M.P. Evans Group plc
Annual Report 2019

Plain-text annual report

A N N U A L R E P O R T For the year ended 31 December 2019 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 9 1 0 2 CONTENTS 1 Group financial highlights 2 Chairman’s statement 5 Operational highlights 6 Map of estates 8 The Group’s business model 10 The palm-oil market STRATEGIC REPORT 12 Strategy 14 Results and financial position 16 Operations: Indonesian palm oil 24 Operations: Malaysian property 26 Risk management SUSTAINABILITY 31 Approach 31 Protecting the environment 33 Sustainable palm-oil production 34 Communities REPORT OF THE DIRECTORS 38 Board of directors 43 Corporate governance 48 Directors' remuneration report FINANCIAL STATEMENTS 51 Independent auditors’ report 56 Consolidated income statement 58 Consolidated balance sheet 60 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 & representatives Profit for the year US$7.5 million (2018 US$7.2 million) Operating profit US$16.1 million (2018 US$19.5 million) Continuing EPS 11.6 US cents (2018 – 9.9 US cents) Proposed to maintain final dividend at 12.75p per share “ More than one million tonnes of crop processed, and improved oil-extraction rates, did not translate into record profits in 2019 only on account of this year coinciding with a period of low crude palm-oil prices. However, towards the end of the year, the price of crude palm oil rose strongly. During the year, the Group was able effectively to acquire a further 2,200 planted hectares by purchasing additional shareholdings in its own operating subsidiaries from one of its minority partners. ” Peter Hadsley-Chaplin  Read more in the Chairman’s statement on pages 2 to 5  Read more on the Group’s commitment to sustainability on pages 31 to 37 GROUP FINANCIAL HIGHLIGHTS GROUP FINANCIAL HIGHLIGHTS +10% REVENUE -36% GROSS PROFIT 2019 US$ 119.3m 2018 US$ 108.6m 2019 US$ 17.0m 2018 US$ 26.5m OPERATING PROFIT -17% 2019 US$ 16.1m 2018 US$ 19.5m +4% 2019 US$ 7.5m 2018 US$ 7.2m PROFIT FOR THE YEAR -8% TOTAL EQUITY 2019 US$ 367.7m 2018 US$ 398.3m OPERATING CASH GENERATED +38% 2019 US$ 41.8m 2018 US$ 30.2m BASIC EARNINGS PER SHARE +17% 2019 11.6 US cents 2018 9.9 US cents NORMAL DIVIDEND PER SHARE –% 2019 17.75 pence 2018 17.75 pence 1 1 M.P. EVANS GROUP PLC ANNUAL REPORT 2019 CHAIRMAN’S STATEMENT In 2019, for the first time, the Group processed more than 1 million tonnes of fresh fruit bunches. 2 Peter Hadsley-Chaplin Chairman STRATEGIC DEVELOPMENTS The Group has continued to looks forward to a long and fruitful relationship with a new Indonesian implement its strategy to focus on partner, Mr Praba Madhavan, a developing and operating majority- like-minded individual with wide held plantations to produce experience in the commodity sector. sustainable Indonesian palm oil. The Group’s approach to making Wherever possible, the Group mills decisions for the long term is suited its own crop of fresh fruit bunches both to a long-lived plant such as (“ffb”). It already operates three of the oil palm and to the thinking its own mills, at Pangkatan, Kota needed to make the right choices for Bangun and Bangka. A second mill at a sustainable future. Kota Bangun, needed to process the increasing crop from the maturing In September 2019, the Group plantings on this project, is on track was able to take a further step in to be commissioned in the middle of executing its strategy by acquiring 2020. Work is also already under way additional shares in its Indonesian at Bumi Mas to construct a mill, which operating subsidiaries previously is expected to be operating in mid- held by one of its minority partners. 2021. As it increases the amount of its This had the effect of expanding own crop that it mills itself, the Group the number of high-quality and will be able to report a higher level environmentally-sound planted of certified sustainable production. hectares owned by the Group. The Furthermore, where it buys ffb from acquisition was fully funded by taking on additional debt of US$25.4 million. independent smallholders, the Group is committed to working with them In this way, the Group successfully to ensure their ffb can be certified consolidated its ownership at a as sustainable under the new RSPO price of US$9,500 per hectare that Independent Smallholder Standard. represented an attractive and low-risk return to shareholders. As The Group’s strategy of controlling part of this transaction, the Group’s all its operations means it is long-standing Indonesian partner, best able to draw on its excellent PT Austindo Nusantara Jaya (“ANJ”), operational management team, with sold all of its holdings in Group a proven track record of developing companies. The board is grateful and improving estates in the most to ANJ for their support over many effective, productive and sustainable years and wishes them well in the way. A strong balance sheet enables future. At the same, time the Group the Group to maintain its planned CHAIRMAN’S STATEMENT programme of investment in the consumption consistently exceeding over the coming years combined Group’s plantations notwithstanding production through the year. At the with the knowledge that the sector the cyclical rise and fall in the price beginning of the year, high stock has experienced an extended of crude palm oil (“CPO”). The need to balances and production growth period of low CPO prices for a build roads, permanent housing and were able to meet this increasing commodity whose price moves in water-management infrastructure, demand. However, as the year wore cycles. The board will monitor the quite apart from the construction on, production growth fell and stocks evolving situation in respect of the of mills, represents a significant unwound, so pressure for a price coronavirus Covid-19 carefully in commitment for a number of years increase grew. By the end of 2019, the reaching its proposals for future after the palms on its new projects price of CPO was US$860 per tonne. dividends. It continues to believe the are planted. A strong balance sheet Demand for palm-kernel oil did not anticipated increase in yield from its also allows the Group to acquire increase in the same way as that for young plantations provides a basis incremental hectarage for planting CPO, so the price for palm kernels for sustained future crop growth and, around its existing projects. received by the Group fell by 34% ultimately, enhanced dividends. RESULTS A record year for production and revenue resulted in only a small increase in profit for the year. The weak CPO price in the second half of 2018 carried through into 2019 until near the end of the year, leading to lower profit margins. Operating profit was US$16.1 million compared with US$19.5 million in 2018 reflecting low CPO prices and a small increase in costs, but also a positive foreign- exchange movement compared with a loss in the previous year. Combined with higher interest costs, resulting from additional debt taken to finance the acquisition of shares from the compared with the previous year in the face of plentiful supplies of its competitor coconut oil. PROJECTED GROWTH IN THE GROUP’S CROP PERSISTS The Group’s crops rose by 16% and those of its ‘scheme’ smallholders by 15%. The total crop processed increased by 21%. DIVIDEND An interim dividend of 5.00p per OPERATIONAL DEVELOPMENTS Projected growth in the Group’s crop persists. 2019 was the first year in which the Group processed more than 1 million tonnes of ffb. The total crop processed increased by 21%. The Group’s crops rose by 16% and those of its ‘scheme’ smallholders (those attached to the Group’s projects) by 15%. The rise in crop was particularly pronounced at Bumi Mas, where the operating standards introduced by the Group are visibly having a positive effect. At a lower volume, the crop at Musi Rawas is also growing at a good rate as this project’s original plantings increasingly come into Group’s minority partner, and a lower share (2018 – 5.00p per share) was harvesting. Crop purchased from tax charge, profit for the year rose by paid on 1 November 2019, and the independent smallholders increased 4% to US$7.5 million. board is recommending a final dividend of 12.75p per share by 56% to 166,000 tonnes as the Group sought to make best use of After nearly ten months of low (2018 – 12.75p per share). This the spare capacity at its three mills. CPO prices, in October 2019, prices maintains dividends for the year increased strongly through to the in respect of normal operations at The Group prides itself on the end of the year. This welcome 17.75p per share. movement did not prevent the extraction it achieves from its ffb. Overall, the Group’s extraction rate average price of CPO for Indonesian The Group finds itself in the unusual rose to 23.7% in its own mills from exporters being the lowest for 13 position of proposing a dividend not 23.5% in 2018. This was the case years. The average price in 2019 for covered by earnings for a second even though the Group processed CPO delivered in Rotterdam was year in succession. The board’s view significantly more crop bought from US$566 per tonne, 5% lower than the is that it should maintain its long- independent smallholders, which is US$598 per tonne seen in 2018. The standing policy of not reducing the not the same quality as its own crop price increase in the last two months dividend given the strong increase or that of its scheme smallholders. of the year was the result of CPO in crop and production projected Following last year’s dip to 23.9% in 3 3 CHAIRMAN’S STATEMENT continued the oil-extraction rate in its Bumi palm on behalf of itself and its increase in supply of vegetable Permai mill in Kota Bangun, caused scheme smallholders, of which oils is expected to be weaker in by high-capacity utilisation leading effective ownership by the Group’s 2020 and significantly below the to longer maintenance intervals, in shareholders, taking account of increase in demand. Stocks of the 2019 the extraction rate at this mill minority-shareholder interests, four main vegetable oils relative to climbed back to 24.6%. The Group’s amounted to 37,100 hectares. consumption are all expected to fall, other mills maintained good rates of oil- and kernel-extraction. In total, the Group produced 230,000 tonnes of CPO, 20% more than in 2018. At Bumi Mas, good progress was made in bringing the project up to the Group’s standards. Roads were strengthened and improved, and housing for workers and staff built. Work to restore plantings which had been neglected was carried out, which contributed to the strong increase in crop BUMI MAS BEING IMPROVED TO THE GROUP’S STANDARDS Roads were strengthened and improved, housing for workers and staff built and work was undertaken to restore plantings. GROUP VALUATION Acquisition of some shareholdings significantly so in the case of palm oil and sunflower oil. In the longer term, insufficient levels of replanting in Malaysia and a reduction in new Indonesian planting are likely to curb growth in production. The last year has seen a small but perceptible shift in consumer and media attitudes towards palm oil, with a greater appreciation of the important part that certified sustainable palm oil can play in the world achieving a sustainable future. from this project. At Musi Rawas, from the Group’s minority partner, In the short term, the uncertainty planting since development began as well as continuing development, surrounding the development of reached 8,000 hectares, of which produced an increase in the total Covid-19 may affect both prices for 5,700 were for the Group and 2,300 US Dollar value of the Group’s CPO and production. However, the for its scheme smallholders. In plantations during the year. This was board remains of the view that palm addition, land compensation had counterbalanced by an increase in oil is well placed to benefit from been paid on 1,300 hectares and debt used to purchase the minority an underlying increase in global further hectares had been surveyed, holdings and a reduction in the value demand for vegetable oil which is a necessary precursor of Malaysian property, leaving the and, therefore, that the outlook to the land being available for Group’s equity valuation at the end remains positive. planting. However, during 2019 the of 2019 at £11.01, slightly lower than a Roundtable for Sustainable Palm year earlier. Oil (“RSPO”) adopted a change to its standards which affects new planting. Development at Musi Rawas was paused to allow the Group time PROSPECTS The Group projects that crop from its existing areas will rise until 2029. BOARD RETIREMENT AND APPOINTMENT At the end of the year, Richard Robinow, a non-executive director, retired from the board. Over many to assess the new standards and With an average age of only 7 years, years the board has been extremely ensure that it complied with them. the palms on the Group’s estates and grateful to Richard for the invaluable In the Group’s own areas and in those of its scheme smallholders contribution he has made to the those of its scheme smallholders, will significantly increase their yield Group as a director and, for a period, planting is carried out in rigorous as they mature. Any additional areas as chairman. His expertise and compliance with RSPO standards that the Group acquires in line with knowledge about both the plantation to ensure the fruit will be certified its strategy would push further into world and corporate affairs generally as being produced sustainably. It the future the year of its peak oil will be greatly missed. is anticipated that planting at Musi production. Rawas can resume by mid-2020. At the same time as Richard At the end of 2019, the Group growth in production of CPO as was pleased to welcome Dr Darian managed 51,600 hectares of oil well as that of competing oilseeds, McBain as a non-executive director. After successive years of strong Robinow’s retirement, the Group 4 M.P. EVANS GROUP PLCANNUAL REPORT 2019Darian has many years of experience working in sustainability roles, most recently as Global Director of Corporate Affairs and Sustainability at Thai Union Group PCL. At Thai Union, Darian has been responsible for introducing changes to embed sustainability throughout the global seafood industry. Prior to this, she was Managing Director at Blue Sky Green, a consultancy focusing on business strategy, supply chain analysis and sustainability. Darian also has experience in the palm-oil industry, working to advocate for sustainable global palm-oil supply chains for WWF-Australia. We look forward to benefiting from the skills and expertise she brings to the board. ACKNOWLEDGEMENTS The Group’s managers, staff and workers in all our operations have been dedicated and worked hard during a challenging year in which they have continued to develop and manage our operations to deliver consistent growth. I should like to put on record the board’s thanks for their efforts. Peter Hadsley-Chaplin Chairman 31 March 2020 CHAIRMAN’S STATEMENT OPERATIONAL HIGHLIGHTS INDONESIAN PALM OIL Total crop processed more than 1 million tonnes Group crops increased 16% to 663,000 tonnes Average extraction rate in Group mills increased to 23.7% Crude-palm-oil production up to 232,000 tonnes Increase of 3,200 mature Group and scheme smallholder hectares in year 65% of Group production certified sustainable; target 100% once Group processes all own crop Group increasing milling capacity as crops increase MALAYSIAN PROPERTY 37% increase in revenue from property sales at associated company Bertam Properties Political uncertainty weighing down on property valuations M.P. EVANS GROUP PLC Net current assets of US$35 million at 31 December 2019 Group equity value of £11.01 per share at 31 December 2019 5 M.P. EVANS GROUP PLC ANNUAL REPORT 2019 M.P. Evans aspires to the quality of its output and management of its plantations being regarded as a reference point for the industry. 1 1 SIMPANG KIRI 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. 2,600 hectares Group planted area: 2,400 hectares Our values are an integral part of everything we do. 2 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. 6 2 KERASAAN 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. Planted area: 2,300 hectares Group minority share: 38% 3 PANGKATAN GROUP 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). 7,400 hectares Group planted area: 7,000 hectares 3 4 MUSI RAWAS 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. 10,000 hectares Group planted area: 5,700 hectares Scheme smallholder planted area: 2,300 hectares 4 OPERATIONAL HIGHLIGHTS 8 7 7 BUMI MAS 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. 10,000 hectares Group planted area: 7,500 hectares Scheme smallholder planted area: 1,400 hectares 8 BERTAM PROPERTIES AND BERTAM ESTATE This land was previously the Group’s Bertam Estate, most of which was sold into Bertam Properties, a joint venture with two Malaysian partners. Starting in 1992, the area has been developed into a new town. The remaining developable land amounts to 179 hectares. Both Bertam Estate and Bertam Properties have significant value as property-development land. Bertam Properties: 280 hectares (Group minority share: 40%) Bertam Estate: 70 hectares 1 2 8 3 5 4 7 6 5 BANGKA 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 biogas plant was commissioned in May 2016 and extended to 60 tonnes in 2019. 10,000 hectares Group planted area: 6,100 hectares Scheme smallholder planted area: 3,900 hectares 5 6 KOTA BANGUN ESTATES 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 2020. 16,000 hectares Group planted area: 10,600 hectares Scheme smallholder planted area: 4,600 hectares 6 7 THE GROUP’S BUSINESS MODEL OUR MAIN RESOURCES 39,400 HECTARES OF GROUP OIL PALM 12,200 HECTARES OF SMALLHOLDER OIL PALM PLANTATION LAND The Group’s plantation land is used to grow oil RELATIONSHIPS WITH COMMUNITIES The Group engages with the local communities palms and harvest them to the fullest extent. living on and near its operations and manages superlative smallholder schemes on their behalf. 