2016 2015*
Note $’000 $’000
Revenue 2 79,265 90,515
Net gain / (loss) arising from changes in fair value of agricultural produce inventory 4 632 (1,147)
Cost of sales:
Depreciation and amortisation (20,959) (21,676)
Other costs (50,868) (61,448)
Gross profit 8,070 6,244
Other operating income 2 1 2
Distribution costs (1,110) (1,097)
Administrative expenses 5 (11,987) (11,702)
Operating loss (5,026) (6,553)
Investment revenues 2, 7 1,742 259
Finance costs 8 (6,005) (5,951)
Loss before tax 5 (9,289) (12,245)
Tax 9 (2,019) (686)
Loss for the year (11,308) (12,931)
Attributable to:
Ordinary shareholders (17,800) (20,912)
Preference shareholders 10 7,402 8,461
Non-controlling interests 34 (910) (480)
(11,308) (12,931)
Basic and diluted loss per 25p ordinary share (US cents) 11 (48.2) (59.0)
* Restated - see Accounting policies (group)
The company is exempt from preparing and disclosing its profit and loss account
All operations for both years are continuing
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R.E.A. Holdings plc Annual Report and Accounts 2016
Group financial statements
Consolidated balance sheet
as at 31 December 2016
2016 2015* 2014*
Note $’000 $’000 $’000
Non-current assets
Goodwill 12 12,578 12,578 12,578
Intangible assets 13 4,176 – –
Property, plant and equipment 14 471,922 468,850 459,096
Prepaid operating lease rentals 15 34,230 34,295 33,879
Stone and coal interests 16 37,208 35,338 31,334
Deferred tax assets 27 12,781 15,669 8,909
Non-current receivables 3,136 1,395 2,749
Total non-current assets 576,031 568,125 548,545
Current assets
Inventories 18 15,767 11,190 16,180
Biological assets 19 2,037 2,105 2,251
Investments 20 9,880 2,158 –
Trade and other receivables 21 42,554 29,103 25,487
Cash and cash equivalents 22 24,593 15,758 16,224
Total current assets 94,831 60,314 60,142
Total assets 670,862 628,439 608,687
Current liabilities
Trade and other payables 29 (43,426) (27,025) (17,818)
Current tax liabilities (317) (3,406) (2,581)
Bank loans 24 (28,628) (50,906) (40,326)
Sterling notes 25 (10,103) – (14,693)
US dollar notes 26 (20,048) – –
Hedging instruments – – (9,590)
Other loans and payables 28 (519) (93) (1,238)
Total current liabilities (103,041) (81,430) (86,246)
Non-current liabilities
Bank loans 24 (97,771) (72,034) (60,638)
Sterling notes 25 (37,037) (55,853) (37,713)
US dollar notes 26 (23,646) (33,637) (33,472)
Deferred tax liabilities 27 (80,830) (86,105) (77,191)
Other loans and payables 28 (18,987) (5,558) (6,802)
Total non-current liabilities (258,271) (253,187) (215,816)
Total liabilities (361,312) (334,617) (302,062)
Net assets 309,550 293,822 306,625
Equity
Share capital 30 121,426 120,288 112,974
Share premium account 31 42,585 30,683 23,366
Translation reserve 32 (39,127) (46,282) (44,324)
Retained earnings 33 161,839 187,481 212,928
286,723 292,170 304,944
Non-controlling interests 34 22,827 1,652 1,681
Total equity 309,550 293,822 306,625
* Restated - see Accounting policies (group)
Approved by the board on 27 April 2017 and signed on behalf of the board.
DAVID J BLACKETT
Chairman
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R.E.A. Holdings plc Annual Report and Accounts 2016
79
Group financial statements
Consolidated statement of comprehensive income
for the year ended 31 December 2016
2016 2015*
Note $’000 $’000
Loss for the year (11,308) (12,931)
Other comprehensive income
Items that may be reclassified to profit or loss:
Actuarial losses (569) (489)
Deferred tax on actuarial losses 27 143 122
(426) (367)
Items that will not be reclassified to profit and loss:
Exchange differences on translation of foreign operations 32 5,222 3,575
Exchange differences on deferred tax 27 2,617 (5,082)
7,413 (1,874)
Total comprehensive income for the year (3,895) (14,805)
Attributable to:
Ordinary shareholders (10,387) (22,786)
Preference shareholders 7,402 8,461
Non-controlling interests (910) (480)
(3,895) (14,805)
* Restated - see Accounting policies (group)
Consolidated statement of changes in equity
for the year ended 31 December 2016
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 2015* 112,974 23,366 (44,324) 212,928 304,944 1,681 306,625
Total comprehensive income – – (1,958) (12,818) (14,776) (29) (14,805)
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) 187,481 292,170 1,652 293,822
Total comprehensive income – – 7,155 (10,824) (3,669) (226) (3,895)
Sale of shareholding in sub-group – – – (7,416) (7,416) 21,401 13,985
Issue of new ordinary shares (cash) 1,138 11,902 – – 13,040 – 13,040
Dividends to preference shareholders – – – (7,402) (7,402) – (7,402)
At 31 December 2016 121,426 42,585 (39,127) 161,839 286,723 22,827 309,550
* Restated - see Accounting policies (group)
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R.E.A. Holdings plc Annual Report and Accounts 2016
Group financial statements
Consolidated cash flow statement
for the year ended 31 December 2016
2016 2015
Note $’000 $’000
Net cash from operating activities 35 2,598 20,063
Investing activities
Interest received 1,742 259
Proceeds from disposal of property, plant and equipment 61 2,512
Purchases of property, plant and equipment (31,137) (32,348)
Expenditure on prepaid operating lease rentals (367) (1,250)
Investment in stone and coal interests (1,860) (4,004)
Net cash used in investing activities (31,561) (34,831)
Financing activities
Preference dividends paid (7,402) (8,461)
Ordinary dividends paid – (4,168)
Repayment of borrowings (11,004) (9,620)
Proceeds of issue of ordinary shares, less costs of issue 13,040 6,793
Proceeds of issue of US dollar notes, less costs of issue (44) –
Redemption of US dollar notes (45) –
Proceeds of issue / sale of sterling notes, less costs of issue 1,922 4,086
Proceeds of issue of sterling notes, by exchange – 39,921
Proceeds of issue of preference shares, less costs of issue – 7,838
Redemption of sterling notes, by exchange – (39,921)
Payment on termination of hedging contract – (10,184)
Purchase of sterling notes – (2,158)
Proceeds of sale of shareholding in subsidiary 13,985 –
New borrowings from related party 12,446 –
New bank borrowings drawn 14,939 30,326
Net cash from financing activities 37,837 14,452
Cash and cash equivalents
Net increase / (decrease) in cash and cash equivalents 36 8,874 (316)
Cash and cash equivalents at beginning of year 15,758 16,224
Effect of exchange rate changes (39) (150)
Cash and cash equivalents at end of year 22 24,593 15,758
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R.E.A. Holdings plc Annual Report and Accounts 2016
81
Group financial statements
Accounting policies (group)
General information
R.E.A. Holdings plc is a company incorporated and domiciled
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 114 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 have conducted a review of the projected cash
flows from operations, investing and financing and have set
out their assessment of liquidity and financing adequacy on
pages 33 and 34 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 2016. The
principal change in accounting policies results from the
amendments to IAS 41 Agriculture and to IAS 16 Property
plant and equipment. The new accounting policies are set
out under “Property, plant and equipment - plantings” and
under “Property, plant and equipment - other” below.
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R.E.A. Holdings plc Annual Report and Accounts 2016
As a result of this change in accounting policies and, as set
out in note 44, the consolidated balance sheets for 2014
and 2015 and the consolidated income statement for 2015
have been restated. In these financial statements,
references to “restated” should be construed accordingly.
The adoption of other amendments to IFRSs has not had
any significant impact on the amounts reported in these
financial statements, although certain 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 applied in these
financial statements), are set out below together with their
effective dates of implementation:
IFRS 9: Financial instruments 1 January 2018
IFRS 15: Revenue from contracts with
customers 1 January 2018
IFRS 16: Leases 1 January 2019
IFRS 10 and IAS28: Sale or contribution
of assets between an investor and its
associate or joint venture (amendments) 1 January 2017
IAS 12: Recognition of deferred tax
assets for unrealised losses (amendments) 1 January 2017
IFRS 2: Classification and measurement
of share-based payment
transactions (amendments) 1 January 2018
IFRS 4: Applying IFRS9 Financial
instruments with IFRS 4 Insurance
contracts (amendments) 1 January 2018
Annual improvements to IFRSs:
2014 - 2016 cycle 1 January 2017/2018
IFRIC interpretation 22: Foreign
currency transactions and advance
consideration 1 January 2018
IAS 40: Transfers of investment
property (amendments) 1 January 2018
IFRS 9 implements 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 will have a material impact on the
group’s reported profit or equity.
The directors are also considering the impact of IFRS 15:
Revenue from contracts with customers. The new standard
requires entities to recognise revenue on the transfer of
goods or services to customers in amounts that reflect the
consideration to which the company expects to be entitled
in exchange for those goods or services. The new standard
will also result in enhanced disclosures about revenue,
provide guidance for transactions that were not previously
addressed comprehensively (for example, service revenue
and contract modifications) and improve guidance for
multiple-element arrangements. The directors do not
consider that the adoption of IFRS 15 will result in any
change to the amount and timing of the group’s revenue, but
may require some additional disclosures.
The directors do not expect that the adoption of the other
standards, amendments and interpretations listed above will
have a material impact on the financial statements of the
group in future periods.
Basis of consolidation
The consolidated financial statements consolidate the
financial statements of the company and its subsidiary
companies (as listed in note (iv) 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.
For the purpose of impairment testing, goodwill is allocated
to each of the group's cash generating units expected to
benefit from the synergies of the combination. Cash
generating units to which goodwill has been allocated are
tested for impairment annually, or more frequently when
there is an indication that the unit may be impaired.
Goodwill arising between 1 January 1998 and the date of
transition to IFRS is retained at the previous UK Generally
Accepted Accounting Practice amount subject to testing for
impairment at that date. Goodwill written off to reserves
prior to 1 January 1998, in accordance with the accounting
standards then in force, has not been reinstated and is not
included in determining any subsequent profit or loss on
disposal.
Other intangible assets
Other intangible assets are stated at cost less accumulated
amortisation and any recognised impairment losses.
