M.P. Evans Group plc Annual Report 2017

Plain-text annual report

A N N U A L R E P O R T For the year ended 31 December 2017 s t n e m e t a t S l a i c n a n i F & t r o p e R l a u n n A 7 1 0 2 CONTENTS 1 Group financial highlights 2 Chairman’s statement 6 Operational highlights and map 8 The Group’s business model 10 The palm-oil market STRATEGIC REPORT 13 Strategy 14 Results and financial position 16 Operations: Indonesian palm oil 24 Operations: Malaysian property 26 Risk management SUSTAINABILITY 31 Approach 33 Zero waste and zero burning 34 Communities 35 Conservation and new land REPORT OF THE DIRECTORS 36 Board of Directors 42 Corporate governance 46 Directors' remuneration report FINANCIAL STATEMENTS 49 Independent auditors’ report to the members of M.P. Evans Group PLC 57 Consolidated income statement 59 Consolidated balance sheet 61 Consolidated cash-flow statement 62 Notes to the consolidated accounts PARENT COMPANY 84 Parent-Company balance sheet 86 Notes to the parent-Company accounts OTHER INFORMATION 90 Subsidiary and associated undertakings 91 Analysis of Indonesian plantation land areas 92 Analysis of Group equity value 93 Five-year summary 94 Notice and venue of meeting 96 Officers, professional advisers and representatives M.P. Evans aspires to the quality of its output and management of its plantations being regarded as a reference point for the industry. “ The Group is able to report a record year for crops, production and profit, with operating profit increasing by 72% to US$34.0 million. ” Peter Hadsley-Chaplin  Read more in the Chairman’s statement on pages 2 to 4  Read more on the Group’s commitment to sustainability on pages 30 to 35 GROUP FINANCIAL HIGHLIGHTS GROUP FINANCIAL HIGHLIGHTS 39%REVENUE 49%GROSS PROFIT 2017 US$ 116.5m 2016 US$ 83.9m 2017 US$ 36.2m 2016 US$ 24.4m 72%OPERATING PROFIT 2017 US$ 34.0m 2016 US$ 19.7m 168%PROFIT FOR THE YEAR 2017 US$ 94.4m 2016 US$ 35.3m 20%TOTAL EQUITY 2017 US$ 414.0m 2016 US$ 344.2m 31%OPERATING CASH GENERATED 2017 US$ 41.2m 2016 US$ 31.3m 83%CONTINUING BASIC EARNINGS PER SHARE 2017 40.7 US cents 2016 22.3 US cents 18%NORMAL DIVIDEND PER SHARE 2017 17.75 pence 2016 15.00 pence Profit for the year US$94.4 million (2016 US$35.3 million) Operating profit up 72% to US$34.0 million Profit on discontinued operations US$68.0 million Continuing EPS 40.7 US cents (2016 – 22.3 US cents) Reduction in Malaysian property-development profit Proposed final dividend of 12.75p per share 1 1 M.P. EVANS GROUP PLC ANNUAL REPORT 2017 CHAIRMAN’S STATEMENT The Group took a significant step forward in 2017, executing its strategy by acquiring a new 10,000-hectare project in East Kalimantan. 2 Peter Hadsley-Chaplin Chairman STRATEGIC DEVELOPMENTS In 2017, the Group consolidated its at a rate that does not compromise its ability to deliver the operational position as the producer of a single excellence for which it has become commodity in a single country: known. Acquisition of a new project Indonesian palm oil. It continues to would further increase future be the Group’s strategic objective to projected crop and CPO growth that expand its production of sustainable even now does not reach a peak until palm oil, in a controlled fashion, nearly the end of the next decade. from its own operations and those In addition, the Group continues to of its associated smallholder co- negotiate for smaller pieces of land operatives. Following the successful to add to its existing plantations at disposal, in 2016, of its Australian Kota Bangun in East Kalimantan, with cattle business and, in March 2017, a view to increasing this project from of its share of the substantial Agro its current total of 15,100 hectares Muko palm-oil joint venture, the towards 20,000 hectares. Group was able to announce, in August 2017, the acquisition of a new 10,000-hectare oil-palm project, PT Bumi Mas Agro (“Bumi Mas”). This was completed in December 2017. The Bumi Mas plantation consists mainly of young oil palms that will quickly contribute to the Group’s crop, crude palm oil (“CPO”) production and cash inflow. In Malaysia, 40 hectares of THE STRATEGY EXPLOITS THE GROUP’S EXCELLENT OPERATIONAL MANAGEMENT TEAM AND PROVEN TRACK RECORD OF ESTATE DEVELOPMENT AND IMPROVEMENT. valuable land from the golf course Even without a new acquisition, on the Bertam Properties Sdn Berhad growth in crop from land already project were approved for property planted, or available to plant, for the development. Group or its smallholders, underlies its commitment to deliver good and A strong balance sheet enables the improving results for shareholders. Group to continue searching for environmentally-suitable plantation land to acquire, in line with its RESULTS The Group is able to report a record strategy. The Group regards areas of year for crops, production and profit. around 10,000 hectares as being an efficient size but will only expand A marked increase in production of CPO in the face of very similar CHAIRMAN’S STATEMENT prices and cost of production led little higher than the US$700 in The board’s intention continues to to an increase in operating profit to 2016. Overall, the price weakened be to maintain or increase its normal US$34.0 million, a 72% increase during the year as supplies of palm dividend in future years. The board compared with US$19.7 million achieved oil increased in response to the believes the anticipated increase in 2016. Results from discontinued recovery in crops throughout South in yield from its young plantations operations, namely the Group’s East Asia after the El Niño. Towards and the acquisition of Bumi Mas Agro Muko palm-oil joint venture, the end of 2017, however, the CPO provide a basis for sustained future contributed another US$68.0 million price began to recover as stocks were crop growth and, hence, enhanced to the record profit for the year. rebuilt and the discount to other dividends. Total profit for the year amounted vegetable oils increased, making CPO to US$94.4 million. THE GROUP’S CROPS INCREASED BY 9% DURING 2017; THOSE OF ITS SMALL- HOLDER CO-OPERATIVES BY A SIMILAR AMOUNT. more attractive to buyers. The price for palm kernel oil, which directly OPERATIONAL DEVELOPMENTS The year saw good progress on affects the price of palm kernels sold planting. In total, the Group planted by the Group, was exceptionally high 2,200 hectares for itself and in January 2017. This level was not 1,000 hectares for its smallholder maintained and, after a marked dip co-operatives during the year. in the middle of the year, returned Planting in South Sumatra at to more normal levels during the Musi Rawas has built up good last quarter. On average, the price momentum. This area accounted This reflected strong growth in crops of palm kernels sold by the Group for 90% of the Group’s new planting during the first half of the year as the was very similar to that in 2016. The in the year as the estates at Kota palms recovered from the extreme Group was able to continue selling Bangun and Bangka are now dryness experienced in 2015-16, a its sustainable palm oil and palm essentially fully planted. The project consequence of an ‘El Niño’ weather kernels at a premium. at Musi Rawas reached 5,200 planted pattern in South East Asia. As typically occurs, the El Niño gave way to a period of high rainfall and, in some DIVIDEND An interim dividend of 5.00p per hectares, including smallholders, by the end of 2017. This is more than half way to the expected cases, temporary flooding. On the Group’s Kota Bangun estates, this share (2016 – 2.25p per share) was total of 10,000 hectares. In North paid on 3 November 2017. Above its Sumatra, the accelerated replanting meant the upturn in crops during the previously announced intention, programme referred to in previous first half of 2017 was not maintained the board is recommending a final reports continues. At the end of 2017, and this area recorded a small dividend of 12.75p per share (2016 including the purchase of Bumi Mas, reduction in crop for the year as a – 12.75p per share). This brings the Group’s share of subsidiaries’ whole compared with 2016. There was dividends in respect of normal land had increased by 37% to stand no such flooding on Bangka Island, where crops increased by nearly half operations to 17.75p per share (2016 – 15.00p per share), an at 33,000 hectares. during the year. Especially noteworthy 18% increase. is the strong increase in crops bought As noted in the Group’s Interim Report, high levels of rainfall in in from third parties, notably on The board paid a special dividend East Kalimantan led to the northern Bangka Island, enabling the Group to of 10.00p per share in April 2017 bund on the Kota Bangun estates make profitable use of spare capacity on completion of the sale of the being overrun. The bund has been in its mills. Overall, the Group Group’s interest in Agro Muko; a repaired and is being strengthened processed 20% more crop in 2017 than special dividend of 5.00p per share to prevent future breaches. Some in the previous year. The Pangkatan was paid in 2016. Hence, subject to 580 hectares of planting carried group benefited from less extreme shareholder approval, total dividends out in 2016 behind the bund had to variation in weather and an increase in respect of 2017 will amount to be replaced, delaying by 12 months in yield from recent replantings. 27.75p per share (2016 – 20.00p the point at which it will come The average price of CPO was US$714 per tonne during 2017, a payments to shareholders of more than US$20 million for the year. temporarily difficult to harvest the remaining low-lying areas. per share) resulting in dividend into harvesting. Flooding made it 3 3 CHAIRMAN’S STATEMENT continued Extraction of crude palm oil and palm during the year. Notwithstanding kernels from fresh fruit bunches (“ffb”) a decline in value of the US Dollar continued at good levels. There was against Sterling, the Group’s equity a small fall in extraction of CPO in valuation remains at approximately Kalimantan, to 24.7%. The Group £11 per share. monitors carefully the performance of its mills against others and this dip was experienced by all other PROSPECTS The Group’s crops are expected to operators in the region, a consequence continue rising, notably from its of high rainfall that followed the projects in East Kalimantan, Bangka El Niño. A similar small reduction Island and South Sumatra. The was experienced in the Pangkatan average age of the Group’s palms mill and in Bangka, although in the following the purchase of Bumi latter’s case this is attributable to Mas is now seven years. This young processing very high levels of third- average age is expected to give rise party ffb, which is not of the same to increasing crops as the palms quality as that produced by the Group mature from the Group’s existing or its smallholder co-operatives. In plantings and new planting on land it respect of extraction rates, the Group already controls, a trend that should continues to perform at a high level last for another decade. in comparison with its peers. World production of CPO grew strongly The Group is able to report a in 2017 as the most recent El Niño record year for CPO production, receded, putting some pressure on which reached 154,000 tonnes. prices and leading to an accumulation The significant increase over the of stocks. In the longer term, previous record of 126,000 tonnes, insufficient levels of replanting in achieved in 2016, was due in part Malaysia and Indonesia are likely to to the purchase of substantial curb growth in production. In the quantities of ffb from third parties in short term, uncertainty about the Bangka. This used spare capacity in world trading regime may lead to its mill which is temporarily available greater commodity-price volatility. until the Group’s own estates reach However, the board remains of the their maximum yields. The mills at view that palm oil is well placed to Kota Bangun in East Kalimantan and in Bangka continue to produce benefit from rising global demand for vegetable oil and, therefore, that the bio-electricity from methane and outlook remains positive. also valuable compost from empty bunches and mill effluent, which the Group uses in its ACKNOWLEDGEMENTS I should like to record the board’s operations. For the first time, in 2017, thanks to the Group’s managers, staff the Group began selling surplus and workers in all our operations power to the Indonesian state for their dedication and hard work electricity company. during what proved to be a very GROUP VALUATION Continuing development of the successful year. Peter Hadsley-Chaplin Group’s Indonesian plantations Chairman has enhanced their US Dollar value 9 April 2018 4 M.P. EVANS GROUP PLCANNUAL REPORT 2017CHAIRMAN’S STATEMENT OUR VALUES INTEGRITY The Group is a reliable partner and employer with a reputation for keeping its word and not tolerating any form of bribery or corruption. TEAMWORK We are open about our challenges and solve them together. EXCELLENCE The Group aspires to the quality of its output and management of its plantations being a reference point for the industry. 5 OPERATIONAL HIGHLIGHTS INDONESIAN PALM OIL Acquisition of new 10,000-hectare project (Bumi Mas) Group crops increased 9% to 435,000 tonnes Crop growth held back by flooding in East Kalimantan Record production of crude palm oil: up 23% to 154,000 tonnes New planting of 2,200 hectares for Group; 1,000 hectares for smallholders Planting at Musi Rawas reached 5,200 hectares: more than half way to expected total Sales begun of bio-electricity to Indonesian grid MALAYSIAN PROPERTY 40 hectares of golf-course land released for development Sale of 383 developed properties as property market slowed M.P. EVANS GROUP PLC Net current assets of US$92.4 million as at 31 December 2017 Group equity value of £10.96 per share at 31 December 2017 6 1. PANGKATAN GROUP 7,400 hectares Group planted area: 7,000 hectares Grouping of three estates (Pangkatan, Bilah, Sennah) whose fruit is processed in a 40-tonne mill built on Pangkatan in 2005. Combination of a long-established, mature (ex-rubber) oil-palm estate (Pangkatan), and land acquired or planted over the last 30 years (Bilah and Sennah). 5. MUSI RAWAS 10,000 hectares Group planted area: 3,600 hectares Smallholder co-operatives planted area: 1,600 hectares Located in South Sumatra province near the town of Lubuk Linggau, the project was started in 2012. Much had previously been planted with smallholders’ rubber, which had been abandoned. The Group began planting oil palm at the end of 2014, and harvesting started in 2017. 6. KOTA BANGUN ESTATES 16,000 hectares Group planted area: 10,600 hectares Smallholder co-operatives planted area: 4,500 hectares Located in East Kalimantan, close to Kota Bangun and next to the Mahakam River, the land was acquired in 2006. The first areas planted started production during 2010; a 60-tonne mill was commissioned in December 2012, and a second mill will be commissioned in 2019. M.P. EVANS GROUP PLCANNUAL REPORT 2017OPERATIONAL HIGHLIGHTS 2. KERASAAN Planted area: 2,300 hectares Group minority share: 38% Mature (ex-rubber) oil-palm estate near the town of Pematangsiantar in North Sumatra. Fresh fruit bunches are processed in the neighbouring Bukit Marajah mill, owned by the SIPEF Group - also the majority shareholder in Kerasaan. 3. SIMPANG KIRI Group planted area: 2,400 hectares 4. BANGKA 10,000 hectares Mature oil-palm estate in the province of Aceh, near the border with North Sumatra, which was acquired in the early 1980s. Fresh fruit bunches are processed in a nearby third-party mill. Group planted area: 6,000 hectares Smallholder co-operatives planted area: 3,800 hectares Located on the island of Bangka, the land was acquired in 2005. The first areas planted started production during 2009. A 45-tonne mill with composting facility and bio-gas plant was commissioned in May 2016. 8 3 Medan 2 Malaysia 1 Kuala Lumpur Singapore Sumatra 7 6 4 Bangka Island 5 Kalimantan Samarinda Indonesia Jakarta 7. BUMI MAS 10,000 hectares Group planted area: 7,500 hectares Smallholder co-operatives planted area: 1,400 hectares Located in East Kalimantan, north-east of Sangatta next to the Manubar River. The land was acquired in 2017. It was largely planted in 2012-14, with the first harvesting taking place during 2015. 8. BERTAM PROPERTIES AND BERTAM ESTATE Bertam Properties: 310 hectares (Group minority share: 40%) Bertam Estate: 70 hectares This land was previously the Group’s Bertam Estate, most of which was sold into a joint venture, Bertam Properties, with two Malaysian partners. Starting in 1992, the area has been developed into a new township. The remaining developable land amounts to 197 hectares. Both Bertam Estate and Bertam Properties have significant value as property-development land. 7 THE GROUP’S BUSINESS MODEL Producing sustainable Indonesian palm oil to deliver strong results and growing returns for shareholders. OUR MAIN RESOURCES PLANTATION LAND The Group’s plantation land is used to grow oil palms and harvest them to the fullest extent. 37,100 HECTARES OF GROUP OIL PALM RELATIONSHIPS WITH COMMUNITIES The Group engages with the local communities living on and near its operations and manages superlative smallholder schemes on their behalf. 11,300 HECTARES OF SMALLHOLDER OIL PALM PEOPLE The Group has nearly 5,000 employees, including 160 agronomic staff, 70 engineers and more than 2,500 harvesters. STABLE FUNDING The Group has a robust capital structure with a market capitalisation of more than US$580 million*, net funds of US$81 million and low levels of debt. 4,800 EMPLOYEES 0% NET GEARING *Based on a share price of 783p on 31 December 2017. OUTCOMES SUSTAINABLE PRODUCTION 85% CERTIFIED SUSTAINABLE 8 M.P. EVANS GROUP PLCANNUAL REPORT 2017 GROUP BUSINESS MODEL FOCUS ON OUR STRENGTH AS A PRODUCER OF SUSTAINABLE INDONESIAN PALM OIL The Group builds shareholder returns by exploiting the Group’s strengths as a producer of sustainable Indonesian palm oil to produce increasing crop, production and revenues. CONTROL OUR OPERATIONS The Group makes the most of its mature areas and maximises the potential of new areas by being in control of its operations. It makes use of the expertise concentrated in its Jakarta regional office. HOW WE OPERATE PROMOTE A PHILOSOPHY OF ZERO WASTE The Group turns its empty bunches into compost and generates electricity from methane collected from mill effluent. It establishes and maintains conservation areas and strictly adheres to environmental standards. DO A THOUSAND SMALL THINGS WELL, REPEATEDLY Even our most senior agronomic managers are resident in our operations, controlling a system of supervision and support that focuses on high agronomic and engineering standards. Staff in Jakarta and the UK are frequent visitors to the operations. MAKE SMALLHOLDER CO-OPERATIVES A SUCCESS The Group treats its smallholder co-operatives equally, planting, maintaining and harvesting land to the same standard as its own areas. As a result, smallholders own a valuable asset and identify their own success with the Group’s success. MAINTAIN STRONGLY INCREASING CROP Having young plantations underpins strong projected crop growth to the end of the 2020s because of the way oil palms increase yield as they mature. New planting or acquisition of young estates helps keep the average age low. GROWING PRODUCTION 154,000 TONNES OF CRUDE PALM OIL LOW AND FALLING COSTS US$ 370 PER TONNE OWN PALM PRODUCT IMPROVING RETURNS, RISING DIVIDENDS 27.75P TOTAL DIVIDEND FOR 2017 9 During 2017, the palm-oil market As a result of increasing production, was dominated by recovery from barring a rally in May, the price of CPO the 2015-16 El Niño weather pattern. fell during the first half of the year. It There was a marked increase in fell from the levels above US$800 per production by both Malaysia tonne at which it had started the year and Indonesia, which together as a rebound in production occurred accounted for 83% of world output following the end of the 2015-16 El of CPO, as average palm yields Niño. From the end of June, however, improved. The resulting fall in the the CPO price strengthened until the price of CPO stimulated demand, beginning of November, when it again resulting in greater imports notably experienced a setback before rising by India, China and the EU. in the last two weeks of December to World consumption of palm oil, finish the year at US$674 per tonne, according to Oil World, rose by 4% US$121 below its level on 1 January. to 65 million tonnes. Despite the fall in price between the beginning and end of the year, the The rebound in global production average price for CPO, cif Rotterdam surpassed increasing consumption, in 2017 was US$714, US$14 higher than leading to a rise in stocks. World it had been in 2016. stocks rose from relatively low levels, and notably in producing countries A shortage of palm kernel oil as well rather than in countries with as its main competitor, coconut oil, import demand. By the end of the drove prices to reach a five-year year, stocks stood at a little above high at the beginning of 2017. As 12 million tonnes, still somewhat production of both oils increased, below the level of 13.5 million the price of palm-kernel oil fell tonnes reached at the end of 2015. sharply even against the background Moreover, the stock:usage ratio for of increasing consumption, before CPO remained at a modest 13% in rising to establish a more normal the main importing countries of India level of discount against coconut oil and China. during the last quarter of the year. US$ per tonne cif Rotterdam THE PALM-OIL MARKET Recovery from the 2015-16 El Niño weather pattern Marked increase in Malaysian and Indonesian production World consumption of CPO increased 4% CRUDE PALM-OIL PRICE 1,000 900 800 700 600 500 400 2013 2014 2015 2016 2017 2018 10 Source: Oil World M.P. EVANS GROUP PLCANNUAL REPORT 2017WORLD CONSUMPTION OF PALM OIL DURING 2017 ROSE BY 4% TO 65 MILLION TONNES. MAIN PRODUCERS OF PALM OIL 2017 54% Indonesia Malaysia 29% Remaining 17% consists of Thailand (4%), Colombia (2%), Nigeria (1%), other countries (10%). Source: Oil World. MAIN CONSUMERS OF PALM OIL 2017 14% India 14% Indonesia 33% Other Asia 15% Africa 12% EU Remaining 12% consists of Americas (8%), other countries (4%). Source: Oil World. THE PALM-OIL MARKET 11 M.P. EVANS GROUP PLC ANNUAL REPORT 2017 STRATEGIC REPORT 2017 12 STRATEGIC REPORT STRATEGY The Group’s strategy is to maintain steady expansion of its majority-owned Indonesian palm-oil areas in a sustainable and cost-effective manner. The Group’s principal activity is operations extends to approximately economies of scale in production the ownership, management and 37,100 hectares. The smallholder areas and administration, and small development of sustainable oil-palm adjoining the new projects amount enough to allow the careful scrutiny estates in Indonesia, together with to 11,300 planted hectares. The by field management needed to the management and development of estimated unplanted land bank is maintain high standards. The Group’s smallholder areas attached to some some 3,500 hectares on the Group’s projects in Bangka, Bumi Mas and of those estates. The Group’s strategy estates and some 1,700 hectares Musi Rawas, including smallholder is to expand its principal activity and on the adjoining smallholder areas areas, are of this size. In Kota maintain a steady rate of growth in managed by the Group, mainly at Bangun, East Kalimantan, the board planted hectarage controlled by it. Musi Rawas in South Sumatra. It is is actively engaged in extending the Control enables the Group to deploy the board’s aim for these areas to be Group’s areas from the currently its operational expertise to greatest planted as rapidly as the availability projected 15,100 hectares to bring effect with the aim of generating of suitable land permits. When fully the project to the equivalent of two better returns to shareholders planted, and without taking account of 10,000-hectare units. During 2017, through a sustained increase in any future acquisitions, the combined the Group successfully acquired a dividends. It designs its operating Group and smallholder areas are 51% share in an area close to one of procedures to address the risks of likely to reach 53,000 hectares. In its Kota Bangun divisions, of which operating in Indonesia. The Group addition, the Group owns a 38% some 500 hectares are estimated to has confidence in both the palm-oil share of the 2,300-hectare Kerasaan be plantable on the Group’s account sector and Indonesia as an area estate in North Sumatra, which could and 100 hectares for its smallholder of operation to provide a basis for potentially be sold to finance the co-operative. Further areas are successfully delivering its strategy. expansion of majority-held areas, in being assessed for prospective line with its strategy. acquisition. In August 2017, the Group was able to announce the acquisition of a new The Group seeks continually to In Malaysia, the Group owns land 10,000-hectare oil-palm project, maintain and, where possible, with property-development potential, PT Bumi Mas Agro (“Bumi Mas”) which improve agronomic standards and as well as a significant minority share was completed in December 2017. This project was planted mainly in productivity on its estates, including investment to manage both excessive of a property-development company. In retaining these assets, the Group 2012-15 and so has a young average rainfall and dry spells, with a view to is maximising the opportunity for age of less than four years held under increasing crops of fresh fruit sharing in the increasing value a renewable 35-year Hak Guna Usaha bunches (“ffb”) and production of of property-development land (“HGU”) land license. These palms crude palm oil (“CPO”). In addition, it in Malaysia. However, both could will quickly contribute to the Group’s has ambitions to add to its portfolio potentially be sold to finance the crop, production and cash inflow. of estates to maintain its ability to Group’s strategic expansion of its The young age profile is expected to increase crop and future profits. Indonesian oil-palm hectarage. It is help sustain the projected rise in the the Group’s long-term intention to Group’s crop and production to the The Group is exploring the acquisition dispose of its property-development end of the next decade. of new land. Its experience is that assets in order to fund the acquisition Following the acquisition of Bumi mill able to process 60 tonnes of palm-oil projects and, in consequence, Mas, the total planted area of the Group’s majority-held Indonesian ffb per hour provides a unit, which is both big enough to provide ultimately to exit from Malaysia. 10,000 hectares of oil palm with a or development of new Indonesian 13 STRATEGIC REPORT continued RESULTS & FINANCIAL POSITION REVENUE AND GROSS PROFIT The Group’s revenue for 2017 was US$116.5 million, 39% higher than OTHER ADMINISTRATIVE EXPENSES The Group’s other administrative Malaysia The Group’s 40% associate, Bertam Properties Sdn Berhad (“Bertam the US$83.9 million achieved in expenses decreased to US$3.1 million Properties”), continued to develop 2016. This follows the substantial in the year (2016 US$4.9 million). In and sell properties profitably during increase in the Group’s production the previous year the Group incurred the year. Its golf-course subsidiary in the year: CPO and palm kernels professional fees of US$2.0 million reached a final agreement with its increased by 23% and 28% as shown responding to the unsuccessful, members to reduce the playing area on page 18. Sales increased by more unsolicited bid by the Malaysian from 36 holes to 18 holes, releasing than this due to falling inventory plantation company Kuala Lumpur valuable land for development. This of finished products during the Kepong Berhad to purchase the Group. entailed a compensation payment to year and, furthermore, the Group achieved a slightly higher sales price as described in the section on TAXATION The Group tax charge for the year was members, which, along with a lower sales volume in the year, resulted in a fall in the Group’s share of Bertam mill-gate price on pages 19 and 20. US$11.2 million (2016 US$7.5 million). Properties’ profit for the year to The Group’s effective tax rate is US$1.4 million (2016 US$3.8 million). Set against a background of higher than the standard rate mainly The Group received dividends of increased sales prices, the Group’s due to the higher rate of taxation US$1.9 million (2016 US$1.9 million). cost of production per tonne of palm borne by the Group’s subsidiary product (a combined measure for companies in Indonesia and the CPO and palm kernels) remained reduction in deferred tax assets PROFIT FOR THE YEAR As a result of the above, the Group’s at the same level to that in 2016 for resulting from the inability of the profit for the year increased to the Group as a whole, whether for Group to carry forward tax losses US$94.4 million (2016 US$35.3 million). its own ffb or for total production arising in its Indonesian subsidiaries including ffb purchased from indefinitely. smallholders and third parties. As a result of the above, the Group achieved a gross margin of US$190 ASSOCIATED COMPANIES Indonesia NET ASSETS AND BORROWING At the end of the year, the Group’s net assets were US$414.0 million (2016 US$344.2 million). Current per tonne (2016 US$183) on sales of The Group sold its 36.84% investment assets exceeded current liabilities CPO during the year, and gross profit in PT Agro Muko in March 2017. by US$92.4 million (2016 US$131.6 increased by 49% to US$36.2 million The Group’s share of profit on million). The decrease in net current (2016 US$24.4 million). disposal and profit up to the point assets was principally a result of the BIOLOGICAL ASSETS The Group has continued to apply of disposal together totalled US$68.0 million. This amount has been included in profit from Group making an initial payment in the acquisition of Bumi Mas. International Accounting Standard discontinued operations. 