6,100 EMPLOYEES 15% NET GEARING PEOPLE The Group has over 6,000 employees, including STABLE FUNDING The Group has a robust capital structure with 200 agronomic staff, 85 engineers and more than market capitalisation of more than US$520 million*, 3,700 harvesters. cash of US$26 million and prudent levels of debt. OUTCOMES 231,900 TONNES OF CRUDE PALM OIL Growing production 65% CERTIFIED SUSTAINABLE Sustainable production US$345 PER TONNE OWN PALM PRODUCT Low costs 17.75p TOTAL DIVIDEND FOR 2019 Improving returns, rising dividends 8 * Based on a share price of 726p on 31 December 2019. M.P. EVANS GROUP PLCANNUAL REPORT 2019 GROUP BUSINESS MODEL HOW WE OPERATE PROMOTE A PHILOSOPHY OF ZERO WASTE The Group turns its empty bunches into compost and generates electricity from methane collected FOCUS ON OUR STRENGTH AS A PRODUCER OF SUSTAINABLE INDONESIAN PALM OIL The Group builds shareholder returns by from mill effluent. It establishes and maintains exploiting the Group’s strengths as an efficient conservation areas and strictly adheres to producer of sustainable Indonesian palm environmental standards. oil to generate increasing crop, production and revenues. 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. 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. MAKE SMALLHOLDER CO-OPERATIVES A SUCCESS The Group treats its smallholder co-operatives DO A THOUSAND SMALL THINGS WELL, REPEATEDLY Even our most senior agronomic managers are equally, planting, maintaining and harvesting resident in our operations, controlling a system of land to the same standard as its own areas. As supervision and support that focuses on a result, smallholders own a valuable asset and high agronomic and engineering standards. identify their own success with the Staff in Jakarta and the UK are frequent visitors Group’s success. to the operations. Producing sustainable Indonesian palm oil to deliver strong results and growing returns for shareholders. 9 THE PALM-OIL MARKET Against a backdrop of low prices, demand for palm oil grew strongly in 2019. Production too increased, to a record 76 million tonnes. tonnes (some 2%), a more modest as a result of African swine fever increase than in 2018. In both reducing the Chinese pig herd. These countries the average yield per developments took place at a time hectare fell slightly. Production when global production of other growth attenuated significantly in the vegetable oils barely increased. The second half of the year. Disease in total increase in world production of Latin America and volcanic eruptions vegetable oils in 2019 was 2 million in Papua New Guinea lay behind tonnes, half of which was from CPO. Rising production was not enough to near stagnant production in the rest satisfy burgeoning demand for palm of the world. This was attributable Consumption of CPO exceeded oil as a food and as a constituent to a respite in palm productivity production in each quarter of 2019. of biodiesel, notably in Indonesia following high crop during 2018 At the beginning of the year, high itself where crude-palm-oil (“CPO”) and the early part of 2019, and stock balances and production consumption increased by 20%. As also palms beginning to show the growth were able to meet increased a result, stocks of CPO fell sharply consequence of many producers demand. However, as the year wore during the year from the high levels opting to reduce costs by restricting on, production growth fell and they had reached at the end of 2018. the use of fertilizers in late 2018 stocks unwound. This became clear Increasing demand and lower stock and 2019 in response to low CPO at the end of October, when the levels saw the volume of trade in CPO prices. At the same time, there was a price of CPO increased dramatically rebound during 2019: 60% of trade in significant increase in the imports of until the end of the year. The price vegetable oils was palm oil. CPO by China, India and the EU during of CPO cif Rotterdam started the 2019. This was especially marked year at US$520 per tonne and Indonesia and Malaysia remain the in China. Here, imports of CPO rose then moved in a corridor between world’s largest palm-oil producers, from 5.4 million tonnes in 2018 to 7.7 US$480 and US$590 per tonne until accounting for 84% of global CPO million tonnes in 2019 as the Chinese the end of October. By the end of production. In these countries soybean crush fell by 10% and less 2019, it stood at US$860 per tonne. production increased by 1 million animal fat was available domestically Notwithstanding the strong upward CRUDE-PALM-OIL PRICE US$ per tonne cif Rotterdam 2015 2016 2017 2018 2019 2020 1,000 900 800 700 600 500 400 10 M.P. EVANS GROUP PLCANNUAL REPORT 2019 THE PALM-OIL MARKET price movement in the last two months of the year, the average price for the year was US$566, US$32 (5%) lower than in 2018. Due to the operation of the export levy and tax in Indonesia, according to Oil World, exporters there experienced an average price of US$525 for the year, a 13-year low. PALM-KERNEL OIL Unlike CPO, palm-kernel oil did not benefit from increased demand for the production of biodiesel. The year also saw ample supplies of coconut oil, the other lauric oil that is a competitor to palm-kernel oil, and rising stocks of palm-kernel oil. As a result, the average price for the year cif Rotterdam was US$668 per tonne, some 28% below 2018. However, trade did increase significantly during the last quarter, leading to a reduction in stocks, which finished the year at 1.4 million tonnes compared with 1.3 million tonnes a year earlier. MAIN PRODUCERS OF PALM OIL 2019 MAIN CONSUMERS OF PALM OIL 2019 58% Indonesia Malaysia 26% 19% Indonesia 13% India 9% China 27% Other Asia 13% Africa 11% EU Main producers Remaining 16% consists of Thailand (4%), Colombia (2%), Nigeria (1%), other countries (9%). Main consumers Remaining 8% consists of Americas (7%), other countries (1%). Source: Oil World. 11 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 the ownership, management and development of sustainable oil-palm estates in Indonesia, together with the management and development of ‘scheme smallholder’ areas attached to those estates. The Group’s strategic goal is to produce only certified sustainable palm oil, expanding its principal activity and to maintain a steady rate of growth in crops and in planted hectarage controlled by it. Majority control enables the Group to deploy its operational expertise to greatest effect with the aim of generating better returns to shareholders through a sustained increase in dividends. It designs its procedures to address the risks of operating in Indonesia. The Group has confidence in both the palm-oil sector and Indonesia as an area of operation to provide a basis for successfully delivering its strategy. The total planted area of the Group’s majority-held Indonesian operations extends to 39,400 hectares. The scheme smallholder areas adjoining the new projects amount to 12,200 planted hectares. The current estimated unplanted land bank is some 1,300 hectares on the Group’s land and some 700 hectares on the adjoining scheme smallholder areas managed by the Group, at Musi Rawas in South Sumatra. The intention is to plant these areas as rapidly as possible. Furthermore, the Group aims to increase the area to the extent that the availability of environmentally- suitable land permits, meaning it would comply with enhanced RSPO standards aimed at preventing any deforestation. Hence, it is possible the Group may be able to plant more than the remaining 2,000 hectares referred to above. Before taking account of any such increase at Musi Rawas, or future acquisitions, the combined Group and scheme smallholder areas are expected to reach 53,600 hectares when fully planted. In addition, the Group owns a 38% share of the 2,300-hectare Kerasaan estate in North Sumatra which, in line with its strategy, could potentially be sold to finance the expansion of majority-held areas. In addition to the expenditure on new planting, the Group is investing in three new mills: at Kota Bangun, Bumi Mas and Musi Rawas, to take maximum advantage of the rapidly-increasing crop in the areas planted since 2005. The mill at Kota Bangun, the second on this project, is expected to be in service by the middle of 2020; work is also already under way at Bumi Mas, where it is planned for the mill to become operational by the middle of 2021. A mill site has been acquired at Musi Rawas. In addition to building these mills and associated composting and biogas facilities, substantial further investment is being made into infrastructure in these areas, such as housing for staff and workers, estate- road networks, power and water distribution as well as workshops, stores and administrative offices. The Group seeks continually to maintain and improve agronomic standards and productivity on its estates, STRATEGIC REPORT 2019 12 M.P. EVANS GROUP PLCANNUAL REPORT 2019 STRATEGIC REPORT STRATEGY including investment to manage both development potential, as well as of section 172 are aligned with how excessive rainfall and dry spells, with a significant minority share of a the Group makes strategic decisions the objective of increasing crops property-development company. concerning its operations can be of fresh fruit bunches (“ffb”) and These assets give the Group the found in the “Sustainability” section production of crude palm oil (“CPO”). opportunity to share in any ongoing of this report on pages 31 to 37. In addition, it has ambitions in the increase in the value of property- medium term to add to its portfolio development land in Malaysia. The board reviews at least annually of estates to maintain its ability to However, either of these assets which organisations or individuals increase crop and future profits. could be sold to finance the Group’s it considers to have a reasonable strategic expansion of its Indonesian expectation of being significantly The Group is actively exploring the oil-palm hectarage. It is the Group’s affected by the activities of the acquisition of new land. In Kota long-term intention to dispose of Group. The list, together with a Bangun, East Kalimantan, the board its property-development assets summary of how the Group engages is engaged in extending the Group’s in order to fund the acquisition or with its stakeholders, is published on areas from the currently-planted development of oil-palm estates the Group’s website (www.mpevans. 15,300 hectares to bring the project in Indonesia, and so to exit from co.uk). The executive directors are towards the equivalent of two Malaysia. 10,000-hectare units. Its experience is that 10,000 hectares of oil palm with a mill able to process 60 tonnes of ffb per hour provides a unit, ‘SECTION 172’ STATEMENT: IMPLEMENTING THE STRATEGY In implementing its strategy, the frequent visitors to the Group’s operations overseas, during which they receive regular briefings from local management on any significant engagement with local communities which is both big enough to provide board meets its obligations under and workforce grievances. These economies of scale in production section 172(1) of the Companies are relayed to the board where and administration, and small Act 2006 (“section 172”) to promote appropriate. enough to allow the careful scrutiny the success of the company for the by field management needed to benefit of its members whilst having In 2018, the board took a decision maintain high standards. The Group’s regard to wider stakeholders and the to produce the Group’s first projects in Bangka, Bumi Mas and impact of decisions over the long sustainability report as part of a Musi Rawas, including smallholder term. Each member of the board is wider strategy on sustainability. areas, are of this size. Following the aware of his or her obligations under Preparation of the report during acquisition of a 51% share in section 172 and due consideration is 2019 provided an excellent 600 hectares of potentially plantable given to stakeholders’ interests when opportunity for the Group to review land close to one of its Kota Bangun strategic decisions are taken. its practices and to augment the divisions in 2018, further areas are being assessed for prospective acquisition. In North Sumatra, Pages 8 and 9 of this report set out the Group’s business model detailed disclosures it already gave on the Group’s approach to sustainability. In compiling the the Group is promoting the formation and how it operates. The nature of report, the Group interviewed of independent smallholder oil-palm plantations is that they representatives from all the Group’s co-operatives that will provide ffb to by necessity require decisions to stakeholder groups. The outcome its Pangkatan mill as well as ensure be made for the long term. This of this stakeholder engagement the Group can demonstrate full encompasses the health and well- was to identify the six material compliance with Indonesian laws being of the environment in which topics presented in the report. A on smallholder development the Group operates as well as that copy of the Group’s sustainability passed long after these estates were of the people living in and around report published in 2020 can be first planted. its operations. Such considerations downloaded from the website are intrinsic to the Group’s way (www.mpevans.co.uk) or a printed In Malaysia, the Group owns a small of operating. Further details version can be obtained by contacting area of oil-palm land with property- demonstrating how the principles the Group’s company secretary. 13 M.P. EVANS GROUP PLC ANNUAL REPORT 2019 RESULTS & FINANCIAL POSITION REVENUE AND GROSS PROFIT The Group’s revenue for 2019 was in prices towards the end of 2019 dividends of US$0.4 million (2018 caused the estimated value of US$0.4 million) in the year. US$119.3 million, 10% higher than the unharvested growing ffb to increase US$108.6 million achieved in 2018. to US$2.1 million (2018 US$1.1 million). The Group’s Malaysian associate, Production of CPO and palm kernels (“PK”) increased by 20% and 22% respectively in the year, as shown FOREIGN EXCHANGE GAINS During 2019, the Indonesian Rupiah Bertam Properties Sdn Berhad (40% owned), contributed US$1.1 million (2018 US$0.6 million) to Group profit on page 18. However, the increase strengthened by approximately 3% in the year, and the Group received in revenue did not match the against the US Dollar. The Group dividends of US$0.6 million (2018 production increases due to a fall in holds monetary assets denominated US$1.2 million) in the year. average sales prices for CPO and PK in Rupiah: operating cash, other by 5% and 34%, as discussed in the receivables, and receivables from section on mill-gate price on page 20. scheme smallholders, as described in PROFIT FOR THE YEAR As a result of the above, the Group’s note 19 to the financial statements. profit for the year was US$7.5 million The Group’s cost of production per A foreign-exchange gain of US$1.2 (2018 US$7.2 million). tonne of palm product (a combined million (2018 loss of US$4.1 million) measure for CPO and palm kernels) arose during the year on the for its own mills increased by retranslation of these balances. NET ASSETS AND BORROWING At the end of the year, the Group’s net assets were US$367.7 million US$25 per tonne in the year for the Group’s own ffb, and by US$20 per tonne when including ffb purchased FINANCE COSTS During 2019, the Group drew down (2018 US$398.3 million). The decrease in net assets mainly arose from from scheme and independent US$85.4 million of its US$120 million applying the relevant accounting smallholders. Further details are in credit facility. The facility was used standards to the Group’s purchase the costs section on page 19. As a for a combination of refinancing in the year of shares in its operating result, the Group achieved a gross existing debt, supporting Group subsidiaries previously held by one margin of US$127 (2018 US$164) per capital expenditure, and financing of its minority partners (see note tonne on sales of CPO from its own the acquisition from the Group’s 12). Current assets exceeded current mills during the year. Low PK prices minority partner. As a result, liabilities by US$35.4 million experienced during the year led financing costs increased to (2018 US$43.0 million). to a loss on sales of PK, but taken US$3.7 million (2018 US$1.4 million). together, each tonne of palm product achieved a gross margin of US$84 (2018 US$141). In addition, the Group TAXATION The Group tax charge for the year At the end of the year, the Group had cash and liquid resources of US$27.1 million (2018 US$24.1 million). incurred expected losses during was US$7.2 million (2018 US$12.7 As a result of the funding draw the early development phase of its projects at both Musi Rawas and million). The Group’s effective tax rate was higher than the standard down, referred to under finance costs above, net debt increased Bumi Mas. UK tax rate mainly due to the higher in the year to US$67.4 million Allowing for all of the above, the Group’s gross profit was standard rate applied in Indonesia, (2018 US$5.9 million) resulting in and tax arising in Indonesia on net gearing of 15% (2018 – 1%); foreign exchange gains on US Dollar gross gearing was 20% (2018 – 7%). US$17.0 million, 36% lower than Group borrowings. the US$26.5 million for 2018. BIOLOGICAL ASSETS The Group continues to apply IAS 41 ASSOCIATED COMPANIES The Group’s Indonesian associate, PT Kerasaan Indonesia (38% owned), in estimating a value for unharvested contributed US$0.8 million (2018 growing ffb for the purposes of US$0.9 million) to Group profit in statutory reporting. The increase the year, and the Group received 14 STRATEGIC REPORT RESULTS & FINANCIAL POSITION -36% +10% +20% +22% GROSS PROFIT REVENUE CRUDE PALM OIL PRODUCTION PALM KERNEL PRODUCTION Ffb arriving at Bangka mill 15 OPERATIONS: INDONESIAN PALM OIL CROPS The strong upward trend in crop any spare capacity whilst its own in slower crop growth in the final plantings continue to mature, so weeks of the year and is likely to growth continued in 2019. The currently yield less than the levels affect crop during the first half Group’s own crops rose by 16%, that will be attained in time. of 2020. Although this has borne those of its scheme smallholders down on crop, the dry weather (those attached to its projects) The Group increased its efforts to allowed the Group to complete by 15%. The Group’s palms have a make profitable use of this spare construction of bunds, drains and young average age of only a little capacity by purchasing crop from pumps to manage water levels in over