Intangible assets acquired separately are measured at cost on
initial recognition. An intangible asset with a finite life is
amortised on a straight-line basis so as to charge its cost to
the income statement over its expected useful life. An
intangible asset with an indefinite life is not amortised but is
tested at least annually for impairment and carried at cost less
any recognised impairment losses.
Computer software that is not integral to an item of property,
plant and equipment is recognised separately as an intangible
asset. Amortisation is provided on a straight-line basis so as
to charge the cost of the software to the income statement
over its expected useful life, not exceeding eight years.
The expected useful lives of acquired intangible assets are as
follows:
Purchased software
Licences (other than land titles)
Other
4-8 years
duration of the licence
up to 6 years
All intra-group transactions, balances, income and expenses
are eliminated on consolidation.
Revenue recognition
Goodwill
Goodwill is recognised as an asset on the basis described
under “Basis of consolidation” above and once recognised is
not depreciated although it 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.
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
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83
Group financial statements
Accounting policies (group)
continued
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.
the US dollar are treated as assets and liabilities of that
entity and are translated at the closing rate of exchange.
Borrowing costs
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.
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 plantings 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 agricultural produce inventory
but before investment income and finance costs.
Pensions and other post-employment benefits
Rental payments under operating leases are charged to
income on a straight-line basis over the term of the relevant
lease.
United Kingdom
Foreign currencies
Transactions in foreign currencies are recorded at the rates
of exchange ruling at the dates of the transactions. At each
balance sheet date, assets and liabilities denominated in
foreign currencies are retranslated at the rates of exchange
prevailing at that date except that non-monetary items that
are measured in terms of historical cost in a foreign
currency are not retranslated. Exchange differences arising
on the settlement of monetary items, and on the
retranslation of other items that are subject to retranslation,
are included in the net profit or loss for the period, except
for exchange differences arising on non-monetary assets
and liabilities, including foreign currency loans, which, to the
extent that such loans relate to investment in overseas
operations or hedge the group’s investment in such
operations, are recognised directly in equity.
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
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.
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 plantings within property, plant and equipment.
Goodwill and fair value adjustments arising on the
acquisition of an entity with a functional currency other than
84
R.E.A. Holdings plc Annual Report and Accounts 2016
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.
Property, plant and equipment - plantings
On application of the amendments to IAS41: Agriculture
and IAS 19: Property, plant and equipment, the directors
elected to state the group’s plantings at deemed cost being
the fair value recognised as at 1 January 2015 less the fair
value at that date of the growing produce which is disclosed
in current assets under “Biological assets”. Additions (which
include interest incurred during the period of immaturity) are
recognised at historical cost.
Depreciation is not provided on immature plants. Once
plants reach maturity, depreciation is provided on a straight
line basis at a rate that will write off the costs of the plants
by the date on which they are scheduled to be replanted,
with a maximum of 24 years.
Property, plant and equipment - other
All property, plant and equipment other than plantings 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 and structures – 20 to 67 years; plant,
equipment and vehicles - 5 to 16 years. Construction in
progress is not depreciated. Where the directors consider
that the residual value of an asset exceeds its carrying
value, no depreciation will be provided.
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 are amortised over
67 years.
Impairment of tangible and intangible assets excluding
goodwill
At each balance sheet date, the group reviews the carrying
amounts of its tangible and intangible assets to determine
whether there is any indication that any asset has suffered
an impairment loss. If any such indication exists, the
recoverable amount of the asset is estimated in order to
determine the extent of the impairment loss (if any). Where
the asset does not generate cash flows that are
independent from other assets, the group estimates the
recoverable amount of the cash-generating unit to which the
asset belongs. An intangible asset with an indefinite useful
life is tested for impairment annually and whenever there is
an indication that the asset may be impaired.
The recoverable amount of an asset (or cash-generating
unit) is the higher of fair value less costs to sell and value in
use. In assessing value in use, estimated future cash flows
are discounted to their present value using a pre-tax
discount rate that reflects current market assessments of
the time value of money and those risks specific to the
asset (or cash-generating unit) for which the estimates of
future cash flows have not been adjusted. If the recoverable
amount of an asset (or cash-generating unit) is estimated to
be less than its carrying amount, the carrying amount of the
asset (or cash-generating unit) is reduced to its recoverable
amount. An impairment loss is recognised as an expense
immediately, unless the relevant asset is carried at a
revalued amount, in which case the impairment loss is
treated as a revaluation decrease.
Where, with respect to assets other than goodwill, an
impairment loss subsequently reverses, the carrying amount
of the asset (or cash-generating unit) is increased to the
revised estimate of its recoverable amount, but so that the
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85
Group financial statements
Accounting policies (group)
continued
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
group’s oil palms are stated at fair value at the point of
harvest of the fresh fruit bunches (“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.
Biological assets
Biological assets comprise the growing produce (fresh fruit
bunches – “FFB”) on oil palm trees and are carried at fair
value.
Non-derivative financial assets
The group’s non-derivative financial assets comprise loans
and receivables (including 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” or “available-for-sale” financial assets.
Loans and receivables
Trade receivables, loans and other receivables in respect of
which payments are fixed or determinable and which are not
quoted in an active market are classified as loans and
receivables. Stone and coal interests are also classified as
loans and receivables. Stone and coal interests are
measured at amortised cost using the effective interest rate
method. 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
Growing produce is valued using a formulaic methodology
to determine the estimated value of the oil content of FFB
which develops in the fruitlets in the five to six weeks
immediately prior to harvest. The oil content so derived,
both CPO and CPKO, is valued at market value, after
deducting harvesting, processing and transport costs.
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.
Periodic movements in the fair value of growing produce are
reflected in the consolidated income statement
Non-derivative financial liabilities
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.
The group’s non-derivative financial liabilities comprise
redeemable instruments, bank borrowings, loans from non-
controlling shareholders, 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
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R.E.A. Holdings plc Annual Report and Accounts 2016
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.
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
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 determination of the fair
value of the group’s biological assets, and the fact that
choice of a different methodology could give a materially
different result, the actual value of ripening FFB may differ
from that estimated (see note 19).
Taxes
The group is subject to taxes in various jurisdictions.
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) mean that tax outcomes may differ
from estimates.
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 may differ
from their realisable value (see note 16).
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 (the growing crop of FFB). No
market exists for unripe FFB, so management must select
an appropriate methodology to be used, together with
suitable metrics, for determining fair value. The quantity of
trees and the absence of accepted valuation bases for
measuring the value of the ripening FFB between flowering
and harvest have led management to value the growing
crop of FFB by reference to the formation of the oil content
in the fruitlets on the FFB in the period immediately before
harvest.
Capitalisation of interest and other costs
As described under “Property plant and equipment -
plantings” in “Accounting policies (group)”, all expenditure
on plantings 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.
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R.E.A. Holdings plc Annual Report and Accounts 2016
2. Revenue
2016 2015
$’000 $’000
Sales of goods 77,642 87,824
Revenue from services 1,623 2,691
79,265 90,515
Other operating income 1 2
Investment revenue 1,742 259
Total revenue 81,008 90,776
In 2016, two customers accounted for respectively 72 per cent and 16 per cent of the group’s sales of agricultural goods
(2015: three customers, 59 per cent, 16 per cent and 15 per cent). As stated in note 23 “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 2016 amounted to 468,371 tonnes (2015: 600,741 tonnes). The fair value of the
crop of fresh fruit bunches was $49.7 million (2015: $45.1 million), based on the price formulae determined by the Indonesian
government for purchases of fresh fruit bunches from smallholders.
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 2016 and 2015, the latter did not meet the quantitative thresholds set out in IFRS 8 “Operating
segments” and, accordingly, no analyses are provided by business segment.
2016 2015*
$’m $’m
Sales by geographical destination:
Indonesia 79.3 90.5
Rest of World – –
79.3 90.5
Carrying amount of net assets by geographical area of asset location:
UK, Continental Europe and Singapore 56.0 58.0
Indonesia 253.6 237.9
309.6 295.9
* Restated - see Accounting policies (group)
4. Agricultural produce inventory movement
The net gain / (loss) arising from changes in fair value of agricultural produce inventory represents the movement in the fair
value of that inventory less the amount of the movement in such inventory at historic cost (which is included in cost of sales).
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89
Group financial statements
Notes to the consolidated financial statements
continued
5. Loss before tax
2016 2015*
$’000 $’000
Salient items charged / (credited) in arriving at loss before tax
Administrative expenses (see below) 11,987 11,702
Movement in inventories (at historic cost) (313) 1,937
Amounts provided against inventories 73 497
Movement in fair value of growing produce 68 146
Operating lease rentals 373 234
Amortisation of intangible assets 74 –
Depreciation of property, plant and equipment 20,453 21,097
Amortisation of prepaid operating lease rentals 432 579
Administrative expenses
Net foreign exchange losses 1,290 818
Net credit for additional pension contributions (see note 37) – (2,267)
Loss on disposal of property, plant and equipment 12 49
Indonesian operations 9,621 11,556
Head office 5,377 6,160
16,300 16,316
Amount included as additions to property, plant and equipment (4,313) (4,614)
11,987 11,702
* Restated - see Accounting policies (group)
Amounts payable to the company’s auditor
The amount payable to Deloitte LLP for the audit of the company’s financial statements was $149,000 (2015: $180,000).
Amounts payable to Deloitte LLP for the audit of accounts of subsidiaries of the company pursuant to legislation were $17,000
(2015: $24,000).
Amounts payable to Deloitte LLP for other services were $8,000 (2015: $10,000) for the provision of certificates of group
compliance with covenants under certain debt instruments (being certificates that those instruments require to be provided by
the company’s auditor) and for group accountancy services.
Amounts payable to affiliates of Deloitte LLP for the audit of subsidiaries’ financial statements were $174,000 (2015:
$195,000) and for other services to subsidiaries were $nil (2015: $95,000).
2016 2015*
$’000 $’000
Earnings before interest, tax, depreciation and amortisation
Operating loss (5,026) (6,553)
Depreciation and amortisation 20,959 21,676
15,933 15,123
* Restated - see Accounting policies (group)
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R.E.A. Holdings plc Annual Report and Accounts 2016
6. Staff costs, including directors
2016 2015
Number Number
Average number of employees (including executive directors):
Agricultural – permanent 5,501 5,333
Agricultural – temporary 2,868 2,991
Head office 11 9
8,380 8,333
$’000 $’000
Their aggregate remuneration comprised:
Wages and salaries 31,825 35,893
Social security costs 700 807
Pension costs 1,493 (728)
34,018 35,972
Details of the remuneration of directors are shown in the “Directors’ remuneration report”.