41 (“IAS 41”) in estimating a value for At the end of 2017, the Group had cash and liquid resources of US$120.8 its unharvested growing ffb for the The Group’s remaining Indonesian million (2016 US$105.7 million), of purposes of statutory reporting. The associate, PT Kerasaan (38% owned), which US$6.9 million had been Group has never included ffb prior to contributed US$1.2 million pledged as security. At this date the harvest in its internal reporting, and (2016 US$1.0 million) to Group profit Group had no net gearing, holding this item is not incorporated in the in the year, and the Group received positive net funds of US$81.4 million board’s decision-making. dividends of US$0.4 million (2016 US$75.3 million); gross gearing (2016 US$0.8 million) in the year. was 9% (2016 – 8%). 14 M.P. EVANS GROUP PLCANNUAL REPORT 2017STRATEGIC REPORT GROSS PROFIT +49% REVENUE +39% CRUDE PALM OIL PRODUCTION +23% PALM KERNEL PRODUCTION +28% Delivery of ffb to the loading ramp at the Bangka mill All figures shown are for 2017 results compared to 2016 results. 15 M.P. EVANS GROUP PLC ANNUAL REPORT 2017 OPERATIONS: INDONESIAN PALM OIL Harvesting mature palms at Rahayu Estate, Kota Bangun 16 CROPS The end of the 2015-16 El Niño weather pattern brought with it a sharp increase in crops as a more normal pattern of rainfall re-established itself. Overall, the Group’s crop increased by 9% during the year, that of its smallholder co-operatives by 10%. Crop from all the Group’s areas grew strongly during the first half of the year but two echoes of the El Niño, heavy rainfall and a pronounced phase of male flowering in the palms, notably in Kota Bangun (East Kalimantan), meant this rate of growth did not persist into the second half of the year. The acquisition of Bumi Mas occurred so late in the year that no crop was harvested between acquisition and the year end. The Group’s own crop was supplemented through significant purchase of crop from third parties, notably in Bangka. Here, the Group’s newest mill still has spare capacity whilst the Group’s own plantings continue to mature and so currently yield less than the levels that will be attained in time. The Group has very successfully sought to make profitable use of this spare capacity by purchasing crop from outside suppliers. Taking this into account, total crop processed by the Group rose by 20% to 654,000 tonnes. As noted in the Group’s interim report, the estates at Kota Bangun (East Kalimantan) suffered from severe flooding in the middle of the year, exacerbated by the project’s northern bund being breached in four places. Repairs were quickly carried out and water levels dropped to more normal levels. However, parts of the project are not yet protected by bunds and in these STRATEGIC REPORT CROP Own crops Kota Bangun, East Kalimantan Bangka Musi Rawas Pangkatan group Simpang Kiri Smallholder co-operative crops Kota Bangun, East Kalimantan Bangka Outside crop purchased Kota Bangun, East Kalimantan Bangka Pangkatan group TOTAL CROP 2017 TONNES 147,600 90,200 400 157,400 38,900 434,500 60,500 40,800 101,300 16,800 85,400 16,100 118,300 654,100 INCREASE/ (DECREASE) % (3) 48 — 6 4 9 (10) 63 10 (18) 260 106 128 20 structure in parts of the estate in addition to benefitting from its value as an organic fertiliser. The area around the Pangkatan mill was less affected by adverse weather than other areas. The benefit of replanting that has taken place over the last few years became apparent as crop grew by 6%, the onset of this increase having been delayed by the El Niño. One of the three estates in the group, Bilah Estate, is just beginning a programme of replanting, which will limit crop growth from the Pangkatan group over the next few years. An accelerated programme of replanting is under way at Simpang Kiri, which held back crop growth from this area in comparison with the Pangkatan group. In both cases, yields from newer seed varieties will benefit the 2016 TONNES 151,700 61,100 — 149,100 37,400 399,300 67,400 25,000 92,400 20,500 23,700 7,800 52,000 543,700 Group after only two to three years. areas modest levels of flooding expected in 2018, and hence there PRODUCTION Thanks to growth in the Group’s own persisted during the heavier rainfall should be a rebound in crop from crop and the significant purchases of associated with the end of an El these areas. Niño. This cumulatively bore down on outside fruit in Bangka, 2017 was a record year for the Group’s production. harvesting in these areas. In addition, Bangka was the first of the Group’s CPO production rose 23% to reach the extreme dryness that is the areas to suffer from the 2015-16 154,000 tonnes, that of palm kernels hallmark of an El Niño in South East El Niño, and the dry period rose by 28% to 33,500 tonnes. Whilst Asia manifests itself not only through experienced here was the longest. the Group does not have its own mill immediate production, but also affects the formation of flowers deep As a more normal pattern of rainfall re-established itself, the area was at Simpang Kiri, it has a contract to sell its ffb to a local mill based on inside the palm that is expressed not affected by flooding in the the commodity price for CPO and an some 18 months later. This resulted same way as experienced in East assumed rate of extraction. To reflect in a phase of disproportionate male Kalimantan. As a result, whilst the the substance of this arrangement, flowering, which significantly affected astonishing rate of growth in crop oil produced from Simpang Kiri’s palm fertility in the early part of 2017 during the first half of the year was crop has been included in CPO and so reduced production of ffb not maintained during the second production, and the comparative during the second half of the year, half, crop nevertheless increased figure for 2016 has been amended and especially so in the last quarter by 48% in the Group’s areas and to bring it in line with the new of the year. Crop in the Kota Bangun 63% in the associated smallholder presentation. estates fell by 3% in comparison with co-operatives during the year as 2016, that in the smallholder areas a whole. The Group is using the Extraction rates have continued at by 10%. A repeat of the unusual compost produced in its mill from good levels. High levels of rainfall conditions present in 2017 is not empty bunches to improve the soil throughout Indonesia have led to 17 STRATEGIC REPORT continued PRODUCTION AND EXTRACTION RATES PRODUCTION Crude palm oil Kota Bangun, East Kalimantan Bangka Pangkatan group Simpang Kiri Palm kernels Kota Bangun, East Kalimantan Bangka Pangkatan group Simpang Kiri EXTRACTION RATES Crude palm oil Kota Bangun, East Kalimantan Bangka Pangkatan group Simpang Kiri Palm kernels Kota Bangun, East Kalimantan Bangka Pangkatan group Simpang Kiri 2017 TONNES 55,600 50,000 39,800 8,600 154,000 10,100 11,700 9,800 1,900 33,500 % 24.7 23.1 22.9 22.3 4.5 5.4 5.7 4.9 INCREASE/ (DECREASE) 2016 % TONNES (7) 137 10 4 23 (8) 154 11 6 28 % (1) (1) (1) _ (2) 8 2 4 60,000 21,100 36,200 8,300 125,600 11,000 4,600 8,800 1,800 26,200 % 25.0 23.3 23.1 22.3 4.6 5.0 5.6 4.7 make an acceptable profit margin notwithstanding the reduction in the mill’s average rate of extraction their purchase involves. The composting and bio-gas facilities in Kota Bangun and Bangka are processing all of the Group’s empty ffb and mill effluent. The compost is a valuable nutrient applied in a carefully controlled and supervised manner by the Group. The bio-gas plant at the Bumi Permai mill at Kota Bangun supplies all of the Group’s electricity needs. Negotiations are at an advanced stage to increase the capacity of this bio-gas plant and sell the resulting electricity to the state electricity company, PLN. In Bangka, following a short delay in commissioning the plant and establishing the connection to the electricity grid, the Group started supplying PLN with its surplus electricity in January 2017. Production of power will increase with the volume of crop processed by the mill. Work has begun in designing and tendering for a second mill, the Rahayu mill, at the Kota Bangun estates. The new mill is expected to begin production in 2019. higher moisture content in the ffb which tend to have larger kernels and so resulted in a slightly lower rate of extraction than in 2016. The and less flesh from which to squeeze CPO. This can be seen in the increase COSTS At US$370 per tonne of palm Group compares its performance in the kernel extraction rate and product (CPO and palm kernels), with other mills in the region and emphasises the good performance in the combined cost of the output remains confident that its mills CPO extraction. continue to perform at a high from the Group’s areas in its three mills was the same as in 2016. The level compared with its peers. The The Group continues to buy outside main upward pressure was from performance of the mill in Bangka, fruit to utilise spare capacity at all the increased cost of labour on the at 23.1%, is very creditable given three of its mills. Whilst outside fruit Group’s Kota Bangun estates. The the high volume of outside fruit yields significantly less CPO than reduction in crop on these estates being processed, which is not of the fruit from the Group’s own areas or did not lead to a proportionate same standard as that produced that of its associated smallholder reduction in unit costs since certain by the Group and its smallholder co-operatives, this is reflected in tasks, for example fertilising, co-operatives. Outside fruit is the price the Group pays for it. pruning and field maintenance, are predominantly from dura palms, Hence, purchases of outside fruit fixed irrespective of the volume of 18 M.P. EVANS GROUP PLCANNUAL REPORT 2017STRATEGIC REPORT crop. Upward cost pressures were offset by the falling cost of fertiliser, and by the benefits of processing substantially more crop than expected in the Bangka mill. The Group makes significant efforts to achieve procurement savings, notably in the bulk purchase and transport of fertilisers. As overall crop volume growth resumes its expected path, unit costs are expected to fall. Unlike the cost of production using the Group’s own ffb, the cost per tonne of palm product for ffb purchased from both the Group’s smallholder co-operatives and outsiders varies with the world market price for CPO. The Group’s aggregate total cost per tonne of palm product, including ffb from all sources, was US$415, also the same level as in 2016. MILL-GATE PRICE The average mill-gate price for CPO received by the Group in 2017, excluding sustainability premia, was US$600 per tonne, slightly higher than the US$595 received in 2016. The picture for palm kernels was very similar with a mill-gate price in 2017 of US$506 per tonne compared to US$512 per tonne in 2016. Sustainability premia were available, although at different levels, for both CPO and palm kernels produced by the Pangkatan and Kota Bangun mills. The Group’s Bangka mill achieved its sustainability certification only in November 2017, and did not sell any output with this premium during 2017; production at Simpang Kiri estate does not qualify for a sustainability premium. Due to the shortage of sustainable supply and strong demand, the Visit by directors to screw-press station, Bumi Permai Mill, East Kalimantan 19 M.P. EVANS GROUP PLC ANNUAL REPORT 2017 STRATEGIC REPORT continued premium for sustainable palm in 2016. In 2017, a total of 3,200 In addition to this new planting, the kernels was upwards of US$40 per hectares were planted, of which 2,200 Group replanted 580 hectares in its tonne during 2016. Averaged across were for the Group and 1,000 for mature North Sumatran estates. The the Group’s total tonnage sold, the smallholder co-operatives. This old dura palms on Sennah Estate revenue from sustainability premia new planting was concentrated in have now all been replanted. The for palm kernels amounted to an the Group’s South Sumatran project effect of this is expected to lead to average of US$25 per tonne in 2017, at Musi Rawas, which accounted an increase in the oil-extraction rate significantly higher than the for 2,800 hectares of the total new over the coming years of Pangkatan US$16 per tonne in 2016. There was planting. The planting on this project mill, which processes the ffb from similarly an increase in sustainability reached 5,200 hectares at the year Sennah. This is, however, likely to be premia for CPO, but at a much lower end, more than half way to the total at the cost of a slightly lower rate of level. Calculated on the same basis, area of 10,000 hectares that the kernel extraction: dura palms have the premium was US$5 per tonne in Group expects to plant. relatively large kernels and thin flesh. 2017 (2016 US$3 per tonne). Replanting continues at Simpang As reported in the Group’s Interim Kiri, and a replanting programme has Taking into account sustainability Report for 2017, a consequence of begun on Bilah, which was largely premia, the average mill-gate price the flooding in Kalimantan described planted originally in the late 1980s per tonne CPO for the year was above is that some 580 hectares of and early 1990s. US$605 (2016 US$598); per tonne the palms planted during 2016 in the of palm kernels it was US$531 areas affected are being replaced. (2016 US$528). This will increase the total cost of planting in these areas by some ASSOCIATED COMPANY: KERASAAN Crops at Kerasaan Estate were 50,000 PLANTING The Group was able to maintain the US$0.6 million and introduce a delay tonnes (2016 – 42,000 tonnes). Strong of 12 months to the point at which crop growth in the first half of the good pace of new planting achieved they will come into harvesting. year, in common with other parts of Bumi Permai Mill, East Kalimantan 20 STRATEGIC REPORT South East Asia, was carried through The development of new plantings Plantation and mill costs into the second half as the estate is monitored by management, as Management monitors and assesses continues to recover from an is the area to be planted in a given the efficiency of plantation costs by outbreak of leaf pest and exploits its year and the cost per hectare of means of performance indicators good soils and benign terrain. Some that planting. A budget for planting which identify field costs per hectare 30% of its planting dates from the programmes is set to allow sufficient and per kilogram of ffb, and mill early to mid-1990s, so a programme planting material to be purchased costs per tonne of palm product. of replanting will have to begin in the for the nursery in the previous year. A significant proportion of costs coming years. A high proportion of planting work both in the field and in the mill PERFORMANCE EVALUATION Plantation and mill operations is undertaken by contractors, and are fixed and therefore vary little management monitors the progress with different levels of utilisation. achieved on the contracted areas. Field costs also vary from estate to Management monitors and assesses Planting costs are monitored by estate depending upon such factors the efficiency of operations with management for each individual as terrain and rainfall pattern, so regard to crops and production using estate. As with other plantation the performance indicators are performance indicators. The crop activities, costs per hectare are monitored by management for each yield per hectare on each year’s influenced by factors such as the individual estate. The projected planting on each estate is budgeted, weather pattern, the soil type and increase in crop is expected to bring recorded and monitored. Yields can terrain. Ultimately, the total planted down the US$370 it currently costs vary widely because of factors such hectarage determines future crop. the Group to produce one tonne of as soil type, terrain, sunshine hours, At the end of 2017 the Group had palm product (a combination of CPO rainfall, distribution of rainfall and reached 48,400 hectares planted and palm kernels). the fertility cycle of the palms. The for itself and its smallholder most important factor is a palm’s co-operatives. age. The Group’s average yield of 19.9 tonnes per hectare reflects the With regard to mill production, CURRENT TRADING AND PROSPECTS Crops during the first quarter of young average age of its palms. the key performance indicators 2018 have been ahead of last year This total can be expected to rise are the extraction rate of palm oil in all regions. At the end of March, in future years. Monitoring of and palm kernels per tonne of ffb, total crop for processing (including performance takes into account the throughput, and the percentage smallholder co-operatives and conditions on each year’s planting of free fatty acids, oil losses, dirt third-party ffb) stood at 183,000 on each estate. Key factors which and moisture. Extraction rates vary tonnes, 23% ahead of the same are under management’s control according to factors such as the type period in 2017. This included, for are husbandry standards, fertiliser and quality of planting material, the the first time, crop from Bumi Mas, application, harvester numbers and productivity, and the quality age profile of plantings, rainfall, etc. Throughput is monitored on a daily acquired at the end of 2017. The palms have continued to recover of infrastructure (estate roads basis; oil losses, dirt and moisture from the El Niño in 2015-16, whose and drains, for example). These content are expressed in terms of dry weather affected the formation are monitored by management on percentages and actual achievement of bunches which would have been the ground and, in some cases, against maximum permitted levels harvested in the second half of independently verified and advised is monitored by management. An 2017. This phenomenon particularly upon. Decisions, such as when and average oil-extraction rate of 23.6%, affected the Group’s estates in East how to replant, are taken based in 2017, compares favourably with Kalimantan, where crop is now on on local conditions. Overall, during industry norms and with mills a strongly upward trend. The Group 2017, the Group achieved total crop operating in the same areas as does continues to purchase outside crop, from its own areas and those of its the Group. which contributes to increased smallholder co-operatives of 535,800 tonnes. production. 21 STRATEGIC REPORT continued The details are set out in the following table: Own crops Smallholder crops Outside crops purchased 3 MONTHS ENDED 31 MARCH 2018 TONNES 125,100 31,800 26,100 183,000 3 MONTHS ENDED 31 MARCH 2017 TONNES 99,900 23,700 25,400 149,000 INCREASE % 25 34 3 23 The Group’s crop is rising owing downward pressure on prices. The to the young age of its palms, an average CPO price cif Rotterdam for average of 7 years, in consequence the first quarter of the year has been of the development of its projects US$677 per tonne, moving very little in Bangka and East Kalimantan over during the quarter to finish March the last ten years and the acquisition at US$675 per tonne, compared with of Bumi Mas. The upward trend in US$674 per tonne at the end of 2017. crop is expected to last until the end However, increasing uncertainty of the next decade. This would be about the world trading regime may further augmented by the acquisition lead to a higher degree of price or development of new project areas. volatility than in the recent past. Nevertheless, the board is of the view The increase in global production that palm oil, because of its high of CPO during 2017 is expected to yield and low cost of production, persist into 2018. However, a poor is well placed to continue to South American soybean harvest benefit from increasing demand for and relatively low stock levels of CPO vegetable oil and hence the outlook in some of the principal consuming remains encouraging. countries is likely to counteract any 22 M.P. EVANS GROUP PLCANNUAL REPORT 2017KEY PERFORMANCE INDICATORS The Group uses key performance indicators at all levels in the Group, both in Indonesia and in the UK, in assessing its plantation operations and directing management effort in supervising those operations. PLANTED HECTARAGE FFB YIELD PER HECTARE Planting new hectarage and The rate at which the Group is replanting hectarage that has able to generate ffb from its reached the end of its economic mature planted hectarage is the life determines the Group’s most important measure of its capacity to produce crop growth agricultural efficiency. in the future. 48,400 HECTARES GROUP AND SMALLHOLDERS 19.9 TONNES PER HECTARE FFB CROP CPO AND PK EXTRACTION RATES The volume of ffb crop is the The rate at which the Group is primary determinant of the able to convert its ffb into CPO Group’s ability to generate CPO and PK, quantified as oil- and and palm kernels (“PK”) for sale. kernel-extraction rates, is the most important measure of its processing efficiency. 23.6% OIL-EXTRACTION RATE 535,800 TONNES COST PER TONNE OF PALM PRODUCT The Group’s long-term profitability depends on its success in minimising the unit cost of production that is summarised in this measure. US$ 370 PER TONNE PALM PRODUCT STRATEGIC REPORT 23 M.P. EVANS GROUP PLC ANNUAL REPORT 2017 OPERATIONS: MALAYSIAN PROPERTY 24 MAJORITY-OWNED: BERTAM ESTATE The value of Bertam Estate’s land, situated in a prime position not far from the slip road onto the highway heading to Penang Island, rises as development progresses on the neighbouring Bertam Properties land. An estimate of its current value is US$36.2 million. It remains the board’s intention to sell Bertam Estate at a suitable time taking into account market conditions and the Group’s need for investment capital. In the meantime, the minor residual oil- palm operation on 65 hectares of cultivated land yielded a crop of 1,500 tonnes (2016 – 1,700 tonnes). No replanting has been done since 1997 and the Group’s objective in managing this land is to maximise the crop and cash revenue from its ageing palms whilst minimising costs. The Group has only three junior employees on Bertam Estate and no other employees or office space in Malaysia. Administrative and agricultural advice and work are carried out by its agent, Straits Estates Sdn Berhad, and other external service providers. ASSOCIATED COMPANY: BERTAM PROPERTIES Mixed development of residential housing and commercial properties continues to progress on Bertam Properties’ land. At the end of 2017, Bertam Properties owned 157 hectares of development land, including 17 hectares already under development, and a 143-hectare golf course. Of the golf course, 40 hectares have been approved for development and their official status will change during 2018. During 2017, Bertam Properties completed the sale of 383 developed properties, a significant decrease from the 479 units completed in 2016. The reduced number of sales recorded in 2017 was mainly of low- cost and single-storey residential terraces. Whilst fewer in number and at lower prices, sales during the year yielded a nearly identical margin to those in the previous year. No land was sold for development during 2017. Overall, less development was begun in 2017 than in either of the preceding years, reflecting a continuing slowdown in the Penang property market. The reduced volume of property transactions in the Penang region, and their total value, in part reflected tighter lending conditions by banks through much of 2017. The remaining development land at Bertam Properties continues to be a valuable asset whose value has appreciated as development in the project is completed and the new town attracts residents and businesses to an area that is designated by the Malaysian government as a ‘hub’ for education. The board expects the value of this land to continue to appreciate in future. An estimate of the current value of the Group’s share in Bertam Properties is US$54.6 million. STRATEGIC REPORT 25 STRATEGIC REPORT continued RISK MANAGEMENT The Group regularly considers its principal risks. They are reviewed and assessed by the audit committee at least annually and reported to the board for approval. The 2017 review concluded that the principal risks reported in the 2016 annual report remain risks to the Group, and that no new principal risks have been identified. Set out below is the board’s evaluation of the principal areas of potential risk. Risks have been classified as being either specific to the Group or of a general nature. The risk to the Group is described, along with the steps taken to mitigate that risk. The board regards the principal risk to the Group to be a reduction in the commodity price for CPO. SPECIFIC RISKS INDONESIA COUNTRY RISK The Group’s strategy is based on maintaining control over its plantation assets and identifying opportunities to expand by acquisition of additional plantation areas.  Read more in the strategic report on page 13 The Group relies on the continuing ability to acquire and enforce property rights in Indonesia. The country has benefited from a period of political stability and economic growth. There is a tendency for nationalist sentiment to increase during presidential elections but, given Indonesia’s significant need for infrastructure development and to attract inward investment, the board continues to perceive a low risk of, for example, nationalisation or the imposition of exchange controls, and the attendant risk that the Group will be unable if necessary, liaise with other plantation companies and industry bodies to lobby the government not to enact such proposals. Security of land tenure is a matter of fundamental concern to plantation operators. The Group holds land in its established estates under 25- or 30-year renewable leases (“HGUs”) which are legally renewable, and which have to date been renewed without difficulty when falling due. The Group has already obtained the HGU for most of the land it has developed since it began its expansion in 2005. Where the Group has not yet received the HGU, it has obtained the necessary licences for these projects, including a valid right to develop the land (izin lokasi) and operating licences (izin usaha perusahan). In all its new project areas, the Group compensates smallholders and ensures full and prompt payment of relevant government taxes. Both are important activities that are assessed during the final application for an HGU. Where other companies have been granted licences which potentially conflict with those held by the Group, swift and determined legal action has been taken to defend to extract profits from its subsidiaries and associated the Group’s position. companies in Indonesia. Operations in Indonesia are deemed to be at high risk In 2014, a draft plantation law was tabled in the from the threat of bribery and corruption. The Group has Indonesian House of Representatives which included a a robust policy on bribery and corruption, completes provision to restrict foreign ownership of plantations in risk assessments and conducts training of senior Indonesia to 30%. This was not enacted but a modified management in Indonesia and Malaysia. It requires version was subsequently passed in September 2014 that all its business partners to submit questionnaires on did not include this restriction. The new law mandated their respective anti-bribery and anti-corruption the government to prioritise domestic investment, protect activities and policies. The Group has employed external local customary rights, empower local farmers and set a advisers to ensure its actions carry the maximum cap on foreign investment at some point in the future. prospect of preventing bribery and corruption in The board continues to monitor the situation and will, its operations. 