seven years, meaning the outside suppliers. In 2019, 166,000 the southern part of this project. Group is experiencing the benefits tonnes of ffb were purchased from The effect of this work on crop is of increased yields that naturally independent smallholders. Taking not immediate, but it is expected occur as oil palms mature, reaching into account purchases of outside to have a significant effect on the their maximum yields at about ffb, total crop processed by the potential of this area over time. In the age of ten years. In addition Group rose by 21% to 1,002,000 the short term, it has allowed the to this upward path in yield, some tonnes. This is the first annual Group to replenish vacant spaces 3,200 immature hectares were declared mature during 2019 report in which the Group can where very young palms had died report it processed more than due to persistent flooding as well for the Group and its scheme 1 million tonnes of ffb. as plant 140 newly-protected smallholders. Harvesting on these areas commenced and they began contributing to total crop. Crop more than tripled both at Bumi hectares. At Kota Bangun, the unusual crop peak during the first half of the In Bangka, as at Kota Bangun, crop year in 2018 was not repeated in volumes were higher during the Mas, acquired by the Group in 2017 2019. Instead, the more normal mild second half of the year than the and, at a lower total volume, on the crop peak occurred in the second first half. Here, as signalled in the newest project at Musi Rawas, in half of the year. This meant that previous annual report, the palms South Sumatra. relatively poor crop performance could not reasonably sustain the in the first half compared with the very high rates of crop growth Compared with previous years, previous year was nearly eliminated experienced in 2017 and 2018. there was a significant increase in the second half of the year. However, after a lower cropping in the purchases of ffb from For the year as a whole, crops in phase during the first half of the independent smallholders. At its Kota Bangun fell by 3% compared year, crop growth resumed its three existing mills, the Group seeks to maximise the use of with 2018. Relatively dry weather upward trend and total crop for the since the middle of 2019 resulted year finished only just behind that 16 M.P. EVANS GROUP PLCANNUAL REPORT 2019STRATEGIC REPORT OPERATIONS 2019 TONNES INCREASE/ (DECREASE) % 194,000 128,900 164,300 122,000 15,400 38,700 663,300 87,300 57,500 19,600 7,700 172,100 39,600 105,200 21,300 166,100 1,001,500 (3) (3) 2 215 228 12 16 3 - 244 381 15 193 30 78 56 21 2018 TONNES 200,400 133,500 161,100 38,700 4,700 34,600 573,000 84,600 57,700 5,700 1,600 149,600 13,500 81,000 12,000 106,500 829,100 CROP Own crops Kota Bangun Bangka Pangkatan group Bumi Mas Musi Rawas Simpang Kiri Scheme smallholder crops Kota Bangun Bangka Bumi Mas Musi Rawas Independent smallholder crop purchased Kota Bangun Bangka Pangkatan group TOTAL CROP CROP HISTORY tonnes Scheme smallholders Group 1,000,000 800,000 600,000 400,000 200,000 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 17 achieved in 2018. As noted previously, much of this estate has excellent sources of laterite for constructing high-quality roads, enabling the Group to maximise the crop it can collect and deliver to the mill. During 2019, the Group successfully continued to embed its ways of working and operating standards at Bumi Mas. Local management focussed on improving field conditions alongside building new housing for the workers and staff on this project, and improving roads which had proved inadequate during heavy rains early in 2019. Roads are important for transporting workers and fertilizers to all parts of the area and evacuating harvested ffb. The result on total crop, which rose by 219%, was dramatic. During 2019, the Group built more than 260 units of accommodation and raised or stoned some 225km of roads. It also took delivery of a small boat that cut travel time to the project by some six hours. More than 1,500 hectares of young areas at Musi Rawas started to come into harvesting, a trend which will gather pace over the coming years. STRATEGIC REPORT continued PRODUCTION AND EXTRACTION RATES GROUP AND THIRD-PARTY MILLS 2019 TONNES 79,000 67,400 42,800 189,200 29,500 4,800 8,400 42,700 231,900 17,000 16,200 10,100 43,300 6,800 1,100 1,800 9,700 53,000 2019 % 24.6 23.1 23.1 23.7 20.9 20.6 21.8 5.3 5.6 5.4 5.4 4.8 4.6 4.8 PRODUCTION Crude palm oil Kota Bangun Bangka Pangkatan group Bumi Mas Musi Rawas Simpang Kiri Palm kernels Kota Bangun Bangka Pangkatan group Bumi Mas Musi Rawas Simpang Kiri EXTRACTION RATES Crude palm oil Kota Bangun Bangka Pangkatan group Bumi Mas Musi Rawas Simpang Kiri Palm kernels Kota Bangun Bangka Pangkatan group Bumi Mas Musi Rawas Simpang Kiri 18 Hence, crop grew strongly, albeit from a low base. One mark of the increasing maturity of this area is that the 2018 Group’s staff are now all resident INCREASE/ (DECREASE) % 11 7 7 8 224 300 9 137 20 15 7 5 10 240 267 6 143 22 INCREASE/ (DECREASE) % 3 - - 1 2 7 (2) 6 2 (2) 2 4 (4) (4) TONNES 71,400 63,200 39,900 174,500 9,100 1,200 7,700 18,000 192,500 14,800 15,100 9,600 39,500 2,000 300 1,700 4,000 43,500 2018 % 23.9 23.2 23.1 23.5 20.4 19.2 22.3 5.0 5.5 5.5 5.3 4.6 4.8 5.0 in the project. A small guest house is available for visiting Group staff to use, avoiding the need to stay at the nearest town, Lubuklinggau, and make the journey into and out of the estates every day. The Group’s older estates in North Sumatra supplying the Pangkatan mill, produced a small increase in crop. At Simpang Kiri, the replanting programme carried out in recent years, started to produce results, leading to a 12% increase in crop from this estate. PRODUCTION A record year for crops, combined with a significant increase in ffb purchased from independent smallholders, led to another record year for Group production. CPO production rose by 20% to 232,000 tonnes; that of palm kernels by 22% to 53,000 tonnes. The Group does not yet have its own mill at Bumi Mas or at Musi Rawas, nor at Simpang Kiri. Instead, it has contracts to sell ffb to local mills based on the commodity price for CPO and an assumed rate of extraction. To reflect the substance of this arrangement, oil produced from these estates’ crops has been included in CPO production figures (see table). Currently, 65% of total production is certified sustainable palm oil (see more in the Sustainability section on page 31). The Group has an objective to design and implement a scheme that will persuade independent smallholders who supply it with ffb to sign up to and adhere to M.P. EVANS GROUP PLCANNUAL REPORT 2019 STRATEGIC REPORT OPERATIONS the RSPO’s Independent Smallholder Extraction rates in 2019 have increased larger kernels and less flesh from Standard (“RISS”). All the Group’s ffb, from the good levels achieved in 2018. which to squeeze CPO. This can be and that of its scheme smallholders, The Group compares its performance seen in the increase in the kernel- are grown to the same high with other mills in the region and extraction rate and emphasises the standards and in a sustainable remains confident that its mills good performance in CPO extraction. way. However, where the Group continue to perform at a high level doesn’t have its own mill, it has no compared with its peers. The The Group continues to buy fruit alternative other than to sell its ffb performance of the mill in Bangka, from independent smallholders to to neighbouring third-party mills at 23.1%, continues at a creditable utilise spare capacity at all three that may not be RSPO certified. This level despite the high and increasing of its mills. Whilst, as noted above, results in some of the Group’s CPO volume of fruit from independent fruit from independent smallholders not being certified sustainable. The smallholders being processed, which yields significantly less CPO than percentage of certified sustainable is not of the same standard as that fruit from the Group’s own areas or production will rise as the Group produced by the Group and its scheme that of its scheme smallholders, this constructs its own mills and works smallholders. Fruit from independent is reflected in the price the Group with independent smallholders to smallholders is predominantly from pays for it. Hence, purchases of fruit comply with RISS. dura palms, which tend to have from independent smallholders COSTS The combined cost per tonne of palm product from the Group’s mills in 2019 was US$345 (2018 US$320). The main sources of cost pressure was from taking on additional workers into newly-mature areas, in which the quantity and weight of ffb in the initial months of cropping are relatively low. In addition, during 2019 there was expenditure associated with diverting harvesters at Kota Bangun to carrying out field work in the face of lower crops, and enhanced levels of mill maintenance. The Group’s policy is to include all depreciation, general charges, administrative costs and overheads, including those of its Jakarta office, in its calculation of cost per tonne. Excluding depreciation and regional overheads reduces the Group’s cost to some US$260 per tonne of palm product. As overall crop volume continues to grow, 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$360, a little higher than the US$340 achieved in 2018 on account of the increase in lower-yielding ffb purchased from independent smallholders. Other 11% Head office Other 3% 8% Mill 12% Labour Depreciation Other 4% 4% 4% Field 77% Labour Fertilizer Depreciation Other 38% 12% 17% 10% 19 M.P. EVANS GROUP PLC ANNUAL REPORT 2019 STRATEGIC REPORT continued make an acceptable profit margin Construction of a second mill, the notwithstanding the reduction in the Rahayu mill, at the Kota Bangun mill’s average rate of extraction their estates is on schedule to begin purchase entails. The proportion commissioning in mid-2020. Civil PLANTING Essentially, all of the Group’s new planting is at Musi Rawas, where steady progress was maintained. of ffb bought from independent works have already begun at the However, during 2019 the RSPO smallholders increased at each site of the planned mill and bulking adopted a change to its standards of the Group’s mills. The highest site at Bumi Mas. The mill here is affecting any new planting. Currently, proportion, 36%, is at the Group’s expected to go into service in the development at Musi Rawas has Bangka mill, which currently has the middle of 2021. most spare capacity following its extension to a 60-tonne-per-hour mill during the second quarter of the year. MILL-GATE PRICE The dominant feature of the period been paused to allow the Group time to assess the new standards and ensure that it complies with them. In the Group’s own areas and in those was the low CPO and palm-kernel of its scheme smallholders, planting The composting and biogas facilities prices described in the section ‘The is carried out in rigorous compliance in Kota Bangun and Bangka are palm-oil market’ above. The average with RSPO standards to ensure that processing all of the empty ffb and cif Rotterdam price for the period the fruit will be certified as being most of the mill effluent at these was US$566 per tonne, 5% lower produced sustainably. At the end of locations. The compost is a valuable than the US$598 recorded in 2018. 2019, planting since development nutrient applied in a carefully Consequently, during 2019, the Group began at Musi Rawas reached 8,000 controlled and supervised manner actually received on average hectares, of which 5,700 were for the by the Group. The biogas plant US$471 per tonne of CPO at mill Group and 2,300 for the scheme at the Bumi Permai mill at Kota gate, US$27 less than in 2018. At the smallholders. In addition, ten hectares Bangun supplies all of these estates’ same time, the average sustainability were ready for planting, and land electricity needs. An extension to the premium additionally received by compensation had been paid on a existing biogas facility at the Bumi the Group rose slightly from US$6 to further 1,300 hectares in anticipation Permai mill was completed towards US$9 per tonne. of planting recommencing in the first the end of 2019 and will begin half of 2020. supplying the state electricity For palm kernels, the Group received company, PLN, with surplus electricity US$245 per tonne, very significantly The Group newly planted in early 2020. This extension allows (34%) lower than the US$374 in the 930 hectares for itself and its the Group to produce electricity previous year, following a sharp decline smallholders, of which 670 hectares from 100% of the mill effluent rather in the price of palm-kernel oil. The were for itself. In North Sumatra, than the 30% processed in the Group did on average receive US$9 470 hectares were replanted. original pilot facility, the Group’s per tonne in the premium available first. In Bangka, the biogas plant was designed to process all of the for kernels sold with sustainability certificates, although this was mill’s effluent and the Group has US$1 per tonne less than in 2018. been supplying PLN with its surplus ASSOCIATED COMPANY: KERASAAN Crops at Kerasaan were 54,200 tonnes (2018 – 51,700 tonnes). Ffb electricity since January 2017. During In total, the Group received some crops grew strongly in the second 2019, faults developed in the 1.2MW US$1.9 million in sustainability and third quarters of the year, before Siemens-Guascor gas engine used by premia during 2019, US$0.5 million tailing off quite sharply in the last the Group to supply electricity to PLN more than in 2018. This was due to two months of 2019. Overall, crop that were eventually addressed by persistent demand for oil certified by finished the year 5% ahead of 2018. the manufacturer. This led to less International Sustainability & Carbon Some 30% of its planting dates from electricity generation than anticipated Certification (“ISCC”), which attracts a the second half of the 1990’s, so a and some increase in maintenance higher premium than oil certified by programme of replanting will begin costs. At both sites, production of the RSPO, as well as sales of certified in the coming years. power will increase with the volume oil and kernels from the Group’s of crop processed by the mills. expanded Bangka mill. 20 Caption for this picture PERFORMANCE EVALUATION 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 Planting new hectarage and replanting hectarage that has reached the end of its economic life determines the Group’s capacity to produce crop growth in the future. 2018: 50,600 hectares 51,600 HECTARES , GROUP AND SCHEME SMALLHOLDERS FFB YIELD PER HECTARE The rate at which the Group is able to generate ffb from its mature planted hectarage is the most important measure of its agricultural efficiency. 2018: 19.3 tonnes per hectare 20.5 TONNES PER HECTARE FFB CROP The volume of ffb crop is the primary determinant of the Group’s ability to generate CPO and PK for sale. 2018: 722,600 tonnes 835,400 TONNES EXTRACTION RATES The rate at which the Group is able to convert its ffb into CPO and PK, quantified as oil- and kernel-extraction rates, is the most important measure of its processing efficiency. 2018: 23.5% oil-extraction rate 23.7% OIL-EXTRACTION RATE 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. 2018: US$320 per tonne palm product US$345 PER TONNE PALM PRODUCT STRATEGIC REPORT OPERATIONS Plantation and mill operations Management monitors and assesses the efficiency of operations with regard to crops and production using key performance indicators. The crop yield per hectare on each year’s planting on each estate is budgeted, recorded and monitored. Yields can vary widely because of factors such as soil type, terrain, sunshine hours, rainfall, distribution of rainfall and the fertility cycle of the palms. The most important factor is a palm’s age. The Group’s average yield of 20.5 tonnes per hectare reflects the young average age of its palms. This yield is higher than in 2018, notwithstanding the addition of 3,200 newly mature hectares during the course of 2019. This figure can be expected to rise in future years. Monitoring of performance takes into account the conditions on each year’s planting on each estate. Key factors which are under management’s control are husbandry standards, fertiliser application, harvester numbers and productivity, and the quality of infrastructure (estate roads and drains, for example). These are monitored by management on the ground and, in some cases, independent verification and advice is sought. Decisions, such as when and how to replant, are taken based on local conditions. Overall, the Group achieved total crop from its own areas and those of its scheme smallholders of 835,400 tonnes. The development of new plantings is monitored by management, as is the area to be planted in a given year and the cost per hectare of that planting. A budget for planting programmes is set in the previous year to allow sufficient planting material to be purchased for the nursery. A high proportion of planting work is undertaken by contractors, and management monitors the progress achieved on the contracted areas. Planting costs are monitored by management for each individual estate. As with other plantation activities, costs per hectare are influenced by factors such as the weather pattern, the soil type and 21 M.P. EVANS GROUP PLC ANNUAL REPORT 2019 Young palms at Bumi Mas 22 STRATEGIC REPORT continued terrain. Ultimately, the total planted hectarage determines future crop. At the end of 2019, the Group had reached 51,600 hectares planted for itself and its scheme smallholders. With regard to mill production, the key performance indicators are: the extraction rate of palm oil and palm kernels per tonne of ffb; throughput; and the percentage of free fatty acids, oil losses, dirt and moisture. Extraction rates vary according to factors including the type and quality of planting material, the age profile of plantings and rainfall. Throughput is monitored on a daily basis. Oil losses, dirt and moisture content are expressed in terms of percentages and actual achievement against maximum permitted levels is monitored by management. An average oil-extraction rate of 23.7% in 2019, compares favourably with industry norms and with mills operating in the same areas as the