7. Investment revenues
2016 2015
$’000 $’000
Interest on bank deposits 44 62
Other interest income 1,698 197
1,742 259
8. Finance costs
2016 2015
$’000 $’000
Interest on bank loans and overdrafts 12,617 8,130
Interest on US dollar notes 2,899 2,716
Interest on sterling notes 5,184 5,042
Interest on other loans 273 –
Change in value of sterling notes arising from exchange fluctuations (10,470) (2,694)
Movements relating to derivative financial instruments – 1,685
Change in value of loans arising from exchange fluctuations 1,378 (4,946)
Other finance charges 251 887
12,132 10,820
Amount included as additions to property, plant and equipment (6,127) (4,869)
6,005 5,951
Amounts included as additions to property, plant and equipment and construction in progress arose on borrowings applicable to
the Indonesian operations and reflected a capitalisation rate of 22.0 per cent (2015: 27.3 per cent); there is no directly related
tax relief.
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R.E.A. Holdings plc Annual Report and Accounts 2016
91
Group financial statements
Notes to the consolidated financial statements
continued
9. Tax
2016 2015*
$’000 $’000
Current tax:
UK corporation tax 1 –
Overseas withholding tax 1,604 1,467
Foreign tax 38 50
Foreign tax - prior year 3 1,778
Total current tax 1,646 3,295
Deferred tax:
Current year 373 (2,987)
Prior year – 378
Total deferred tax 373 (2,609)
Total tax 2,019 686
* Restated - see Accounting policies (group)
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 (2015: 25 per cent) and for the United Kingdom, the taxation provision reflects a
corporation tax rate of 20 per cent (2015: 20.25 per cent) and a deferred tax rate of 19 per cent (2015: 20 per cent).
The tax charge for the year can be reconciled to the loss per the consolidated income statement as follows:
2016 2015*
$’000 $’000
Loss before tax (9,289) (12,245)
Notional tax at the UK standard rate of 20 per cent (2015: 20.25 per cent) (1,858) (2,480)
Tax effect of the following items:
Interest not deductible 2,475 –
Other expenses not deductible 702 897
Non taxable income (29) (27)
Overseas tax rates above UK standard rate (24) (637)
Overseas withholding taxes, net of relief 310 608
Tax credit on loss in overseas subsidiary not recognised 381 178
Tax losses in overseas subsidiaries time expired 21 –
Prior year adjustments 3 2,156
Change in rate of tax applicable to UK tax losses 49 –
Additional tax credits (11) (9)
Tax expense at effective tax rate for the year 2,019 686
* Restated - see Accounting policies (group)
A regulation issued in 2015 by the Indonesian Ministry of Finance restricts the amount of finance charges that may be
deducted from company profits for taxation purposes by reference to the debt equity ratio of the entity concerned. Where equity
is negative, no deduction of finance charges is permitted.
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 Indonesian rupiah 103 billion ($7.4 million) was refunded in full.
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R.E.A. Holdings plc Annual Report and Accounts 2016
9. Tax - continued
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.
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.
It had 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 taxpayers to apply for
such interest following receipt of the disputed tax refunds. Following the Tax Court decisions, the subsidiary applied to the tax
office for the payment to it of interest of up to 48 per cent of the disputed tax that had been refunded. This amounted to some
Indonesian rupiah 52 billion ($3.9 million) in aggregate. During discussions in 2016 with the local tax office, the tax officials
rejected the subsidiary’s claim for interest on that part of the repayment which represented a refund to the subsidiary of the tax
which had been voluntarily paid at the time of the disputed assessment. The subsidiary disagrees with this interpretation and is
considering an appeal.
In the meanwhile, undisputed interest (equivalent to $1.1 million) was repaid during 2016 and has been credited to income;
only this amount has been recognised in these financial statements.
10. Dividends
2016 2015
$’000 $’000
Amounts recognised as distributions to equity holders:
Preference dividends of 9p per share (2015: 9p per share) 7,402 8,461
Ordinary dividends (2015: 7.75p per share) – 4,168
7,402 12,629
11. Loss per share
2016 2015*
$’000 $’000
Basic and diluted loss for the purpose of calculating loss per share ** (17,800) (20,912)
’000 ’000
Weighted average number of ordinary shares for the purpose of basic and diluted loss per share 36,950 35,455
* Restated - see Accounting policies (group)
** Being net loss attributable to ordinary shareholders
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R.E.A. Holdings plc Annual Report and Accounts 2016
93
Group financial statements
Notes to the consolidated financial statements
continued
12. Goodwill
2016 2015
$’000 $’000
Beginning of year 12,578 12,578
End of year 12,578 12,578
The goodwill of $12.6 million 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 $19.0 million
and has an indefinite life. The goodwill is reviewed for impairment as explained under “Goodwill” in “Accounting policies (group)”.
Accordingly, the oil palm business in Indonesia is regarded as the cash generating unit to which the goodwill relates. The
recoverable amount of the goodwill has been assessed by comparing the carrying value per planted hectare of the group’s oil
palm plantations with publicly disclosed valuations conducted recently of Indonesian plantations held by other groups.
Based upon their review, the directors have concluded that no impairment of goodwill is required.
13. Intangible assets
2016
$’000
Beginning of year –
Transfers from property, plant and equipment 4,123
Transfers from deferred charges 1,142
End of year 5,265
Amortisation:
Beginning of year –
Additions 74
Transfers from property, plant and equipment 124
Transfers from deferred charges 891
End of year 1,089
Carrying amount:
Beginning of year –
End of year 4,176
Computer software that is not integral to an item of property, plant and equipment is recognised separately as an intangible
asset.
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R.E.A. Holdings plc Annual Report and Accounts 2016
14. Property, plant and equipment
Plantings Buildings Plant, Construction Total
and structures equipment in progress
and vehicles
$’000 $’000 $’000 $’000 $’000
Cost:
At 1 January 2015 (restated) 178,420 213,898 104,431 12,510 509,259
Opening balance adjustment (363) 363 – – –
Additions 9,411 15,629 1,897 5,412 32,349
Exchange differences – – (36) – (36)
Disposals – (1) (2,530) – (2,531)
Transfers from plantings (8,202) 8,202 – – –
Transfers to / (from) construction in progress – 1,708 6,281 (7,989) –
Transfers to current receivables (345) – – (2) (347)
At 31 December 2015 (restated) 178,921 239,799 110,043 9,931 538,694
Additions 7,104 18,082 2,173 3,778 31,137
Exchange differences – – (63) – (63)
Disposals (24) (16) (439) – (479)
Transfers to / (from) construction in progress – 1,008 82 (1,090) –
Transfers to intangible assets – – (124) (3,999) (4,123)
Transfers to deferred charges – – – (3,025) (3,025)
Transfers to current receivables (4) – – – (4)
Transfers to income statement (141) – – – (141)
At 31 December 2016 185,856 258,873 111,672 5,595 561,996
Accumulated depreciation:
At 1 January 2015 (restated) – 16,291 33,872 – 50,163
Opening balance adjustment – 1,682 – – 1,682
Charge for year 8,689 4,061 6,898 – 19,648
Exchange differences – – (29) – (29)
Disposals – (1) (1,619) – (1,620)
At 31 December 2015 (restated) 8,689 22,033 39,122 – 69,844
Charge for year 9,082 5,076 6,608 – 20,766
Transfers to intangible assets – – (124) – (124)
Disposals – (11) (401) – (412)
At 31 December 2016 17,771 27,098 45,205 – 90,074
Carrying amount:
At 31 December 2016 168,085 231,775 66,467 5,595 471,922
At 31 December 2015 170,232 217,766 70,921 9,931 468,850
At 1 January 2015 178,420 197,607 70,559 12,510 459,096
The depreciation charge for the year includes $313,000 (2015: $233,000) which has been capitalised as part of additions to
plantings.
In accordance with the amendments to IAS 41: Agriculture and IAS 16: Property, plant and equipment, the assets previously
disclosed as ‘Biological assets’ have been transferred as follows. Growing produce, which is still classified as a biological asset,
is now disclosed in current assets. As regards the balance, the group has adopted, as permitted by the amended provisions of
IAS 41, the fair value as at 31 December 2014 as deemed cost. The assets concerned comprise oil palm trees, nurseries and
the field infrastructural improvements relating to the planting of trees. This balance of deemed cost has been allocated by
separating the infrastructural improvements at estimated depreciated current cost and treating the remaining balance as
attributable to the oil palm trees (plantings).
At the balance sheet date, the book value of finance leases included in property, plant and equipment was $nil (2015: $nil).
At the balance sheet date, the group had entered into contractual commitments for the acquisition of property, plant and
equipment amounting to $1.4 million (2015: $1.2 million).
R.E.A. Holdings plc Annual Report and Accounts 2016
95
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Group financial statements
Notes to the consolidated financial statements
continued
14. Property, plant and equipment - continued
At the balance sheet date, property, plant and equipment of $298.6 million had been charged as security for bank loans.
15. Prepaid operating lease rentals
2016 2015
$’000 $’000
Cost:
Beginning of year 38,536 37,286
Additions 367 1,250
Exchange differences – –
End of year 38,903 38,536
Accumulated amortisation:
Beginning of year 4,241 3,407
Opening balance adjustment – 112
Exchange differences – –
Charge for year 432 722
End of year 4,673 4,241
Carrying amount:
End of year 34,230 34,295
Beginning of year 34,295 33,879
The amortisation charge for the year includes $nil (2015: $143,000) which has been capitalised as part of the additions to
plantings.
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 (2015: 70,584 hectares). An HGU is effectively a government lease entitling the lessee to utilise the land
leased for agricultural and related purposes. Retention of an HGU is subject to payment of annual land taxes in accordance
with prevailing tax regulations. HGUs are normally 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 $15.2 million had been charged as security for bank loans (see
note 24).
16. Stone and coal interests
2016 2015
$’000 $’000
Stone company 17,435 17,435
Coal companies 22,773 20,903
Provision against loan to coal companies (3,000) (3,000)
37,208 35,338
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, the company’s
subsidiary, 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 5 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.
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R.E.A. Holdings plc Annual Report and Accounts 2016
16. Stone and coal interests - continued
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 2016 consolidated income statement (2015: $nil).
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
2016 2015
$’000 $’000
Agricultural produce 6,921 4,221
Engineering and other operating inventory 8,846 6,969
15,767 11,190
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 $13.5 million had been charged as security for bank loans (see note 24).