26 M.P. EVANS GROUP PLCANNUAL REPORT 2017STRATEGIC REPORT RELATIONSHIP WITH LOCAL POPULATIONS frequent visits by the executive directors to all areas of the Group’s operations, including the operations of The Group’s business model includes making associated companies. In order to strengthen its controls, smallholder co-operatives a success. Smallholder the Group is putting in place an integrated operations areas are planted, maintained and harvested to the and accounting software system which staff will be able same standard as the Group’s own areas.  See the business model on pages 8 to 9 A breakdown in relations could significantly disrupt the Group’s operations, for example through strikes, or lead ultimately to a stoppage in production should villagers pursue their case by blocking roads in order to prevent ffb, a perishable crop, from reaching the mill to be processed. Particular attention is paid to the Group’s relationship with the local population where development is taking place. On each of the projects, there has been extensive communication not only with local government officials but also with local people collectively and through their representatives: the local mayor and village heads. Smallholder co-operative schemes (“KKPA”) are being developed alongside the Group’s areas and managed by the Group. Staff members have been appointed to deal with compensation for losing the use of land and crops, and to explain the basis and workings of the KKPA schemes and to gain the support of the villages surrounding the Group’s project areas. This is a time- consuming but effective process SUPERVISION OF OPERATIONS The business model explains how the Group controls and supervises its operations using expert staff. The Group also uses key performance indicators (KPIs) to monitor plantation operations.  See the business model on pages 8 to 9  Find out more in the KPIs on page 23 to access from the UK as well as Indonesia and Malaysia. The Group has seats on the board of its large Malaysian associated company and regularly attends its board meetings, as well as maintaining a dialogue with its chief executive and senior management. At the Group’s regional office in Jakarta, the local president director has put together a team of senior managers (agricultural, engineering, legal, procurement, marketing, finance, human resources, internal audit and sustainability) with extensive experience and expertise, well qualified to confront the problems that arise on developing and mature estates. Senior agronomic managers are resident in Sumatra (also covering Bangka and Musi Rawas) and Kalimantan. The Group uses its Kalimantan training school to instil the Group’s systems and high standards into new and existing staff, covering agriculture, engineering, finance and social and environmental topics. RELATIONSHIP WITH LOCAL PARTNERS As set out in the business model, the Group’s strength is as a producer of Indonesian palm oil. Under Indonesian law, the Group’s subsidiaries are required to have a local partner with at least 5% of the equity.  The Group’s business model is on pages 8 to 9 A breakdown in relations with a local partner could affect relations with the local populations where the Group is operating, with a detrimental effect on operations. The board recognises the importance of building and maintaining a good relationship with the minority partners and fellow shareholders in its Indonesian plantation projects but inevitably disagreements do sometimes arise. The executive directors endeavour to Geographical distance between the UK head office and maintain regular and open contact, both formal and its operations located in Indonesia and Malaysia puts a informal, with the Group’s partners to discuss current premium on strong supervision of the Group’s operations. and future issues affecting the Group’s operations. Regular written reporting from all operating companies is Where disputes do arise, the Group seeks to negotiate a supplemented with routine telephone contact and mutually acceptable settlement. 27 M.P. EVANS GROUP PLC ANNUAL REPORT 2017 STRATEGIC REPORT continued PROTECTION OF THE ENVIRONMENT Sustainable production and zero waste are priority areas for the Group. Further information is included in the section on sustainability and in the business model.  Read more about sustainability: pages 30 to 35  See the business model on pages 8 to 9 Concerns about global warming and particularly the destruction of tropical rainforest have received, and continue to receive, close scrutiny in the media. The palm- oil industry, unfairly in some cases, is closely associated with cutting down rainforest and destroying the habitat of endangered species. The Group may therefore receive attention from the many organisations connected with climate change and South East Asian tropical rainforests. The Group is a member of the Round Table on Sustainable Palm Oil (“RSPO”). The RSPO has strict guidelines by which members must abide in order to be able to state that they are producing sustainable palm oil, including the protection of forested areas. The Group endorses the “Principles and Criteria” which have been adopted by the membership. The Group has specialist RSPO officers, supported by external consultants, working to ensure the Group complies with RSPO best practice. All of its mills have been accredited by the RSPO. them) and the liquid effluent from the mill. The resulting compost is tested for its nutrient value and applied in the field, reducing the requirement for inorganic fertiliser. No effluent is discharged into external water courses. At the mills in Kalimantan and Bangka, methane is captured from the mill effluent before it is used for composting and then in a bio-gas engine to generate electricity. Management follows industry best-practice guidelines and abides by Indonesian law with regard to such matters as fertiliser application and health and safety. Any accidents are thoroughly investigated by senior head- office staff. Health and safety inspections are carried out annually. The managers of all of the Group’s estates and mills hold a monthly meeting with key staff to review health and safety. These meetings are minuted and actions identified and followed up. GENERAL RISKS COMMODITY-PRICE FLUCTUATION Sales of CPO and palm kernels take place based on a world market over which the Group has no control. This has been considered as part of the Group’s assessment of viability.  Assessment of viability report is on pages 43 to 44 Additionally, the Group’s Pangkatan mill in North Sumatra The prices of crude palm oil (“CPO”) and palm kernels and Bumi Permai mill in East Kalimantan are covered by determine the Group’s revenue and earnings. Fluctuations International Sustainability Carbon Certification (“ISCC”). in the price directly affect the Group’s reported earnings and its ability to generate cash inflows from its operations. As evidenced by its projects in Kalimantan and on Bangka Island, the Group has a clear policy that only The Group relies on its ability to sell its palm oil, palm heavily degraded land will be acquired and developed. kernels and ffb into a world market over which it has As required under RSPO principles, an environmental no control. Palm oil is a permanent tree crop with ffb assessment is undertaken by an independent consultant being harvested every day of the year. Palm oil and palm for any new project. Implicit in these studies is the kernels are sold on a fortnightly basis by open tender requirement to maintain riparian buffer zones and and ffb are sold on a day-by-day basis under contract at nature conservation areas and to compensate people a price derived from the quoted world price. Over a year, cultivating land to be developed in a fair and by selling on a “spot” basis, an average price is therefore transparent way. achieved. Given this, the directors have taken the view that in the long run it is not generally cost-effective to With regard to its mills, the Group has installed sell forward contracts for the delivery of CPO, particularly composting systems which utilise both the “empty” fruit since the presence of Indonesian export tax increases the bunches (i.e., after the fruit has been removed from risk in such contracts since it is determined and levied at 28 STRATEGIC REPORT the time of delivery, not at the time at which the contract Whilst a remarkably hardy plant, the oil palm can be is agreed. subject to attack from such pests as caterpillars and other insects, and certain diseases. The practice of The price of palm oil is determined both by disposable proper management and husbandry instilled by the income around the world generated by economic activity Group in its field staff is designed to identify and prevent and by the supply, pricing and demand for competing these attacks from becoming widespread. Appropriate vegetable oils. These factors can result in fluctuations agronomic measures are taken where any outbreaks in the price. As with any commodity, over supply does occur. Senior agricultural staff are kept up to date with occur in the vegetable-oil market which exerts downward current research in this area, for example by attending pressure on prices. The competing oils, the main ones relevant conferences. of which are soybean, oilseed rape and sunflower, are annual crops and producers tend to react to low prices The board has taken the view that acceptance of weather by switching to other crops which has, in the past, risk is part of the business. quickly reduced oversupply and restored upward pressure on prices. EXCHANGE-RATE FLUCTUATION The board is satisfied that the fundamental structure of the vegetable-oil market, and particularly the palm- oil market, is sound. Continuing strong demand from the fast-developing economies, such as India, China and Indonesia itself, as well as from more established markets for vegetable oil for human consumption has supported prices, as has demand for vegetable oils as The Group’s functional currency is the US Dollar. Risks associated with changes in exchange rates have been assessed by the board, as set out in note 32 to the financial statements.  Note 32, containing further detail, is on page 82 a bio-fuel. Palm oil is the vegetable oil with the highest Palm oil is a US-Dollar-denominated commodity and a production in the world, has the lowest cost and is the significant proportion of revenue costs in Indonesia most productive, by a wide margin, in terms of yield (such as fertiliser and fuel) and development costs (such per hectare. WEATHER AND NATURAL DISASTERS The Group projects a sustained increase in crop. Adverse weather events may temporarily slow the rate of increase in crop.  More detail about our strategy is on page 13 as heavy machinery and fuel) are US-Dollar related. Adverse movements in the Indonesian Rupiah against the US Dollar can have a negative effect on other revenue costs in US-Dollar terms. The movement of the Malaysian Ringgit against the US Dollar has an effect in US-Dollar terms when Malaysian earnings and assets are translated. The board has taken the view that these risks are part of the business and feels that adopting hedging mechanisms to counter the negative effects of exchange Oil palms rely on regular sunshine and rainfall but these movements are both difficult to achieve and would not be patterns can vary and extremes such as unusual dry cost-effective. Surplus cash balances are largely held in periods or, conversely, heavy rainfall leading in some US Dollars. locations to flooding, can occur. Dry periods, in particular, will affect yields in the short- and medium-term but any Approved by the board of directors and signed on its deficits so caused tend to be made up at a later date. behalf Where appropriate, bunding is built around flood-prone areas and drainage constructed and adapted either to evacuate surplus water or to maintain water levels in areas quick to dry out. Tristan Price Chief executive 9 April 2018 29 M.P. EVANS GROUP PLC ANNUAL REPORT 2017 SUSTAINABILITY The Group produces certified sustainable palm oil in all its palm-oil mills. 30 SUSTAINABILITY APPROACH The Group recognises public concerns about the impact of the palm-oil industry’s agronomic practices on the environment and natural habitat in the regions where it operates, and the risk to the Group’s reputation and operations of failing to address these concerns. The Group makes sustainable Certification In addition, the Pangkatan and long-term decisions investing in The Group demonstrates its Kalimantan mills are certified under land, the environment, a skilled commitment to sustainability through ISCC, which is a leading certification workforce and the communities in its membership of the Roundtable system for sustainability and and around its operations. on Sustainable Palm Oil (“RSPO”). greenhouse gas emissions. The Group has a dedicated Compliance with RSPO standards sustainability manager based in is independently audited. All its ISCC was one of the first schemes Jakarta supported by field staff estates, whether they have a mill or to comply with the requirements resident on the Group’s estates. not, and including all smallholder of the EU’s Renewable Energy schemes attached to the Group’s Directive, and can be used to meet In 2017, the Group launched a projects, are run in accordance legal requirements in the bioenergy social survey in collaboration with the RSPO’s standards, which markets as well as to demonstrate with the University of Indonesia relate to environmental, social and sustainability and traceability in that collected information about ethical plantation practices. The the food, feedstock and chemical the quality of life of people living Group’s policy is for all its mills to be industries. The Bangka mill will on and around its operations in certified by the RSPO with any new become ISCC-certified as soon as Indonesia. This will help ensure the mills achieving RSPO certification the Group has constructed its own Group understands the impact of its within 18 months of commencing bulking facility on Bangka for the operations on those living on and operation. All three of its mills have crude palm oil produced there. around its plantations. been certified. Bulking tanks at the Kota Bangun estates, complying with ISCC-certification requirements 31 Barn owls have been introduced to keep the rat population down. CPO The oil flesh squeezed from the fruit is clarified, purified and stored, ready for sale to a refinery. n i o t a t n a P l Water transport is used in preference to road transport, wherever possible. Mill Fresh fruit bunches are sterilised to loosen the fruitlets from the bunch. The nuts are separated from the fruitlets’ flesh, which are squeezed to produce CPO. The residue and nut shells are used as fuel in the boiler to provide steam to the steriliser. C o m p o s t Empty bunches and waste water are turned into compost which is put out into the plantations, providing vital nutrition and helping to improve soil structure. Palm kernels The nuts removed from the fruit are cracked and the kernels sold to producers who make palm kernel oil. All waste water from sterilisation is pumped into a large covered pond. The waste water is then pumped from the bio-gas pond and used to produce compost. Bio-gas The pond is stirred, which promotes the collection of methane under the cover. This bio-gas is filtered, cleaned and burned to produce electricity for the Group’s mills, housing, pumps and workers’ villages. Any surplus is sold to the electricity grid as renewable energy. 32 M.P. EVANS GROUP PLCANNUAL REPORT 2017ZERO WASTE: GOOD FOR THE ENVIRONMENT WHILST KEEPING DOWN M.P. EVANS’ COSTS ENVIRONMENT Zero waste The Group’s mills in Kota Bangun (East Kalimantan) and Bangka capture methane from mill effluent. This methane is used to fuel a bio-gas engine which generates electricity for office compounds, housing and workers’ villages in the vicinity of the mill, giving rise to a significant reduction in the use of diesel for the generators which would otherwise have been needed. In Bangka, the Group began selling surplus electricity to the state electricity company in January 2017. In addition to capturing methane from mill effluent, the Group operates a composting facility in its three mills. Effluent is applied to the empty fruit bunches to create a nutritious compost. The compost, in turn, is applied in the field, reducing the requirement for inorganic fertilisers. Surplus effluent (which can occur during very rainy periods) is applied directly in the field, which acts as a beneficial organic fertiliser. The generation of electricity from mill effluent and the use of empty bunches to produce compost are at the heart of what the Group does to achieve ‘zero waste’. Zero burning The Group operates a strict policy prohibiting the burning of vegetation or old palms in order to clear land and when carrying out new planting or replanting on its estates. Vegetation or old palms/trees are chipped and stacked in inter-rows between the new planting lines and allowed to rot down. All the Group’s managers are trained to be alert to fires and react quickly to any that do arise through natural forces or by accident. The Group operates a fire watch on all its estates. It also maintains water tenders that can be quickly deployed and used to pump water from drains on the estate in an effort to extinguish any fire. The Group is not aware of any fire hotspots on or near the Group’s estates developed since 2005. SUSTAINABILITY In line with our zero burning policy, all the Group’s managers are trained to be alert to natural or accidental fires Careful water management is important for the palms and reduces the risk of fire Our nutritious home-produced compost is used as an organic fertiliser in our palm plantations Methane is captured for bio-gas production in covered ponds 33 M.P. EVANS GROUP PLC ANNUAL REPORT 2017 SUSTAINABILITY continued COMMUNITIES Doing the right thing for the long term naturally includes doing the right thing both for the environment and for the communities that live on and around the Group’s operations. The Group believes the success of its operations is bound up with the success of smallholders operating alongside it. Successful smallholders foster strong support for the Group’s activities amongst the local communities where it operates. The Group’s managers get to know the village heads of the communities near Group operations, and maintain an open dialogue with them on any issues that affect their communities. On the plantations, the Group ensures workers have access to medical care either in a local hospital or in clinics and medical centres we build and staff. The Group provides crêches to care for workers’ children and builds nursery schools. For primary and secondary education, the Group either provides buildings or organises buses to transport students to the nearest government school. INTEGRITY The Group is committed to respecting the rights of all our workers, whether they be permanent, temporary or casual, indigenous or immigrants from other Indonesian islands or elsewhere. Smallholder schemes The main way in which the Group understand what is being given up, in terms of either legal or customary supports local communities is rights, in return for financial through smallholder co-operative compensation offered by the Group. schemes that operate alongside the Group’s own areas. When it In the early stages, the Group loans undertakes new development, the the finance to plant these areas and Group enters into an arrangement helps the co-operative to obtain its with the local community to provide own bank finance, guaranteed by land planted with oil palms. The the Group, once official land titles Group carries out an intensive have been issued. More importantly programme of ‘socialisation’ for the future, the Group ensures designed to ensure that all co-operative areas are planted individuals giving up rights to land and managed to exactly the same do so freely and only after they fully standard as its own areas. 34 The Group then manages the co-operative schemes on behalf of the members, and buys their fresh fruit bunches at a price set by the provincial Indonesian government. This has been a successful way of engendering goodwill with the community in and around our areas of operation, as well as providing it with a tangible and remunerative business which is owned by them. Co-operatives potentially give a triple benefit to those living near the Group’s operations: 1. Members receive a compensation payment if they offer land to the Group to develop; 2. Members may come and work for the Group for a wage; and 3. As a co-operative member, they receive an income from a well- managed and productive asset. Employees The Group undertakes to train and motivate its staff and workforce, to help employees improve their skills and extend their education and qualifications. Medical care is provided on the plantations in polyclinics staffed on a daily basis by trained employees. Doctors visit these clinics once or twice a week. On its Kalimantan project, the Group employs a full- time doctor and the Group pays for hospital treatment if this is required. The Group provides good-quality housing for its employees, together with clean, potable water and proper sanitation. SUSTAINABILITY CONSERVATION AND NEW LAND The Group ensures that any new plantation development is undertaken only in heavily-degraded areas which will not be suitable habitats for major endangered species. On new projects, well-marked conservation areas are set aside in areas designated as having ‘high conservation value’ (“HCV”) status. Ongoing programmes of planting jungle trees and other plants are undertaken. Areas alongside river banks are set aside as conservation areas both to prevent leaching of fertilisers into water courses and to provide wildlife corridors. The Group has nearly 3,000 hectares of conservation areas, which are regularly monitored by sustainability teams resident on its estates. Outside the conservation areas, beneficial “host” plants are planted alongside estate roads to attract predators of leaf pests (insects). The predators feed on leaf-pest larvae, thus reducing the need for chemical spraying. Barn owls are, where possible, introduced and bred to control rats, thus minimising the need for chemical baits. New planting procedure (‘NPP’) documents have been routinely lodged with the RSPO Secretariat in a timely manner and are available on the RSPO website. All new plantings carried out since the beginning of 2015 have been covered by an HCV and high carbon stock (“HCS”) assessment. In accordance with its RSPO commitments, the Group does not plant in peat. 35 M.P. EVANS GROUP PLC ANNUAL REPORT 2017 REPORT OF THE DIRECTORS BOARD OF DIRECTORS Peter Hadsley-Chaplin Tristan Price Matthew Coulson EXECUTIVE CHAIRMAN CHIEF EXECUTIVE FINANCE DIRECTOR Appointed a director in 1989, chairman in 2010. Former executive chairman of Bertam Holdings PLC and Lendu Holdings PLC. Former chairman of The Association of the International Rubber Trade. Prior to joining the Group in 1988 he was a commodity broker with C Czarnikow Limited. Appointed a director in 2010, chief executive in June 2016. Previously worked as a senior UK diplomat, as an economist at the Organisation for Economic Co-operation and Development (OECD) and at the Treuhandanstalt (East German privatisation agency). Appointed a director in 2017. Joined the Group as chief finance officer in 2016 with previous experience as an audit director of Deloitte LLP, including work on companies in the agricultural sector and in the technical policy team. 36 REPORT OF THE DIRECTORS Jock Green-Armytage Richard Robinow Philip Fletcher Bruce Tozer SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR INDEPENDENT NON-EXECUTIVE DIRECTOR Appointed a director in 1999 and chairman from 2005 to 2009. A non- executive director of R.E.A. Holdings PLC (previously chairman) and a former director of the Belgian plantation group SA SIPEF NV. Member of the audit and remuneration committees. Appointed a director and chairman of the audit and remuneration committees in 2013. Formerly a director of Rowe Evans Investments PLC from 1989 to 1994. Currently chairman of JZ International Limited and chairman or director of many of its investee companies. Previously chief executive of The Guthrie Corporation PLC and chairman of AMEC PLC. NON-EXECUTIVE DIRECTOR Retired as managing director in June 2016, having been appointed director in 1987, managing director in 1991 and executive chairman between 1999 and 2005. Former executive director of Bertam Holdings PLC and Lendu Holdings PLC. Joined the Group in 1982 after an initial career in accountancy with KPMG in London and Sydney and in industry with the Rio Tinto plc group. Member of the audit committee. INDEPENDENT NON-EXECUTIVE DIRECTOR Appointed a director in 2016. Has held senior roles at Rabobank International, JP Morgan, and Credit Agricole. Chairman of Climate Mundial Ltd (an FCA- regulated advisory firm focused on environmental and climate finance) and on the advisory board of Generation 10, a data analytics and commodity logistics software company. Member of the audit and remuneration committees. 