Group. Mill construction and associated infrastructure is undertaken by contractors. Management monitors carefully progress achieved against budget and agreed timetables. Plantation and mill costs Management monitors and assesses the efficiency of plantation costs by means of performance indicators which identify field costs per hectare and per kilogram of ffb, and mill costs per tonne of palm product. A significant proportion of costs both in the field and in the mill are fixed and therefore vary little with different levels of utilisation. Field costs also vary from estate to estate depending upon such factors as terrain and rainfall pattern, so the performance indicators are monitored by management for each individual estate. The projected increase in crop is expected to bring down the US$345 it currently costs the Group to produce one tonne of palm product. STRATEGIC REPORT OPERATIONS CURRENT TRADING AND PROSPECTS Crop in the first two months of 2020 is ahead of last year in all regions, very notably so at Bumi Mas and Musi Rawas, the Group’s youngest areas. Compared with last year, the Group has also purchased significantly more ffb from independent smallholders. The Group changed its policy in the middle of 2019 to purchase more outside fruit, so the rate of growth of outside purchases will not be sustained for the year 2020 as a whole. At the end of February, total crop processed was 180,000 tonnes, 47% more than the 122,000 tonnes processed during the first two months of 2019. The details are set out in the following table: 2 MONTHS ENDED 29 FEB 2020 TONNES INCREASE % 2 MONTHS ENDED 28 FEB 2019 TONNES Own crops Smallholder crops Outside crops purchased 107,100 27,500 45,600 180,200 23 27 240 47 87,200 21,600 13,400 122,200 in demand for CPO. In the longer term, insufficient levels of replanting in Malaysia and a reduction in new Indonesian planting are likely to curb growth in production. Average yield per hectare for the industry in 2019 stagnated in Malaysia and declined slightly in Indonesia. Whilst these benign forces remain in place, the near-term position has been clouded by the outbreak of Covid-19 in China that, at the date of this report, had spread across most of the globe. The impact of this outbreak remains uncertain, but it has already had a negative effect on global economic growth and the short-term demand for palm oil, The Group’s crop is rising due to the vegetable-oil supply increases during which may persist. The CPO price young age of its palms, an average 2020 failing to match increased declined during February to a low of 7 years. This is a consequence of demand, combined with depleted of US$640 per tonne, falling a little the development of its projects in stock levels compared with recent further to US$610 at the end of Bangka and East Kalimantan over the years. Projections by the respected March. It is possible that widespread last ten years and the acquisition of publication, Oil World, show the level infection within Indonesia could Bumi Mas. The upward trend in crop of palm-oil stocks to consumption reach the Group’s workforce and is expected to last until the end of reaching a multi-year low during bring with it the possibility that it the decade. This would be further the second half of the year. This could temporarily reduce the Group’s augmented by the acquisition or development takes place against a capacity to harvest or mill ffb and development of new project areas. background of tight supply of all the so reduce the expected growth in major vegetable oils. To some extent its production. Notwithstanding the As reported in the section ‘The trade in palm oil, and hence demand, uncertainties surrounding Covid-19, palm-oil market’ on pages 10 and is likely to be affected by restrictions the board is of the view that palm 11, the price of CPO strengthened placed by India on imports of oil, because of its high yield and low considerably in the last two months refined palm oil from Malaysia, cost of production, is well placed of 2019 to finish the year at US$860 although this is more likely to lead to benefit from increasing demand per tonne cif Rotterdam. The rise was to a re-arrangement of trade flows for vegetable oil and hence that the prompted by expectations of modest rather than a net overall reduction outlook remains encouraging. 23 M.P. EVANS GROUP PLC ANNUAL REPORT 2019 OPERATIONS: MALAYSIAN PROPERTY MAJORITY-OWNED: BERTAM ESTATE The value of Bertam Estate, situated ASSOCIATED COMPANY: BERTAM PROPERTIES The development of residential in a prime position not far from the housing and commercial properties slip road onto the highway heading was reduced in 2019 as Bertam to Penang Island, has risen over Properties paused commencing many years as development has new development and successfully progressed on the neighbouring undertook initiatives to reduce its Bertam Properties land. Political stock of finished properties. At the uncertainty over the composition end of 2019, Bertam Properties of the government continues to owned 179 hectares of development affect prospects for the wider land, including 51 hectares economy, and so the property and already under development, and a financial markets, in Malaysia. 103-hectare golf course. During the Nevertheless, the board sees year, work on the new 18-hole course advantage in selling Bertam Estate was completed at the Penang Golf notwithstanding prevailing property Resort. This was a combination of market conditions in which current creating new holes and renovating values have fallen significantly, in order to invest the proceeds into its existing holes from the 36 holes previously in play before 39 hectares Indonesian plantations. of land was transferred to Bertam Properties for development. In the meantime, the residual oil- palm operation on 65 hectares of During 2019, as a result of its cultivated land yielded a crop of initiative to clear its stock, Bertam 1,100 tonnes (2018 – 1,200 tonnes). Properties sold 461 properties, 70% The Group has three junior employees more than in 2018. This led to a on Bertam Estate and no other significant increase of MYR28 million, employees or office space in Malaysia. or 37%, in property revenue, but this Administrative and agricultural was achieved at the cost of a lower advice and work are carried out by gross-sales margin. The sales margin its agent, Straits Estates Sdn Berhad, on property fell to 21% in 2019 from and other external service providers. 28% in 2018. No land was sold for 24 STRATEGIC REPORT OPERATIONS Bertam Properties show home 25 development during 2019. There was little sign of recovery in the Malaysian property market, although mid-cost residential property, a strength of Bertam Properties, has held up better than commercial property and high-end residential property. The Penang region too has proved more resilient than other regions of Malaysia, but the housing market remains sensitive to lending conditions by banks. 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. Whilst there may be some short-term downward pressure on the property market as a result of the political uncertainty referred to above, the board expects the value of this land to continue to appreciate in the longer term. 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 2019 review concluded that the principal risks reported in the 2018 annual report remain risks to the Group, and that no new principal risks have been identified other than in relation to the recent Covid-19 outbreak described below. 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 CORONAVIRUS COVID-19 Demand for the Group’s products varies to some extent with the health of the global economy, and its ability to harvest and process its ffb fully and efficiently relies on having a healthy workforce. The Group assesses that Covid-19 can affect it principally in two ways: indirectly through the demand for CPO and PK, and directly through affecting the health, and as far as possible, access blocked the attendant risk that the Group to external visitors. The Group will be unable to extract profits has prepared plans to isolate from its subsidiaries and associated individual divisions or estates, companies in Indonesia. including stopping all harvesting and production where this becomes warranted. Remote working arrangements are in place in both the Jakarta and UK offices. In 2014, a draft law including a restriction of 30% on foreign ownership of plantations in Indonesia was tabled but not enacted. Rather, a new law mandated the government  Read more in the strategic report to prioritise domestic investment, on page 23 INDONESIA COUNTRY RISK hence capacity, of its workforce. The Group’s strategy is based As set out in the general risk on on maintaining control over its commodity-price fluctuation below, plantation assets and identifying notwithstanding shorter-term opportunities to expand by disruption arising from the spread of acquisition of additional Covid-19, the Group believes there will plantation areas. be continuing strong demand from the fast-developing economies, such The Group relies on the continuing as India, China and Indonesia itself, ability to acquire and enforce property as well as from more established rights in Indonesia. The country has markets in Europe, for vegetable oil benefited from a period of political for human consumption and demand stability and economic growth. for vegetable oils as a biofuel. There is a tendency for nationalist sentiment to increase during protect local customary rights, empower local farmers and set a cap on foreign investment at some point in the future. The board continues to monitor the situation and will, 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 (“HGU’s”) which are legally renewable, and which have to date been renewed without difficulty when falling due. Whilst the future impact on human health of Covid-19 remains uncertain, the Group has put in place precautionary measures to prevent the spread of any infection. Monitoring of the workforce for symptoms of the virus has been established. Travel by the Group’s staff has been reduced to essential travel only. Movement on the Group’s estates has been restricted and, 26 presidential elections, although there The Group has already obtained was no sign of this in the lead-up to the HGU for most of the land it the 2019 Presidential election that has developed since it began its took place in April 2019. In any case, expansion in 2005. Where the Group given Indonesia’s significant need for has not yet received the HGU, it has infrastructure development and to obtained the necessary licences attract inward investment, the board for these projects, including a valid continues to perceive a low risk of, for example, nationalisation or the right to develop the land (izin lokasi) and operating licences (izin usaha imposition of exchange controls, and perusahan). The Group’s experience M.P. EVANS GROUP PLCANNUAL REPORT 2019to strengthen its controls, the Group of the equity. has been that renewal of HGUs has puts a premium on strong supervision been straightforward, even where of the Group’s operations. Regular changes in applicable regulations written reporting from all its operating have occurred since the HGUs were companies is supplemented with originally issued. 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 the Group’s position. routine telephone contact and frequent visits by the executive directors to all areas of the Group’s operations, including the operations of associated companies. In order is putting in place an integrated operations and accounting software system which staff will be able 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, Operations in Indonesia are as well as maintaining a dialogue deemed to be at high risk from the with its chief executive and senior threat of bribery and corruption. management. The Group has a robust policy on bribery and corruption, completes risk assessments and conducts training of senior management in Indonesia and Malaysia. It requires all its business partners to complete questionnaires on their respective anti-bribery and anti-corruption activities and policies. The Group has employed external advisers to ensure its actions carry the maximum prospect of preventing bribery and corruption in its operations. At the Group’s regional office in Jakarta, the local president director has 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)  Read more in the strategic report and Kalimantan. on pages 12 to 23 SUPERVISION OF OPERATIONS The business model explains how the Group controls and 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, supervises its operations using health and safety, modern slavery, expert staff. The Group also uses anti bribery and social and key performance indicators (KPIs) environmental topics. to monitor plantation operations. Geographical distance between the UK head office and its operations located in Indonesia and Malaysia  See the business model on pages 8 to 9  Read more in the KPIs on pages 21 to 22 STRATEGIC REPORT RISK MANAGEMENT RELATIONSHIP WITH LOCAL PARTNERS As set out in the business model, the Group’s strength is as a producer of sustainable Indonesian palm oil. The Group seeks to have a local partner in each subsidiary with at least 5% 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. The executive directors endeavour to maintain regular and open contact, both formal and informal, with the Group’s partners to discuss current and future issues affecting the Group’s operations. Where any differences do arise, the Group seeks to negotiate a mutually acceptable settlement.  The Group’s business model is on pages 8 to 9 PROTECTION OF THE ENVIRONMENT Sustainable production is a priority for the Group. Further information is included in the section on sustainability and in the business model 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 27 M.P. EVANS GROUP PLC ANNUAL REPORT 2019 STRATEGIC REPORT continued RELATIONSHIP WITH LOCAL POPULATIONS The Group’s business model includes making smallholder co-operatives a success. Smallholder areas are planted, maintained and harvested to the same standard as the Group’s own areas. 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 cause disruption 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 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 schemes and to gain the support of the villages surrounding the Group’s project areas. This is a time-consuming but effective process.  See the business model on pages 8 to 9 SCHEME SMALLHOLDERS BANGKA In 2019, each scheme smallholder received a monthly dividend of IDR 8.2 million, 3 times the average wage. On average the Group paid scheme smallholders IDR 14.7 million per hectare of land compensation before planting began. 90 scheme smallholders worked for the Group in 2019 at an average wage of IDR 3.0 million per month plus benefits such as housing and healthcare. 28 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 and were revised in 2019 to tighten the definition of ‘forested areas’. 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. Additionally, the Group’s Pangkatan mill in North Sumatra and Bumi Permai mill in East Kalimantan are certified under the strict requirements of ISCC. The Group has a clear policy that only heavily degraded land will be acquired and developed. As required under RSPO principles, high conservation value and high carbon stock assessments are undertaken by an independent consultant for any new project. Implicit in these studies is the requirement to maintain riparian- buffer zones and nature-conservation areas and to compensate people cultivating land to be developed in a fair and transparent way. The Group has a policy of ‘zero waste’. It has installed composting systems at its mills which utilise both the “empty” fruit bunches (i.e. after the fruit has been removed from 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 the effluent is used for composting; the methane is used in a biogas 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. The Group began preparing its first self-standing Sustainability Report during 2019, which was published in January 2020 (available on the Group’s website at www.mpevans. co.uk). The report set out the Group’s actions to protect the environment, demonstrates the benefits of sustainable palm-oil production and how it seeks to achieve a positive economic and social impact on communities in and around its areas of operation. The report also contained detailed annexes of numerical information on the Group’s activities that are relevant to sustainability.  Read more about sustainability: pages 31 to 37  See the business model on pages 8 to 9 STRATEGIC REPORT RISK MANAGEMENT PESTS AND DISEASE The Group projects a sustained increase in crop. Productivity would be affected if palms were impacted by pests or disease. GENERAL RISKS COMMODITY-PRICE FLUCTUATION Sales of CPO and PK 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. Whilst a remarkably hardy plant, the oil palm can be subject to attack from such pests as caterpillars and other insects, and certain diseases. The practice of proper management The prices of CPO and PK determine and husbandry instilled by the the Group’s revenue and earnings. Group in its field staff is designed Fluctuations in the price directly to identify and prevent these affect the Group’s reported earnings attacks from becoming widespread. and its ability to generate cash Appropriate agronomic measures are inflows from its operations. taken where any outbreaks occur. Senior agricultural staff are kept up to date with current research in this area, for example by attending relevant conferences. The Group relies on its ability to sell its palm oil, palm kernels and ffb into a world market over which it has no control. Palm oil is a permanent tree crop with ffb being harvested every  More detail about our strategy is day of the year. Palm oil and palm on page 12 kernels are sold on an approximately fortnightly basis by open tender and ffb are sold on a day-by-day basis under contract at a price derived from the quoted world price. Over a year, by selling on a “spot” basis, an average price is therefore achieved. Given this, the directors have taken the view that in the long run it is not generally cost-effective to sell forward contracts for the delivery of CPO, particularly since the presence of a progressive Indonesian export tax increases the risk in such contracts given it is determined and levied at the time of delivery, not at the time at which the contract is agreed. The price of palm oil is determined both by disposable income around the world generated by economic activity and by the supply, pricing 29 and demand for competing vegetable dry periods or, conversely, heavy Malaysian Ringgit against the US oils. These factors can result in rainfall leading in some locations Dollar has an effect in US-Dollar fluctuations in the price. The Group’s to flooding, can occur. Dry periods, terms when Malaysian assets are ability to collect sustainability in particular, will affect yields in the translated into US Dollars. premiums helps to mitigate the short- and medium-term but any effect of falling prices. As with any deficits so caused tend to be made commodity, over supply does occur up at a later date. Where appropriate, in the vegetable-oil market which bunding is built around flood-prone exerts downward pressure on prices. areas and drainage constructed and The competing oils, the main ones adapted either to evacuate surplus of which are soybean, oilseed rape water or to maintain water levels in and sunflower, are annual crops and areas quick to dry out. The Group producers tend to react to low prices acknowledges that climate change by switching to other crops which could lead to increasing disruption has, in the past, quickly reduced over of existing patterns of rainfall and supply and restored upward pressure sunshine. 