19. Biological assets
Biological assets comprise the growing produce on the group's oil palms and are carried at fair value. The basis of valuation is
set out under “Biological assets” in Accounting policies (group). Biological assets are classified as level 3 in the fair value
hierarcy prescribed by IFRS 7 “Financial instruments: Disclosures” as no transactions occur in growing produce prior to harvest.
2016 2015*
$’000 $’000
Beginning of year 2,105 2,251
Fair value loss taken to income (68) (146)
End of year 2,037 2,105
* Restated - see Accounting policies (group)
At the balance sheet date, biological assets of $2.0 million had been charged as security for bank loans (see note 24).
20. Investments
2016 2015
$’000 $’000
R.E.A. Holdings plc 7.5 per cent US dollar notes 2022 9,880 –
REA Finance B.V. 8.75 per cent guaranteed sterling notes 2020 – 2,158
9,880 2,158
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R.E.A. Holdings plc Annual Report and Accounts 2016
97
Group financial statements
Notes to the consolidated financial statements
continued
20. Investments - continued
On 24 November 2016 the company issued $24,035,218 nominal of 7.5 per cent dollar notes 2022 by way of an exchange
offer and placing at 100 per cent of their principal amount. $10.0 million of such notes were acquired by R.E.A. Services
Limited (“REAS”) (a wholly owned subsidiary of the company) of which $120,000 were sold prior to the year end at the
purchase price.
The £1.5 million nominal of REA Finance B.V. (“REAF”) 8.75 per cent guaranteed sterling notes 2020 (“the 2020 sterling
notes”) acquired at 97 per cent of their principal amount during 2015 were sold on 6 July 2016 at the purchase price.
The company has designated the above holdings as available-for-sale investments carried at cost. The directors consider that
the fair value of the investments approximates cost. The investments are quoted on the London Stock Exchange.
21. Trade and other receivables
2016 2015
$’000 $’000
Due from sale of goods 10,269 5,233
Prepayments and advance payments 8,703 7,035
Advance payment of taxation 15,236 9,883
Deposits and other receivables 8,346 6,952
42,554 29,103
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 11 days (2015: 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 $14.2 million had been charged as security for bank loans (see note
24).
22. 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 $24.6 million (2015: $15.8 million) is set out in note 23 under the heading “Credit risk”. At 31
December 2016, $0.1 million of total bank deposits were subject to charges.
23. Financial instruments
Capital risk management
The group manages as capital its debt, which includes the borrowings disclosed in notes 24 to 26 and note 29, 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.
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R.E.A. Holdings plc Annual Report and Accounts 2016
23. Financial instruments - continued
Net debt to equity ratio
Net debt, equity and the net debt to equity ratio at the balance sheet date were as follows:
2016 2015
$’000 $’000
Debt * 229,702 212,430
Cash and cash equivalents (24,593) (15,758)
Net debt 205,109 196,672
* 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) 309,550 293,822
Net debt to equity ratio 66.3% 66.9%
Significant accounting policies
Details of the significant accounting policies and methods adopted, including the criteria for recognition, the basis of
measurement and the basis on which income and expenses are recognised, in respect of each class of financial instrument are
disclosed in “Accounting policies (group)” above.
Categories of financial instruments
Non-derivative financial assets as at 31 December 2016 comprised loans, investments and receivables (including stone and
coal interests) and cash and cash equivalents amounting to $90.6 million (2015: $67.1 million).
Non-derivative financial liabilities as at 31 December 2016 comprised liabilities at amortised cost amounting to $280.6 million
(2015: $201.0 million).
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.
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.
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R.E.A. Holdings plc Annual Report and Accounts 2016
99
Group financial statements
Notes to the consolidated financial statements
continued
23. Financial instruments - continued
Interest is payable on drawings under Indonesian rupiah term loan facilities varying between 1.2 per cent and 4.8 per cent (2015:
between 3.8 per cent and 4.8 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.
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 2016 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 $1.1 million (2015: pre-tax profit (and equity) decrease of $1.1 million).
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 certain debt
swaps 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.
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 $2.3 million on the net sterling denominated non-derivative monetary items (2015: loss $2.2
million). 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 $6.9 million on the net Indonesian rupiah denominated, non-derivative monetary
items (2015: loss of $5.0 million).
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 2016, 87 per
cent of bank deposits were held with banks with a Moody’s prime rating of P1 and 13 per cent with a bank with a Moody’s
prime rating of P3. Substantially all sales of goods are made on the basis of cash against documents or letters of credit. At the
balance sheet date, no trade receivables were past their due dates, nor were any impaired; accordingly no bad debt provisions
were required. The maximum credit risk exposures in respect of the group’s financial assets at 31 December 2016 and 31
December 2015 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.
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R.E.A. Holdings plc Annual Report and Accounts 2016
23. Financial instruments - continued
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 24.
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
2016 % $’000 $’000 $’000 $’000
Bank loans 11.0 38,269 15,455 83,210 136,934
US dollar notes - repayable 2017 8.5 21,813 – – 21,813
US dollar notes - repayable 2022 8.5 901 1,803 30,344 33,048
Sterling notes - repayable 2015/2017 10.4 11,231 – – 11,231
Sterling notes - repayable 2020 10.1 3,434 3,436 45,094 51,964
Non-controlling shareholder loans - US dollar 6.0 460 3,026 5,593 9,079
Non-controlling shareholder loans - sterling 10.6 504 2,101 3,703 6,308
Trade and other payables, and customer deposits 31,385 – – 31,385
107,997 25,821 167,944 301,762
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
At 31 December 2016, the group’s non-derivative financial assets (other than receivables) comprised cash and deposits of
$24.6 million (2015: $15.8 million) carrying a weighted average interest rate of nil per cent (2015: 1.4 per cent) all having a
maturity of under one year, and stone and coal interests of $37.2 million (2015: $35.3 million) details of which are given in note
16.
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. Cash and deposits, US dollar notes and sterling notes are
classified as level 1 in the fair value hierarchy prescribed by IFRS 7 “Financial instruments: disclosures”. (Level 1 includes
instruments where inputs to the fair value measurements are quoted prices in active markets). All other financial instruments
are classified as level 3 in the fair value hierarchy. (Level 3 includes instruments which have no observable market data to
provide inputs to the fair value measurements). No reclassifications between levels in the fair value hierarchy were made
during 2016 (2015: none).
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R.E.A. Holdings plc Annual Report and Accounts 2016
101
Group financial statements
Notes to the consolidated financial statements
continued
23. Financial instruments - continued
2016 2016 2015 2015
Book value Fair value Book value Fair value
$’000 $’000 $’000 $’000
Cash and deposits* 24,593 24,593 15,758 15,758
Bank debt - within one year* (28,628) (28,628) (50,906) (50,906)
Bank debt - after more than one year* (97,771) (97,771) (72,034) (72,034)
Loans from non-controlling shareholder - after more than one year* (12,469) (12,469) – –
US dollar notes - repayable 2017** (20,048) (20,206) (33,637) (31,290)
US dollar notes - repayable 2022** (23,646) (24,035) – –
Sterling notes - repayable 2015/2017** (10,103) (10,143) (10,623) (12,346)
Sterling notes - repayable 2020** (37,037) (38,553) (45,230) (45,826)
Net debt (205,109) (207,212) (196,672) (196,644)
* Bearing interest at floating rates
** Bearing interest at fixed rates
The fair values of cash and deposits and bank debt approximate their carrying values since these carry interest at current
market rates. The fair value of investments approximates their carrying value. 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.
24. Bank loans
2016 2015
$’000 $’000
Bank loans 126,399 122,940
The bank loans are repayable as follows:
On demand or within one year 28,628 50,906
Between one and two years 5,997 22,575
After two years 91,774 49,459
126,399 122,940
Amount due for settlement within 12 months (shown under current liabilities) 28,628 50,906
Amount due for settlement after 12 months 97,771 72,034
126,399 122,940
All bank loans are denominated in Indonesian rupiah (2015: denominated in US dollars $73.7 million and Indonesian rupiah
$49.2 million) and are at floating rates, thus exposing the group to interest rate risk. The weighted average interest rate in
2016 was 11 per cent (2015: 7.3 per cent). Bank loans of $126.4 million (2015: $92.9 million) are secured on the land,
plantations, property, plant and equipment and certain current assets owned by REA Kaltim, PT Kutai Mitra Sejahtera, PT Putra
Bongan Jaya and PT Sasana Yudha Bhakti having an aggregate book value of $343 million (2015: $300 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 Indonesian rupiah denominated facilities of $14.3 million (2015: $21.6
million).
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R.E.A. Holdings plc Annual Report and Accounts 2016
25. Sterling notes
The sterling notes comprise £8.3 million (2015: £8.3 million) nominal of 9.5 per cent guaranteed 2015/17 sterling notes and
£31.9 million (2015: £31.9 million) nominal of 8.75 per cent guaranteed 2020 sterling notes, in each case issued by the
company’s subsidiary, REAF. The sterling notes are guaranteed by the company and another wholly owned subsidiary of the
company, 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.
The repayment obligation in respect of the sterling notes of £40.2 million ($49.1 million) is carried in the balance sheet net of
the unamortised balance of the note issuance costs.
If a person or group of persons acting in concert obtains the right to exercise more than 50 per cent of the votes that may
generally be cast at a general meeting of the company, each holder of sterling notes has the right to require that the notes held
by such holder be repaid at 101 per cent of par, plus any interest accrued thereon up to the date of completion of the
repayment.
26. US dollar notes
The US dollar notes comprise $20.2 million (2015: $34.0 million) nominal of 7.5 per cent dollar notes 2017 (“2017 dollar
notes”) and $24.0 million (2015: nil) nominal of 7.5 per cent dollar notes 2022 (“2022 dollar notes”). The 2017 dollar notes are
repayable on 30 June 2017 and the 2022 dollar notes on 30 June 2022.
Pursuant to proposals made in November 2016 to holders of the 2017 dollar notes, $13.8 million of such notes were
exchanged on 24 November 2016 for a like amount of 2022 dollar notes, and at the same time a further $225,000 of 2022
dollar notes were issued to holders of $45,000 of 2017 dollar notes who subscribed in cash $180,000 under the top-up
provisions of the exchange proposals. In addition, R.E.A. Services Limited, a wholly owned subsidiary of the company, subscribed
a further $10.0 million of 2022 dollar notes pursuant to the placing.
The US dollar notes are unsecured obligations of the company and are stated net of the unamortised balance of the note
issuance costs.