37 REPORT OF THE DIRECTORS continued The directors present the audited consolidated and Matthew Coulson who was appointed on 1 February 2017. parent-Company financial statements of M.P. Evans Group Derek Shaw retired from the board on 31 January 2017. PLC for the year ended 31 December 2017. Richard Robinow, Philip Fletcher and Peter Hadsley- REVIEW OF BUSINESS AND FUTURE DEVELOPMENTS A review of the year and future prospects (including the annual general meeting in accordance with the articles of association and, being eligible, will offer themselves for Chaplin will retire from the board at the forthcoming principal risks and uncertainties facing the Company) is re-election. included in the chairman’s statement (pages 2 to 4) and in the strategic report (pages 12 to 29) and is incorporated The directors serving at the end of the year, together in this report by reference. RESULTS AND DIVIDEND Details of the profit for the year are given in the consolidated income statement on page 57. with their interests at the beginning (or later date of appointment) and end of the year, in the shares of 10p each in the Company, were as follows: BENEFICIAL OPTIONS At 31 December 2017 A special dividend of 10.00p (2016 – 5.00p) per share was P E Hadsley-Chaplin 1,561,717 paid on 12 April 2017, and an interim dividend of 5.00p (2016 – 2.25p) per share in respect of 2017 was paid on 3 November 2017. The board recommends a final dividend of [12.75]p (2016 – 12.75p) per share. This dividend will be paid on or after 22 June 2018 to those shareholders on the register at the close of business on 20 April 2018. This final dividend is not provided for in the 2017 financial statements. T R J Price M H Coulson P A Fletcher J M Green-Armytage R M Robinow B C J Tozer At 1 January 2017 18,000 1,500 1,048,171 – 96,147 – P E Hadsley-Chaplin 1,561,717 – 216,347 8,333 – – – – – SHARE CAPITAL The Company has one class of share. Details of the T R J Price P A Fletcher issued share capital of the Company are as follows: J M Green-Armytage Issued (fully-paid and voting) capital at 1 January 2017 Shares issued in respect of options exercised Shares bought back and cancelled Issued (fully-paid and voting) capital at 31 December 2017 SHARES OF 10P EACH 55,739,719 95,000 (951,268) 54,883,451 R M Robinow J D Shaw B C J Tozer Further details of the directors’ interests in share options are disclosed in the report of the board to the shareholders on directors’ remuneration, on pages 46 to 48. None of the directors holds any beneficial interest – 275,000 1,128,171 – 96,147 333,065 – – – – – – During the year, the Company bought back and cancelled in, or holds options to buy shares in, any subsidiary 951,268 10p shares for a total cost of US$9,188,000, undertaking of the Company as at the date of this report. representing 1.7% of the Company’s issued share capital, as the board considered that the share price undervalued No director has had a material interest in any contract of the Group’s assets and purchases would be earnings- significance in relation to the business of the Company, or enhancing. any of its subsidiary undertakings, during the financial year or had such an interest at the end of the financial year. DIRECTORS AND DIRECTORS’ INTERESTS The present membership of the board is detailed on As permitted by the Company’s articles of association, pages 36 and 37. The directors shown on pages 36 and there was throughout the year to 31 December 2017, and is 37 served throughout the year, with the exception of at the date of this report, a qualifying third-party indemnity 38 M.P. EVANS GROUP PLCANNUAL REPORT 2017 provision, as defined in section 236 of the Companies Act 2006 in force for the benefit of the directors. SUBSTANTIAL INTERESTS The following substantial interests have been disclosed to the Company as at the date of this report: NATURE SHARES % REPORT OF THE DIRECTORS STATEMENT OF DIRECTORS’ RESPONSIBILITIES IN RESPECT OF THE FINANCIAL STATEMENTS The directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare financial statements for each financial year. Under that law the directors have prepared the Group financial statements Aberdeen Standard Investments KL-Kepong International Ltd Alcatel Bell Pensioenfonds VZW JP Morgan Asset Management (UK) Ltd M M Hadsley-Chaplin Montanaro Asset Management Limited Indirect 8,703,501 15.88 in accordance with International Financial Reporting Direct 7,159,492 13.06 Direct 5,750,000 10.49 Direct Direct 2,580,000 1,928,254 4.71 3.52 Standards (IFRSs) as adopted by the European Union and the Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practices (United Kingdom Accounting Standards, comprising Financial Reporting Standard 101 ‘Reduced Disclosure Framework’ (“FRS101”) and applicable law). Under company law the directors must not approve the financial Direct 1,850,000 3.38 statements unless they are satisfied that they give a true OUTSTANDING OPTIONS TO SUBSCRIBE As at the date of this report, there were options to and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these financial statements, the subscribe for 300,000 shares outstanding under the directors are required to: executive share-option schemes and options to subscribe for 160,070 shares outstanding under the 2017 • select suitable accounting policies and then apply long-term incentive scheme. If all of the options them consistently; were exercised, the resulting number of shares would • make judgements and accounting estimates that are represent (a) 0.83% of the enlarged issued share reasonable and prudent; capital at that date; and (b) 0.92% of the enlarged • state whether IFRSs as adopted by the European Union issued equity share capital at that date if the proposed and applicable United Kingdom accounting standards, authority to purchase shares was exercised in full including FRS101, have been followed, subject to (excluding any share capital which may be purchased and any material departures disclosed and explained held in treasury). in the Group’s and Company’s financial statements PAYMENTS TO SUPPLIERS It is the Group’s normal practice to make payments to suppliers in line with agreed terms, provided that the supplier has performed in accordance with the relevant respectively; and • prepare the financial statements on the going-concern basis unless it is inappropriate to presume that the Company will continue in business. terms and conditions. The Group’s average creditor days The directors are responsible for keeping adequate calculated as at 31 December 2017 amounted to 39 days accounting records that are sufficient to show and explain (2016 - 45 days). the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the FINANCIAL INSTRUMENTS Details of the Group’s financial instruments, and the Company and the Group and enable them to ensure that the financial statements and the directors’ remuneration board’s policy with regard to their use, are given in report comply with the Companies Act 2006 and, as note 32 to the consolidated accounts on pages 82 and 83. regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding SUBSIDIARY COMPANIES Details of the Group’s subsidiary companies, including the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection their country of operation, are given on page 90. of fraud and other irregularities. 39 REPORT OF THE DIRECTORS continued The directors are responsible for the maintenance and integrity of the Company’s website. Legislation in GOING CONCERN The Group’s operations are funded through a the United Kingdom governing the preparation and combination of cash resources, loan finance, and long- dissemination of financial statements may differ from term equity. The board has undertaken a recent review of legislation in other jurisdictions. the Group’s financial position, including forecasts, risks and sensitivities. The review has considered the Group’s The directors consider that the annual report and accounts, plans for further development in Indonesia, along with taken as a whole, are fair, balanced and understandable, the required funding for that development. Based on and provide the information necessary for shareholders that review, the board has concluded that the Group is to assess the Company’s performance, business model expected to be able to continue in operational existence and strategy. for the foreseeable future, being at least the next 12 months from the date of approval of these financial Each of the directors whose names and functions are statements. As a result, the board has concluded that listed in the report of the directors confirms that, to the the going-concern basis continues to be appropriate in best of their knowledge: preparing the financial statements. • the parent-Company financial statements, which have been prepared in accordance with United Kingdom POST-BALANCE-SHEET EVENTS On 4 January 2018, the Group paid the deferred Generally Accepted Accounting Practice (United consideration of US$49.2 million for the acquisition of Kingdom Accounting Standards, comprising FRS 101 Sunrich Plantations Pte Ltd (see note 13). “Reduced Disclosure Framework”, and applicable law), give a true and fair view of the assets, liabilities, On 12 January 2018, the Group announced that the budget financial position and loss of the Company; for the share buyback programme had been extended • the Group financial statements, which have been by £2.5 million to a total of £10 million, and that the prepared in accordance with IFRSs as adopted by the programme would run up to 30 June 2018. European Union, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and INDEPENDENT AUDITORS The auditors, PricewaterhouseCoopers LLP, have • the report of the directors includes a fair review of expressed their willingness to continue in office and a the development and performance of the business resolution to re-appoint them will be proposed at the and the position of the Group and parent Company, forthcoming annual general meeting. together with a description of the principal risks and uncertainties that it faces. Approved by the board of directors and signed on In the case of each director in office at the date the report of the directors is approved: its behalf Katya Merrick Company secretary • so far as the director is aware, there is no relevant 9 April 2018 audit information of which the Group and parent Company’s auditors are unaware; and • they have taken all the steps that they ought to have taken as a director in order to make themselves aware of any relevant audit information and to establish that the Group and parent Company’s auditors are aware of that information. 40 M.P. EVANS GROUP PLCANNUAL REPORT 2017REPORT OF THE DIRECTORS Directors visiting the new mill at Bangka viewing the continuous settling tank, one stage in purifying CPO 41 CORPORATE GOVERNANCE The board recognises the importance of a sound system of officer, prior to his appointment as finance director. Each corporate governance and internal control, and the board executive director, and non-executive director with less seeks to follow the principles set out in the Corporate than nine years’ tenure, retires and must seek re-election Governance Code for Small and Mid-Size Quoted at least every three years. Non-executive directors who Companies 2013 published by the Quoted Companies have served on the board continuously for a period of Alliance (“QCA”) as far as they are relevant to the Group nine years or more will offer themselves for re-election at and its context. It should be noted that the Group is each year’s annual general meeting. not currently required to comply with this Code but it is nonetheless the board’s intention to disclose and report The board reserves to itself a range of key decisions on the corporate-governance structures and processes to ensure it retains proper direction and control of operated by the Group and to develop these further to the Company, whilst delegating authority to individual meet the appropriate standards. An explanation of how executive directors who are responsible for the day-to- the Group has applied the principles is set out below. day management of the business. All major and strategic OPERATION OF THE BOARD Directors decisions of the Company are made in the United Kingdom. The executive and non-executive directors have discussions, on an informal yet frequent basis, to discuss Details of the Company’s board, together with those of progress against budget and other business issues. the audit and remuneration committees, are set out on pages 36 and 37. The board comprises an executive The board has an executive chairman, Peter Hadsley- chairman, two further executive directors and four non- Chaplin. Given the current structure and composition of executive directors, one of whom chairs the audit and the board, the role that Peter Hadsley-Chaplin performs remuneration committees. (which is not that of chief executive), the size of the Group, the size of the shareholdings which the directors Whilst for the early part of 2017 the board comprised hold in the Company and the active dialogue with two executives and five non-executives, following the institutional shareholders that takes place throughout the retirement of Derek Shaw on 31 January 2017 and the year, the board considers that a non-executive chairman appointment of Matthew Coulson as finance director would not provide any further benefit to the Company. on 1 February 2017, the board is now made up of three executive directors and four non-executives. The The board has access to independent professional maximum number of directors permitted under the advice at the Group’s expense when the board deems articles of association is eight. it necessary in order for them to carry out their responsibilities. Currently, the board retains Peel This structure is designed to ensure that there is a clear Hunt LLP as the Company’s nominated adviser. The balance of responsibilities between the executive and board additionally receives advice from independent the non-executive functions. The board meets at least professionals on legal matters, corporate public relations, quarterly and is provided with information which includes taxation, and valuation of the Group’s property assets. executive operating reports, management accounts and budgets. All of the executive directors and non-executive Independence and re-election of long-serving directors directors attended each of the 10 full board meetings During the year, the board has sought to maintain a held in 2017, with the exception of Jock Green-Armytage balance of executive and non-executive directors. who was excused from the meetings held on 4 July 2017 A description of the roles and responsibilities of the and 14 September 2017, Bruce Tozer who was excused directors is set out on pages 36 and 37. More than half from the meeting held on 4 July 2017 and Richard of the directors are non-executive, out of whom Richard Robinow who was excused from the meeting held on Robinow has served for more than nine years. The board 19 June 2017. Matthew Coulson attended the meeting held on 12 January 2017 in his capacity as chief financial considers that Richard Robinow and Jock Green-Armytage have valuable experience in the palm-oil industry. Bruce 42 M.P. EVANS GROUP PLCANNUAL REPORT 2017CORPORATE GOVERNANCE Tozer brings experience in commodity finance and general meeting and the results of the votes cast at environmental markets, and agri-business project finance those meetings, and reports and presentations given at including palm oil, to complement the existing skill set meetings with investors. of the board. The board is confident that each of these directors acts in the best interests of the Company and the Group, free from any conflicts or undue influence. ACCOUNTABILITY Financial reporting As such, the board is satisfied that Richard Robinow, A detailed review of the performance and financial Bruce Tozer and Jock Green-Armytage are independent position of the Group is included in the chairman’s and that the Group should continue to benefit from their statement and the strategic report. The board uses these experience and knowledge. The board acknowledges that and the report of the directors to present a balanced and Philip Fletcher, who was formerly managing director, is understandable assessment of the Group’s position and not independent but takes the view that the Group is well prospects. The directors’ responsibility for the financial served by Mr Fletcher in a non-executive role, due to his statements is described on pages 39 and 40 of the report extensive knowledge of the Group and the sector. of the directors. Directors’ remuneration and appointment Risk management As set out in the report on pages 46 to 48, the The directors acknowledge their responsibilities for the remuneration of the executive directors is determined Group’s system of risk management. Such a system can by the remuneration committee whilst that of the provide reasonable, but not absolute, assurance against non-executives is determined by the whole board. The material misstatement or loss. A review of the process of committee, which during the course of 2017 comprised risk identification, evaluation and management is carried Jock Green-Armytage, Richard Robinow and Derek Shaw out and reviewed by the audit committee. The committee until 31 January 2017, and Jock Green-Armytage, Richard considers the Group’s principal risks, and a summary is Robinow and Bruce Tozer from 29 March 2017, met twice presented to the board for discussion and approval. The and all meetings were attended by all members of the review process considers the control environment and committee serving at the time. the major business risks faced by the Group. In summary this is reported on pages 26 to 29. The Company does not currently have a nominations committee. Any new appointments to the board are Important control procedures, in addition to the day-to- discussed at a full board meeting, taking into account day supervision of parent-Company business, include the current skills and experience of the board and that regular executive visits to the areas of operation of the of the candidate. Each member of the board is given the Group and of its associates, comparison of operating opportunity to meet the individual concerned prior to an performance and monthly management accounts with appointment being made. Relations with shareholders plans and budgets, application of authorisation limits, internal audit of subsidiary undertakings and frequent communication with local management. A board visit, The board attaches great importance to communications including both executives and non-executives, to the with both institutional and private shareholders. Jakarta office and the Kota Bangun estates took place in The board actively meets with major shareholders to October 2017. update them on the progress of the Group and discuss any areas of concern that they may have. Any issues Going concern raised by major shareholders are discussed by the board The board has assessed and concluded on the going- as a whole. This is not always possible with private concern status of the Group, and further information is shareholders, but the annual general meeting provides included in the directors’ report on page 40. an opportunity for private shareholders to raise any issues and discuss the development of the business with Viability board members. The board considers the Group’s longer-term viability on a regular basis. In order to do this, both short-term The board uses the Group’s website (www.mpevans. co.uk/investors) to make available details of the annual budgets and longer-term projections are prepared and reviewed by the board. Due to the long-term nature of the 43 CORPORATE GOVERNANCE continued main industry within which the Group operates, the board auditors of the Group may also attend part or all of each has concluded that projections should be prepared, and meeting and they have direct access to the committee therefore viability considered, over a 10-year period. for independent discussions, without the presence of the executive directors. The committee met three times At the year end, the Group held net funds of during 2017 and each meeting was attended by all of the US$81.4 million. Whilst the Group paid US$49.2 million members with the exception of the meeting held on of deferred consideration related to the acquisition of 14 September 2017 which Jock Green-Armytage was unable Sunrich Plantations Pte Ltd (see note 13) after the end to attend and which Bruce Tozer chaired in his place. of the year, the Group remains in a strongly positive The external auditors attended two of the meetings. net funds position. The Group’s plans for further development of its Indonesian operations have been The audit committee may examine any matters relating taken into consideration, as set out in the strategic report, to the financial affairs of the Group or the Group’s including development of existing projects, investment audit; this includes reviews of the annual accounts and in new hectarage, and appropriate financing where announcements, accounting policies, compliance with necessary. accounting standards, reviewing the Group’s principal risks, the appointment of and fees of auditors and such Principal areas of risk, and their mitigation, are included other related matters as the board may require. in the section on risk management on pages 26 to 29. As noted, whilst legislative changes in Indonesia could During the year the audit committee has: adversely impact on the viability of the Group in its • reviewed the Group’s external financial reporting, current form, the board monitors the situation carefully including receiving a report from the external auditors and considers the risk to be low. Financially, the main risk on the audit work they have performed; to the Group’s results is commodity-price fluctuation, and • reviewed the effectiveness of the Group’s internal as has been demonstrated in previous years, the Group is controls, including a review of the main findings of the able to continue delivering returns even during periods of internal-audit team in Indonesia; lower crude palm oil (“CPO”) prices. • considered the ongoing appropriateness of the Group’s accounting policies; The Group’s prospects remain sound, in particular given • assessed critical accounting judgements and key the young average age of its palms, at seven years. estimates made during the year, particularly in relation An upward trend in crop is expected to last until the to the Group’s acquisition of Bumi Mas in the year, and end of the next decade. Given these prospects and the the recognition and carrying value of deferred tax; resources available to the Group, the board intends at • considered and approved the Group’s risk analysis; least to maintain, if not increase, normal dividends in and future years from their current levels. • agreed the fees and terms of appointment of In light of the above, the board has not identified any the external auditors, reviewed their quality and effectiveness and discussed the key risks to be significant concerns regarding the Group’s longer-term addressed during their audit. viability. Auditors AUDIT COMMITTEE The audit committee is formally constituted with written The auditors were first appointed, following a tender exercise, in 2009. The audit partner changes at least terms of reference (which are available on the Company’s every five years in accordance with professional and website) and is chaired by Jock Green-Armytage. The regulatory standards in order to protect independence other members are Richard Robinow, Bruce Tozer and and objectivity, with Darryl Phillips the audit partner for Philip Fletcher. Jock Green-Armytage and Richard Robinow the 2017 audit. Current policy is to tender the external served throughout the year and Bruce Tozer and Philip audit at least every ten years. Fletcher served since their appointments on 29 March 2017. The executive directors are not members of the The audit committee meets the external auditors to committee but can be invited to attend its meetings. The consider audit planning and the results of the external 44 M.P. EVANS GROUP PLCANNUAL REPORT 2017CORPORATE GOVERNANCE audit. The committee specifically considered the scope those assets and liabilities. The committee concluded of the Group auditors’ engagement and agreed the that it was appropriate to recognise a fair value significant risks for the audit of the 2017 results. adjustment to the plantation land acquired, and that The external auditors have provided only audit services no goodwill arose as part of the business combination; during the current year. Accordingly, the board does not and consider there to be a risk that the provision of non- • the treatment of deferred tax in the consolidated audit services may compromise the external auditors’ balance sheet. The committee considered the independence. judgement that deferred tax should not be provided on unremitted earnings of subsidiaries and associates To assess the effectiveness of the auditors, the committee and concluded that this approach remains appropriate. reviewed their fulfilment of the agreed audit plan and It has also reviewed the estimated carrying value of variations from it, and the auditors’ report on issues deferred tax assets relating to brought-forward tax arising during the course of the audit. losses and has concluded that the estimates are Financial reporting and review of financial statements reasonable. The committee is able to ensure it has a full After reviewing presentations and reports from understanding of business performance through its management and consulting with the auditors, the audit receipt of regular financial and operational reporting, committee is satisfied that the financial statements its review of the budget and long-term plan and its properly present the critical judgements and key discussion of key accounting policies and judgements. It estimates for both the amounts reported and relevant has specifically addressed: disclosures. The committee is also satisfied that the • the acquisition of Bumi Mas made by the Group during significant assumptions used for determining the value of the year. The committee considered the identifiable assets and liabilities have been appropriately scrutinised, assets and liabilities acquired, and the fair values of challenged and are sufficiently robust. Board visit to Kota Bangun estates, East Kalimantan 45 DIRECTORS’ REMUNERATION REPORT The remuneration committee, which is formally constituted with written terms of reference (available BOARD PERFORMANCE EVALUATION Whilst the board, in line with its approach for the on the Company’s website), keeps under review the previous financial year, does not undertake any formal remuneration and terms of employment of the executive appraisal process for the directors, there is a close directors and recommends such remuneration and terms working relationship between the board as a whole to the board. The committee comprises Jock Green- and the executive and non-executive directors and with Armytage, Richard Robinow and Bruce Tozer, and is the Company’s external advisers. Given the nature of chaired by Jock Green-Armytage. SERVICE CONTRACTS All of the executive directors have service contracts with the Company. These contracts continue until terminated the business of the Group and the open dialogue with investors, the board does not feel that a formal appraisal process is currently appropriate but will continue to review this position. by either party giving not less than one year’s notice in writing. The non-executive directors do not have service SUCCESSION PLANNING The chairman maintains a strong individual relationship contracts or provisions for pre-determined compensation with all the directors and any changes to the board are on termination of their appointment. managed collaboratively and with minimal cost and TOTAL DIRECTORS’ REMUNERATION FOR THE YEAR ENDED 31 DECEMBER 2017 SALARY AND FEES £ BONUS PAID £ BONUS DEFERRED £ BENEFITS IN KIND £ SALARY IN LIEU OF PENSION £ PENSION COSTS £ GAIN ON EXERCISE OF SHARE OPTIONS £ TOTAL REMUN- ERATION 2017 £ TOTAL REMUN- ERATION 2016 £ Executive directors P E Hadsley-Chaplin 170,500 T R J Price 1, 3 M H Coulson 1, 2, 3 P A Fletcher 284,000 183,333 — 56,833 94,667 59,950 — — 94,667 59,950 — 27,092 37,465 25,046 — 18,728 22,408 — — 273,153 301,634 10,000 268,125 811,332 546,227 9,885 11,667 — — — — 349,831 — — 212,253 637,833 211,450 154,617 89,603 51,021 21,667 268,125 1,434,316 1,060,114 Non-executive directors R M Robinow 32,000 J M Green-Armytage 37,300 B C J Tozer P A Fletcher J D Shaw 32,000 32,000 2,667 135,967 — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — — 32,000 37,300 32,000 32,000 2,667 36,000 41,200 22,284 22,222 59,500 135,967 181,206 Total 773,800 211,450 154,617 89,603 51,021 21,667 268,125 1,570,283 1,241,320 1. The pension costs for Mr T R J Price and Mr M H Coulson are the contributions made by the Company to a Company-sponsored self- invested personal pension (“SIPP”). 2. Mr M H Coulson’s remuneration in the table above is for the period from his appointment on 1 February 2017. 3. In line with the Group remuneration policy, described below, half of the bonuses for the year to Mr T R J Price and Mr M H Coulson have been deferred into an award of fully-paid shares of equal value which vest after three years subject to continued employment by the Group. 46 M.P. EVANS GROUP PLCANNUAL REPORT 2017 DIRECTORS’ REMUNERATION REPORT disruption to the Group. It is considered that the board would be robust to any unplanned retirements and be EXECUTIVE DIRECTORS When determining the remuneration of the executive able to recruit suitable, well-qualified candidates within a directors, the remuneration committee considers the pay reasonable time period. and conditions across the Group, particularly those of the senior management of the operations in Indonesia. REMUNERATION POLICY The Group’s remuneration committee recognises that the The Group aims to provide remuneration packages for the directors and senior management which are a fair Group’s success depends, in part, on the performance reward for their contribution to the business, having of the directors and senior management and the regard to the complexity of the Group’s operations and importance of ensuring that employees are incentivised. the need to attract, retain and motivate high-quality Its philosophy is to offer a transparent and simple senior management. Remuneration packages are remuneration package to the executive directors, designed to be broadly comparable with those offered comprising a salary and a bonus related to current by similar businesses, such as European plantation and results and personal performance (including significant AIM-listed companies. additional contribution in terms of time and expertise). Half of the bonus is payable in cash and half is deferred Non-pensionable bonuses may be awarded annually in into an award of fully-paid shares which vest three years arrears at the discretion of the committee, taking account after their grant, subject to continued employment by the of the Group’s performance during the period and other Group. This structure for remuneration is designed to be targeted objectives. Bonuses do not exceed twelve easily understood by both executives and shareholders. months’ salary, half payable in cash and half deferred It aims to encourage the executive directors to work into an award of fully-paid shares which vest three years collegiately, focus their efforts on making decisions that after their grant subject to continued employment by are in the Group’s best long-term interests, and, to some the Group (as described above). The bonus in respect extent, share in the benefits that accrue to shareholders of 2017 took into account the strong increase in profit from a higher future share price. This avoids the need for and production of CPO and palm kernels, and the good complex performance measures and the risk that targets progress made in planting new areas. The absolute encourage behaviour that sacrifices long-term growth value of these measures was assessed, as was their potential in favour of short-term results. outturn against expected performance. In addition, the remuneration committee acknowledged, inter LONG-TERM INCENTIVE SCHEME The long-term incentive scheme established in 2017 governs alia, furtherance of the Group’s strategic objectives of controlling all its operations and the successful the grant of both deferred-bonus awards to executive acquisition of the 10,000-hectare project Bumi Mas. directors and annual awards of fully-paid shares to senior staff other than directors. The award of fully-paid shares has the advantage of being substantially less dilutive than market-priced share options whilst continuing to NON-EXECUTIVE DIRECTORS The fees of the non-executive directors are determined by the board having regard to the complexity of the provide an adequate level of incentive to the recipient. Group’s operations and the need to attract, retain and The long-term incentive for executive directors is through the level of fees paid for similar roles in equivalent motivate high-quality non-executive directors and the award of fully-paid share options under the deferred- companies. bonus policy described above. No additional performance criteria attach to the deferred-bonus awards since the original bonus will have been performance-related. In EXECUTIVE SHARE-OPTION SCHEMES The chief executive is a member of executive share- respect of senior staff who are not directors, the Group option schemes which were established in 2001 and 2012. now aims annually to give a limited number of fully-paid No further options can be granted under the scheme shares which vest after three years subject to continued established in 2001 and the remuneration committee employment by the Group. No performance criteria attach does not intend to grant any further share options under to the senior-staff awards. the scheme established in 2012. 