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 movements is both difficult to achieve and would not be cost effective. Surplus cash balances are largely held in US Dollars.  Note 31, containing further details, is on pages 82 to 83 Approved by the board of directors and signed on its behalf Tristan Price Chief executive 31 March 2020 on prices. The board has taken the view that The board is satisfied that the acceptance of weather risk, including fundamental structure of the that caused by climate change, is vegetable-oil market, and particularly part of the business. It is mitigated the palm-oil market, is sound. by the geographical diversity of its Continuing strong demand from the operations. fast-developing economies, such as India, China and Indonesia itself, as well as from more established markets in Europe, for vegetable oil for human consumption, has supported prices, as has demand for vegetable oils as a biofuel. Palm oil is the vegetable oil with the highest production in the world, has the lowest cost and is the most productive, by a wide margin, in terms of yield per hectare.  Assessment of viability report is on pages 46 WEATHER AND NATURAL DISASTERS The Group projects a sustained  More details about our strategy is on page 12 EXCHANGE-RATE FLUCTUATION 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 31 to the financial statements. Palm oil is a US-Dollar-denominated commodity and a significant proportion of direct costs in Indonesia (such as fertiliser and fuel) and development costs (such as heavy machinery and fuel) are US-Dollar related. Hence, adverse increase in crop. Adverse weather movements in the Indonesian events may temporarily slow the Rupiah against the US Dollar can rate of increase in crop. have a negative effect both on other revenue costs in US-Dollar terms Oil palms rely on regular sunshine and when Rupiah-denominated and rainfall but these patterns can assets are translated into US Dollars. vary and extremes such as unusual Similarly, the movement of the 3030 M.P. EVANS GROUP PLCANNUAL REPORT 2019 SUSTAINABILITY SUSTAINABILITY APPROACH APPROACH The Group’s operational and financial success in producing crude palm oil comes from taking the right decisions for the long term. The Group makes long-term decisions investing in land, the environment, its workforce and the communities in and around its operations. This approach is well suited to a robust long-term asset such as oil palm and aligns • protecting the environment; establish a benchmark for future • demonstrating the benefits of sustainable palm-oil production; • having a positive economic and social impact on local communities. reporting and to set expectations with regard to the future. The Group will work to provide disclosures to GRI Standards in the future. The cornerstone of the Group’s commitment to sustainability is Whilst the Group has for many its membership of the Roundtable years published a wide range of on Sustainable Palm Oil (“RSPO”). information showing its approach Palm oil is a global commodity to sustainability, in January 2020 and the Group believes the way to the Group published its first make meaningful progress is for sustainability report. This annual the industry to commit to a system report should be read in conjunction of transparent global rules against with the sustainability report, both of which are available to which performance is rigorously and independently verified. All three download from www.mpevans.co.uk. of the Group’s existing mills have completely with the thinking required Information for the sustainability to make decisions that will lead to a report was prepared based on been certified and Group policy is for any new mills to achieve RSPO sustainable future for the economy, society and the environment. standards published by the Global certification as soon as practically Reporting Initiative (“GRI”) that are possible after commencing widely used in this sphere. The operation. In the meantime, all the The Group has three priority themes report sets out the Group’s strategy, estates that will in due course supply in guiding its operational approach policies and practices, as well as Group mills once they are built to sustainability: its performance over 24 months to already comply with RSPO standards. PROTECTING THE ENVIRONMENT Concerns about global warming and particularly the destruction of the tropical rainforest have rightly received, and continue to receive, close scrutiny. The palm-oil industry is one of those associated with cutting down tropical rainforest and destroying the habitat of endangered species. Oil-palm plantations do not require land that was previously forest. The Group believes there is plentiful land available to grow sustainable palm oil that does not require rainforest destruction and that sustainable palm oil can be an important contributor to building global sustainable agriculture. In order to protect the environment, the Group minimises the emission of greenhouse gases and has strict policies to prevent it from being responsible for any deforestation. The sustainability report sets out the Group’s activity in capturing methane and generating biogas, preventing any burning of land for subsequent cultivation, the identification and protection of conservation and high-carbon-stock areas, and promoting biodiversity. The Group has a ‘zero waste’ approach in which all of the waste from our mills is converted into either biogas or compost which we use to reduce application of inorganic fertilizers. Not only is this good for the environment; it also reduces the Group’s costs. 31 APPROACH continued HOW TO PRODUCE CERTIFIED SUSTAINABLE PALM OIL Start nursery Negotiate with local community over land compensation Submit planting plan to RSPO for approval Submit studies to RSPO for independent approval Receive operating license Obtain permission from government for agricultural development Conduct high- conservation-value and carbon stock studies 32 M.P. EVANS GROUP PLCANNUAL REPORT 2019 Planting declared mature Begin planting Build mill Apply to RSPO for certification Full RSPO audit The Group produces certified sustainable palm oil in all its palm-oil mills. SUSTAINABILITY APPROACH SUSTAINABLE PALM-OIL PRODUCTION Just 19% of all palm oil is currently RSPO certified. The Group believes this should increase across the industry until most, if not all, palm oil produced is certified as sustainable. For this to happen the industry needs to ensure that ffb are traceable. The biggest challenge is persuading independent smallholders, who account for 40% of all ffb supply, to adopt sustainability standards. If this can be done, the amount of certified sustainable palm oil produced will increase significantly. The Group is working to persuade independent smallholders from which it buys ffb to commit to producing their crop in line with the RSPO Independent Smallholders Standard, which includes mapping where the fruit is harvested. Already all the ffb produced in our own estates and those of the Group’s scheme smallholders are fully traceable. Work is already under way to establish a system for knowing where all the ffb the Group processes originate. It has long-standing policies and operating procedures to manage water carefully and prevent pollution of air, land or water. The sustainability report sets out how the Group certifies its production and how it plans to achieve full traceability of all the ffb it processes, as well as how it manages water and agricultural chemicals. 33 M.P. EVANS GROUP PLC ANNUAL REPORT 2019 APPROACH continued SUSTAINABLY CERTIFIED CPO OUTPUT FROM GROUP MILLS 2019 79% 2018 86% TOTAL ELECTRICITY GENERATED (MWH) 2019 2018 12,200 9,200 WOMEN IN THE PERMANENT WORKFORCE 2019 27% 2018 25% INJURIES PER YEAR PER 100 WORKERS 2019 2018 4.0 2.7 34 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. Yields from independent smallholder areas are commonly very significantly less than those achieved by commercial operators. If those commercial operations can share information and techniques with smallholders in co-operative schemes and those in the wider community, they can help them to improve their yields. Improving the productivity of their land can help improve living standards and relieve Palm-oil estates are often in remote pressure for further deforestation. rural locations and are likely to be the largest source of income in the area, supporting both families and the entire community. The estate and the local communities are to an extent mutually dependent. The Group believes it is in its interests to act both responsibly and ethically. It works hard to The sustainability report sets out how the Group runs award-winning smallholder co-operative schemes alongside its estates, promotes gender equality, works to improve the education and health of its workforce and the communities where it operates and how it is vigilant for engender goodwill with communities any sign of modern slavery amongst to secure a committed and skilled the firms from which it buys goods workforce and to maintain efficient and services. operations. Palm-oil estates can act as beacons demonstrating the value of good governance and responsible development by setting high standards in how they treat staff and workers and in how they work in partnership with local communities. SUSTAINABILITY COMMUNITIES CASE STUDY CHILD CARE Children do not belong in the workplace and should have free access to education. The Group has provided nursery schooling in our estates for many years, allowing parents to go to work. At the next stage of children’s education, where there are government schools the Group provides transport to get students to and from school each day. In places where there are no government schools, the Group builds primary schools. In 2019, it began construction of its first secondary school, at Kota Bangun. The Group currently has 13 crèches in which children of any age up to 6 years are properly looked after. The crèches are equipped with play areas, kitchens, toys, baby cradles and beds. Older children can take part in supervised games or activities such as reading, singing, and learning about common animals and plants. The carers are often women from the local community. These crèches are free to use for the Group’s workforce. 2020 SUSTAINABILTY REPORT Setting out the Group’s strategy, policies and practices In January 2020, the Group published its first sustainability report covering our activities for the two years up to June 2019. To read online please visit www.mpevans.co.uk Or ring 01892 516 333 to obtain a copy 35 COMMUNITIES continued VEGETABLE GARDENS The Group has always been conscious that its responsibility to workers extends beyond paying them properly. The Group supports workers and their families by providing a good standard of housing. In its estates the Group establishes good co-operative shops where workers and their families can buy basic foodstuffs and the necessities of everyday life at a reasonable price. In many places the Group also provides a weekly bus service to a nearby market, so that families have the chance to buy a wider variety of goods and foodstuffs. Since 2018, all of the Group’s housing has a small allotment attached to them so that every household can grow fresh vegetables. Free of any charge to the workers, the Group provides seeds, advice and encouragement as one way to improve their food security. 36 M.P. EVANS GROUP PLCANNUAL REPORT 2019SUSTAINABILITY COMMUNITIES SUPPORTING OUR COMMUNITIES SHOP + 21 co-operative stores SCHOOL 5 nursery schools 2 primary schools 550 pupils 35 teachers 22 football pitches 22 volleyball courts 10 tennis courts 1 swimming pool 45 mosques 40 imams 4 churches 3 preachers + 8 doctors 20 nurses and midwives 11 clinics 41,000 patient treatments 13 community halls COMMUNITY HALL 37 M.P. EVANS GROUP PLC ANNUAL REPORT 2019 REPORT OF THE DIRECTORS 38 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. REPORT OF THE DIRECTORS Jock Green-Armytage Philip Fletcher Bruce Tozer Dr Darian McBain SENIOR INDEPENDENT NON-EXECUTIVE DIRECTOR NON-EXECUTIVE DIRECTOR INDEPENDENT NON-EXECUTIVE DIRECTOR INDEPENDENT NON-EXECUTIVE DIRECTOR 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. Retired as managing director in June 2016, having been appointed director in 1987 and managing director in 1991. He was 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. Appointed a director in 2016. Has held senior roles at Rabobank International, JP Morgan, and Credit Agricole. Chairman of Climate Mundial Ltd (an 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. Appointed a director in 2020. Global Director of Corporate Affairs and Sustainability at Thai Union. A leading academic in the field of integrated sustainability analysis. She has won awards for furthering sustainability and ethics in business. Board member of not-for-profit organisation Be Slavery Free. She has previously worked with WWF, focusing on the palm-oil industry. Member of the audit and remuneration committees. 39 REPORT OF THE DIRECTORS continued The directors present the audited consolidated and Richard Robinow served on the board throughout the parent-Company financial statements of M.P. Evans year, retiring on 31 December 2019. Dr Darian McBain Group PLC for the year ended 31 December 2019. joined the board on 1 January 2020 and will present REVIEW OF BUSINESS AND FUTURE DEVELOPMENTS A review of the year and future prospects (including the herself for election as a non-executive director at the forthcoming annual general meeting. Philip Fletcher, Bruce Tozer, Matthew Coulson and Jock Green-Armytage principal risks and uncertainties facing the Company) will retire from the board at the forthcoming annual is included in the chairman’s statement (pages 2 to general meeting in accordance with the articles of 5) and in the strategic report (pages 12 to 30) and is association and, being eligible, will offer themselves incorporated in this report by reference. for re-election. RESULTS AND DIVIDEND Details of the profit for the year are given in the The directors serving at the end of the year, together with their interests at the beginning and end of the year in the consolidated income statement on page 56. shares of 10p each in the Company were as follows: An interim dividend of 5.00p (2018 – 5.00p) per share in respect of 2019 was paid on 1 November 2019. The board At 31 December 2019 BENEFICIAL OPTIONS recommends a final dividend of 12.75p (2018 - 12.75p) P E Hadsley-Chaplin 1,561,717 per share. This dividend will be paid on or after 19 June 2020 to those shareholders on the register at the close of business on 24 April 2020. This final dividend is not provided for in the 2019 financial statements. SHARE CAPITAL The Company has one class of share. Details of the issued share capital of the Company are as follows: T R J Price M H Coulson J M Green-Armytage R M Robinow P A Fletcher B C J Tozer At 1 January 2019 50,000 1,500 — 96,147 1,048,171 — Issued (fully-paid and voting) at 1 January 2019 Issued in respect of options exercised Bought back and cancelled Issued (fully-paid and voting) at 31 December 2019 SHARES OF 10P EACH 54,677,872 50,000 266,652 54,461,220 P E Hadsley-Chaplin 1,561,717 T R J Price M H Coulson J M Green-Armytage R M Robinow P A Fletcher B C J Tozer 50,000 1,500 — 96,147 1,048,171 — — 161,678 22,490 — — — — — 153,406 16,664 — — — — During the year, the Company bought back and cancelled are disclosed in the directors’ remuneration report, on 266,652 (2018 – 280,579) 10p shares for a total cost of pages 48 to 50. Further details of the directors’ interests in share options US$2,286,000 (2018-US$2,733,000), representing 0.5% (2018 - 0.5%) of the Company’s issued share capital, as the board considered that the share price undervalued the Group’s assets and that purchases would enhance earnings. DIRECTORS AND DIRECTORS’ INTERESTS The present membership of the board is detailed on pages 38 and 39. All of these directors, other than Dr None of the directors holds any beneficial interest in, or holds options to buy shares in, any subsidiary undertaking of the Company as at the date of this report. No director has had a material interest in any contract of significance in relation to the business of the Company, or any of its subsidiary undertakings, during the financial year or had such an interest at the end of Darian McBain, served throughout the year and up to the the financial year. date of signing of these financial statements. In addition, 40 M.P. EVANS GROUP PLCANNUAL REPORT 2019 REPORT OF THE DIRECTORS As permitted by the Company’s articles of association, there was throughout the year to 31 December 2019, SUBSIDIARY COMPANIES Details