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R.E.A. Holdings plc Annual Report and Accounts 2016
103
Group financial statements
Notes to the consolidated financial statements
continued
27. Deferred tax
The following are the major deferred tax assets and liabilities recognised by the group and the movements thereon during the
year and preceding year:
Deferred tax assets / (liabilities) Plantings Other Income/ Agricultural Tax Total
property, expenses* produce losses
plant and and other
equipment inventory
$’000 $’000 $’000 $’000 $’000 $’000
At 1 January 2015 (restated) (42,630) (24,308) (8,816) (843) 8,315 (68,282)
Credit/(charge) to income for the year 1,553 495 (8,069) 438 8,192 2,609
Credit to comprehensive income for the year** – – 122 – – 122
Transfers – (23) 197 – 23 197
Exchange differences*** (4,018) (662) 583 (4) (981) (5,082)
At 31 December 2015 (restated) (45,095) (24,498) (15,983) (409) 15,549 (70,436)
Credit/(charge) to income for the year 1,397 (280) 2,308 (207) (3,591) (373)
Credit to comprehensive income for the year** – – 143 – – 143
Exchange differences*** 475 2,053 (318) 2 405 2,617
At 31 December 2016 (43,223) (22,725) (13,850) (614) 12,363 (68,049)
Deferred tax assets – 43 367 8 12,363 12,781
Deferred tax liabilities (43,223) (22,768) (14,217) (622) – (80,830)
At 31 December 2016 (43,223) (22,725) (13,850) (614) 12,363 (68,049)
Deferred tax assets – 1 119 – 15,549 15,669
Deferred tax liabilities (45,095) (24,499) (16,102) (409) – (86,105)
At 31 December 2015 (restated) (45,095) (24,498) (15,983) (409) 15,549 (70,436)
* 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.
Deferred tax assets and liabilities at 1 January and 31 December 2015 have been restated - see Accounting policies (group).
At the balance sheet date, the group had unused tax losses of $50.5 million (2015: $63.2 million) available to be applied
against future profits. A deferred tax asset of $12.4 million (2015: $15.6 million) 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 $462,000 incurred by the
group’s coal subsidiary in 2016 (2015: tax loss $122,000) has not been recognised and at the balance sheet date, tax losses
aggregating $9.7 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 $6.1 million (2015: $5.6 million). 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 $43.2 million (2015: $45.1 million) in respect of plantings arises from their recognition prior to
2015 at fair value in the group accounts, compared with their historic base cost in the local accounts of overseas subsidiaries.
From 2015 onwards this temporary difference reverses as the plantings are depreciated over their remaining useful life.
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R.E.A. Holdings plc Annual Report and Accounts 2016
28. Other loans and payables
2016 2015
$’000 $’000
Indonesian retirement benefit obligations 7,037 5,651
Loans from non-controlling shareholder 12,469 –
19,506 5,651
Repayable as follows:
On demand or within one year (shown under current liabilities) 519 93
In the second year 5,195 186
In the third to fifth years inclusive 9,871 280
After five years 3,921 5,092
Amount due for settlement after 12 months 18,987 5,558
19,506 5,651
Liabilities by currency:
Sterling 4,746 –
US dollar 7,723 –
Indonesian rupiah 7,037 5,651
19,506 5,651
Further details of the retirement benefit obligations are set out in note 37. The directors estimate that the fair value of other
loans and payables approximates their carrying value.
29. Trade and other payables
2016 2015
$’000 $’000
Trade purchases and ongoing costs 12,309 7,763
Customer deposits 14,926 6,852
Other tax and social security 3,730 2,810
Accruals 11,172 8,249
Other payables 1,289 1,351
43,426 27,025
The average credit period taken on trade payables is 30 days (2015: 33 days).
The directors estimate that the fair value of trade and other payables approximates their carrying value.
30. Share capital
2016 2015
£’000 £’000
Authorised (in sterling):
85,000,000 – 9 per cent cumulative preference shares of £1 each (2015: 75,000,000) 85,000 75,000
50,000,000 – ordinary shares of 25p each (2015: 41,000,000) 12,500 10,250
97,500 85,250
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R.E.A. Holdings plc Annual Report and Accounts 2016
105
Group financial statements
Notes to the consolidated financial statements
continued
30. Share capital - continued
2016 2015
$’000 $’000
Issued and fully paid (in US dollars):
63,641,232 – 9 per cent cumulative preference shares of £1 each (2015: 63,641,232) 105,414 105,414
40,509,529 – ordinary shares of 25p each (2015: 36,839,529) 17,013 15,875
132,500 – ordinary shares of 25p each held in treasury (2015: 132,500) (1,001) (1,001)
121,426 120,288
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 20 December 2016 3,670,000 ordinary shares were issued, credited as fully paid, by way of placing at £2.95 per
share (total consideration £10.8 million - $13.4 million) to Mirabaud Pereire Nominees Limited and Emba Holdings
Limited (a related party). The middle market price at close of business on 14 December 2016 (being the date at which
the terms of issue were fixed) was £2.94
There have been no changes in ordinary shares held in treasury during the year.
31. Share premium account
$’000
At 1 January 2015 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
Issue of new ordinary shares (cash) (see note 30) 12,289
Cost of issues (387)
At 31 December 2016 42,585
32. Translation reserve
2016 2015*
$’000 $’000
Beginning of year (46,282) (44,324)
Exchange differences on translation of foreign operations 5,222 3,575
Exchange differences on deferred tax 2,617 (5,082)
Attributable to non-controlling interests (684) (451)
End of year (39,127) (46,282)
* Restated - see Accounting policies (group)
33. Retained earnings
2016 2015*
$’000 $’000
Beginning of year 187,481 212,928
Sale of non-controlling shareholding in a subsidiary (7,416) –
Loss for the year after preference dividend (18,226) (21,279)
Ordinary dividend paid – (4,168)
End of year 161,839 187,481
* Restated - see Accounting policies (group)
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R.E.A. Holdings plc Annual Report and Accounts 2016
34. Non-controlling interests
2016 2015*
$’000 $’000
Beginning of year 1,652 1,681
Sale of non-controlling shareholding in a subsidiary 21,401 –
Share of result for the year (910) (480)
Exchange translation differences 684 451
End of year 22,827 1,652
* Restated - see Accounting policies (group)
DSN’s purchase of a shareholding in a subsidiary was accounted for as follows:
2016
$’000
Amount paid for shareholding 13,985
Share of net assets purchased (21,401)
Loss on disposal (7,416)
In connection with the acquisition by DSN of a shareholding in REA Kaltim, subsidiaries of DSN subscribed in December 2016
in cash for 77 class B shares and 1,453 class A shares in the share capital of REA Kaltim at a price of $6,864.60 per share.
Also in December 2016 REA Kaltim issued to subsidiaries of DSN by way of the capitalisation of shareholder loans a further
110 class B shares and 220 class B shares at a price of $6,864.60 per share.
35. Reconciliation of operating loss to operating cash flows
2016 2015*
$’000 $’000
Operating loss (5,026) (6,553)
Amortisation of intangible assets 74 –
Depreciation of property, plant and equipment 20,766 19,648
(Increase) / decrease in fair value of agricultural produce inventory (632) 1,147
Amortisation of prepaid operating lease rentals 432 722
Amortisation of sterling and US dollar note issue expenses 584 275
Loss on disposal of property, plant and equipment 12 49
Cumulative loss on termination of hedging contract ** – 9,002
Operating cash flows before movements in working capital 16,210 24,290
(Increase) / decrease in inventories (excluding fair value movements) (3,944) 3,844
Decrease in receivables 760 3,585
Increase in payables 13,136 6,964
Exchange translation differences (791) (1,397)
Cash generated by operations 25,371 37,286
Taxes paid (2,313) (5,427)
Tax refunds received 241 4,601
Interest paid (20,701) (16,397)
Net cash from operating activities 2,598 20,063
* Restated - see Accounting policies (group)
** The cumulative loss on termination of hedging contract represented the cumulative prior year mark-to-market losses on the terminated hedging
contract, and was a cash flow offset against the $10.2 million 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 (2015: $nil).
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107
Group financial statements
Notes to the consolidated financial statements
continued
36. Movement in net borrowings
2016 2015
$’000 $’000
Change in net borrowings resulting from cash flows:
Decrease in cash and cash equivalents 8,874 (316)
Net increase in bank borrowings (3,935) (20,706)
Increase in related party borrowings (12,469) –
(7,530) (21,022)
Issue of sterling notes – (4,086)
Issue of US dollar notes (345) –
Amortisation of sterling notes expenses (318) (109)
Amortisation of US dollar notes expenses (266) (165)
(8,459) (25,382)
Currency translation differences 2,036 (2,686)
Net borrowings at beginning of year (198,686) (170,618)
Net borrowings at end of year (205,109) (198,686)
37. Retirement benefit obligations
United Kingdom
The company is the principal employer of the R.E.A. Pension Scheme (the “Scheme”) and a subsidiary company is a participating
employer. The Scheme is a multi-employer contributory defined benefit scheme with assets held in a trustee-administered fund,
which has participating employers outside the group. The Scheme is closed to new members.
As the Scheme is a multi-employer scheme, in which the employers are unable to identify their respective shares of the
underlying assets and liabilities (because there is no segregation of the assets), and does not prepare valuations on an IAS 19
basis, the group accounts for the Scheme as if it were a defined contribution scheme.
A non-IAS 19 valuation of the Scheme was last prepared, using the attained age method, as at 31 December 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 3.2 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 3.2 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 surplus 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.
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R.E.A. Holdings plc Annual Report and Accounts 2016
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. No contributions under that recovery plan were required to be made in 2016 or will be required
going forward (2015: £313,400 - $475,000) and the remaining provision for such contributions was credited to the group’s
2015 income statement.
The resultant net credit to administrative expenses relating to additional contributions to the Scheme pursuant to the recovery
plan was as follows:
2016 2015
$’000 $’000
Release of provision relating to additional contributions paid in the year – (475)
Additional contributions paid in the year – 475
Release of balance of provision relating to additional contributions no longer required – (2,267)
Net credit to administrative expenses (note 5) – (2,267)
The sensitivity of the surplus 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 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:
2016 2015
Discount rate (per cent) 8.45 9.14
Salary increases per annum (per cent) 6 6
Mortality table (Indonesia) (TM1) 111-2011 111-2011
Retirement age (years) 55 55
Disability rate (per cent of the mortality table) 10 10
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R.E.A. Holdings plc Annual Report and Accounts 2016
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:
2016 2015
$’000 $’000
Balance at 1 January 5,651 5,584
Current service cost 958 883
Interest expense 533 439
Actuarial loss recognised in statement of comprehensive income 571 489
Exchange 139 (569)
Paid during the year (815) (1,175)
Balance at 31 December (see note 28) 7,037 5,651
The amounts recognised in administrative expenses in the consolidated income statement were as follows:
2016 2015
$’000 $’000
Current service cost 958 883
Interest expense 533 439
1,491 1,322
Amount included as additions to property, plant and equipment (114) (110)
1,377 1,212
Estimated lump sum payments to Indonesian employees on retirement in 2017 are $519,000 (2016: $93,000).