47 DIRECTORS’ REMUNERATION REPORT continued Options which were previously granted under the 2001 At 31 December 2017 the middle-market quotation for and 2012 schemes give the chief executive the right to the Company’s shares, as derived from the London purchase shares on a future date at the market price Stock Exchange Daily Official List, was 783.25p, as of the shares on the date that the options are granted. compared with the high and low quotations for the year As such, the value of any option is closely tied to the of 819.75p and 630.00p respectively. performance of the Group as reflected in its share price. There will be no gain in exercise unless the share price on the exercise date exceeds the share price on PENSIONS The Company sponsors self-invested personal the date the options were granted. On 31 December 2017, pensions (“SIPPs”) for the UK executive directors. options over 200,000 (2016 – 275,000) shares granted to Contributions made by the Company to the SIPPs and him under these schemes remained outstanding. to a life-assurance company give the executives a During the year, 75,000 options were exercised pension at retirement, a pension to a spouse payable (2015 none) shortly before they were due to lapse, on death whilst in the employment of the Company, and none (2016 none) lapsed. and life-assurance cover based on a multiple of salary. No element of a director’s remuneration package, other The chief executive and finance director are members than basic salary, is pensionable. Individuals may elect of the long-term incentive scheme established in 2017 to forgoe contributions to the SIPP, in which case they described above, under which half of any discretionary receive an additional salary paid in lieu of the employer’s bonus is deferred into fully-paid shares. Under this pension contributions at the same cost to the Company. arrangement options over 24,680 fully-paid shares were awarded in 2017 (2016 none), representing half of the Approved by the board of directors and signed bonus awarded to these individuals in respect of 2016. by its order No options are held by the non-executive directors. Katya Merrick Company Secretary 9 April 2018 OPTIONS HELD OVER SHARES OF THE COMPANY BY THE EXECUTIVE DIRECTORS DURING THE YEAR ENDED 31 DECEMBER 2017 BALANCE AT 1 JAN 2017 GRANTED IN THE YEAR EXERCISED IN THE YEAR BALANCE AT 31 DEC 2017 EXERCISE PRICE DATE OF GRANT DATE FROM WHICH NORMALLY EXERCISABLE EXPIRY DATE Executive share- option scheme T R J Price Total Long-term incentive scheme T R J Price M H Coulson Total *75,000 *75,000 50,000 5,750 44,250 25,000 275,000 — — — — — — — 75,000 — — — — — — 75,000 50,000 5,750 44,250 25,000 75,000 200,000 385.00 159.50 483.21 520.00 510.00 410.50 16 Nov 07 16 Nov 10 16 Nov 17 24 Nov 08 24 Nov 11 24 Nov 18 19 Jun 12 19 Jun 15 19 Jun 22 17 Jan 13 17 Jan 16 17 Jan 23 17 Jan 13 17 Jan 16 17 Jan 23 13 Jun 16 13 Jun 19 13 Jun 26 — — — 16,347 8,333 24,680 — — — 16,347 8,333 24,680 0.00 0.00 8 Jun 17 8 Jun 17 3 Apr 20 3 Apr 20 2 Apr 27 2 Apr 27 * Held at appointment on 1 January 2010 48 M.P. EVANS GROUP PLCANNUAL REPORT 2017INDEPENDENT AUDITORS’ REPORT INDEPENDENT AUDITORS’ REPORT To the members of M.P. Evans Group PLC Report on the audit of the financial statements OPINION In our opinion: • M.P. Evans PLC’s Group financial statements and parent-Company financial statements (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 2017 and of the Group’s profit and cash flows for the year then ended; • the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the European Union; • the parent-Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards, comprising FRS 101 “Reduced Disclosure Framework”, and applicable law); and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. We have audited the financial statements, included within the annual report, which comprise: the consolidated and parent-Company balance sheets as at 31 December 2017; the consolidated income statement and statement of comprehensive income, the consolidated cash-flow statement, and the consolidated and parent-Company statements of changes in equity for the year then ended; the accounting policies; and the notes to the financial statements. BASIS FOR OPINION We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities under ISAs (UK) are further described in the auditors’ responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We remained independent of the Group in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, which includes the FRC’s Ethical Standard, as applicable to listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. 49 INDEPENDENT AUDITORS’ REPORT continued OUR AUDIT APPROACH Overview • Overall Group materiality: US$1.7 million (2016: US$1.5 million), based on 5% of profit before tax (excluding profit from discontinued operations). • Overall parent-Company materiality: US$1,300,000 (2016: US$650,000), based on 1% of total assets. Materiality • We performed audit work over the complete financial information for reporting units Audit scope which accounted for approximately 100% (2016: 100%) of the Group’s revenue and 100% (2016: 100%) of the Group’s profit before taxation, excluding the profit from discontinued operations and the share of profit from associates. These reporting units comprised certain operating businesses in Indonesia and centralised functions. Key audit matters • Identified 29 reporting units, three of which were significant due to their size. These comprised certain operating businesses in Indonesia, associates and centralised functions which required an audit of their complete financial information. • Conducted specific audit procedures on certain balances and transactions in respect of a number of other reporting units such as those relating to acquisition accounting in respect of Sunrich Plantations Pte Ltd and the disposal of the associated undertaking PT Agro Muko. • Acquisition accounting and disclosures in respect of Sunrich Plantations Pte Ltd. • Capitalisation of costs in relation to plantation assets. • Assessment of the gain on disposal of PT Agro Muko (“PTAM”). THE SCOPE OF OUR AUDIT As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits we also addressed the risk of management override of internal controls, including evaluating whether there was evidence of bias by the directors that represented a risk of material misstatement due to fraud. KEY AUDIT MATTERS Key audit matters are those matters that, in the auditors’ professional judgement, were of most significance in the audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by the auditors, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. These matters, and any comments we make on the results of our procedures thereon, 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. This is not a complete list of all risks identified by our audit. 50 M.P. EVANS GROUP PLCANNUAL REPORT 2017INDEPENDENT AUDITORS’ REPORT KEY AUDIT MATTER HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER Acquisition accounting and disclosures in respect We assessed the completeness and accuracy of management’s of Sunrich Plantations Pte Ltd. provisional purchase price allocation through the following Refer to page 44 (corporate governance), notes procedures: 3 and 13 for the related accounting policies, • We obtained, read and understood the sale and purchase judgements and estimates for further information. agreement (“SPA”) and vouched the consideration paid During the year the Group completed the purchase of 100% of the share capital of Sunrich Plantations Pte Ltd for a consideration of US$52.3 million. In accordance with IFRS3, management are required to separately identify and record the fair value of the acquired assets and liabilities, including plantation assets and land rights. Management identified US$45.4 million in relation to planting assets and US$53.6 million in respect of land rights. The accounting for a significant acquisition can be complex, in particular where there are a number of consideration payments, escrow arrangements and fair value assessments. Management prepared its assessment of the acquisition accounting and associated disclosure taking account of their experience of other acquisitions as well as already running a number of other similar plantations. to corroborating evidence including bank statements. We ensured that any consideration adjustments through amounts in escrow were properly reflected; • We performed audit work over the acquired balance sheet, which included the vouching of key balances to corroborating evidence such as contracts, bank confirmations and other accounting records and verifying liabilities for completeness by reviewing post-acquisition transactions. This work was carried out by our local PwC team with direction and oversight from the Group team; • We tested the fair value adjustments and purchase price allocation (specifically land and plantation assets), by assessing management’s rationale and explanations against other recent market transactions as well as against historical records within the Group such as costs of planting per hectare. Further, we assessed if other intangible assets, such as customer relationships and contracts, should be recognised (which they were not) given the nature of the entity; and • We discussed the results of this analysis with management and the audit committee and ensured appropriate disclosure was included within the annual report which describes the nature of the acquisition and arising fair value adjustments. Based on the work performed in this area, we have determined that the accounting and disclosures are appropriate. 51 INDEPENDENT AUDITORS’ REPORT continued KEY AUDIT MATTER HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER Capitalisation of costs in relation to plantation We have audited the level of capitalised assets within “Planting” assets through a number of procedures, which included the following: The Group accounts for bearer plants (oil • We agreed the split of hectares between mature palms), in accordance with IAS16 Property, Plant (depreciating) and immature (non-depreciating) areas. This and Equipment (“IAS 16”), under the historic was done through site visits, our knowledge of the business, accumulated cost model (before maturity) and through prior year audits, and ensuring that the records were subsequently records depreciation over the consistent with internal management information including useful economic life of the asset as estimated by the views of management’s agro-economic team; management once maturity is reached. • We recalculated management’s allocation of costs between As at 31 December 2017 the Group held a net book the categories by systematically applying costs incurred over value of US$130.1 million (2016 US$90.6 million) mature and immature areas; in relation to “Planting”, of which US$44.3 million (2016 US$21.8 million) related to immature planting and was not depreciated. As further disclosed in the strategic report, the Group’s plantations covered 37,100 hectares. The main area of judgement required by management is to ensure that directly attributable costs are allocated appropriately between immature plantations (and therefore capitalised when incurred) and mature plantations (expensed when incurred). This allocation is done using • We tested a sample of additions to immature areas by verifying the nature of the costs capitalised against corroborating evidence and assessing whether the nature of the costs capitalised meet the required criteria defined in IAS 16; and • We audited management’s assumptions used to estimate the period over which palms mature and the useful economic life used for depreciation, by comparing to scientific literature, industry standards and licencing agreements over land rights. internal records which identify areas and dates Based on the evidence obtained we believe that the policies of planting activities. The allocation of costs is and estimates used in terms of capitalising and depreciating performed using systematic calculations on where these costs are reasonable and the related disclosures are time and costs are spent. appropriate. Once capitalised, there are further considerations around the point at which palms become mature and the period over which they are depreciated. Management consider a number of factors including industry ‘norms’ in forming their policies which are that palms are declared mature once they produce economically viable fruit, typically around 30 months. Oil palms produce fruit over their whole lives, but become uneconomic to harvest after 20-25 years of harvesting because of their height. This pattern is common throughout the industry and informs the depreciation period of 20 years applied consistently by the Group. 52 M.P. EVANS GROUP PLCANNUAL REPORT 2017INDEPENDENT AUDITORS’ REPORT KEY AUDIT MATTER HOW OUR AUDIT ADDRESSED THE KEY AUDIT MATTER Assessment of the gain on disposal of PT Agro We audited the completeness and accuracy of management’s Muko (“Agro Muko”) calculation of the gain on disposal of Agro Muko. In doing so, we On 6 December 2016 the Group entered into a performed the following: conditional contract to sell its interest in the • Obtained, read and understood the sale and purchase share capital of PT Agro Muko (“Agro Muko”). In agreement (“SPA”) and the accounting implications. We February 2017 the statutory approvals from the ensured that the terms of the SPA were consistent with our Indonesian authorities were obtained and, in line knowledge of the transaction and agreed to board minutes; with the share purchase agreement and market announcements, the sale and purchase completed for a cash consideration of US$99.8 million on 17 March 2017. Management have classified the share of results • We vouched the consideration received to the SPA and bank accounts; • We verified whether the gain on disposal was calculated in accordance with the relevant clauses of the SPA; from the Agro Muko operations up to 17 March 2017 • We compared the net assets disposed to underlying as discontinued operations and a gain on disposal accounting records and performed audit procedures over the was calculated by deducting transaction-related completion balance sheet of Agro Muko; costs and the Group’s share of net assets at the completion date from the consideration received. • We evaluated the adequacy of the related disclosure in the financial statements for compliance with the requirements Given the quantum of the transaction and of IFRS5. complexities of disclosures as required by IFRS5, Discontinued Operations, we have considered this to be a key audit matter. From the evidence obtained we found the calculation of the gain on disposal is appropriate and the disclosures made as discontinued operations are in accordance with IFRS5. We determined that there were no key audit matters applicable to the parent Company to communicate in our report. HOW WE TAILORED THE AUDIT SCOPE We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole, taking into account the structure of the Group and the parent Company, the accounting processes and controls, and the industry in which they operate. M.P. Evans Group PLC (“MP Evans”) is traded on the London Stock Exchange’s Alternative Investment Market (“AIM”). The Group’s assets consist of oil-palm plantations (both majority and minority held) in Indonesia and property development in Malaysia. The Group is structured to include UK-based holding entities and Indonesian-based operating subsidiaries. The Group also has associate interests in PT Kerasaan, an Indonesian palm-oil producer, and in Bertam Properties, a Malaysian property developer. The Group operates with a head office management and finance team in the UK, as well as a local management and finance team in Indonesia. In establishing the overall approach to the Group audit, we determined the type of work that needed to be performed at the reporting units by us, as the Group engagement team, or by component Auditors of other PwC network firms and other firms operating under our instruction. As the majority of the Group’s operations are in Indonesia, we have carried out full-scope audits over the principal trading subsidiaries in Indonesia, utilising our component audit team. Where the work was performed by component Auditors, we determined the level of involvement we needed to have in the audit work at those reporting units to be able to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the financial statements as a whole. 53 INDEPENDENT AUDITORS’ REPORT continued We identified 29 reporting units, three of which were significant due to their size. These comprised certain operating businesses and centralised functions which required an audit of their complete financial information. We also conducted specific audit procedures on certain balances and transactions in respect of a number of other reporting units. This gave us coverage of approximately 100% of the Group’s profit before taxation, excluding the profit from discontinued operations and the share of profit from associates. This, together with the additional procedures performed at the Group level, including testing the consolidation process, the purchase of Sunrich Plantation Pte Ltd, and the sale of PT Agro Muko, gave us the evidence we needed for our opinion on the Group financial statements as a whole. MATERIALITY The scope of our audit was influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures on the individual financial statement line items and disclosures and in evaluating the effect of misstatements, both individually and in aggregate, on the financial statements as a whole. Based on our professional judgement, we determined materiality for the financial statements as a whole as follows: GROUP FINANCIAL STATEMENTS PARENT-COMPANY FINANCIAL STATEMENTS OVERALL MATERIALITY US$1.7 million (2016: US$1.5 million). US$1,300,000 (2016: US$650,000). HOW WE DETERMINED IT 5% of profit before tax (excluding profit 1% of total assets. from discontinued operations). RATIONALE FOR BENCHMARK APPLIED Based on the benchmarks used in The parent Company does not generate the annual report, profit before tax income but incurs some expenses which is the primary measure used by include salaries (including directors), the shareholders in assessing the administrative expenses linked with the performance of the Group, and is a parent Company operation and interest generally accepted auditing benchmark. expense for the bank loan. The entity Note, when applying the profit before itself is predominantly that of a holding tax benchmark, we have excluded profit company and as such total assets is from discontinued operations and the deemed to be the most appropriate net gain on disposal of PT Agro Muko. benchmark. Investors are interested in the investments held by the parent. For each component in the scope of our Group audit, we allocated a materiality that is less than our overall Group materiality. The range of materiality allocated across components was between US$6,000 and US$1,300,000. Certain components were audited to a local statutory audit materiality that was also less than our overall Group materiality. We agreed with the audit committee that we would report to them misstatements identified during our audit above US$85,000 (Group audit) (2016: US$50,000) and US$32,500 (parent-Company audit) (2016: US$32,500) as well as misstatements below those amounts that, in our view, warranted reporting for qualitative reasons. 54 M.P. EVANS GROUP PLCANNUAL REPORT 2017 INDEPENDENT AUDITORS’ REPORT CONCLUSIONS RELATING TO GOING CONCERN We have nothing to report in respect of the following matters in relation to which ISAs (UK) require us to report to you when: • the directors’ use of the going-concern basis of accounting in the preparation of the financial statements is not appropriate; or • the directors have not disclosed in the financial statements any identified material uncertainties that may cast significant doubt about the Group’s and parent-Company’s ability to continue to adopt the going-concern basis of accounting for a period of at least twelve months from the date when the financial statements are authorised for issue. However, because not all future events or conditions can be predicted, this statement is not a guarantee as to the Group’s and parent-Company’s ability to continue as a going concern. REPORTING ON OTHER INFORMATION The other information comprises all of the information in the annual report other than the financial statements and our auditors’ report thereon. The directors are responsible for the other information. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except to the extent otherwise explicitly stated in this report, any form of assurance thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. If we identify an apparent material inconsistency or material misstatement, we are required to perform procedures to conclude whether there is a material misstatement of the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report based on these responsibilities. With respect to the strategic report and report of the directors, we also considered whether the disclosures required by the UK Companies Act 2006 have been included. Based on the responsibilities described above and our work undertaken in the course of the audit, ISAs (UK) require us also to report certain opinions and matters as described below. STRATEGIC REPORT AND REPORT OF THE DIRECTORS In our opinion, based on the work undertaken in the course of the audit, the information given in the strategic report and report of the directors for the year ended 31 December 2017 is consistent with the financial statements and has been prepared in accordance with applicable legal requirements. In light of the knowledge and understanding of the Group and parent Company and their environment obtained in the course of the audit, we did not identify any material misstatements in the strategic report and report of the directors. RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS AND THE AUDIT Responsibilities of the directors for the financial statements As explained more fully in the statement of directors’ responsibilities, the directors are responsible for the preparation of the financial statements in accordance with the applicable framework and for being satisfied that they give a true and fair view. The directors are also responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. 