of the Group’s subsidiary companies, including and is at the date of this report, a qualifying third- their country of operation, are given on page 90. party indemnity provision, as defined in section 234 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: KL-Kepong International Ltd Standard Life Aberdeen plc Nokia Bell Pensioenfonds ofp MM Hadsley-Chaplin NATURE SHARES % Direct 11,127,286 20.45 Indirect 6,443,787 11.84 Direct Direct 5,862,422 10.78 1,928,254 3.54 OUTSTANDING OPTIONS TO SUBSCRIBE As at the date of this report, there were options to subscribe for 175,000 shares outstanding under the 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 in accordance with International Financial Reporting 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 statements unless they are satisfied that they give a true executive share-option schemes, and options to subscribe and fair view of the state of affairs of the Group and for 241,915 shares outstanding under the 2017 long-term the Company and of the profit or loss of the Group and incentive scheme. If all of the options were exercised, the Company for that period. In preparing these financial resulting number of shares would represent (a) 0.76% statements, the directors are required to: of the enlarged issued share capital at that date; and (b) 0.84% of the enlarged issued equity share capital at that date if the proposed authority to purchase shares was exercised in full (excluding any share capital which may • select suitable accounting policies and then apply them consistently; • make judgements and accounting estimates that are be purchased and held in treasury). reasonable and prudent; 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 terms and conditions. The Group’s average creditor days calculated as at 31 December 2019 amounted to 50 days • state whether IFRSs as adopted by the European Union and applicable United Kingdom accounting standards, including FRS101, have been followed, subject to any material departures disclosed and explained in the Group’s and Company’s financial statements respectively; and (2018 - 39 days). The increase was due to the timing of • prepare the financial statements on the going-concern payments to suppliers around the year end. However, basis unless it is inappropriate to presume that the the Group continues to ensure that payables are settled Company will continue in business. within agreed terms. FINANCIAL INSTRUMENTS Details of the Group’s financial instruments, and the accounting records that are sufficient to show and explain the Group and Company’s transactions and disclose with board’s policy with regard to their use, are given in note reasonable accuracy at any time the financial position 31 to the consolidated accounts on pages 82 and 83. of the Company and the Group and enable them to The directors are responsible for keeping adequate 41 REPORT OF THE DIRECTORS continued ensure that the financial statements and the directors’ remuneration report comply with the Companies Act GOING CONCERN The Group’s operations are funded through a 2006. They are also responsible for safeguarding the combination of cash resources, loan finance, and long- assets of the Company and the Group, and hence for term equity. The board has undertaken a recent review of taking reasonable steps for the prevention and detection the Group’s financial position, including forecasts, risks of fraud and other irregularities. and sensitivities (including an assessment of the impact of Covid-19). The review has considered the Group’s The directors are responsible for the maintenance plans for further development in Indonesia, along with and integrity of the Company’s website. Legislation in the required funding for that development. Based on the United Kingdom governing the preparation and that review, the board has concluded that the Group is dissemination of financial statements may differ from expected to be able to continue in operational existence legislation in other jurisdictions. for the foreseeable future, being at least the next 12 months from the date of approval of these financial In the case of each director in office at the date the statements. As a result, the board has concluded that report of the directors is approved: the going-concern basis continues to be appropriate in • so far as the director is aware, there is no relevant audit information of which the Group and parent Company’s auditors are unaware; and preparing the financial statements. INDEPENDENT AUDITORS BDO LLP were appointed as the Group’s auditors in • they have taken all the steps that they ought to have 2019 following a formal tendering process at the end of taken as a director in order to make themselves aware PricewaterhouseCoopers LLP’s term in office. A resolution of any relevant audit information and to establish that to appoint them will be proposed at the forthcoming the Group and parent Company’s auditors are aware of annual general meeting. that information. Approved by the board of directors and signed by its order Katya Merrick Company secretary 31 March 2020 42 M.P. EVANS GROUP PLCANNUAL REPORT 2019REPORT OF THE DIRECTORS CORPORATE GOVERNANCE CORPORATE GOVERNANCE The board has formally adopted the Quoted Companies Alliance Corporate Governance Code (“QCA Code”) published in 2018 as its recognised corporate governance code. The board is committed to following the principles set out in the QCA Code, to disclose and report on the corporate-governance structures and processes operated by the Group and to develop these further to continue to meet the appropriate standards. An explanation of how the Group has applied the principles, including an index of corporate governance disclosures, is included on the Group’s website (www.mpevans.co.uk). The chairman’s statement on corporate governance is set out below. The board recognises the importance of a sound Each board member invested a significant amount of system of corporate governance and internal control. time in answering a series of structured questions. In some respects, the Group’s corporate governance is A consolidated report of these assessments was more developed than required under the QCA Code, the considered by the board and actions in response to Group’s recognised corporate governance code. it were agreed. The retirement of Richard Robinow The board is made up of three executive directors and four non-executives. This structure is designed to ensure that there is a clear balance of responsibilities between the executive and the non-executive functions. As chairman I am primarily responsible for setting the Group’s strategy in conjunction with the board, and for ensuring the effective operation of the board. This includes making sure the board continues to develop its corporate governance in response to changes in official standards and public expectations through full and timely discussion at board meetings. Board evaluation and a review of corporate governance will take place at from the board at the end of 2019 after many years of valuable service, meant that further consideration was given to what skills and attributes would enhance the composition of the board. Given the Group’s focus on producing sustainable palm-oil the directors were delighted that Dr Darian McBain, both an experienced independent corporate director and senior academic specialising in sustainability and ESG, accepted an appointment to the board as a non-executive director. She will be able to provide valuable perspective in these increasingly significant areas. The next board evaluation is scheduled to take place in the first quarter of 2021. least every two years, although the corporate governance Effective risk management, and acknowledging the role information on our website is reviewed annually. that stakeholders play in our Group’s operations, are A good system of corporate governance is of no use without a board whose members continue to develop their skills and capabilities. Our board members have extensive experience and remain professionally active and motivated to broaden their knowledge. All directors have the opportunity to attend seminars and formal training courses; they keep in touch with relevant developments through discussion amongst their business and professional contacts; and they read relevant trade and other professional publications. This activity is recorded by the Group’s company secretary, central to our success. We believe compliance with the QCA Code provides a valuable support in strengthening our ability to grow and so deliver returns to our shareholders that also benefits our wider stakeholders. The Group sees ethical behaviour as a competitive advantage to building trust with suppliers and attracting and retaining high-performing staff. This too is emphasised in the QCA Code. Finally, the Group operates in a sector where timelines are long and hence where there is a premium on boards in which shareholders can place their long-term trust. who recommends appropriate seminars and training There have been no significant changes to the Group’s opportunities to directors. The board conducted the first formal evaluation of itself during the first quarter of 2019. This was conducted internally, led by me and supported by the company corporate governance framework during the year other than widening the scope of the remuneration committee to include the remuneration of senior management as well as that of executive directors. secretary. Its design drew on an independent framework Peter Hadsley-Chaplin, Chairman and recommended questions assessing the nature 31 March 2020 and performance of the board and its committees. 43 CORPORATE GOVERNANCE continued OPERATION OF THE BOARD Directors decisions of the Company are made in the United Kingdom. The executive and non-executive directors Details of the Company’s board, together with those of discuss progress against budgets and other business the audit and remuneration committees, are set out on issues, both during board meetings and at other times. pages 38 and 39. The board comprises an executive chairman, working on a part-time basis, two further The board has access to independent professional full-time executive directors and four non-executive advice at the Group’s expense when the board deems directors, one of whom chairs the audit and remuneration it necessary in order for them to carry out their committees. The maximum number of directors permitted responsibilities. Currently, the board retains Peel under the articles of association is eight. Hunt LLP as the Company’s nominated adviser. The board additionally receives advice from independent This structure is designed to ensure that there is a clear professionals on legal matters, corporate public relations, balance of responsibilities between the executive and taxation, and valuation of the Group’s property assets. the non-executive functions. Non-executive directors The company secretary provides support on matters of are expected to contribute two to three days’ service corporate governance. per month to the Company, including attendance at board meetings and the AGM. The board meets at least Independence and re-election of long-serving directors quarterly and is provided with information at least During the year, the board has sought to maintain a monthly. It receives operating summaries, executive balance of executive and non-executive directors. A operating reports, management accounts and budgets. description of the roles and responsibilities of the All of the executive directors and non-executive directors directors is set out on pages 38 and 39. More than half attended each of the nine full board meetings held in of the directors are non-executive and, in accordance 2019, with the exception of Matthew Coulson who was with the QCA Code, two of the non-executives serving excused from the meeting held on 26 June 2019 and Jock during 2019, Jock Green-Armytage and Bruce Tozer, were Green-Armytage who was unable to attend the meeting independent. The appointment of Darian McBain at the held on 10 December 2019. beginning of 2020 increases the number of independent non-executive directors to three. The board as a whole is collectively responsible for the success of the Company. The personal attributes of each The board considers that Richard Robinow, who served of the directors facilitates rigorous but constructive throughout 2019, contributed valuable technical and debate, informed and considered decision making and operational experience in the palm-oil industry, having effective monitoring of progress in achieving the Group’s been in senior roles in a number of related businesses. strategic objectives. It promotes a culture founded on its Jock Green-Armytage also brings significant industry values of integrity, teamwork and excellence. Members knowledge as well as experience in both corporate of the board lead by example during their frequent visits to operations and interactions with staff. Remuneration finance and corporate governance, as well as chairing FTSE-listed companies. Bruce Tozer’s background is in of all staff rewards those who display these behaviours; commodity finance, environmental markets, and agri- access to the Group’s long-term incentive scheme is business project finance, including palm oil, contributing likewise offered to senior staff who qualify on grounds insight from the finance sector. Philip Fletcher, as of length of service and promote the Group’s values. The former managing director and finance director of the Group dismisses staff found to have breached the value Group, has extensive specific knowledge of both the of integrity. sector, operations in Indonesia and the finances of the Group. As well as general corporate experience through The board reserves to itself a range of key decisions her directorships in a South-East-Asian-based global (which can be found at www.mpevans.co.uk) to ensure seafood producer, Darian McBain has a special interest it retains proper direction and control of the Company, in sustainable food production and ESG issues and the whilst delegating authority to individual executive board will benefit from her recognised knowledge and directors who are responsible for the day-to-day experience in these fields. management of the business. All major and strategic 44 M.P. EVANS GROUP PLCANNUAL REPORT 2019REPORT OF THE DIRECTORS CORPORATE GOVERNANCE The board has an executive chairman, Peter Hadsley- questionnaires for the Group bodies of which they were Chaplin. Given the time that he has served the Company a member. Separate questionnaires were distributed and both as a director and chairman, as well as the size of completed by the: his shareholding in the Company, he is not considered independent. • whole board; • audit committee; Each executive director, and non-executive director with less than nine years’ tenure, retires and must seek • remuneration committee; re-election at least every three years. Non-executive • non-executive directors. directors who have served on the board continuously for a period of nine years or more will offer themselves for re-election at each year’s annual general meeting. Directors’ remuneration and appointment As set out in the report on pages 48 to 50, the remuneration of the executive directors is determined by the remuneration committee whilst that of the non executives is determined by the whole board. The committee, which during the course of 2019 comprised Jock Green-Armitage, Richard Robinow and Bruce Tozer, met twice and all meetings were attended by all members of the committee. The Company does not currently have a nominations committee. Any new appointments to the board are The results of these questionnaires were analysed by the company secretary. Whilst no category covered in the questionnaires returned a low score, the board assessed its best performing area to be its work on strategy. The full board discussed the outcome of the evaluation and agreed some actions in response to it. During the year the board has reviewed how items qualify for inclusion on the board agenda; reviewed and changed delegation from the board to its committees; reviewed stakeholder identification; and disclosed more about the board’s mix of skills and experience. It continues to work on formal recording of risk appetite; how to intensify monitoring anti-bribery and corruption efforts; and will set the frequency of external reviews of internal audit. discussed at a full board meeting, taking into account Relations with shareholders the current skills and experience of the board and that of the candidate. Each member of the board is given the opportunity to meet the individual concerned before an appointment is made. Succession planning The chairman maintains a strong individual relationship with all the directors and any changes to the board are managed collaboratively and with minimal cost and disruption to the Group. It is considered that the board would be robust to any unplanned retirements and be able to recruit suitable, well-qualified, candidates within a The board attaches great importance to communications with both institutional and private shareholders. The executive directors regularly meet shareholders to update them on the progress of the Group and discuss any areas of concern that they may have. At other times the executive directors respond to questions they receive from shareholders. Any issues raised by major shareholders are discussed by the board as a whole. Whilst this is not always possible with smaller shareholders, the chairman personally responds to communications received from individuals, and the annual general meeting provides an opportunity for reasonable time period. Any recruitment of new members smaller shareholders to meet executive and non- to the board takes into account the board’s assessment of its composition and the skills and experience required in the board successfully to formulate and execute Group strategy. executive members of the board, to raise any issues and discuss the development of the business with them. Many of the Group’s smaller shareholders have become personally known to the directors through their many years of regular attendance at the Company’s AGMs. Board performance evaluation The board undertook a performance evaluation during the first quarter of 2019. This was an internal evaluation drawing on material purchased from a professional adviser. Each director was asked to complete the The board uses the Group’s website (www.mpevans. co.uk) to make available details of the AGMs, the results of the votes cast at those meetings, and reports and presentations given at meetings with investors. 