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”.
2016 2015
$’000 $’000
Short term benefits 1,405 2,111
Post employment benefits – –
Other long term benefits – –
Termination benefits – –
Share based payments – –
1,405 2,111
As described in note 30 ordinary shares were placed with Emba Holdings Limited on 20 December 2016.
39. Rates of exchange
2016 2016 2015 2015
Closing Average Closing Average
Indonesian rupiah to US dollar 13,436 13,369 13,795 13,377
US dollar to sterling 1.2226 1.36 1.4832 1.53
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 2016
41. Resolution of competing rights over certain plantation areas
The fully titled land areas held by 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 2016 to $8.6 million (2015: $8.6
million), comprising prepaid operating lease rentals of $2.6 million (2015: $2.6 million) and infrastructural improvements of
$6.0 million (2015: $6.0 million).
Completion has been subject to the now successful resolution of certain due diligence queries in respect of PU (in particular
with regard to land titles) and the satisfaction of various Indonesian regulatory approvals, which are anticipated to be obtained
during the course of 2017.
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 ($11.6 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 sale
proceeds.
As at 31 December 2016 the aggregate outstanding balances owing by the three cooperatives to Bank BPD amounted to
Indonesian rupiah 121.4 billion ($9.0 million) (2015: Indonesian rupiah 122.6 billion - $8.9 million).
43. Operating lease commitments
The group leases premises under operating leases in London, Balikpapan, Samarinda and Singapore. These leases, which are
renewable, run for periods of between 6 months and 10 years, and do not include contingent rentals, or options to purchase the
properties.
The future minimum lease payments under operating leases are as follows:
2016 2015
$’000 $’000
Within one year 212 147
In the second to fifth year inclusive 1,062 111
After five years 996 –
2,270 258
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111
Group financial statements
Notes to the consolidated financial statements
continued
44. Reconciliation of change in accounting policy
Prior-year financial information has had to be re-stated as a result of a change explained in Accounting policies (group). The
following tables show the adjustments made accordingly to the balance sheet and income statement for the prior year.
Previously Adoption of
reported amended
31 December IAS 16 and 31 December
2015 IAS 41 2015 (restated)
Balance sheet $’000 $’000 $’000
Non-current assets
Goodwill 12,578 – 12,578
Biological assets 339,091 (339,091) –
Property, plant and equipment 155,642 313,208 468,850
Prepaid operating lease rentals 34,295 – 34,295
Stone and coal interests 35,338 – 35,338
Deferred tax assets 15,787 (118) 15,669
Non-current receivables 1,395 – 1,395
Total non-current assets 594,126 (26,001) 568,125
Current assets
Inventories 11,190 – 11,190
Biological assets – 2,105 2,105
Investments 2,158 – 2,158
Trade and other receivables 29,103 – 29,103
Cash and cash equivalents 15,758 – 15,758
Total current assets 58,209 2,105 60,314
Total assets 652,335 (23,896) 628,439
Current liabilities
Trade and other payables (27,025) – (27,025)
Current tax liabilities (3,406) – (3,406)
Bank loans (50,906) – (50,906)
Other loans and payables (93) – (93)
Total current liabilities (81,430) – (81,430)
Non-current liabilities
Bank loans (72,034) – (72,034)
Sterling notes (55,853) – (55,853)
US dollar notes (33,637) – (33,637)
Deferred tax liabilities (92,168) 6,063 (86,105)
Other loans and payables (5,558) – (5,558)
Total non-current liabilities (259,250) 6,063 (253,187)
Total liabilities (340,680) 6,063 (334,617)
Net assets 311,655 (17,833) 293,822
Equity
Share capital 120,288 – 120,288
Share premium account 30,683 – 30,683
Translation reserve (46,282) – (46,282)
Retained earnings 204,429 (16,948) 187,481
309,118 (16,948) 292,170
Non-controlling interests 2,537 (885) 1,652
Total equity 311,655 (17,833) 293,822
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R.E.A. Holdings plc Annual Report and Accounts 2016
44. Reconciliation of change in accounting policy - continued
Previously Adoption of
reported amended
31 December IAS 16 and 31 December
2014 IAS 41 2014 (restated)
Balance sheet $’000 $’000 $’000
Non-current assets
Goodwill 12,578 – 12,578
Biological assets 310,175 (310,175) –
Property, plant and equipment 151,172 307,924 459,096
Prepaid operating lease rentals 33,879 – 33,879
Stone and coal interests 31,334 – 31,334
Deferred tax assets 8,909 – 8,909
Non-current receivables 2,749 – 2,749
Total non-current assets 550,796 (2,251) 548,545
Current assets
Inventories 16,180 – 16,180
Biological assets – 2,251 2,251
Trade and other receivables 25,487 – 25,487
Cash and cash equivalents 16,224 – 16,224
Total current assets 57,891 2,251 60,142
Total assets 608,687 – 608,687
Current liabilities
Trade and other payables (17,818) – (17,818)
Current tax liabilities (2,581) – (2,581)
Bank loans (40,326) – (40,326)
Sterling notes (14,693) – (14,693)
Hedging instruments (9,590) – (9,590)
Other loans and payables (1,238) – (1,238)
Total current liabilities (86,246) – (86,246)
Non-current liabilities
Bank loans (60,638) – (60,638)
Sterling notes (37,713) – (37,713)
US dollar notes (33,472) – (33,472)
Deferred tax liabilities (77,191) – (77,191)
Other loans and payables (6,802) – (6,802)
Total non-current liabilities (215,816) – (215,816)
Total liabilities (302,062) – (302,062)
Net assets 306,625 – 306,625
Equity
Share capital 112,974 – 112,974
Share premium account 23,366 – 23,366
Translation reserve (44,324) – (44,324)
Retained earnings 212,928 – 212,928
304,944 – 304,944
Non-controlling interests 1,681 – 1,681
Total equity 306,625 – 306,625
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113
Group financial statements
Notes to the consolidated financial statements
continued
44. Reconciliation of change in accounting policy - continued
Previously Adoption of
reported amended
31 December IAS 16 and 31 December
2015 IAS 41 2015 (restated)
Income statement $’000 $’000 $’000
Revenue 90,515 – 90,515
Net gain / (loss) arising from changes in fair value of
agricultural produce inventory (1,147) – (1,147)
Cost of sales:
Depreciation and amortisation (11,104) (10,572) (21,676)
Other costs (61,302) (146) (61,448)
Gross profit 16,962 (10,718) 6,244
Net gain arising from changes in fair value of
biological assets 13,060 (13,060) –
Other operating income 2 – 2
Distribution costs (1,097) – (1,097)
Administrative expenses (11,702) – (11,702)
Operating profit / (loss) 17,225 (23,778) (6,553)
Investment revenues 259 – 259
Finance costs (5,951) – (5,951)
Profit / (loss) before tax 11,533 (23,778) (12,245)
Tax (6,631) 5,945 (686)
Profit / (loss) for the year 4,902 (17,833) (12,931)
Cash flow
Cash flow from operating, investing and financing activities is unaffected by the change of accounting policy.
114
R.E.A. Holdings plc Annual Report and Accounts 2016
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115
Company financial statements
Company balance sheet
as at 31 December 2016
2016 2015
Note $’000 $’000
Non-current assets
Investments (iv) 269,827 270,489
Deferred tax assets (v) 929 978
Non-current receivables – 51
Total non-current assets 270,756 271,518
Current assets
Trade and other receivables (vi) 26,146 15,859
Cash and cash equivalents (vii) 614 278
Total current assets 26,760 16,137
Total assets 297,516 287,655
Current liabilities
Trade and other payables (viii) (4,627) (1,069)
US dollar notes (ix) (20,048) –
Amount owed to group undertaking (x) (13,765) –
Total current liabilities (38,440) (1,069)
Non-current liabilities
US dollar notes (ix) (23,646) (33,637)
Amount owed to group undertaking (x) (38,944) (63,944)
Total non-current liabilities (62,590) (97,581)
Total liabilities (101,030) (98,650)
Net assets 196,486 189,005
Equity
Share capital (xi) 121,426 120,288
Share premium account (xii) 42,585 30,683
Exchange reserve (xii) (4,300) (4,300)
Profit and loss account (xii) 36,775 42,334
Total equity 196,486 189,005
The company reported a loss in the financial year ended 31 December 2016 of $2.2 million (2015: loss $2.8 million).
Approved by the board on 27 April 2017 and signed on behalf of the board.
DAVID J BLACKETT
Chairman
116
R.E.A. Holdings plc Annual Report and Accounts 2016
Company financial statements
Company statement of changes in equity
for the year ended 31 December 2016
Share Share Exchange Profit Total
capital premium reserve and loss
Note $’000 $’000 $’000 $’000 $’000
At 1 January 2015 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
Total comprehensive income (xii) – – – 1,843 1,843
Issue of new ordinary shares (cash) (xi) 1,138 11,902 – – 13,040
Dividends to preference shareholders (iii) – – – (7,402) (7,402)
At 31 December 2016 121,426 42,585 (4,300) 36,775 196,486
There are no gains or losses other than those recognised in the profit and loss account.
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117
Company financial statements
Company cash flow statement
for the year ended 31 December 2016
2016 2015
Note $’000 $’000
Net cash (outflow) / inflow from operating activities (xiv) (6,925) 427
Investing activities
Interest received 7,592 6,952
Dividends and other distributions received from subsidiaries (xvi) 4,028 –
Repayment of loans by subsidiary companies * – 5,242
New loans made to subsidiary companies * (8,033) (19,787)
Further investment in stone and coal interests (1,860) (3,968)
Net cash used in investing activities 1,727 (11,561)
Financing activities
Preference dividends paid (iii) (7,402) (8,461)
Ordinary dividends paid (iii) – (4,168)
Proceeds of issue of ordinary shares, less costs of issue 13,040 6,793
Proceeds of issue of preference shares, less costs of issue – 7,838
Proceeds of issue of US dollar notes, less costs of issue (44) –
Redemption of US dollar notes (ix) (45) –
New loans from subsidiary company – 8,709
Net cash from financing activities 5,549 10,711
Cash and cash equivalents
Net increase / (decrease) in cash and cash equivalents 351 (423)
Cash and cash equivalents at beginning of year 278 728
Effect of exchange rate changes (15) (27)
Cash and cash equivalents at end of year (vii) 614 278
* Excluding amounts dealt with within “Further investment in stone and coal interests”
118
R.E.A. Holdings plc Annual Report and Accounts 2016
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 23 to the
consolidated financial statements.