55 INDEPENDENT AUDITORS’ REPORT continued In preparing the financial statements, the directors are responsible for assessing the Group’s and the parent- Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going-concern basis of accounting unless the directors either intend to liquidate the Group or the parent-Company or to cease operations, or have no realistic alternative but to do so. Auditors’ responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors’ report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditors’ report. Use of this report This report, including the opinions, has been prepared for and only for the parent Company’s members as a body in accordance with Chapter 3 of Part 16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing. Other required reporting COMPANIES ACT 2006 EXCEPTION REPORTING 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 • certain disclosures of directors’ remuneration specified by law are not made; or • the parent-Company financial statements are not in agreement with the accounting records and returns. We have no exceptions to report arising from this responsibility. Darryl Phillips (Senior Statutory Auditor) for and on behalf of PricewaterhouseCoopers LLP Chartered Accountants and Statutory Auditors London 9 April 2018 56 M.P. EVANS GROUP PLCANNUAL REPORT 2017CONS0LIDATED INCOME STATEMENT For the year ended 31 December 2017 Continuing operations Revenue Cost of sales Gross profit Gain on biological assets Foreign-exchange gains/(losses) Other administrative expenses Other income Operating profit Finance income Finance costs Profit before tax Tax on profit on ordinary activities Profit after tax Share of associated companies’ profit after tax Profit for the year from continuing operations Profit for the year from discontinued operations Profit for the year Attributable to: Owners of M.P. Evans Group PLC Non-controlling interests Continuing operations Basic earnings per 10p share Diluted earnings per 10p share Continuing and discontinued operations Basic earnings per 10p share Diluted earnings per 10p share Note 2017 US$’000 2016 US$’000 116,536 (80,290) 36,246 47 365 (3,068) 360 33,950 2,147 (1,027) 35,070 (11,244) 23,826 2,590 26,416 68,018 94,434 90,514 3,920 94,434 83,864 (59,480) 24,384 683 (658) (4,931) 258 19,736 868 (1,389) 19,215 (7,547) 11,668 4,763 16,431 18,823 35,254 31,273 3,981 35,254 US cents US cents 40.7 40.5 163.8 163.0 22.3 22.3 56.1 56.0 6 7 8 9 16 11 29 12 12 12 12 57 CONS0LIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2017 Other comprehensive income Items that may be reclassified to the income statement Exchange gain/(loss) on translation of foreign operations Release of deferred profit on sale of land Items that will not be reclassified to the income statement Other comprehensive (expense)/income Other comprehensive income/(expense) for the year Profit for the year Total comprehensive income Attributable to: Owners of M.P. Evans Group PLC Non-controlling interests Note 2017 US$’000 2016 US$’000 1,655 (135) (473) 1,047 94,434 95,481 91,499 3,982 95,481 (221) (291) 12 (500) 35,254 34,754 30,771 3,983 34,754 29 58 M.P. EVANS GROUP PLCANNUAL REPORT 2017 CONS0LIDATED BALANCE SHEET As at 31 December 2017 Note 2017 US$’000 2016 US$’000 Non-current assets Goodwill Property, plant and equipment Investments in associates Investments Deferred-tax asset Trade and other receivables Current assets Biological assets Inventories Trade and other receivables Current-tax asset Current-asset investments Cash and cash equivalents Assets classified as held for sale Total assets Current liabilities Borrowings Trade and other payables Current-tax liability Net current assets Non-current liabilities Borrowings Deferred-tax liability Retirement-benefit obligations Total liabilities Net assets Equity Share capital Other reserves Retained earnings Equity attributable to the owners of M.P. Evans Group PLC Non-controlling interests Total equity 14 15 16 17 24 20 18 19 20 21 21 23 22 23 24 25 26 28 28 29 12,228 321,558 20,467 53 12,280 5,465 372,051 1,843 10,462 34,368 4,614 6,913 113,910 — 172,110 544,161 9,159 65,194 5,317 79,670 92,440 30,285 11,813 8,434 50,532 130,202 413,959 9,255 51,346 323,397 383,998 29,961 413,959 1,157 201,789 18,392 66 15,386 2,889 239,679 1,576 13,436 19,026 3,440 14,262 91,405 31,751 174,896 414,575 9,519 19,232 14,590 43,341 131,555 20,810 526 5,675 27,011 70,352 344,223 9,366 49,669 261,964 320,999 23,224 344,223 The financial statements on pages 57 to 83 were approved by the board of directors on 9 April 2018 and signed on its behalf by Tristan Price Chief executive Matthew Coulson Finance director 59 CONS0LIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2017 SHARE CAPITAL US$’000 OTHER RESERVES US$’000 RETAINED EARNINGS US$’000 Note NON- CONTROLLING INTERESTS US$’000 TOTAL US$’000 TOTAL EQUITY US$’000 Profit for the year Other comprehensive income for the year Total comprehensive income for the year Issue of share capital Share buy-backs Dividends paid Dividends from associates Credit to equity for equity- settled share-based payments Group reconstruction Minority interest arising on acquisition Transactions with owners At 1 January 2017 At 31 December 2017 Profit for the year Disposal of associate Other comprehensive (expense)/income for the year Total comprehensive income for the year Issue of share capital Dividends paid Dividends from associates Credit to equity for equity- settled share-based payments Transactions with owners At 1 January 2016 At 31 December 2016 26 10 16 27 26 10, 29 16 27 — — — 13 (124) — — — — — (111) 9,366 9,255 — — — — 6 — — — 6 9,360 9,366 2,590 87,924 90,514 3,920 94,434 535 450 985 62 1,047 3,125 88,374 91,499 3,982 95,481 493 124 — (2,240) 175 — — (1,448) 49,669 51,346 — (9,188) (19,995) 2,240 506 (9,188) (19,995) — 54 (52) — 229 (52) — (26,941) 261,964 323,397 (28,500) 320,999 383,998 4,763 (24,506) 26,510 24,506 31,273 — (683) 181 (502) — — — — — — 2,755 2,755 23,224 29,961 506 (9,188) (19,995) — 229 (52) 2,755 (25,745) 344,223 413,959 3,981 35,254 — 2 — (500) (20,426) 51,197 30,771 3,983 34,754 225 — — 231 — 231 (10,033) (10,033) (2,375) (12,408) (6,377) 6,377 21 (6,131) 76,226 49,669 — (3,656) 214,423 261,964 — 21 — — — 21 (9,781) 300,009 320,999 (2,375) 21,616 23,224 (12,156) 321,625 344,223 60 M.P. EVANS GROUP PLCANNUAL REPORT 2017CONS0LIDATED CASH-FLOW STATEMENT For the year ended 31 December 2017 Note 30 15 6 13 11 Net cash generated by operating activities Investing activities Purchase of property, plant and equipment Interest received Proceeds on disposal of property, plant and equipment Purchase of subsidiary undertaking Disposal of associated undertaking Net cash generated by investing activities Financing activities New borrowings Repayment of borrowings Decrease in bank deposits treated as current-asset investments Dividends paid to Company shareholders Dividends paid to non-controlling interests Exercise of Company share options Buy-back of Company shares Net cash used by financing activities Net increase in cash and cash equivalents Net cash and cash equivalents at 1 January Effect of foreign-exchange rates on cash and cash equivalents Cash and cash equivalents at 31 December 21 2017 US$’000 20,723 (29,533) 2,147 67 (39,589) 99,769 32,861 — (9,552) 7,349 (19,995) — 506 (9,188) (30,880) 22,704 91,405 (199) 113,910 2016 US$’000 22,888 (26,847) 868 155 — 79,720 53,896 11,486 (14,073) 4,141 (9,802) (2,375) — — (10,623) 66,161 25,811 (567) 91,405 61 NOTES TO THE CONSOLIDATED ACCOUNTS For the year ended 31 December 2017 1 General information M.P. Evans Group PLC is a public limited company incorporated in the United Kingdom under the Companies Act 2006 and listed on the London Stock Exchange’s Alternative Investment Market (“AIM”). The Company is registered in England and Wales, and the address of its registered office is given on page 96. The nature of the Group’s operations and its principal activities are set out in note 4 and in the strategic report on pages 12 to 29. The Group is domiciled in the UK. The functional currency of M.P. Evans Group PLC, determined under IAS 21, is the US Dollar. Likewise, the functional currency of subsidiaries operating in the palm-oil sector is the US Dollar, reflecting the primary economic environment in which the Group operates. The presentational currency for the Group accounts is also the US Dollar. As permitted by section 408 of the Companies Act 2006, the Company has elected not to present its own income statement for the year. M.P. Evans Group PLC reported a loss of US$1,426,000 for the financial year ended 31 December 2017 (2016 loss of US$6,979,000). The Company’s separate financial statements are set out on pages 84 to 89. By virtue of Section 479A of the Companies Act 2006, the following subsidiaries are exempt from the requirement to have an audit and prepare individual accounts: Lendu (UK) Limited; Sungkai Estates Limited; Supara Investments Limited; The Singapore Para Rubber Estates, Limited; Bertam UK Limited; Bertam Consolidated Rubber Company Limited; and Sungkai Holdings Limited. Details of all subsidiary companies are shown on page 90. 2 Adoption of new and revised accounting standards (a) New and amended standards adopted by the Group There have been a number of amendments to IFRSs issued by the International Accounting Standards Board (“IASB”) that have become effective for the first time during the year ended 31 December 2017. However, whilst the Group has assessed each of them, none of the following standards have had a material impact on the Group’s results or financial position. IAS 12 (amendments) Recognition of deferred-tax assets for unrealised losses IAS 7 (amendments) Disclosure initiative Annual Improvements to IFRS Standards 2014-2016 Cycle (b) New standards, amendments and interpretations issued but not effective for the year beginning 1 January 2017 and not adopted early At the date of authorisation of these financial statements, a number of new and revised IFRSs have been issued by the IASB but are not yet effective, as listed below. The directors have performed an initial review of each of the new and revised standards, and based on the Group’s current operations and accounting policies, are of the view that their adoption will not lead to any material change in the Group’s financial reporting. IFRS 16 Leases IFRS 17 Insurance contracts IFRS 2 (amendments) Classification and measurement of share-based payment transactions IAS 28 (amendments) Long-term interests in associates and joint ventures IAS 19 (amendments) Plan amendment, curtailment or settlement Annual Improvements to IFRS Standards 2015-2017 Cycle IFRIC 22 Foreign currency transactions and advance consideration IFRIC 23 Uncertainty over income tax treatments In addition to the above, the IASB has also issued two new standards which are not effective for the 2017 Group accounts and have not been adopted early, but will be adopted in 2018. At the date of authorisation of these financial statements, the directors have completed their review of these new standards, and have concluded as follows: IFRS 9 Financial instruments – the standard replaces IAS 39 and introduces some new requirements in particular in relation to impairment based on an expected credit loss model, and a new hedge accounting model. Due to both the low level of credit loss experienced by the Group, and the lack of hedge accounting, no material change is expected. IFRS 15 Revenue from contracts with customers – the standard sets out a five-step model for recognition and measurement of revenue. Due to the nature of the Group’s main revenue streams, this is not expected to lead to a material change in the Group’s own revenue accounting. The timing of revenue recognition by the Group’s property associate is expected to change upon implementation of IFRS 15. If the consolidated accounts for 2017 had been prepared under the new standard, the Group’s share of this associate’s profit for the year would have increased by approximately US$0.8 million and its share of the net assets would have increased by approximately US$3.5 million. 62 M.P. EVANS GROUP PLCANNUAL REPORT 2017 NOTES TO THE CONSOLIDATED ACCOUNTS 3 Accounting policies (a) Accounting convention and basis of presentation The consolidated financial statements of M.P. Evans Group PLC have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and IFRS Interpretations Committee (“IFRS IC”) interpretations as adopted by the European Union, and the Companies Act 2006 as applicable to companies reporting under IFRS. They have been prepared under the historical cost convention, as modified by the valuation of biological assets and available-for-sale financial assets. The Group’s financial statements therefore comply with the AIM rules. (b) Going concern The financial statements have been prepared on a going-concern basis. The directors have conducted a review of projected cash flows from operations, investing and financing, concluding that the Group has sufficient projected funds to carry on its business and its planned investment programme in the medium term. Furthermore, the Group has control over its main cash expenditure, investment in its new estates and mills, which it can manage according to the resources available. Further details are given in the report of the directors on page 40. (c) Basis of consolidation The Group financial statements consolidate the financial statements of the Company and all of its subsidiaries, and equity account for its associated undertakings. The Group treats as subsidiaries those entities in which it has power over the investee, has the rights or exposure to variable returns, and has the ability to affect those returns. All subsidiary and associated undertakings prepare their financial statements to 31 December. Where necessary, the financial statements of subsidiary and associated companies are adjusted prior to consolidation or equity accounting to bring them into line with the Group’s accounting policies. All intra-Group transactions, balances, income and expenses are eliminated on consolidation. The results of subsidiaries or associated companies acquired or disposed of during the year are included in the consolidated income statement from or up to the effective point of gaining or losing either control or significant influence as appropriate. Non-controlling interests in the net assets of subsidiaries are separately identified. They consist of non-controlling interests at the date of business combination, and the non-controlling interest’s share of subsequent changes in equity. On disposal of a subsidiary or associated company, the gain or loss on disposal is calculated as the difference between the fair value of the proceeds received and the Group’s consolidated carrying value of the assets and liabilities of the subsidiary or associated undertaking, including goodwill where relevant. If required by IFRS 5, results (including comparative amounts) of the disposed-of subsidiary or associated undertaking are included within discontinued operations. (d) Revenue Revenue represents the fair value of crops and produce sold during the year, excluding sales taxes. Income is recognised at the point of delivery, which is deemed to be the point at which the risks and rewards are transferred to the buyer. Revenue in respect of construction contracts is recognised at the point the sale of the developed property is fully completed. (e) Retirement benefits The Group operates a defined-contribution pension scheme. The pension charge represents the contributions payable by the Group under the rules of the scheme. In Indonesia, as required by law, a lump sum is paid to employees on retirement or on leaving the Group’s employment. This terminal benefit is unfunded but the expense is accrued by the Group based on an annual actuarial review, and charged to the income statement on the basis of individuals’ service at the balance-sheet date. (f ) Share-based payments The Group issues equity-settled, share-based payments to certain employees. Such share-based payments are measured at fair value (excluding the effect of any non-market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled, share-based payments is expensed on a straight-line basis over the vesting period, based on the Group’s estimate of shares that will eventually vest. Fair value is measured by application of the Black-Scholes model, using management’s best estimates assuming that: options are exercised in the middle of the vesting period for market-priced options, and at the start of the vesting period for options issued under the long-term incentive scheme; dividend yield is the latest annual dividend divided by the share price on the date the options are granted; share-price volatility is assessed as the average standard deviation over one year using share prices since 1 January 1993. At each balance-sheet date the Group estimates the number of options it expects to vest. Any changes from the previous estimate are recognised in the income statement. (g) Goodwill On acquisition of shares in subsidiary companies or associated undertakings, the directors compare the fair value of the consideration given for the shares with the fair value of the identifiable net assets acquired, including an estimation of the fair value of property, plant and equipment, intangible fixed assets and biological assets. This comparison is used to establish the value of goodwill or the excess of fair value of the identifiable net assets and liabilities acquired over their cost. 63 NOTES TO THE CONSOLIDATED ACCOUNTS continued 3 Accounting policies continued (g) Goodwill (continued) Goodwill arising on acquisition is ascribed to an operating subsidiary and capitalised, with provision being made for any impairment. Goodwill is tested for impairment at least annually but provisions, once made, are not reversed. ‘Negative goodwill’, where the fair value of the assets acquired exceeds the fair value of the consideration given, is taken to the income statement in the period in which it arises. (h) Biological assets For internal reporting and decision-making, the Group’s policy is to recognise fresh fruit bunches (“ffb”) at the point of harvest. For the purposes of statutory reporting, taking into account advice from the Group’s auditor on the interpretation of IAS 41, the Group’s policy is to include an estimate of the fair value of ffb prior to harvest as a biological asset in the Group’s financial statements (see note 18). The impact of initial valuations and subsequent changes in value are included in the Group’s income statement. The valuation falls into the IFRS category ‘Level 3’, since sales of ffb prior to harvest are never transacted. Deferred tax is recognised at the relevant local rate on the difference between the cost of biological assets and their carrying value determined under IAS 41. (i) Property, plant and equipment Property, plant and equipment is stated at historical cost less depreciation. Historical cost includes all expenditure incurred in acquiring the asset, including directly-attributable borrowing costs. Leasehold land in Indonesia is held on 25- or 30-year leases and is not depreciated as the leases can be renewed without significant cost. Perpetual-leasehold land in Malaysia is classified as freehold land, which is not depreciated. Oil-palm plantings are recognised at cost and depreciated, once they reach maturity, over 20 years. Land and buildings, plant, equipment and vehicles are written off over their estimated useful lives at rates which vary between 0% and 50% per annum. Estimated useful lives are reviewed at each balance-sheet date. Where the board judges the residual value of an asset to exceed its carrying value, no provision is made for depreciation. Construction in progress is measured at cost and is not depreciated. (j) Investments in associated companies Undertakings over which the Group has the ability to exert significant influence, but not control through shareholdings and board membership, are treated as associated undertakings. Investments in associated undertakings are held in the consolidated financial statements under the equity method of accounting. The consolidated income statement includes the Group’s share of the profit or loss on ordinary activities after taxation based on audited financial information for the year ended 31 December 2017. In the consolidated balance sheet, the investments in the associated undertakings are shown as the Group share of net assets at the balance-sheet date, as adjusted for any associated goodwill. (k) Assets held for sale The Group treats assets as held for sale once the sale is considered highly probable and is expected to complete within 12 months of the balance-sheet date. They are valued at the lower of carrying amount, and fair value less costs to sell. (l) Inventories Inventories are valued at the lower of cost and net realisable value. In the case of palm oil, cost represents the weighted- average cost of production, including appropriate overheads. Other inventories are valued on the basis of first in, first out. (m) Taxation The tax charge for the year comprises current and deferred tax. The Group’s current-tax asset or liability is calculated using tax rates that have been enacted or substantively enacted by the balance-sheet date. Deferred tax is accounted for using the balance-sheet liability method, calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realised. Liabilities are generally recognised for all taxable temporary differences; deferred-tax assets are recognised if it is probable that taxable profits will be available against which deductible temporary differences can be utilised. Deferred tax is not provided on initial recognition of goodwill. The Group recognises deferred-tax liabilities arising from taxable temporary differences on investments in subsidiaries and associates, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred-tax assets is reviewed at each balance-sheet date. Deferred-tax assets and liabilities are offset when there is a legally enforceable right to set off current-tax assets against current-tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current-tax assets and liabilities on a net basis. 64 M.P. EVANS GROUP PLCANNUAL REPORT 2017 NOTES TO THE CONSOLIDATED ACCOUNTS 3 Accounting policies continued (n) Financial instruments Financial assets and financial liabilities are initially recognised on the Group’s balance sheet at fair value when the Group becomes a party to the contractual provisions of the instrument. Available-for-sale financial assets – the Group’s investments in unlisted shares (other than associated undertakings) are classified as available for sale and stated at fair value, with gains and losses recognised directly in equity. Fair value is the directors’ estimate of sales proceeds at the balance-sheet date. Trade and other receivables – these represent both amounts due from customers in the normal course of business and financing made available to smallholder co-operatives. In both cases balances are not interest-bearing, and are initially stated at their fair value, and subsequently measured at amortised cost, using the effective interest-rate method, as reduced by appropriate allowances for estimated irrecoverable amounts, which are charged to the income statement. Cash and cash equivalents – these include cash at hand, and bank deposits with original maturities of three months or less. Current-asset investments – these include bank deposits with original maturities of between three and twelve months. Bank borrowings – interest-bearing bank loans and overdrafts are recorded at the proceeds received, net of direct issue costs. Finance charges are accounted for on an accruals basis in the income statement using the effective interest-rate method. Trade and other payables – these are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest-rate method. Equity instruments – equity instruments issued by the Company are recorded at the proceeds received, net of direct issue costs. (o) Foreign currencies As set out in note 1, the functional currency of the parent Company and of subsidiaries operating in the palm-oil sector is the US Dollar. The functional currency of Group companies operating in the property-development sector is the local currency, the Malaysian Ringgit. Where relevant, results of all Group companies are translated for the purposes of consolidation into the Group’s presentation currency, the US Dollar. The monetary assets and liabilities of the Group’s foreign operations are translated at exchange rates on the balance-sheet date. Items in the income statement are translated at the average exchange rate for the period. Exchange differences are recognised as a profit or loss in the period in which they arise, except for exchange differences on monetary items payable to foreign operations where settlement is neither planned nor likely to occur, in which case the difference is recognised initially in other comprehensive income. In addition, exchange differences arising from translating the results of Group companies that do not have the US Dollar as their functional currency are also recognised in other comprehensive income. (p) Segmental reporting Operating segments are consistent with the internal reporting provided to the chief operating-decision maker. The chief operating-decision maker, which is responsible for allocating resources and assessing performance of the operating segments, is the board of directors. The Group’s reportable operating segments are included in note 4. (q) Critical accounting judgements and key sources of estimation uncertainty The preparation of consolidated financial statements under IFRS requires the Group to make estimates and assumptions that affect how its policies are applied and hence amounts are reported in the financial statements. Estimates and judgements are periodically evaluated. They are based on historical experience and other factors including expectations of future events that are believed to be reasonable under the circumstances. Actual results may differ from estimates. The critical judgements and key estimates which have the most significant impact on the carrying amount of assets and liabilities are identified below and discussed further in the relevant notes to the accounts. Critical judgements • Deferred tax on unremitted earnings (note 24); • Depreciation of leasehold land (note 15); and • Identifiable intangible assets in acquisition of subsidiary (note 13). Key estimates • • • Fair values on acquisition of subsidiary (note 13); Carrying value of deferred-tax assets relating to losses (note 24); and Valuation of biological assets – growing produce (note 18). 65 NOTES TO THE CONSOLIDATED ACCOUNTS continued 4 Segment information The Group’s reportable segments follow the areas of activity set out in the strategic report. These are distinguished by location and product: palm oil plantation crops in Indonesia and property development in Malaysia. The other category in the table relates principally to the Group’s central functions. PLANTATION INDONESIA US$’000 PROPERTY MALAYSIA US$’000 OTHER US$’000 TOTAL US$’000 2017 Continuing operations Revenue Gross profit/(loss) Gain on biological assets Foreign-exchange (loss)/gain Other administrative expenses Other income Operating profit Finance income Finance costs Profit before tax Tax Profit after tax 116,393 36,256 47 (766) (108) 360 1,355 (552) (10,780) — — — — — — — — — Share of associated companies’ profit after tax 1,189 1,401 Profit for the year from continuing operations Profit for the year from discontinued operations 143 (10) — 1,131 (2,960) — 792 (475) (464) — Profit for the year Consolidated total assets Assets Investments in associates Consolidated total liabilities Liabilities Other information Additions to property, plant and equipment Depreciation 456,485 3,105 459,590 70,061 29,507 11,430 — 17,362 17,362 67,209 — 67,209 — — — 60,141 130,202 26 42 29,533 11,472 *116,536 36,246 47 365 (3,068) 360 33,950 2,147 (1,027) 35,070 (11,244) 23,826 2,590 26,416 68,018 94,434 523,694 20,467 544,161 * US$37.2 million of revenue (31.9%) was from sales of CPO to two customers (16.7% and 15.2% respectively). 66 M.P. EVANS GROUP PLCANNUAL REPORT 20174 Segment information continued 2016 Continuing operations Revenue Gross profit/(loss) Gain on biological assets Foreign-exchange gain/(loss) Other administrative expenses Other income Operating profit Finance income Finance costs Profit before tax Tax Profit after tax Share of associated companies’ profit after tax 986 3,777 Profit for the year from continuing operations Profit for the year from discontinued operations Profit for the year Consolidated total assets Assets Investments in associates Consolidated total liabilities Liabilities Other information Additions to property, plant and equipment Depreciation 315,665 2,292 317,957 26,475 26,824 10,800 * US$12.4 million of revenue (14.8%) was from sales of CPO to one customer. — 16,100 16,100 80,518 — 80,518 NOTES TO THE CONSOLIDATED ACCOUNTS PLANTATION INDONESIA US$’000 PROPERTY MALAYSIA US$’000 OTHER US$’000 TOTAL US$’000 83,742 24,415 683 744 (236) 252 699 (638) (6,959) — — — — — — — — — 122 (31) — (1,402) (4,695) 6 169 (751) (588) — *83,864 24,384 683 (658) (4,931) 258 19,736 868 (1,389) 19,215 (7,547) 11,668 4,763 16,431 18,823 35,254 396,183 18,392 414,575 — — — 43,877 70,352 23 52 26,847 10,852 67 NOTES TO THE CONSOLIDATED ACCOUNTS continued 5 Employees Employee costs during the year Wages and salaries Social security costs Current service cost of retirement benefit (see note 25) Other pension costs Share-based payment charge Average monthly number of persons employed (including executive directors) Estate manual Local management United Kingdom head office 2017 US$’000 13,499 1,925 1,160 137 229 2016 US$’000 12,402 1,641 1,153 135 21 16,950 15,352 Number Number 4,706 79 7 4,792 4,302 68 7 4,377 Details of directors’ remuneration required by the Companies Act 2006 are shown within the report of the board to the shareholders on directors’ remuneration on page 46 and form part of these audited financial statements. 6 Finance income Interest receivable on bank deposits 7 Finance costs Interest payable on bank loans and overdrafts 8 Profit before tax Profit before tax is stated after charging: Depreciation of property, plant and equipment Costs associated with response to KLK offer Auditors’ remuneration Employee costs (note 5) The analysis of auditors’ remuneration is as follows: Fees payable to the Company’s auditor and their associates for services to the Group* Audit of UK parent Company Audit of consolidated financial statements Audit of overseas subsidiaries Total audit services Taxation advisory services Other services Total non-audit services 2017 US$’000 2,147 2017 US$’000 1,027 2017 US$’000 11,472 — 394 16,950 23 116 233 372 — — — 2016 US$’000 868 2016 US$’000 1,389 2016 US$’000 10,852 2,000 486 15,352 20 134 191 345 110 2 112 * In addition to the above, fees of US$22,000 (2016 US$29,000) were payable to other firms for the audit of subsidiary companies. 68 M.P. EVANS GROUP PLCANNUAL REPORT 2017NOTES TO THE CONSOLIDATED ACCOUNTS 9 Tax on profit on ordinary activities United Kingdom corporation tax charge for the year Relief for overseas taxation Overseas taxation Adjustments in respect of prior years Total current tax Deferred taxation – origination and reversal of temporary differences (see note 24) 2017 US$’000 432 (432) — 6,436 (5) 6,431 4,813 11,244 2016 US$’000 121 (121) — 5,159 4 5,163 2,384 7,547 The standard rate of tax for the year, based on the United Kingdom standard rate of corporation tax, was 19.25% (2016 – 20%). The standard rate of Indonesian tax was 25% for the current year (2016 – 25%). The actual tax charge is higher than the standard rate for the reasons set out in the following reconciliation: Profit on ordinary activities before tax Tax on profit on ordinary activities at the standard rate Factors affecting the charge for the year Profits taxed at higher standard tax rate Losses no longer available Unrealised Indonesian exchange differences not included in Group profit Withholding tax on overseas dividends and interest Adjustment relating to intercompany loan relationships Utilisation of losses brought forward Unrelieved losses Other differences Total tax charge 10 Dividends paid and proposed 2017 interim dividend – 5.00p per 10p share (2016 interim dividend- 2.25p) 2017 special dividend – 10.00p per 10p share (2016 - 5.00p) 2016 final dividend – 12.75p per 10p share (2015 final dividend – 6.50p) 2017 US$’000 35,070 6,751 2,587 1,011 (549) 38 1,211 (870) 443 622 11,244 2017 US$’000 3,660 7,155 9,180 19,995 2016 US$’000 19,215 3,843 1,204 — 1,179 464 1,327 (814) 727 (383) 7,547 2016 US$’000 1,528 3,653 4,852 10,033 Following the year end, the board has proposed a final dividend for 2017 of 12.75p per 10p share, amounting to US$9.8 million. The dividend will be paid on or after 22 June 2018 to those shareholders on the register at the close of business on 20 April 2018. 