45 CORPORATE GOVERNANCE continued ACCOUNTABILITY Financial reporting A detailed review of the performance and financial has concluded that projections should be prepared, and therefore viability considered, over a 10-year period. position of the Group is included in the chairman’s At the year end, the Group held cash and other liquid statement and the strategic report. The board uses these funds of US$27.1 million. Furthermore, as disclosed and the report of the directors to present a balanced and in note 22, at the year end the Group had available understandable assessment of the Group’s position and undrawn finance facilities of up to US$34.6 million. The prospects. The directors’ responsibility for the financial Group’s plans for further development of its Indonesian statements is described on pages 41 and 42 of the report operations have been taken into consideration, as set out of the directors. Risk management in the strategic report, including development of existing projects, investment in new hectarage, and appropriate financing where necessary. The directors acknowledge their responsibilities for the Group’s system of risk management. Such a system can Principal areas of risk, and their mitigation, are included provide reasonable, but not absolute, assurance against in the section on risk management on pages 26 to 30. material misstatement or loss. A review of the process of As noted, whilst legislative changes in Indonesia could risk identification, evaluation and management is carried adversely impact on the viability of the Group in its out and reviewed by the audit committee. The committee current form, the board monitors the situation carefully considers the Group’s principal risks, and a summary is and considers the risk to be low. Financially, the main risk presented to the board for discussion and approval. The to the Group’s results is commodity-price fluctuation, and review process considers the control environment and as has been demonstrated, the Group is able to continue the major business risks faced by the Group. In summary, delivering returns even during periods of lower crude- this is reported on pages 26 to 30. palm-oil prices. Important control procedures, in addition to the day-to- The Group’s prospects remain sound, in particular day supervision of parent-Company business, include given the young average age of its palms, at a little over regular executive visits to the areas of operation of the seven years. An upward trend in crop is expected to last Group and of its associates, comparison of operating until towards the end of the next decade. Given these performance and monthly management accounts with prospects and the resources available to the Group, the plans and budgets, application of authorisation limits, board intends, where possible, to maintain or increase, internal audit of subsidiary undertakings and frequent normal dividends in future years from their current levels. communication with local management. Internal audit is subject to periodic external review. A board visit, In light of the above, the board has not identified any including both executives and non executives, to the significant concerns regarding the Group’s longer-term Jakarta office and the Bangka estates took place in October 2019. viability. Going concern AUDIT COMMITTEE REPORT The audit committee is formally constituted with written The board has assessed and concluded on the going- terms of reference (which are available on the Company’s concern status of the Group, and further information is website www.mpevans.co.uk) and is chaired by Jock included in the directors’ report on page 42. Green-Armytage. The other members are Bruce Tozer Viability and Philip Fletcher, who served throughout the year, and Darian McBain who was appointed to the committee on The board considers the Group’s longer-term viability 9 January 2020. Richard Robinow served on the audit on a regular basis. In order to do this, both short-term committee throughout 2019 until his retirement from budgets and longer-term projections are prepared and the board on 31 December 2019. The executive directors reviewed by the board. Due to the long-term nature of are not members of the committee but can be invited to the industry within which the Group operates, the board attend its meetings. The auditors of the Group may also 46 M.P. EVANS GROUP PLCANNUAL REPORT 2019REPORT OF THE DIRECTORS CORPORATE GOVERNANCE attend part or all of each meeting and they have direct of the Group auditors’ engagement and agreed the access to the committee for independent discussions, significant risks for the audit of the 2019 results. The without the presence of the executive directors. The external auditors have provided only audit services during committee met six times during 2019 and each meeting the current year. Accordingly, the board does not consider was attended by all of the members. The external there to be a risk that the provision of non-audit services auditors attended two of the meetings. may compromise the external auditors’ independence. The audit committee may examine any matters relating To assess the effectiveness of the auditors, the committee to the financial affairs of the Group or the Group’s will review their fulfilment of the agreed audit plan and audit; this includes reviews of the annual accounts and variations from it, and the auditors’ report on issues announcements, accounting policies, compliance with arising during the course of the audit. accounting standards, reviewing the Group’s principal risks, the appointment of and fees of auditors and such Financial reporting and review of financial statements other related matters as the board may require. The committee is able to ensure it has a full During the year the audit committee has: receipt of regular financial and operational reporting, understanding of business performance through its • reviewed the Group’s external financial reporting, including receiving a report from the external auditors on the audit work they have performed; • reviewed the effectiveness of the Group’s internal controls, including a review of the main findings of the internal-audit team in Indonesia; • assessed critical accounting judgements and key estimates made during the year; • considered and approved the Group’s risk analysis; • reviewed the quality and effectiveness of the external audit; and • conducted and concluded a formal tender process for the Group external audit appointment. Auditors Current policy is to tender the external audit at least every ten years. Accordingly, during 2019 the board its review of the budget and long-term plan and its discussion of key accounting policies and judgements. It has specifically addressed the: • accounting treatment for the acquisition of shares in the Group’s Indonesian subsidiaries; • ongoing validity of deferred-tax assets held by the Group in relation to losses, particularly in light of Indonesian tax rules; • impact of new and revised accounting standards on the Group’s financial reporting; • Group’s equity valuation, as disclosed in the annual report; and • ongoing validity of key judgements in the financial statements. The committee considered the judgements that deferred tax should not be provided on unremitted earnings of subsidiaries and associates, and the judgement that depreciation should not be provided on leasehold land, and concluded that both appointed BDO LLP as the Group’s external auditors. remained appropriate. It adopted the recommendations of the audit committee following a formal tender process which considered the After reviewing presentations and reports from 2017 FRC recommendation on audit tenders. The audit management and consulting with the auditors, the audit partner changes at least every five years in accordance committee is satisfied that the financial statements with professional and regulatory standards in order to properly present the critical judgements and key protect independence and objectivity, with Anna Draper estimates for both the amounts reported and relevant the audit partner for the 2019 audit. disclosures. The committee is also satisfied that the significant assumptions used for determining the value of The audit committee meets the external auditors to assets and liabilities have been appropriately scrutinised, consider audit planning and the results of the external challenged and are sufficiently robust. audit. The committee specifically considered the scope 47 DIRECTORS’ REMUNERATION REPORT REMUNERATION COMMITTEE The remuneration committee, which is formally executive directors and annual awards of fully-paid shares to senior staff other than directors. The award of constituted with written terms of reference (available on fully-paid shares has the advantage of being substantially the Company’s website at www.mpevans.co.uk), keeps less dilutive than market-priced share options, whilst under review the remuneration and terms of employment continuing to provide an adequate level of incentive to of the executive directors and recommends such the recipient. remuneration and terms to the board. The committee comprised Jock Green-Armytage, Richard Robinow and The long-term incentive for executive directors is through Bruce Tozer throughout 2019, and is chaired by Jock the award of fully-paid share options under the deferred- Green-Armytage. Darian McBain was appointed to the bonus policy described above. No additional performance remuneration committee on 9 January 2020. criteria attach to the deferred-bonus awards since the original bonus will have been performance-related. SERVICE CONTRACTS All of the executive directors have service contracts with In respect of senior staff who are not directors, the Group the Company. These contracts continue until terminated aims annually to give a limited number of fully-paid by either party giving not less than one year’s notice in shares which vest after three years subject to continued writing. The non-executive directors do not have service employment by the Group. This is designed to retain contracts or provisions for pre-determined compensation valued individuals in a growing and competitive sector. on termination of their appointment. No performance criteria attach to these awards. REMUNERATION POLICY The Group’s remuneration committee recognises EXECUTIVE DIRECTORS When determining the remuneration of the executive that the Group’s success depends, in part, on the directors, the remuneration committee considers the pay performance of the directors and senior management and conditions across the Group, particularly those of and the importance of ensuring that employees are the senior management of the operations in Indonesia. incentivised. Its philosophy is to offer a transparent and The Group aims to provide remuneration packages for the simple remuneration package to the executive directors, directors and senior management which are a fair reward comprising a salary and a bonus related to current for their contribution to the business, having regard results and personal performance (including significant to the complexity of the Group’s operations and the additional contribution in terms of time and expertise). need to attract, retain and motivate high-quality senior Half of the bonus is payable in cash and half is deferred management. Remuneration packages are designed to into an award of fully-paid shares which vest three years be broadly comparable with those offered by similar after their grant, subject to continued employment by the businesses, such as European plantation and AIM-listed Group. This structure for remuneration is designed to be companies. easily understood by both executives and shareholders. It aims to encourage the executive directors to work Non-pensionable bonuses may be awarded annually in collegiately, focus their efforts on making decisions that arrears at the discretion of the committee, taking account are in the Group’s best long-term interests, and, to some of the Group’s performance during the period and other extent, share in the benefits that accrue to shareholders targeted objectives. Bonuses do not exceed twelve from a higher future share price. This avoids the need months’ salary, half payable in cash and half deferred for complex performance measures and the risk that into an award of fully-paid shares which vest three years numerical targets encourage behaviour that sacrifices after their grant, subject to continued employment by the long-term growth potential in favour of short-term Group (as described above). The bonus in respect of 2019 results. took into account the processing, for the first time of over 1 million tonnes of ffb. The remuneration committee LONG-TERM INCENTIVE SCHEME The long-term incentive scheme established in 2017 noted achievements by the executive directors such as the purchase of shares from a minority partner in the governs the grant of both deferred-bonus awards to Group’s operating subsidiaries at an attractive price, the 48 M.P. EVANS GROUP PLCANNUAL REPORT 2019REPORT OF THE DIRECTORS DIRECTORS’ REMUNERATION REPORT TOTAL DIRECTORS’ REMUNERATION FOR THE YEAR ENDED 31 DECEMBER 2019 SALARY AND FEES £ BONUS PAID £ 1BONUS DEFERRED £ OTHER BENEFITS £ SALARY IN LIEU OF PENSION £ 2PENSION COSTS £ TOTAL REMUNERATION 2019 £ TOTAL REMUNERATION 2018 £ Executive directors P E Hadsley-Chaplin 180,900 T R J Price M H Coulson 301,300 212,200 33,919 56,494 39,788 — 56,494 39,788 29,527 42,333 29,414 694,400 130,201 96,282 101,274 27,819 24,308 14,521 66,648 — 10,000 10,000 20,000 272,165 490,929 345,711 263,193 919,116 336,004 1,108,805 1,518,313 Non-executive directors J M Green-Armytage R M Robinow P A Fletcher B C J Tozer 39,700 34,000 34,000 34,000 141,700 — — — — — — — — — — — — — — — — — — — — — — — — — 39,700 34,000 34,000 34,000 38,500 33,000 33,000 33,000 141,700 137,500 Total 836,100 130,201 96,282 101,274 66,648 20,000 1,250,505 1,655,813 1. In line with Group remuneration policy, half of the bonuses for the year to Mr T R J Price and Mr M H Coulson (being 4.5 months’ salary) have been deferred into an award of options over fully-paid shares of equal value which vest after three years subject to continued employment by the Group. 2. The pension costs for Mr T R J Price and Mr M H Coulson are the contributions made by the Company to Company-sponsored self- invested personal pensions. The annual ratio for total compensation of the chief executive in relation to the median of Group’s UK payroll excluding this individual was 3.9 in 2019. The equivalent ratio for the percentage increase in annual total compensation was 0.2. introduction of a new Indonesian partner, completion of Options which were previously granted under the 2012 the first four phases of the Kota Bangun bunding project, scheme give the chief executive the right to purchase and management of a thorough tender for the Group’s shares on a future date at the market price of the shares external audit. The absolute value of these measures on the date that the options are granted. As such, the was assessed, as was their outturn against expected value of any option is closely tied to the performance of performance. NON-EXECUTIVE DIRECTORS The fees of the non-executive directors are determined by the Group as reflected in its share price. There will be no gain on exercise unless the share price on the exercise date exceeds the share price on the date the options were granted. On 31 December 2019, options over 125,000 the board having regard to the complexity of the Group’s (2018 – 125,000) shares granted to him under this scheme operations and the need to attract, retain and motivate remained outstanding. During the year, no options were high-quality non-executive directors and the level of fees exercised (2018 - 75,000) and none (2018 – none) lapsed. paid for similar roles in equivalent companies. EXECUTIVE SHARE-OPTION SCHEMES During 2019, the chief executive was a member of the executive share-option scheme which was established The chief executive and finance director are members of the long-term incentive scheme established in 2017 described above, under which half of any discretionary bonus is deferred into options over fully-paid shares. in 2012. The remuneration committee does not intend to Under this arrangement options on 14,098 fully-paid grant any further share options under that scheme. shares were awarded in 2019 (2018 – 20,390), representing 49 M.P. EVANS GROUP PLC ANNUAL REPORT 2019 DIRECTORS’ REMUNERATION REPORT continued half of the bonus awarded to these individuals in assurance company give the executives a pension at respect of 2018. retirement, a pension to a spouse payable on death whilst in the employment of the Company, and life- No options are held by either the chairman or non- assurance cover based on a multiple of salary. No executive directors. element of a director’s remuneration package, other than basic salary, is pensionable. Individuals may elect to forgo At 31 December 2019 the middle-market quotation for contributions to the SIPP, in which case they receive an the Company’s shares, as derived from the London Stock additional salary paid in lieu of the employer’s pension Exchange Daily Official List, was 726p, as compared with contributions at the same cost to the Company. the high and low quotations for the year of 750p and 612p respectively. Approved by the board of directors and signed by its order PENSIONS The Company sponsors self-invested personal pensions Katya Merrick (“SIPPs”) for the UK executive directors. Contributions Company Secretary made by the Company to the SIPPs and to a life- 31 March 2020 OPTIONS HELD OVER SHARES OF THE COMPANY BY THE EXECUTIVE DIRECTORS DURING THE YEAR ENDED 31 DECEMBER 2019 BALANCE AT 1 JAN 2019 GRANTED IN THE YEAR EXERCISED IN THE YEAR BALANCE AT 31 DEC 2019 EXERCISE PRICE PENCE DATE FROM WHICH NORMALLY EXERCISABLE DATE OF GRANT EXPIRY DATE Executive share-option scheme T R J Price Total 50,000 5,750 44,250 25,000 125,000 Long-term incentive scheme T R