The company financial statements are set out on pages 116
to 128.
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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119
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 119, 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
2016 2015
$’000 $’000
Amounts recognised as distributions to equity holders:
Preference dividends of 9p per share (2015: 9p per share) 7,402 8,461
Ordinary dividends (2015: 7.75p per share) – 4,168
7,402 12,629
Investments
(iv)
2016 2015
$’000 $’000
Shares in subsidiaries 91,775 91,775
Loans 178,052 178,714
269,827 270,489
The movements were as follows:
Shares Loans
$’000 $’000
At 1 January 2015 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
Additions to loans – 10,846
Effect of exchange – (11,508)
At 31 December 2016 91,775 178,052
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R.E.A. Holdings plc Annual Report and Accounts 2016
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 80.8
PT Kartanegara Kumala Sakti (Indonesia) Plantation agriculture Ordinary 80.8
PT KCC Resources Indonesia (Indonesia) Stone and coal operations Ordinary 80.8
PT Kutai Mitra Sejahtera (Indonesia) Plantation agriculture Ordinary 80.8
PT Persada Bangun Jaya (Indonesia) Plantation agriculture Ordinary 80.8
PT Putra Bongan Jaya (Indonesia) Plantation agriculture Ordinary 80.8
PT REA Kaltim Plantations (Indonesia) Plantation agriculture Ordinary 85
PT Sasana Yudha Bhakti (Indonesia) Plantation agriculture Ordinary 80.8
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 2015 978
Credit to income for the year –
Effect of change in tax rate –
Effect of exchange –
At 31 December 2015 978
Charge to income for the year –
Effect of change in tax rate (49)
Effect of exchange –
At 31 December 2016 929
There were no deferred tax liabilities at 1 January 2015, 31 December 2015 or 31 December 2016.
At the balance sheet date, the company had unused tax losses of $4.9 million (2015: $4.9 million) available to be applied
against future profits. A deferred tax asset of $929,000 (2015: $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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121
Company financial statements
Notes to the company financial statements (continued)
Trade and other receivables
(vi)
2016 2015
$’000 $’000
Trade debtors – –
Amount owing by group undertakings 26,035 15,267
Other debtors 88 567
Prepayments and accrued income 23 25
26,146 15,859
The directors consider that the carrying amount of trade and other receivables approximates their fair value. The amounts
owing by group undertakings are non-interest bearing and repayable on demand.
(vii) Cash and cash equivalents
Cash and cash equivalents comprise short-term bank deposits. The Moody’s prime ratings of these deposits amounting to
$614,000 (2015: $278,000) is set out in note 23 to the consolidated financial statements under the heading “Credit risk”.
(viii) Trade and other payables
2016 2015
$’000 $’000
Amount owing to group undertakings 561 651
Other creditors 442 90
Accruals 3,624 328
4,627 1,069
The directors consider that the carrying amount of trade and other payables approximates their fair value. The amounts owing
to group undertakings are non-interest bearing and repayable on demand.
(ix) US dollar notes
The US dollar notes comprise $20.2 million (2015: $34.0 million) nominal of 7.5 percent dollar notes 2017 (“2017 dollar
notes”) and $24.0 million (2015: nil) nominal of 7.5 percent dollar notes 2020 (“2020 dollar notes”). The 2017 dollar notes are
repayable on 30 June 2017 and the 2020 dollar notes on 30 June 2020.
Pursuant to proposals made in November 2016 to holders of the 2017 dollar notes, $13.8 million of such notes were
exchanged on 24 November 2016 for a like amount of 2022 dollar notes, and at the same time a further $225,000 of 2022
dollar notes were issued to holders of $45,000 of 2017 dollar notes who subscribed in cash $180,000 under the top-up
provisions of the exchange proposals. In addition, R.E.A. Services Limited, a wholly owned subsidiary of the company, subscribed
a further $10.0 million of 2022 dollar notes pursuant to the placing.
The US dollar notes are unsecured obligations of the company and are stated net of the unamortised balance of the note
issuance costs.
(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 ($13.8 million) is repayable in December 2017, the second loan of £31.9 million ($38.9 million) is repayable in
August 2020.
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R.E.A. Holdings plc Annual Report and Accounts 2016
(xi) Share capital
2016 2016
£’000 £’000
Authorised (in sterling):
85,000,000 – 9 per cent cumulative preference shares of £1 each (2015: 75,000,000) 85,000 75,000
50,000,000 – ordinary shares of 25p each (2015: 41,000,000) 12,500 10,250
97,500 85,250
$’000 $’000
Issued and fully paid (in US dollars):
63,641,232 – 9 per cent cumulative preference shares of £1 each (2015: 63,641,232) 105,414 105,414
40,509,529 – ordinary shares of 25p each (2015: 36,839,529) 17,013 15,875
132,500 – ordinary shares of 25p each held in treasury (2015: 132,500) (1,001) (1,001)
121,426 120,288
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 20 December 2016 3,670,000 ordinary shares were issued, credited as fully paid, by way of placing at £2.95 per
share (total consideration £10.8 million - $13.4 million) to Mirabaud Pereire Nominees Limited and Emba Holdings
Limited (a related party). The middle market price at close of business on 14 December 2016 (being the date at which
the terms of issue were fixed) was £2.94
There have been no changes in ordinary shares held in treasury during the year.
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123
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 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
At 1 January 2016 30,683 (4,300) 42,334
Total comprehensive income – – 1,843
Dividends to preference shareholders – – (7,402)
Issue of ordinary shares (cash) 12,289 – –
Costs of issues (387) – –
At 31 December 2016 42,585 (4,300) 36,775
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
$2.2 million (2015: loss $2.8 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 23 to the consolidated financial statements. Loans from group undertakings are not included in the consolidated
financial statements but are considered to be level 3 in the hierarchy due to the lack of observable market data available. The
table below provides an analysis of the book and fair values of financial instruments excluding trade receivables and trade
payables at the balance sheet date.
2016 2016 2015 2015
Book value Fair value Book value Fair value
$’000 $’000 $’000 $’000
Cash and cash equivalents 614 614 278 278
US dollar notes - repayable 2017 (20,048) (20,206) (33,637) (31,290)
US dollar notes - repayable 2022 (23,646) (24,035) – –
Loan from REA Finance B.V. - repayable 2017 (13,765) (13,765) (16,699) (16,699)
Loan from REA Finance B.V. - repayable 2020 (38,944) (38,944) (47,243) (47,243)
Net debt (95,789) (96,336) (97,301) (94,954)
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 2016
The company finances its operations through a mixture of share capital, retained profits, loans from a group undertaking,
borrowings in US dollars at fixed rates and credit from suppliers. At 31 December 2016, the company had outstanding $20.2
million nominal (2015: $34 million) of 7.5 per cent dollar notes 2017 and $24.0 million (2015: nil) of 7.5 per cent dollar notes
2022.
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
2016, 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 (2015: $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
2016 % $’000 $’000 $’000 $’000
US dollar notes - repayable 2017 8.5 21,813 – – 21,813
US dollar notes - repayable 2022 8.5 901 1,803 30,344 33,048
Loan from REA Finance.B.V. - repayable 2017 9.7 15,215 – – 15,215
Loan from REA Finance B.V. - repayable 2020 8.9 3,504 3,506 46,382 53,392
41,433 5,309 76,726 123,468
Weighted Under Between Over 2 Total
average 1 year 1 and 2 years
interest rate years
2015 % $’000 $’000 $’000 $’000
US dollar notes - repayable 2017 8.5 2,551 35,286 – 37,837
Loan from REA Finance B.V. - repayable 2017 9.7 1,619 13,975 – 15,594
Loan from REA Finance B.V. - repayable 2020 8.9 4,225 4,222 60,004 68,451
8,395 53,483 60,004 121,822
At 31 December 2016, the company’s non-derivative financial assets (other than receivables) comprised cash and deposits of
$614,000 (2015: $278,000) carrying a weighted average interest rate of nil per cent (2015: nil per cent) all having a maturity
of under one year and loans (including Indonesian stone and coal interests) of $39,028,000 (2015: $37,200,000).
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125
Company financial statements
Notes to the company financial statements (continued)
(xiv) Reconciliation of operating loss to operating cash flows
2016 2015
$’000 $’000
Operating loss (225) (57)
Amortisation of US dollar note issue expenses 266 166
Operating cash inflows before movements in working capital 41 109
(Increase) / decrease in receivables (1,599) 8,754
Increase in payables 3,474 313
Exchange translation differences 103 246
Cash outflow from operations 2,019 9,422
Taxes paid (982) (903)
Interest paid (7,962) (8,092)
Net cash (outflow) / inflow from operating activities (6,925) 427
(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 group accounts for the Scheme as if it were a defined contribution scheme.
A non-IAS 19 valuation of the Scheme was last prepared, using the attained age method, as at 31 December 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 3.2 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 3.2 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 surplus 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. No contributions under that recovery plan were required in 2016 nor will be required going
forward. The company made no payments to the Scheme in 2016 (2015: $nil).
There are no agreed allocations of any surplus 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 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 and, therefore, no provision has been
made.
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R.E.A. Holdings plc Annual Report and Accounts 2016
(xvi) Related party transactions
2016 2015
Loans to subsidiaries $’000 $’000
PT Cipta Davia Mandiri 14,561 6,528
PT KCC Resources Indonesia 12,622 12,622
Makassar Investments Limited 14,216 425
REA Finance B.V. 3,008 3,649
PT REA Kaltim Plantations 70,531 89,101
R.E.A. Services Limited 24,086 29,220
139,024 141,545
2016 2015
Dividends received from subsidiaries $’000 $’000
R.E.A. Services Limited 4,028 –
4,028 –
2016 2015
Interest received from subsidiaries $’000 $’000
PT Cipta Davia Mandiri 417 410
REA Finance B.V. 283 322
PT REA Kaltim Plantations 6,612 5,951
7,312 6,683
Placing with related party
As described in note (xi) ordinary shares were placed with Emba Holdings Limited on 20 December 2016.
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”.