69 NOTES TO THE CONSOLIDATED ACCOUNTS continued 11 Discontinued operations Agro Muko Share of associated companies’ profit Profit on disposal of discontinued operations NAPCo Share of associated companies’ profit Profit on disposal of discontinued operations Net profit from discontinued operations 2017 US$’000 2016 US$’000 1,622 66,396 — — 68,018 7,129 — 4,312 7,382 18,823 On 17 March 2017 the Group completed the sale of its 36.84% interest in PT Agro Muko, which had been included as an asset held for sale at the end of 2016. Total sale proceeds were US$99.8 million (being the Group’s only cash inflow on discontinued operations) and the Group recorded a profit on disposal of US$66.4 million. In the prior year, the Group disposed of its 34.37% interest in The North Australian Pastoral Company Pty Limited (“NAPCo”). 12 Basic and diluted earnings per share The calculation of earnings per 10p share is based on: Profit for the year attributable to the owners of M.P. Evans Group PLC Average number of shares in issue Diluted average number of shares in issue* 2017 US$’000 90,514 2017 NUMBER OF SHARES 55,255,776 55,545,708 2016 US$’000 31,273 2016 NUMBER OF SHARES 55,721,155 55,799,844 * The difference between the number of shares in issue and the diluted number of shares relates to unexercised share options held by directors and key employees of the Group. 13 Acquisition of subsidiary On 22 December 2017, the Group acquired 100% of Sunrich Plantations Pte Ltd (“Sunrich”), which in turn owns 95% of the issued share capital of PT Bumi Mas Agro (“Bumi Mas”), a company owning an oil-palm plantation in Indonesia. The acquisition was made in line with the Group’s strategy of expanding its majority-owned planted oil-palm area in Indonesia. The provisional fair value amounts recognised in respect of the identifiable assets acquired and liabilities assumed are as set out in the table below: Property, plant and equipment Deferred-tax asset Current assets Current liabilities (excluding borrowings) Bank borrowings Shareholder loans Deferred-tax liability Retirement benefit obligations Minority interest Total identifiable assets Goodwill 70 2017 US$’000 102,353 1,333 8,731 (5,336) (18,667) (32,658) (11,071) (665) (2,755) 41,265 11,071 52,336 M.P. EVANS GROUP PLCANNUAL REPORT 201713 Acquisition of subsidiary continued Satisfied by: Cash Deferred consideration Net cash outflow arising on acquisition: Cash consideration Stamp duty paid Cash acquired with subsidiary NOTES TO THE CONSOLIDATED ACCOUNTS 2017 US$’000 7,442 44,894 52,336 40,000 100 (511) 39,589 On 22 December 2017, US$40 million was paid to the sellers of Sunrich. Of this amount, US$7.4 million was for the equity, with the remainder being used to repay shareholder loans to Bumi Mas. On 4 January 2018, deferred consideration of US$49.2 million was paid. Of the deferred consideration US$2.3 million has subsequently been repaid to the Group, and a further US$2.0 million is due to be repaid to the Group in accordance with the sales & purchase agreement and these amounts have been reflected in the total consideration in the table above. Critical judgement In accordance with the requirements of IFRS3, the directors considered whether there were any identifiable intangible assets as part of the acquisition. The directors concluded that there were no such assets and that a fair-value adjustment should be made to plantation land. The directors have considered the requirement for a deferred-tax liability regarding the fair-value adjustment to plantation land. They noted that under the IASB’s Conceptual Framework a liability would normally only be recognised if ‘settlement’ were expected to result in an ‘outflow of economic benefits’. There are no ‘outflows’ in this case since the value of land is not consumed through use and any sale is not expected to result in a taxable gain. However, the directors have relied on the advice of the auditor that, despite their assessment that there are no circumstances in which use or disposal of the land would lead to an economic outflow or tax charge, IAS12 nevertheless obliges them to make a provision for a deferred-tax liability. Key estimate The directors have made an estimate of the fair value of the assets and liabilities acquired (reflected in the table above). Accounting for the acquisition of Sunrich has been undertaken using provisional amounts at 31 December 2017. Current assets at acquisition include receivables from smallholders with a fair value of US$5,911,000. This represents the full amount due from smallholders, which are all judged to be collectable. The fair value of the non-controlling interest in Sunrich was estimated based on a proportionate share of the total fair value of the equity. Sunrich (and its subsidiary Bumi Mas) did not contribute any revenue or profit to the Group’s results between the date of acquisition and the balance-sheet date. If the acquisition had been completed on the first day of the financial year then Group revenue for the year would have been US$125,778,000 and Group profit for the year would have been US$94,648,000. 14 Goodwill At 1 January 2017 Acquisition (see note 13) At 31 December 2017 2017 US$’000 1,157 11,071 12,228 Goodwill is carried at cost. The directors have tested goodwill for impairment, concluding that the carrying amounts are recoverable. Goodwill brought forward arose in respect of the Group’s projects in Indonesia in Kota Bangun, East Kalimantan and on Bangka Island. The directors consider the fair value of those investments to exceed their carrying value by a significant margin. Given this, and the size of that goodwill balance, the directors do not consider it necessary to provide further detailed disclosures regarding impairment. Goodwill relating to the acquisition in the year has not been included within the scope of impairment testing due to the timing of the acquisition. 71 NOTES TO THE CONSOLIDATED ACCOUNTS continued 15 Property, plant and equipment Cost or valuation At 1 January 2017 Additions Acquisition Re-classification Exchange differences Disposals LEASEHOLD LAND US$’000 PLANTING US$’000 BUILDINGS US$’000 PLANT EQUIPMENT & VEHICLES US$’000 CON- STRUCTION IN PROGRESS US$’000 38,564 7,625 53,628 — 20 — 112,608 14,209 45,449 — — (631) 62,478 42,973 282 2,391 5,031 18 (82) 1,811 870 2,048 5 (832) 3,805 5,606 15 (7,079) — — TOTAL US$’000 260,428 29,533 102,353 — 43 (1,545) At 31 December 2017 99,837 171,635 70,118 46,875 2,347 390,812 Accumulated depreciation At 1 January 2017 Charge for the year Exchange differences Disposals At 31 December 2017 Net book value at 31 December 2017 Cost or valuation At 1 January 2016 Additions Re-classification Exchange differences Disposals At 31 December 2016 Accumulated depreciation At 1 January 2016 Charge for the year Exchange differences Disposals At 31 December 2016 Net book value at 31 December 2016 Net book value at 1 January 2016 250 17 — — 267 99,570 21,991 4,654 — (317) 26,328 145,307 15,687 3,473 16 (43) 19,133 50,985 20,711 3,328 5 (518) 23,526 23,349 33,753 4,820 101,376 11,522 — (9) — — — (290) 53,115 32,684 21 9,521 (7) (172) 1,520 9,351 (2) (580) — — — — — 2,347 13,713 8,964 (18,872) — — 38,564 112,608 62,478 42,973 3,805 233 17 — — 250 38,314 33,520 17,818 4,453 — (280) 21,991 90,617 83,558 12,673 3,179 (7) (158) 15,687 46,791 40,442 18,015 3,203 (3) (504) 20,711 22,262 14,669 — — — — — 3,805 13,713 58,639 11,472 21 (878) 69,254 321,558 234,641 26,847 — (18) (1,042) 260,428 48,739 10,852 (10) (942) 58,639 201,789 185,902 Included in planting is immature planting of US$44,270,000 (2016 US$21,823,000) which is not depreciated. Critical judgement Included in leasehold land is land in Indonesia which is not being depreciated. Land is held on 25- or 30-year leases, and as those leases can be renewed without significant cost and the Group has previous experience of successful lease renewals, the directors have concluded that the land should not be depreciated. The carrying value of the land at the end of the year is US$98,858,000 (2016 US$37,786,000). As at 31 December 2017, the Group had entered into contractual commitments for the acquisition of property, plant and equipment of US$1,041,000 (2016 US$907,000). Depreciation is charged to cost of sales, other than US$37,000 (2016 US$42,000) charged to other administrative expenses. 72 M.P. EVANS GROUP PLCANNUAL REPORT 2017 NOTES TO THE CONSOLIDATED ACCOUNTS 16 Investments in associates Details of the Group’s subsidiary and associated undertakings are given on page 90. The Group’s associated companies are both unlisted. Share of net assets At 1 January Exchange differences Profit for the year Profit from discontinued associates Dividends received Reclassified as held for sale Disposals At 31 December Goodwill At 1 January Reclassified as held for sale Disposals At 31 December Carrying value At 31 December SHARE OF NET ASSETS 2017 US$’000 SHARE OF NET ASSETS 2016 US$’000 18,392 1,725 2,590 — (2,240) — — 20,467 — — — — 96,585 366 4,763 11,441 (6,376) (31,016) (57,371) 18,392 1,001 (735) (266) — 20,467 18,392 The summarised results of the Group’s associated undertakings and the Group’s aggregate share of their summarised results are shown below: 2017 KERASAAN US$’000 BERTAM PROPERTIES US$’000 TOTAL US$’000 KERASAAN US$’000 BERTAM PROPERTIES US$’000 2016 TOTAL US$’000 Total Revenue Profit after tax Non-current assets Current assets Current liabilities Non-current liabilities Net assets Group share Revenue Profit after tax Non-current assets Current assets Current liabilities Non-current liabilities Carrying value at 31 December 7,126 3,130 4,687 4,828 (826) (517) 8,172 29,049 3,502 27,529 22,402 (2,322) (4,206) 43,403 7,018 2,595 4,666 2,795 (966) (463) 6,032 38,380 9,442 18,430 35,707 (9,957) (3,930) 40,250 (38.00%) (40.00%) (38.00%) (40.00%) 2,708 1,189 1,781 1,835 (314) (197) 3,105 11,620 1,401 11,012 8,961 (929) (1,682) 17,362 14,328 2,590 12,793 10,796 (1,243) (1,879) 20,467 2,667 986 1,773 1,062 (367) (176) 2,292 15,352 3,777 7,372 14,283 (3,983) (1,572) 16,100 18,019 4,763 9,145 15,345 (4,350) (1,748) 18,392 73 NOTES TO THE CONSOLIDATED ACCOUNTS continued 17 Investments Other available-for-sale financial investments (unlisted) At 1 January Revaluation loss Exchange differences At 31 December 2017 US$’000 2016 US$’000 66 (20) 7 53 78 (9) (3) 66 The directors have reviewed the fair value of the Group’s available-for-sale investments (categorised as level 3 in the IFRS fair-value hierarchy) and concluded that their realisable market value equals their carrying value. 18 Current biological assets Ffb prior to harvest 2017 US$’000 1,843 2016 US$’000 1,576 Oil palms are harvested continuously, many times throughout the year, and at any given time each palm will be at a different point in its production cycle. It is not possible to undertake a full census of all palms, and so it is necessary to measure the volume of growing ffb indirectly. Key estimate The estimation in respect of ffb prior to harvest is based on the market price of ffb in each of the Group’s locations on 31 December less the cost of harvesting and transport to mill. The market price is applied to a weight of ffb. This weight derives from the assumption that value accrues exponentially to ffb from the increase in oil content in the four weeks prior to harvest: in terms of tonnage at any given month end, equivalent to 32% of the following month’s crop. The chosen valuation methodology determines the value presented for ffb prior to harvest. Changes to the assumed tonnage will have a directly equivalent proportional effect on the reported valuation. Different defensible valuation methods will give widely differing answers. Changes to both tonnage and methodology lead to a range of valuations between US$1.8 million and US$17.4 million. The Group has never included ffb prior to harvest in its internal reporting and decision-making. The gain shown in the consolidated income statement represents the net movement in the fair value of ffb prior to harvest during the year. 19 Inventories Processed produce for sale Estate stores Nurseries 74 2017 US$’000 3,504 5,574 1,384 10,462 2016 US$’000 6,743 5,223 1,470 13,436 M.P. EVANS GROUP PLCANNUAL REPORT 201720 Trade and other receivables Current assets Trade receivables Receivable from smallholder co-operatives Other receivables Prepayments and accrued income Non-current assets Receivable from smallholder co-operatives Trade and other receivables analysed by currency of receivable: Indonesian Rupiah US Dollar Sterling Malaysian Ringgit NOTES TO THE CONSOLIDATED ACCOUNTS 2017 US$’000 495 23,807 9,148 918 34,368 2016 US$’000 379 15,499 2,431 717 19,026 5,465 2,889 34,844 4,273 711 5 21,662 — 252 1 39,833 21,915 Sales of palm oil are made for cash payment in advance of delivery. The Group makes full provision against invoices outstanding for more than 30 days. At 31 December 2017 there was no provision for impairment of trade receivables (2016 US$nil). The directors consider that the carrying amount of trade and other receivables approximates their fair value. The Group makes finance available to its associated smallholder co-operatives, both during the immature stage of initial plantings, and as working capital facilities for mature areas. All balances due from smallholders, including those for immature areas, are repayable on demand. However, the Group may allow a longer period of finance at its discretion. At an early stage in the development of a new project, costs are incurred but not yet allocated to a specific smallholder, awaiting the completion of further development. Given the above, receivables from smallholders have been classified as current assets with the exception of those balances not yet allocated to a specific smallholder which are expected to take greater than 12 months to recover. An analysis of the balance is as follows: Immature areas - allocated Mature areas Current asset Non-current asset – immature areas – not allocated 21 Cash and other liquid resources Cash and cash equivalents Current-asset investments 2017 US$’000 15,022 8,785 23,807 5,465 29,272 2017 US$’000 113,910 6,913 120,823 2016 US$’000 6,967 8,532 15,499 2,889 18,388 2016 US$’000 91,405 14,262 105,667 Cash and cash equivalents comprise cash held by the Group and short-term bank deposits with an original maturity of three months or less. Current-asset investments are bank deposits with a maturity of twelve months or less, which have been pledged as security against bank loans. The carrying value of these assets approximates their fair value. 75 NOTES TO THE CONSOLIDATED ACCOUNTS continued 22 Trade and other payables Trade payables Amounts owed to associated undertakings Other payables 2017 US$’000 8,131 18 57,045 65,194 2016 US$’000 9,328 16 9,888 19,232 The average credit period taken for trade purchases is 37 days (2016 – 45 days). The Group has processes in place to ensure payables are settled within the agreed terms. The amounts above also reflect the Group’s anticipated cash outflows for these financial liabilities. Other payables include the deferred consideration for the purchase of Sunrich (see note 13). 23 Borrowings Secured borrowing at amortised cost Bank loans Total borrowings Amount due for settlement within one year Due for settlement in one to two years Due for settlement in two to five years Due for settlement after five years Amount due for settlement after one year Analysis of borrowings by currency: US Dollar Indonesian Rupiah Analysis of anticipated cash outflows: Within one year Due within one to two years Due within two to five years Due after five years 2017 US$’000 2016 US$’000 39,444 30,329 9,159 8,573 20,157 1,555 30,285 39,444 35,495 3,949 39,444 11,301 10,252 22,108 1,758 45,419 9,519 11,402 9,408 — 20,810 30,329 26,347 3,982 30,329 9,836 11,802 9,712 — 31,350 Bank loans from lenders in Malaysia are secured on the assets of Bertam Estate. Bank loans in Indonesia are secured against certain assets within subsidiary companies, comprising land titles, fixed assets, inventory and cash balances. No new credit facilities were drawn in the year, and at 31 December 2017, the Group had an available revolving credit facility of US$5 million (2016 – US$5 million). The weighted average interest rate paid on bank loans in the year was 6.2% (2016 – 4.1%). The analysis of anticipated cash outflows above is based on interest and exchange rates in force at the balance-sheet date. 76 M.P. EVANS GROUP PLCANNUAL REPORT 2017 NOTES TO THE CONSOLIDATED ACCOUNTS 24 Deferred tax The following are the major deferred-tax liabilities and assets recognised by the Group and movements thereon: At 1 January 2017 (Charge)/credit to income statement Acquisition of subsidiary Exchange differences At 31 December 2017 At 1 January 2016 Credit/(charge) to income statement Exchange differences At 31 December 2016 ACCELERATED TAX DEPRECIATION US$’000 RETIREMENT- BENEFIT OBLIGATIONS US$’000 OTHER TIMING DIFFERENCES US$’000 (3,236) 1,418 (896) (590) 44 (4,678) (3,950) 825 (111) (3,236) 545 2 (21) 1,944 1,058 336 24 1,418 16,678 (4,462) (9,150) 135 3,201 19,539 (3,545) 684 16,678 TOTAL US$’000 14,860 (4,813) (9,738) 158 467 16,647 (2,384) 597 14,860 Certain deferred-tax assets and liabilities have been offset. The following is the analysis of deferred-tax balances (after offset) for financial reporting purposes: Deferred-tax assets Deferred-tax liabilities 2017 US$’000 12,280 (11,813) 467 2016 US$’000 15,386 (526) 14,860 Critical judgement 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 US$554,030,000 (2016 US$383,453,000). No liability has been recognised in respect of these differences because either the Group is in a position to control the timing of the reversal of the temporary differences, or such a reversal would not give rise to an additional tax liability. At the balance-sheet date, the aggregate amount of temporary differences associated with undistributed earnings of associates for which deferred-tax liabilities have not been recognised was US$14,361,000 (2016 US$40,766,000). No liability has been recognised in respect of these differences because the reversal would not give rise to an additional tax liability as the dividends would not be taxed on receipt. Key estimate At the balance-sheet date, the Group had unused tax losses of US$63,421,000 (2016 US$86,299,000) available for offset against future profits. The directors have reviewed estimates of future profits and a deferred-tax asset has been recognised in respect of US$49,399,000 (2016 US$66,708,000) of such losses. No deferred-tax asset has been recognised in respect of the remaining US$14,022,000 (2016 US$19,591,000) due to the unpredictability of future profit streams and due to the 5-year time limit on utilisation of tax losses in Indonesia. The directors have considered the sensitivity of the deferred-tax asset recognised in respect of losses to changes in estimated future profits, particularly with regard to changes in the price of CPO. If CPO prices were to fall by 10% from those initially estimated, then the deferred-tax asset would be reduced by approximately US$3.5 million. At the balance-sheet date, the aggregate amount of temporary differences associated with outstanding executive share options for which deferred-tax assets have not been recognised was US$3,145,000 (2016 US$1,285,000). No asset has been recognised in respect of these differences due to the unpredictability of future profit streams. 77 2017 % 7.25 8.00 2016 % 8.00 8.00 2017 US$’000 2016 US$’000 1,160 444 733 2,337 (195) 2,142 5,675 665 (48) 8,434 1,153 389 (21) 1,521 (179) 1,342 4,233 — 100 5,675 NOTES TO THE CONSOLIDATED ACCOUNTS continued 25 Retirement-benefit obligations The Group’s only obligation relates to an unfunded, non-contributory, post-employment statutory benefit scheme in Indonesia. A lump sum is paid to employees on retirement or on leaving the Group’s employment. This terminal benefit is accrued by the Group based on an annual actuarial review, and charged in the income statement on the basis of individuals’ service at the balance-sheet date. Retirement is assumed at the earlier of age 55 years or 30 years’ service. Standard Indonesian mortality assumptions are used, and no allowance is made for internal promotion. The main assumptions used to assess the Group’s liabilities are: Discount rate Salary increase per annum Reconciliation of scheme liabilities: Current-service cost Interest cost Actuarial loss/(gain) Less: Benefits paid out Movement in the year At 1 January Acquired on acquisition Exchange differences At 31 December 26 Share capital At 1 January 2017 Issued during the year Redeemed during the year At 31 December 2017 At 1 January 2016 Issued during the year At 31 December 2016 AUTHORISED NUMBER ALLOTTED, FULLY PAID AND VOTING NUMBER AUTHORISED £’000 ALLOTTED FULLY PAID AND VOTING US$’000 87,000,000 55,739,719 8,700 — — 95,000 (951,268) 87,000,000 54,883,451 87,000,000 55,700,444 — 39,275 87,000,000 55,739,719 — — 8,700 8,700 — 8,700 9,366 13 (124) 9,255 9,360 6 9,366 During the year, as the result of the exercise of share options, the Company issued 95,000 10p shares for US$506,000 cash consideration. In addition, the Company bought back and cancelled 951,268 10p shares for a total cost of US$9,188,000 (an average of 746 pence per share). In the previous year, 39,275 10p shares were issued to shareholders who elected to take scrip in lieu of cash dividends. 78 M.P. EVANS GROUP PLCANNUAL REPORT 2017 NOTES TO THE CONSOLIDATED ACCOUNTS 27 Share-based payments The Group has equity-settled share-option schemes in place for directors and selected employees of the Group. Under the schemes established in 2001 and 2012, options are exercisable at a price equal to the quoted market price of the Company’s shares on the date of grant. Under the Group’s long-term incentive scheme established in 2017, options are exercisable at nil cost. For all schemes, the vesting period is three years and if the options remain unexercised after a period of ten years from the date of grant, the options lapse. Options may be forfeited if the employee leaves the Group before the options vest. Details of the share options outstanding during the year are as follows: At 1 January Granted during the year Exercised during the year At 31 December Exercisable at the end of the year 2017 WEIGHTED- AVERAGE EXERCISE PRICE (PENCE) 379.5 0.0 405.0 253.4 364.4 NUMBER OF SHARE OPTIONS 395,000 139,680 (95,000) 439,680 255,000 2016 WEIGHTED- AVERAGE EXERCISE PRICE (PENCE) 355.1 410.5 — 379.5 375.4 NUMBER OF SHARE OPTIONS 370,000 25,000 — 395,000 350,000 The weighted average share price at the date of exercise for share options exercised during the year was 405p. The options outstanding at 31 December 2017 had a weighted-average remaining contractual life of 5.5 years and exercise prices in the range of nil to 520p. The Group recognised total expenses of US$229,000 related to equity-settled share-based payments (2016 US$21,000). Details of the directors’ share options are set out in the report of the directors’ remuneration report on pages 46 to 48. 79 NOTES TO THE CONSOLIDATED ACCOUNTS continued 28 Reserves SHARE- PREMIUM ACCOUNT US$’000 REVALU- ATION RESERVE US$’000 CAPITAL- REDEMPTION RESERVE US$’000 MERGER RESERVE US$’000 SHARE- OPTION RESERVE US$’000 SHARE OF ASSOCIATES’ RESERVES US$’000 FOREIGN- EXCHANGE RESERVE US$’000 TOTAL US$’000 RETAINED EARNINGS US$’000 At 1 January 2017 30,728 2,202 4,087 766 547 11,272 67 49,669 261,964 Exchange differences Release of deferred profit on sale of land Retirement-benefit obligations Issue of shares Share-based payments Share buy-back Group reconstruction Dividends from associates Profit for the financial year Dividends paid — — — 493 — — — — — — 14 (135) — — — — — — — — — — — 124 — — — — — — At 31 December 2017 31,221 2,081 4,211 At 1 January 2016 30,503 2,499 4,087 Exchange differences Release of deferred profit on sale of land Retirement-benefit obligations Disposal of associate Issue of shares Share-based payments Dividends from associates Profit for the financial year Dividends paid — — — — 225 — — — — (6) (291) — — — — — — — — — — — — — — — — — — — — — — — — — — 766 766 — — — — — — — — — — — — — 175 — — — — — 1,144 (488) 670 984 — — — — — — (2,240) 2,590 — — — — — — — — — — (135) — — 617 175 — — (534) — 54 (9,188) (52) (2,240) 2,240 2,590 87,924 — (19,995) 722 12,766 (421) 51,346 323,397 526 36,775 1,070 76,226 214,423 — — — — — 21 — — — 616 (1,003) (393) 172 — — (24,506) — — (6,376) 4,763 — — — — — — — — — (291) — — 10 (24,506) 24,506 225 21 — — (6,376) 6,376 4,763 26,510 — (10,033) At 31 December 2016 30,728 2,202 4,087 766 547 11,272 67 49,669 261,964 29 Non-controlling interests At 1 January Share of profit in the year Dividends paid Share of retirement benefit credited to other comprehensive income Acquisition At 31 December 2017 US$’000 23,224 3,920 — 62 2,755 29,961 2016 US$’000 21,616 3,981 (2,375) 2 — 23,224 80 M.P. EVANS GROUP PLCANNUAL REPORT 2017NOTES TO THE CONSOLIDATED ACCOUNTS 2017 US$’000 33,950 (47) 600 (135) 2017 US$’000 19,736 (684) (55) (291) 11,472 10,852 20 1,865 229 2,240 50,194 4,586 (7,258) (6,369) 41,153 (19,403) (1,027) 20,723 9 1,352 21 6,376 37,316 (5,435) (3,599) 3,057 31,339 (7,062) (1,389) 22,888 30 Note to the consolidated cash-flow statement Operating profit Biological gain Disposal of property, plant and equipment Release of deferred profit Depreciation of property, plant and equipment Impairment of investment Retirement-benefit obligations Share-based payments Dividends from associated companies Operating cash flows before movements in working capital Decrease/(increase) in inventories Increase in receivables (Decrease)/increase in payables Cash generated by operating activities Income tax paid Interest paid Net cash generated by operating activities 31 Analysis of movements in net funds CASH AND CASH EQUIVALENTS US$’000 CURRENT ASSET INVESTMENTS US$’000 BORROWINGS DUE WITHIN ONE YEAR US$’000 BORROWINGS DUE AFTER ONE YEAR US$’000 TOTAL US$’000 At 1 January 2017 91,405 14,262 (9,519) (20,810) 75,338 Net increase in cash and cash equivalents Acquisition of subsidiary Repayment of borrowings Change in deposits Reclassification Foreign-exchange movements At 31 December 2017 22,704 — — — — (199) 113,910 — — — (7,349) — — 6,913 — (2,667) 9,552 — (6,525) — (9,159) — (16,000) — — 6,525 — (30,285) At 1 January 2016 25,811 18,403 (13,453) (19,222) Net increase in cash and cash equivalents New borrowings Repayment of borrowings Change in deposits Reclassification Foreign-exchange movements At 31 December 2016 66,161 — — — — (567) 91,405 — — — (4,141) — — 14,262 — — 14,073 — (9,893) (246) (9,519) — (11,486) — — 9,893 5 22,704 (18,667) 9,552 (7,349) — (199) 81,379 11,539 66,161 (11,486) 14,073 (4,141) — (808) (20,810) 75,338 81 NOTES TO THE CONSOLIDATED ACCOUNTS continued 32 Financial instruments Capital-risk management The Group manages its capital to ensure that entities in the Group will be able to continue as going concerns while maximising returns to shareholders. The capital structure of the Group consists of debt (see note 23), cash and cash equivalents, current- asset investments and equity attributable to the owners of the parent Company, comprising issued capital, reserves and retained earnings. The Group is not subject to any externally-imposed capital requirements. The Group’s board continues to monitor the capital structure based on the funding requirements of the Group. At the balance- sheet date the Group had net funds of US$81,379,000 (2016 US$75,338,000) and equity attributable to the owners of the parent Company of US$383,998,000 (2016 US$320,999,000). The board intends to fund its continuing Indonesian expansion by a combination of the Group’s cash and other liquid resources, securing debt finance, and considering the sale of further non-core assets where appropriate. Categories of financial instruments All of the Group’s financial assets (other than cash and other liquid resources) are classified as loans and receivables, with the exception of its other investments shown in note 16, which are classified as available-for-sale financial assets. All of the Group’s financial liabilities are measured at amortised cost. In the opinion of the directors, there was no significant difference between the carrying values and estimated fair values of the Group’s primary financial assets and liabilities at either the current, or preceding, financial year end. Financial-risk management objectives The majority of the Group’s main risks arising from the Group’s financial instruments are foreign-currency, interest-rate, credit and liquidity. The board reviews and agrees the policies for managing these risks. The policies and the impact of these risks on the Group’s balance sheet at the end of the financial year are summarised below. Foreign-currency risk The majority of the Group’s operations are undertaken in Indonesia and Malaysia. The Group does not have transactional currency exposures arising from sales or purchases by its operating units, but the Group’s balance sheet can be significantly affected by movements in exchange rates. Whilst the Group’s trading takes place in local currencies in South East Asia, relevant commodity prices are determined in US Dollars in a world market which reduces the Group’s currency risk. The Group has a policy not to hedge exchange-rate fluctuation and does not make use of forward-currency contracts. The currency profile of the Group’s monetary assets, excluding trade and other receivables (the currency profile of which is given in note 20), are as follows: US Dollar Indonesian Rupiah Australian Dollar Sterling Malaysian Ringgit 2017 US$’000 82,620 36,278 201 1,175 549 2016 US$’000 60,420 21,090 15,223 8,253 681 120,823 105,667 The currency profile of the Group’s monetary liabilities, excluding trade and other payables, is shown in note 23. The Group is exposed to changes in foreign-currency exchange rates. This is in relation to the impact of movements on its non-US Dollar monetary assets and in relation to the consolidation of its non-US Dollar-functional-currency subsidiary and associated undertakings. The most significant sensitivity arises in respect of movements in the Indonesian Rupiah. Management estimates that a 10% weakening of the US Dollar against the Indonesian Rupiah would result in a fall in profit for the year and net assets of US$6,555,000 (2016 US$3,948,000). 