2016 2015
$’000 $’000
Short term benefits 1,405 2,111
1,405 2,111
There is no remuneration other than short term benefits.
(xvii) Rates of exchange
See note 39 to the consolidated financial statements.
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127
Company financial statements
Notes to the company financial statements (continued)
(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 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 $126 million (2015: $123 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 (xv) above.
Operating leases
The company has an annual commitment under an operating lease of $199,000 (2015: $157,000). The commitment expires
after ten years (2015: 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:
2016 2015
$’000 $’000
Within one year 113 157
In the second to fifth year inclusive 797 –
After five years 996 –
1,906 157
(xix) Post balance sheet events
There have been no material post balance sheet events that would require disclosure or adjustment to these financial
statements.
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129
Notice of annual general meeting
This notice is important and requires your immediate attention. If
8.
To re-appoint Deloitte LLP, chartered accountants, as auditor of
you are in any doubt as to what action to take, you should
the company to hold office until the conclusion of the next
consult your stockbroker, solicitor, accountant or other
annual general meeting of the company at which accounts are
appropriate independent professional adviser authorised under
laid before the meeting.
the Financial Services and Markets Act 2000 if you are resident
in the United Kingdom or, if you are not so resident, another
9.
To authorise the directors to fix the remuneration of the auditor.
appropriately authorised independent adviser. If you have sold or
otherwise transferred all your ordinary shares in R.E.A. Holdings
10.
That the company is generally and unconditionally authorised for
plc, please forward this document and the accompanying form of
the purposes of section 701 of the Companies Act 2006 to
proxy to the person through whom the sale or transfer was
make market purchases (within the meaning of section 693(4)
effected, for transmission to the purchaser or transferee.
of the Companies Act 2006) of any of its ordinary shares on
such terms and in such manner as the directors may from time
Notice is hereby given that the fifty-seventh annual general meeting of
to time determine provided that:
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 13 June
(a)
the maximum number of ordinary shares which may be
2017 at 10.00 am to consider and, if thought fit, to pass the following
purchased is 5,000,000 ordinary shares;
resolutions. Resolutions 13 and 14 will be proposed as special
resolutions and resolution 3 will be dealt with as special business; all
(b)
the minimum price (exclusive of expenses, if any) that
other resolutions will be proposed as ordinary resolutions.
may be paid for each ordinary share is £1.00;
1.
To receive the company’s annual accounts for the financial year
(c)
the maximum price (exclusive of expenses, if any) that
ended 31 December 2016, together with the accompanying
may be paid for each ordinary share is an amount equal to
statements and reports including the auditor’s report.
the higher of: (i) 105 per cent of the average of the
middle market quotations for the ordinary shares in the
2.
To approve the directors’ remuneration report for the financial
capital of the company as derived from the Daily Official
year ended 31 December 2016.
List of the London Stock Exchange for the five business
days immediately preceding the day on which such share
3.
To approve, for the purposes of section 226C(1)(b) of the
is contracted to be purchased and (ii) the higher of the
Companies Act 2006, the making of the Loss of Office Payment
last independent trade and the current highest
(as defined and described under “Resignation of Mark Parry” in
independent bid on the London Stock Exchange; and
the Directors’ report) and to authorise the directors to do all acts
and things that they may reasonably consider necessary or
(d)
unless previously renewed, revoked or varied, this
desirable in connection with the same.
authority shall expire at the conclusion of the annual
general meeting of the company to be held in 2018 (or, if
4.
To elect as a director Carol Gysin, who having been appointed an
earlier, on 30 June 2018)
executive director of the company on 21 February 2017, retires
in accordance with the articles of association and submits
provided further that:
herself for election.
5.
To elect as a director Michael St. Clair-George, who, having been
maximum number of ordinary shares that may be bought
appointed a non-executive director of the company during 2016,
back and held in treasury at any one time is 400,000
retires in accordance with the articles of association and submits
ordinary shares; and
(i)
notwithstanding the provisions of paragraph (a) above, the
himself for election.
6.
To re-elect as a director John Oakley, who, having become a
company may, before this authority expires, make a
non-executive director at the beginning of 2016 and having
contract to purchase ordinary shares that would or might
served for more than nine years as a director, retires as required
be executed wholly or partly after the expiry of this
by the UK Corporate Governance Code and submits himself for
authority, and may make purchases of ordinary shares
re-election.
pursuant to it as if this authority had not expired.
(ii)
notwithstanding the provisions of paragraph (d) above, the
7.
To re-elect as a director Richard Robinow, who, having been a
11.
That the directors be and are hereby generally and
non-executive director for more than nine years, retires as
unconditionally authorised for the purposes of section 551 of
required by the UK Corporate Governance Code and submits
the Companies Act 2006 (the “Act”) to exercise all the powers of
himself for re-election.
the company to allot, and to grant rights to subscribe for or to
convert any security into, shares in the capital of the company
(other than 9 per cent cumulative preference shares) up to an
130
R.E.A. Holdings plc Annual Report and Accounts 2016
aggregate nominal amount (within the meaning of sub-sections
therein or, if the directors consider it necessary, as
(3) and (6) of section 551 of the Act) of £2,372,617; such
permitted by the rights of those securities) but subject in
authorisation to expire at the conclusion of the next annual
each case to such exclusions or other arrangements as
general meeting of the company (or, if earlier, on 30 June 2018),
the directors may consider necessary or appropriate to
save that the company may before such expiry make any offer or
deal with fractional entitlements, treasury shares (other
agreement which would or might require shares to be allotted, or
than treasury shares being sold), record dates or legal,
rights to be granted, after such expiry and the directors may allot
regulatory or practical difficulties which may arise under
shares, or grant rights to subscribe for or to convert any security
the laws of any territory or the requirements of any
into shares, in pursuance of any such offer or agreement as if
regulatory body or stock exchange in any territory
the authorisations conferred hereby had not expired.
whatsoever; and
12.
That the directors be and are hereby generally and
(ii)
otherwise than as specified at paragraph (i) of this
unconditionally authorised for the purposes of section 551 of
resolution, to the allotment of equity securities and the
the Companies Act 2006 (the “Act”) to exercise all the powers of
sale of treasury shares up to an aggregate nominal
the company to allot, and to grant rights to subscribe for or to
amount (calculated, in the case of the grant of rights to
convert any security into, 9 per cent cumulative preference
subscribe for, or convert any security into, shares in the
shares in the capital of the company (“preference shares”) up to
capital of the company, in accordance with sub-section
an aggregate nominal amount (within the meaning of sub-
(6) of section 551 of the Act) of £1,009,425
sections (3) and (6) of section 551 of the Act) of £21,358,768,
such authorisation to expire at the conclusion of the next annual
and shall expire at the conclusion of the next annual general
general meeting of the company (or, if earlier, on 30 June 2018),
meeting of the company (or, if earlier, on 30 June 2018), save
save that the company may before such expiry make any offer or
that the company may before such expiry make any offer or
agreement which would or might require preference shares to be
agreement which would or might require equity securities to be
allotted or rights to be granted, after such expiry and the
allotted, or treasury shares to be sold, after such expiry and the
directors may allot preference shares, or grant rights to
directors may allot equity securities or sell treasury shares, in
subscribe for or to convert any security into preference shares, in
pursuance of any such offer or agreement as if the power
pursuance of any such offer or agreement as if the
conferred hereby had not expired.
authorisations conferred hereby had not expired.
13.
That the directors be and are hereby given power:
general meeting may be called on not less than 14 clear days’
14.
That a general meeting of the company other than an annual
notice.
By order of the board
R.E.A. SERVICES LIMITED
Secretary
27 April 2017
Registered office:
First Floor
32 – 36 Great Portland Street
London W1W 8QX
Registered in England and Wales no: 00671099
(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 2017 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
company as treasury shares for cash.
as if section 561 of the Act did not apply to the allotment or sale,
provided that such powers shall be limited:
(i)
to the allotment of equity securities for cash in connection
with a rights issue or open offer in favour of holders of
ordinary shares and to the sale of treasury shares by way
of an invitation made by way of rights to holders of
ordinary shares, in each case in proportion (as nearly as
practicable) to the respective numbers of ordinary shares
held by them on the record date for participation in the
rights issue, open offer or invitation (and holders of any
other class of equity securities entitled to participate
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R.E.A. Holdings plc Annual Report and Accounts 2016
131
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”, ”Resignation of Mark Parry”,
procedures described in the CREST Manual (available via
“Acquisition of the company’s own shares”, “Authorities to allot
www.euroclear.com/CREST) subject to the company’s articles of
share capital”, “Authority to disapply pre-emption rights”,
association. CREST personal members or other CREST sponsored
“General meeting notice period” and “Recommendation” contain
members, and those CREST members who have appointed (a) voting
information regarding, and recommendations by the board of the
service provider(s), should refer to their CREST sponsor or voting
company as to voting on, resolutions 3 to 7 and 10 to 14 set out
service provider(s), who will be able to take the appropriate action on
above in this notice of the 2017 annual general meeting of the
their behalf.
company (the “2017 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
close of business on 11 June 2017 or, in the event of any adjournment,
required information as described in the CREST Manual (available via
at close of business on the date which is two days before the day of the
www.euroclear.com/CREST). The CREST proxy instruction, regardless
adjourned meeting. Changes to entries on the register of members
of whether it constitutes a proxy appointment or an instruction to
after this time shall be disregarded in determining the rights of any
amend a previous proxy appointment, must, in order to be valid be
person to attend or vote at the meeting.
transmitted so as to be received by the company’s registrars (ID: RA10)
by 10.00 am on 11 June 2017. 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 11 June 2017.
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.signalshares.com (and so that
voting service provider(s) take(s)) such action as shall be necessary to
the appointment is received by the service by no later than 10.00 am on
ensure that a message is transmitted by means of the CREST system
11 June 2017) or the CREST electronic proxy appointment service as
by any particular time. In this connection, CREST members and, where
described below. Shareholders who have not already registered for
applicable, their CREST sponsors or voting service provider(s) are
Capita’s share portal may do so by registering as a new user at
referred, in particular, to those sections of the CREST Manual
www.signalshares.com and giving the investor code shown on the
concerning practical limitations of the CREST system and timings.
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.
132
R.E.A. Holdings plc Annual Report and Accounts 2016
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 2017 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 2017 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 2017 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 2017 Notice, the issued share capital of the
company comprises 40,509,529 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 40,377,029 as at the date of this 2017
Notice.
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R.E.A. Holdings plc Annual Report and Accounts 2016
133
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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)
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