82 M.P. EVANS GROUP PLCANNUAL REPORT 2017NOTES TO THE CONSOLIDATED ACCOUNTS 32 Financial instruments continued Interest-rate risk In order to optimise the income received on its cash deposits the Group continuously reviews the terms of these deposits to take advantage of the best market rates. UK funds are passed to banks who have a credit rating of at least A minus. The Group’s only financial liabilities other than short-term trade and other payables are the borrowings referred to in note 23. The Group’s net position means it is not materially exposed to changes in interest rates on its financial assets and liabilities. Credit risk The Group’s credit risk on cash deposits is described above. Regarding trade receivables, the Group performs a credit evaluation before extending credit to customers. The Group does not have any significant concentrations of credit risk (defined by management as more than 10% of gross monetary assets), other than in relation to bank deposits which management seeks to mitigate through the use of banks with high credit ratings, and loans extended to the smallholder co-operative schemes attached to the Group’s new projects. The Group’s maximum exposure to credit risk is represented by the carrying amount of financial assets in the financial statements. Liquidity risk The Group manages liquidity risk by maintaining adequate cash reserves and banking facilities, and through actively monitoring the Group’s forecast and actual cash flows. All of the Group’s monetary financial assets and liabilities have a maturity profile of less than ten years. The maturity profile for financial liabilities is shown in note 23. 33 Related-party transactions Remuneration of key management personnel The remuneration of the directors, who are the key management personnel of the Group, is set out in the directors’ remuneration report on page 46. The directors’ participation in the executive share-option schemes and long-term incentive scheme is disclosed on page 48. The Group received dividends from its associated companies during the year. These are set out in note 16. 34 Post-balance-sheet events On 4 January 2018, the Group paid deferred consideration of US$49.2 million for the acquisition of Sunrich Plantations Pte Ltd (see note 13). On 12 January 2018, the Group announced that the budget for the share buy-back programme had been extended by £2.5 million to a total of £10 million, and that the programme would run up to 30 June 2018. 83 PARENT-COMPANY BALANCE SHEET As at 31 December 2017 Non-current assets Property, plant and equipment Investments in subsidiaries Current assets Trade and other receivables Cash and cash equivalents Total assets Current liabilities Trade and other payables Net current assets Non-current liabilities Borrowings Total liabilities Net assets Equity Share capital Other reserves Retained earnings Total equity Note iv v vi vii viii ix ix x 2017 US$’000 896 31,494 32,390 102,665 1,336 104,001 136,391 39,314 64,687 4,898 44,212 92,179 9,255 37,397 45,527 92,179 2016 US$’000 907 31,494 32,401 137,722 964 138,686 171,087 41,687 96,999 7,347 49,034 122,053 9,366 36,605 76,082 122,053 The Company recorded a loss for the year of US$1,426,000 (2016 loss US$6,979,000). The financial statements of pages 84 to 89 were approved by the board of directors on 9 April 2018 and signed on its behalf by Tristan Price Chief executive Matthew Coulson Finance director 84 M.P. EVANS GROUP PLCANNUAL REPORT 2017 PARENT-COMPANY PARENT-COMPANY STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2017 Loss for the year Total comprehensive expense for the year Issue of share capital Dividends Share buy-back Credit to equity for equity-settled share-based payments Transactions with owners At 1 January 2017 At 31 December 2017 Loss for the year Total comprehensive expense for the year Issue of share capital Dividends Credit to equity for equity-settled share-based payments Transactions with owners At 1 January 2016 At 31 December 2016 SHARE CAPITAL US$’000 — — 13 — (124) — (111) 9,366 9,255 — — 6 — — 6 OTHER RESERVES US$’000 — — 493 — 124 175 792 36,605 37,397 — — 225 — 21 246 9,360 9,366 36,359 36,605 RETAINED EARNINGS US$’000 (1,426) (1,426) — (19,995) (9,188) 54 (29,129) 76,082 45,527 (6,979) (6,979) — (10,033) — (10,033) 93,094 76,082 TOTAL US$’000 (1,426) (1,426) 506 (19,995) (9,188) 229 (28,448) 122,053 92,179 (6,979) (6,979) 231 (10,033) 21 (9,781) 138,813 122,053 85 NOTES TO THE PARENT-COMPANY ACCOUNTS For the year ended 31 December 2017 i Significant accounting policies Basis of accounting M.P. Evans Group PLC is a public limited company incorporated in the United Kingdom and registered in England and Wales. The financial statements of the Company are presented as required by the Companies Act 2006. The financial statements have been prepared in accordance with Financial Reporting Standard 101, ‘Reduced Disclosure Framework’ (“FRS 101”). The financial statements have been prepared on a going-concern basis under the historical cost convention, in accordance with applicable accounting standards in the United Kingdom. The principal accounting policies are summarised below. The directors have concluded that the functional currency is the US Dollar, reflecting the primary economic environment in which the Company operates. The presentational currency for the Company accounts is also the US Dollar. As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in relation to share-based payment, financial instruments, capital management, presentation of comparative information in relation to certain assets, presentation of a cash-flow statement, and certain related party transactions. Pursuant to Section 408 of the Companies Act 2006, the Company’s own income statement and statement of other comprehensive income are not presented separately in the Company financial statements, but they have been approved by the Board. The Company has assessed the impact of new and revised accounting standards as described in note 2 to the consolidated financial statements, and has concluded that none have a material impact on the Company’s results or financial position. Cash-flow statement The Company has not included a cash-flow statement as part of its financial statements since the consolidated financial statements of the Group, of which the Company is a member, include a cash-flow statement and are publicly available. Property, plant and equipment Property, plant and equipment are stated at the historic purchase cost less accumulated depreciation. Plant, equipment and vehicles are depreciated over their estimated useful lives at 25%. Estimated useful lives are reviewed at each balance-sheet date. Where the board judges the residual value of an asset to exceed its carrying value, no provision is made for depreciation. Investments in subsidiaries Investments in subsidiaries are shown at cost less provision for impairment. Trade and other receivables These represent amounts due from Group companies in the normal course of business, are repayable on demand, unsecured and are not interest-bearing. These are measured at amortised cost. Cash and cash-equivalents These include cash in hand and deposits held with banks with original maturities of three months or less. Trade and other payables Trade and other payables are initially measured at fair value, and are subsequently measured at amortised cost. Borrowings are recorded at the proceeds received, net of direct issue costs. 86 M.P. EVANS GROUP PLCANNUAL REPORT 2017NOTES TO THE PARENT-COMPANY ACCOUNTS ii Result for the year As permitted by section 408 of the Companies Act 2006, the Company has elected not to present its own profit and loss account for the year. M.P. Evans Group PLC reported a loss for the year ended 31 December 2017 of US$1,426,000 (2016 loss US$6,979,000). The auditors’ remuneration for audit services was US$23,000 (2016 US$20,000). iii Employees Employee costs during the year Wages and salaries Social security costs Pension costs Shared-based payments 2017 US$’000 2016 US$’000 1,762 299 52 65 2,178 1,795 267 65 21 2,148 As recorded in the report of the directors’ remuneration report on page 46, wages and salary costs include bonuses paid to the directors in respect of 2017 and 2016. Average monthly number of persons employed Staff Directors iv Property, plant and equipment Cost At 1 January 2017 Additions At 31 December 2017 Accumulated depreciation At 1 January 2017 Charge for the year At 31 December 2017 Net book value at 31 December 2017 Net book value at 31 December 2016 NUMBER NUMBER 4 3 7 5 2 7 LAND AND BUILDINGS US$’000 PLANT, EQUIPMENT & VEHICLES US$’000 834 — 834 — — — 834 834 236 26 262 163 37 200 62 73 TOTAL US$’000 1,070 26 1,096 163 37 200 896 907 87 NOTES TO THE PARENT-COMPANY ACCOUNTS continued v Investments in subsidiaries Subsidiary undertakings At 1 January and 31 December 2017 The following companies are the principal direct subsidiary companies of M.P. Evans Group PLC: M.P. Evans & Co. Limited Sungkai Holdings Limited US$’000 31,494 HOLDING % 100 100 COUNTRY OF OPERATION UK UK Holdings are all of ordinary shares. The directors believe the carrying value of investments is supported by their underlying net assets. Details of all subsidiary companies are shown on page 90. vi Trade and other receivables Amounts owed by subsidiary undertakings Other debtors Prepayments and accrued income vii Trade and other payables Amounts owed to subsidiary undertakings Borrowings Other creditors viii Called-up share capital See note 26 to the consolidated financial statements. 2017 US$’000 2016 US$’000 101,790 137,471 783 92 121 130 102,665 137,722 2017 US$’000 35,684 2,449 1,181 39,314 2016 US$’000 36,273 2,449 2,965 41,687 88 M.P. EVANS GROUP PLCANNUAL REPORT 2017NOTES TO THE PARENT-COMPANY ACCOUNTS ix Reserves SHARE- PREMIUM ACCOUNT US$’000 CAPITAL- REDEMPTION RESERVE US$’000 MERGER RESERVE US$’000 OTHER RESERVES US$’000 TOTAL US$’000 RETAINED EARNINGS US$’000 At 1 January 2017 30,728 3,896 1,434 Issue of shares Share buy-back Share-based payments Loss for the financial year Dividends* 493 — — — — — 124 — — — — — — — — At 31 December 2017 31,221 4,020 1,434 547 — — 175 — — 722 * See note 10 to the consolidated financial statements. x Reconciliation of movement in shareholders’ funds Loss for the financial year Dividends Issue of shares Share buy-back Share-based payments Net decrease in shareholders’ funds At 1 January At 31 December xi Post-balance-sheet events 36,605 76,082 493 124 175 — — 37,397 2017 US$’000 (1,426) (19,995) (21,421) 506 (9,188) 229 — (9,188) 54 (1,426) (19,995) 45,527 2016 US$’000 (6,979) (10,033) (17,012) 231 — 21 (29,874) (16,760) 122,053 92,179 138,813 122,053 On 12 January 2018, the Company announced that the budget for the share buy-back programme had been extended by £2.5 million to a total of £10 million, and that the programme would run up to 30 June 2018. 89 SUBSIDIARY AND ASSOCIATED UNDERTAKINGS As at 31 December 2017 SUBSIDIARY UNDERTAKINGS NAME OF SUBSIDIARY PT Prima Mitrajaya Mandiri PT Teguh Jayaprima Abadi PT Perkebunan Tenera Muarawis PT Bumi Mas Agro PT Gunung Pelawan Lestari PT Evans Lestari PT Pangkatan Indonesia PT Bilah Plantindo PT Sembada Sennah Maju PT Simpang Kiri Plantation Indonesia % OF SHARES HELD COUNTRY OF INCORPORATION COUNTRY OF OPERATION FIELD OF ACTIVITY 95 95 51 95 90 80 80 80 80 80 Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Production of CPO and PK Production of CPO and PK Production of CPO and PK Production of CPO and PK Production of CPO and PK Production of CPO and PK Production of CPO and PK Production of CPO and PK Production of CPO and PK Production of CPO and PK Provision of agronomic and management-consultancy services Property development and production of oil-palm ffb PT Evans Indonesia 100 Indonesia Bertam Consolidated Rubber Company Limited 100 England & Wales Malaysia M.P. Evans & Co. Limited Sunrich Plantations Pte Ltd Sungkai Holdings Limited PT Surya Makmur PT Aceh Timor Indonesia Bertam (U.K.) Limited Lendu Australia Pty. Ltd Lendu (U.K.) Limited Sungkai Estates Limited 100 England & Wales United Kingdom Holding company 100 Singapore Singapore Holding company 100 England & Wales United Kingdom Holding company 75 75 Indonesia Indonesia Indonesia Indonesia Holding company Holding company 100 England & Wales United Kingdom and Australia Dormant 100 Australia Australia Dormant 100 England & Wales United Kingdom Dormant 100 England & Wales United Kingdom Dormant Supara Investments Limited 100 England & Wales United Kingdom Dormant The Singapore Para Rubber Estates, Limited 100 England & Wales United Kingdom Dormant The shareholdings in the above companies represent ordinary shares. KEY: CPO = crude palm oil, PK = palm kernels, ffb = fresh fruit bunches ASSOCIATED UNDERTAKINGS Details of the associated undertakings as at 31 December 2017 are as follows: UNLISTED ISSUED, FULLY- PAID SHARE CAPITAL % HELD COUNTRY OF INCORPORATION COUNTRY OF OPERATION FIELD OF ACTIVITY PT Kerasaan Indonesia Rp 138.07m 38.00 Indonesia Indonesia Production of oil-palm ffb Bertam Properties Sdn. Berhad. RM 60.00m 40.00 Malaysia Malaysia Property development 90 M.P. EVANS GROUP PLCANNUAL REPORT 2017 ANALYSIS OF INDONESIAN PLANTATION LAND AREAS As at 31 December 2017 The information on pages 91 to 96 does not form part of the audited financial statements. PLANTED HECTARAGE1 Subsidiaries – oil palm Kota Bangun, East Kalimantan Bumi Mas Bangka Musi Rawas2 Pangkatan group Simpang Kiri Total GROUP SMALLHOLDER CO-OPERATIVE SCHEMES OWNERSHIP % MATURE HA IMMATURE HA TOTAL HA MATURE HA IMMATURE HA TOTAL HA 95.00 95.00 90.00 80.00 80.00 80.00 9,322 4,945 4,088 269 5,766 1,640 1,250 2,531 1,959 3,361 1,203 738 10,572 7,476 6,047 3,630 6,969 2,378 3,911 857 1,977 - 625 509 1,867 1,534 4,536 1,366 3,844 1,534 26,030 11,042 37,072 6,745 4,535 11,280 Group share of subsidiaries’ land 23,373 9,597 32,970 Associates – oil palm Kerasaan Group share of associates’ land Memorandum: Group share of subsidiaries’ land and share of associates’ land Subsidiaries’ land and Group share of associates’ land Notes 38.00 2,077 789 240 91 2,317 880 24,162 9,688 33,850 26,819 11,133 37,952 1. All of the Group’s areas in the Pangkatan Group, Simpang Kiri and Bumi Mas have a final land license (“HGU”), as does all of the associate’s area at Kerasaan. The Group’s projects at Kota Bangun and Bangka have HGUs covering 8,700 and 5,700 hectares respectively. The remaining areas on these projects and at Musi Rawas are in the process of obtaining HGUs, and have the necessary operating and development licences. 2. The board’s current estimate is that it may be possible to plant 10,000 hectares, of which 7,000 hectares would relate to the Group and 3,000 hectares to the smallholder co-operatives. 91 ANALYSIS OF GROUP EQUITY VALUE As at 31 December 2017 The information in the following table provides a directors’ estimate of the Group equity value at 31 December 2017 utilising, except where indicated, an independent valuation of the Group’s properties performed at the end of 2017. OWNERSHIP % PLANTED AREA HA TOTAL MARKET VALUE US$’000 MARKET VALUE PER PLANTED HECTARE US$ MARKET VALUE ATTRIBUTABLE TO GROUP US$’000 INDONESIAN OIL PALM PLANTATIONS Group Kota Bangun, East Kalimantan6 Bumi Mas1 Bangka6 Musi Rawas Pangkatan group6 Simpang Kiri Smallholders Kota Bangun, East Kalimantan Bangka Musi Rawas Associates Kerasaan2 Total Indonesia MALAYSIAN PROPERTY Bertam Estate Bertam Properties Total Malaysia Net cash3 Other assets and liabilities4 Total equity value Equity value (£ per share5) Notes: 95.00 95.00 90.00 80.00 80.00 80.00 95.00 90.00 80.00 10,572 7,476 6,047 3,630 6,969 2,378 37,072 4,536 3,844 1,534 9,914 226,610 102,353 132,200 41,200 118,704 32,940 654,007 29,500 19,760 10,170 59,430 21,400 13,700 21,900 11,300 17,000 13,900 17,600 6,500 5,100 6,600 6,000 38.00 2,317 34,200 14,800 100.00 40.00 n/a n/a 215,280 97,235 118,980 32,960 94,963 26,352 585,770 28,025 17,784 8,136 53,945 12,996 652,711 36,170 54,612 90,782 81,379 (12,445) 812,427 £10.96 1. Bumi Mas was not included in the independent valuation at 31 December 2017, as the Group’s acquisition of this property was completed on 22 December 2017. The amount included in the table above represents the fair value of the property, plant and equipment of Bumi Mas taken from note 13. No amount has been included in the Group equity valuation at 31 December 2017 for the smallholder hectares at Bumi Mas. 2. The Group’s only oil-palm associate, Kerasaan, was not included in the independent valuation at 31 December 2017. The value in the table above has been carried forward from the independent valuation performed at 31 December 2016. 3. Net cash is taken as cash and other liquid resources less borrowings from the 31 December 2017 balance sheet. 4. Other assets and liabilities taken as net assets minus plantation and property-related assets, minus net cash from the 31 December 2017 balance sheet. 5. Amount per share calculated using the year-end exchange rate and year-end shares in issue (see note 26). 6. Market value per planted hectare includes value of mills on the related estates. 92 M.P. EVANS GROUP PLCANNUAL REPORT 2017FIVE-YEAR SUMMARY Production* Crude palm oil Palm kernels Crops 2017 Tonnes 2016 Tonnes 2015 Tonnes 2014 Tonnes 154,000 33,500 125,600 26,200 112,000 22,700 104,000 20,400 2013 Tonnes 93,300 18,600 Oil-palm fresh fruit bunches (“ffb”) Indonesian majority-owned estates Indonesian associated-company estates 434,500 50,000 399,300 384,000 423,900 382,100 385,500 386,900 344,200 387,000 Average sale prices Crude palm oil – Rotterdam cif per tonne Exchange rates US$1 = Indonesian Rupiah – average – year end US$1 = Malaysian Ringgit – average – year end £1 = US Dollar – average – year end Revenue Gross profit Profit before tax US$ 714 13,382 13,568 4.30 4.05 1.29 1.35 US$’000 116,536 36,246 35,070 US$ 700 13,303 13,473 4.14 4.49 1.35 1.24 US$’000 83,864 24,384 19,215 US$ 622 13,390 13,785 3.91 4.29 1.53 1.47 US$’000 72,528 15,059 6,769 US$ 821 11,864 12,440 3.27 3.50 1.65 1.56 US$’000 89,956 31,767 24,062 US$ 856 10,449 12,189 3.15 3.28 1.56 1.66 US$’000 82,186 24,735 6,530 Basic earnings per share 163.8 56.1 43.4 45.4 26.3 US cents US cents US cents US cents US cents Dividends per share: Normal Special Total PENCE PENCE PENCE PENCE PENCE 17.75 10.00 27.75 15.00 5.00 20.00 8.75 — 8.75 8.75 — 8.75 8.25 — 8.25 US$’000 US$’000 US$’000 US$’000 US$’000 Equity attributable to the owners of M.P. Evans Group PLC Net cash generated by operating activities 383,998 20,723 320,999 22,888 300,009 20,231 291,509 29,156 274,091 19,494 * Production figures have been restated to include CPO and palm kernel production from Simpang Kiri. 93 NOTICE OF MEETING NOTICE IS HEREBY GIVEN that the annual general meeting of M.P. Evans Group PLC will be held at Tallow Chandlers’ Hall, 4 Dowgate Hill, London EC4R 2SH on Friday 15 June 2018 at 12 noon for the following purposes: AS ORDINARY BUSINESS 1 To receive and consider the report of the directors and the audited consolidated financial statements for the year ended 31 December 2017. To re-elect Richard Robinow as a director. To re-elect Philip Fletcher as a director. To re-elect Peter Hadsley-Chaplin as a director. To declare a final dividend. To re-appoint PricewaterhouseCoopers LLP as auditors and to authorise the directors to determine their remuneration. 2 3 4 5 6 AS SPECIAL BUSINESS To consider and, if thought fit, pass the following resolution as a special resolution: RESOLUTION ON FORM OF PROXY No 1 No 2 No 3 No 4 No 5 No 6 RESOLUTION ON FORM OF PROXY 7 That the Company is hereby generally and unconditionally authorised to make market purchases No 7 (within the meaning of section 693 of the Companies Act 2006) of shares of 10p each in the capital of the Company provided that: a) the maximum number of shares hereby authorised to be purchased is 5,481,231; b) the minimum price which may be paid for each share is 10p (exclusive of expenses); c) the maximum price (exclusive of expenses) which may be paid for each share is an amount equal to 105% of the average of the middle-market quotations for such shares as derived from the Daily Official List of the London Stock Exchange for the five business days immediately preceding the day of purchase; and d) the authority hereby conferred shall expire at the conclusion of the next annual general meeting of the Company or on 30 June 2019 whichever shall be the earlier save that the Company may, before the expiry of this authority, make a contract of purchase which will or may be executed wholly or partly after such expiry and may make a purchase of shares pursuant to any such contract. By order of the board Katya Merrick Company Secretary 9 April 2018 94 M.P. EVANS GROUP PLCANNUAL REPORT 2017 NOTICE OF MEETING NOTES 1. A member of the Company entitled to attend, speak and vote at the meeting convened by this notice may appoint a proxy to exercise all or any of his or her rights to attend, speak and vote at the meeting on his or her behalf. A proxy need not be a member of the Company. Appointment of a proxy will not subsequently preclude a member from attending and voting at the meeting in person if he or she so wishes. A member may appoint more than one proxy provided that each proxy is appointed to exercise the rights attached to different shares held by the member. The form of proxy contains instructions on how to appoint more than one proxy. 2. A form of proxy for use at the meeting is enclosed. Please return the form of proxy as soon as possible. To be valid, it must be received by post or (during normal business hours only) by hand at the office of the registrars, Computershare Investor Services PLC, at The Pavilions, Bridgwater Road, Bristol, BS99 6ZZ no later than 12 noon on 13 June 2018 (or, if the meeting is adjourned, no later than 48 hours before the time for holding the adjourned meeting, or, if a poll is taken otherwise than at or on the same day as the meeting at which it is demanded, no later than 24 hours before the time appointed for the taking of the poll). 3. The right to appoint a proxy does not apply to persons whose shares are held on their behalf by another person and who have been nominated to receive communications from the Company in accordance with section 146 of the Companies Act 2006 (“nominated persons”). Nominated persons may have a right under an agreement with the registered shareholder who holds the shares on their behalf to be appointed (or to have someone else appointed) as a proxy. Alternatively, if nominated persons do not have such a right, or do not wish to exercise it, they may have a right under such an agreement to give instructions to the person holding the shares as to the exercise of voting rights. 4. Pursuant to regulation 41 of the Uncertificated Securities Regulations 2001, the Company has specified that only those shareholders registered on the register of members of the Company at 11.00 p.m. on 13 June 2018 (or, if the meeting is adjourned, 48 hours before the time of the adjourned meeting) shall be entitled to attend and vote at the meeting in respect of the number of shares registered in their name at that time. Changes to the register of members after that time will be disregarded in determining the rights of any person to attend and vote at the meeting. 5. As at 9 April 2018, the Company's issued share capital consisted of 54,812,312 shares carrying one vote each. Therefore the total number of voting rights in the Company as at that date was 54,812,312. 6. Copies of the directors’ service contracts and terms and conditions of appointment will be available for inspection at the registered office of the Company during normal business hours and at the place of the meeting from 15 minutes prior to the meeting until its conclusion. 7. 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, but powers purported to be exercised by more than one authorised representative in respect of the same shares will be treated as not exercised. 8. Members who wish to communicate with the Company in relation to the meeting should do so by writing to the Registrars at The Pavilions, Bridgwater Road, Bristol BS99 6ZZ. No other methods of communication will be accepted. In particular, no person may use any electronic address to communicate with the Company for any purposes other than those expressly stated in the relevant document. Any addressee of this notice who has sold or transferred all of the shares of the Company held by him or her should pass the annual report of which this notice forms part (including the form of proxy enclosed herewith) to the person through whom the sale was effected for transmission to the transferee or purchaser THE ANNUAL GENERAL MEETING WILL BE HELD ON FRIDAY 15 JUNE 2018 AT NOON VENUE Tallow Chandlers’ Hall 4 Dowgate Hill, London EC4R 2SH TALLOW CHANDLERS’ HALL CLOSEST TRANSPORT LINKS Mansion House (District and Circle Lines) Cannon Street (District and Circle Lines, National Rail Services) Bank (Central, Northern and Waterloo & City Lines) 95 M.P. EVANS GROUP PLC ANNUAL REPORT 2017 OFFICERS, PROFESSIONAL ADVISERS & REPRESENTATIVES EXECUTIVE DIRECTORS Peter E Hadsley-Chaplin, MA MBA Chairman SECRETARY AND REGISTERED OFFICE Katya Merrick 3 Clanricarde Gardens, Tunbridge Wells, Kent TN1 1HQ Company number: 1555042 t +44 (0)1892 516 333 e katya.merrick@mpevans.co.uk Tristan R J Price, MA MSc FCA w www.mpevans.co.uk Chief executive Matthew H Coulson, BA FCA Finance director INDONESIAN REGIONAL OFFICE PT Evans Indonesia Gedung Graha Aktiva, Suite 1001, Jl HR Rasuna Said Blok X-1 Kav 03, NON-EXECUTIVE DIRECTORS Jakarta 12950 Richard M Robinow, MA *† Senior independent MANAGING AGENT IN MALAYSIA Straits Estates Sdn. Berhad Jock M Green-Armytage, BA MBA *† Independent, Chair of audit and remuneration committee Philip A Fletcher, FCA * Bruce C J Tozer, BSc MSc MBA *† Independent * Member of the audit committee † Member of the remuneration committee Loke Mansion, 147 Lorong Kelawei, 10250 Penang INDEPENDENT AUDITORS PricewaterhouseCoopers LLP Chartered Accountants and Registered Auditors 1 Embankment Place, London WC2N 6RH REGISTRARS Computershare Investor Services PLC The Pavilions, Bridgwater Road, Bristol BS99 6ZZ t +44 (0)3707 071 176 f +44 (0)3707 036 101 w www.computershare.com PRINCIPAL BANKERS Bank CIMB Niaga Graha CIMB Niaga Lt.11, Jalan Jend. Sudirman Kav.58, Jakarta 12190, Indonesia AmBank Group 55 Jalan Raja Chulan, 50200 Kuala Lumpur, Malaysia NatWest 89 Mount Pleasant Road, Tunbridge Wells, Kent TN1 1QJ NOMINATED ADVISER AND BROKER Peel Hunt LLP Moor House, 120 London Wall, London EC2Y 5ET SOLICITORS Hogan Lovells International LLP Atlantic House, 50 Holborn Viaduct, London EC1A 2FG 96 3 Clanricarde Gardens Tunbridge Wells Kent TN1 1HQ United Kingdom t +44 (0)1892 516 333 e enquiries@mpevans.co.uk w mpevans.co.uk

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