J Price M H Coulson Total 16,347 12,059 — 28,406 8,333 8,331 — 16,664 45,070 — — — — — — — 8,272 8,272 — — 5,826 5,826 14,098 483.21 520.00 510.00 410.50 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 0.00 0.00 0.00 0.00 0.00 0.00 8 Jun 17 3 Apr 20 2 Apr 27 12 Jan 18 12 Jan 21 11 Jan 28 11 Jan 19 11 Jan 22 10 Jan 29 8 Jun 17 3 Apr 20 2 Apr 27 12 Jan 18 12 Jan 21 11 Jan 28 11 Jan 19 11 Jan 22 10 Jan 29 — — — — — — — — — — — — — — 50,000 5,750 44,250 25,000 125,000 16,347 12,059 8,272 36,678 8,333 8,331 5,826 22,490 59,168 50 INDEPENDENT AUDITORS’ REPORT INDEPENDENT AUDITORS’ REPORT To the members of M.P. Evans Group PLC Report on the audit of the financial statements OPINION We have audited the financial statements of M.P. Evans BASIS FOR OPINION We conducted our audit in accordance with International Group PLC (the ‘Parent Company’) and its subsidiaries Standards on Auditing (UK) (ISAs (UK)) and applicable law. (the ‘Group’) for the year ended 31 December 2019 Our responsibilities under those standards are further which comprise the Consolidated Income Statement, described in the Auditor’s responsibilities for the audit Consolidated Statement of Comprehensive Income, of the financial statements section of our report. We Consolidated and Parent-Company Balance Sheets, are independent of the Group and the Parent Company Consolidated and Parent-Company Statements of in accordance with the ethical requirements that are Changes in Equity, Consolidated Cash Flow Statement and relevant to our audit of the financial statements in the notes to the financial statements, including a summary of UK, including the FRC’s Ethical Standard as applied to significant accounting policies. listed entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. The financial reporting framework that has been applied We believe that the audit evidence we have obtained is in the preparation of the Group financial statements is sufficient and appropriate to provide a basis for applicable law and International Financial Reporting our opinion. Standards (IFRSs) as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Parent-Company financial CONCLUSIONS RELATING TO GOING CONCERN We have nothing to report in respect of the following statements is applicable law and United Kingdom matters in relation to which the ISAs (UK) require us to Accounting Standards, including Financial Reporting report to you where: • 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 or the 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. Standard 101 Reduced Disclosure Framework (United Kingdom Generally Accepted Accounting Practice). In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 31 December 2019 and of the Group’s profit 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; and • the financial statements have been prepared in accordance with the requirements of the Companies Act 2006. 51 INDEPENDENT AUDITORS’ REPORT continued KEY AUDIT MATTERS Key audit matters are those matters that, in our professional judgment, were of most significance in our 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) we identified, 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 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. KEY AUDIT MATTER HOW WE ADDRESSED THE KEY AUDIT MATTER IN THE AUDIT Valuation of biological assets (note 3 and 17) Our audit work included, but was not restricted to, the The Group’s accounting policy in relation to biological assets is included within note 3 and further explained in note 17. The unharvested fresh fruit bunches (‘FFB’) on the bearer plants at the year end fall within the scope of IAS 41 Biological Assets and are therefore held at fair value less costs to sell determined on the basis following: We assessed the key inputs and assumptions in the calculation being: • production data – agreed to internal production reports for January 2020 over which we performed analytical review procedures, considering the reasonableness of current year production against prior year production for the same period of the net present value of expected future cash • average growth rate – agreed to externally published flows arising in the production of FFB. Management research papers exercise significant judgement in determining the method to be applied in determining fair value as well as in the underlying assumptions used in • selling price – agreed to sales price achieved in December 2019, independently verified by the component audit team. the calculation. These assumptions include the • costs to sell – agreed to internal cost data for December 2019 estimation of the weight of unharvested FFB at the independently verified by the component audit team. balance sheet date (being the actual production We considered the valuation model applied and determined for the first month subsequent to the balance it to be appropriate for the purpose of this valuation in sheet date multiplied by 32%, based on the average accordance with IAS 41. growth rate of FFB), selling price and costs to sell. We identified this as a significant risk due to the Key observations: Based on the procedures we performed, we inherent uncertainty around the future estimates. identified no changes to key assumptions that would result in material changes to the valuation. Identification of prior period errors For each of the errors identified we performed the following: Our audit identified four material accounting and • We considered the correct accounting treatment with disclosure errors in the prior period financial reference to the relevant accounting standards, supporting information, requiring correction via prior period documentation where relevant and, through discussion with adjustment and therefore restatement of the management. comparative information. Of these, one required a significant proportion of the engagement team’s resources and efforts in the auditing of the correction of this error. This was therefore treated as a Key Audit Matter. • We checked that the appropriate disclosures were made in accordance with relevant accounting standards. Key observations: Based on the procedures performed we are satisfied that the identified errors were appropriately There was a reclassification from revaluation corrected and disclosed. reserve to investments in associates resulting from a historic deferral of profit from a land sale between the Group and its associate (note 15). 52 M.P. EVANS GROUP PLCANNUAL REPORT 2019INDEPENDENT AUDITORS’ REPORT OUR APPLICATION OF MATERIALITY We apply the concept of materiality both in planning being US$575,000. Performance materiality was set at 75% of materiality (taking into account various factors and performing our audit, and in evaluating the including the expected total value of known and likely effect of misstatements. For planning, we consider misstatements, brought forward misstatements and the materiality to be the magnitude by which misstatements, number of material estimates). including omissions, could influence the economic decisions of reasonable users that are taken on the basis of the financial statements. In order to reduce AN OVERVIEW OF THE SCOPE OF OUR AUDIT The Group financial statements are a consolidation of to an appropriately low level the probability that any twenty one companies consisting of the parent company misstatements exceed materiality, we use a lower (audited by BDO UK), three management companies materiality level, performance materiality, to determine (audited by Creaseys UK), thirteen palm-oil plantation the extent of testing needed. Importantly, misstatements trading companies (audited by BDO Indonesia), one other below these levels will not necessarily be evaluated trading company (audited by RSM Singapore) and three as immaterial as we also take account of the nature associate entities (one audited by Deloitte Indonesia and of identified misstatements, and the particular two audited by BDO Penang). The majority of the Group’s circumstances of their occurrence, when evaluating their operations are located in Indonesia with the head office effect on the financial statements as a whole. and main group accounting function being located in the United Kingdom. The materiality for the Group financial statements as a whole was set at US$639,000. This was determined on Our audit of the Group and Parent Company financial the basis of 5% of profit before tax. In 2018, materiality statements was scoped by obtaining an understanding was set by the previous auditors at US$1,000,000 based of the Group and its environment, including the Group’s on 5.5% of profit before tax (excluding profit from system of internal control, the performance and discontinued operations). financial position of each component as a proportion of the total for the Group and assessing the risks of Performance materiality was set at US$447,000 being 70% material misstatement at the Group level. Based on our of the above materiality level taking into account various assessment, we identified nine operating plantation factors including the expected total value of known and companies which, in our view, required an audit of their likely misstatements, brought forward misstatements, the complete financial information due to their financial number of material estimates and the expected use of significance to the Group (“significant components”). sample testing. The audit procedures for these components were performed by the component auditors. It was considered Where financial information from components was appropriate to perform audit procedures on specific audit audited separately, component materiality levels, areas where their balance was material to the Group excluding the parent company, were set for this purpose at lower levels up to a maximum of 83% of for a further five companies and one associate entity (“material but not significant components”). Where these Group materiality and ranged between US$28,000 and components were located overseas, the audit procedures US$531,000, being 4% and 83% of Group materiality were performed by the component auditors whilst the respectively. audit procedures for components located in the UK were performed by the Group audit team. For the other We agreed with the audit committee that we would components that were not identified as being significant report to them all individual audit differences in excess to the Group, we performed analytical review procedures of US$13,000 being 2% of materiality. We also agreed to at a Group level. report differences below this threshold that, in our view, warranted reporting on qualitative grounds. Components that were subject to full scope audit procedures accounted for 100% of the Group’s revenue, The materiality for the Parent Company financial 79% of the Group’s profit before tax and 94% of the statements, as a holding company, was based on 2% of Group’s total assets. total assets but restricted to 90% of Group materiality, 53 INDEPENDENT AUDITORS’ REPORT continued 5% 16% PBT REVENUE 6% TOTAL ASSETS 79% 100% 94% Significant (full scope procedures) Material but not significant (specific scope procedures) Non significant (analytical procedures) As part of our audit planning, the Senior Statutory Auditor and other senior members of the Group audit team OTHER INFORMATION The Directors are responsible for the other information. visited the Indonesian component audit team to review The other information comprises the information the planning documentation on the audit file and met included in the annual report, other than the financial with local management, as these are the most significant statements and our auditor’s report thereon. Our opinion components to the Group. We discussed the group and on the financial statements does not cover the other local risks identified and agreed the testing approach and information and, except to the extent otherwise explicitly audit timelines. stated in our report, we do not express any form of assurance conclusion thereon. As part of the audit strategy for this year’s audit, the Senior Statutory Auditor and other senior members In connection with our audit of the financial statements, of the Group audit team also visited three of the our responsibility is to read the other information and, Group’s Indonesian plantations, accompanied by Group in doing so, consider whether the other information is management. The three estates visited were Pangkatan, materially inconsistent with the financial statements Bilah and Sennah. Senior members of the Group audit team visited or our knowledge obtained in the audit or otherwise appears to be materially misstated. If we identify such material inconsistencies or apparent material Indonesia again to meet with the component auditors misstatements, we are required to determine whether and perform a review of the complete audit files for the there is a material misstatement in the financial Indonesian operating units and requested the component statements or a material misstatement of the other auditors to perform any further procedures required. information. If, based on the work we have performed, we conclude that there is a material misstatement of this At the completion stage senior members of the Group other information, we are required to report that fact. We audit team attended meetings with local audit and local have nothing to report in this regard. management teams and reviewed component audit teams’ reporting, addressing risks and specific procedures raised. We held discussions with component and group management to discuss the findings from our audit, OPINIONS ON OTHER MATTERS PRESCRIBED BY THE COMPANIES ACT 2006 In our opinion, based on the work undertaken in the including local adjustments raised. course of the audit: 54 M.P. EVANS GROUP PLCANNUAL REPORT 2019INDEPENDENT AUDITORS’ REPORT • the information given in the strategic report and the Directors’ report for the financial year for which the financial statements are prepared is consistent with the financial statements; and • the strategic report and the Directors’ report have been prepared in accordance with applicable legal requirements. MATTERS ON WHICH WE ARE REQUIRED TO REPORT BY EXCEPTION In the light of the knowledge and understanding of the Group and the Parent Company and its environment obtained in the course of the audit, we have not identified material misstatements in the strategic report or the Directors’ report. We have nothing to report in respect of the following matters in relation to which the Companies Act 2006 requires us to report to you if, in our opinion: AUDITOR’S 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 auditor’s 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 • adequate accounting records have not been kept, or Financial Reporting Council’s website : www.frc.org.uk/ returns adequate for our audit have not been received auditorsresponsibilities. This description forms part of from branches not visited by us; or our auditor’s report. • the Parent Company financial statements are not in agreement with the accounting records and returns; or • certain disclosures of Directors’ remuneration specified by law are not made; or • we have not received all the information and explanations we require for our audit. RESPONSIBILITIES OF DIRECTORS As explained more fully in the Statement of Directors’ Responsibilities within the Report of the Directors, set out on pages 41 and 42 the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the Directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. 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. USE OF OUR REPORT This report is made solely to the Parent Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Parent Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Parent Company and the Parent Company’s members as a body, for our audit work, for this report, or for the opinions we have formed. Anna Draper (Senior Statutory Auditor) for and on behalf of BDO LLP, Statutory Auditor Gatwick United Kingdom 31 March 2020 BDO LLP is a limited liability partnership registered in England and Wales (with registered number OC305127) 55 CONS0LIDATED INCOME STATEMENT For the year ended 31 December 2019 Note 2019 US$’000 2018 US$’000 Continuing operations Revenue Cost of sales Gross profit Gain/(loss) on biological assets Foreign-exchange gains/(losses) Other administrative expenses Other income Operating profit Finance income Finance costs Profit before tax Tax on profit on ordinary activities Profit after tax Share of associated companies’ profit after tax Profit for the year Attributable to: Owners of M.P. Evans Group PLC Non-controlling interests Continuing operations Basic earnings per 10p share Diluted earnings per 10p share Basic earnings per 10p share Continuing operations 119,341 (102,297) 17,044 927 1,161 (3,466) 458 16,124 403 (3,747) 12,780 (7,183) 5,597 1,873 7,470 6,333 1,137 7,470 108,553 (82,028) 26,525 (703) (4,056) (2,940) 652 19,478 300 (1,430) 18,348 (12,657) 5,691 1,470 7,161 5,405 1,756 7,161 US cents US cents 11.6 11.5 9.9 9.8 Pence Pence 9.0 7.4 6 7 8 9 28 11 11 56 M.P. EVANS GROUP PLCANNUAL REPORT 2019FINANCIAL STATEMENTS CONS0LIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended 31 December 2019 Other comprehensive income (net of tax) Items that may be reclassified to the income statement Exchange gain/(loss) on translation of foreign operations 390 (393) 2019 US$’000 2018* US$’000 Items that will not be reclassified to the income statement Remeasurement of retirement-benefit obligations Other comprehensive income for the year Profit for the year Total comprehensive income Attributable to: Owners of M.P. Evans Group PLC Non-controlling interests * Restated, see note 27 696 1,086 7,470 8,556 7,370 1,186 8,556 711 318 7,161 7,479 5,633 1,846 7,479 57 CONS0LIDATED BALANCE SHEET As at 31 December 2019 COMPANY NUMBER: 1555042 Note 2019 US$’000 2018* US$’000 2017* US$’000 Non-current assets Goodwill Other intangible assets 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 Total assets Current liabilities Borrowings Trade and other payables Current-tax liability Net current assets Non-current liabilities Borrowings Trade and other payables 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 * Restated, see notes 15 and 27 13 13 14 15 16 19 17 18 19 20 20 22 21 22 21 23 24 25 27 27 28 11,767 1,433 368,744 21,553 66 5,284 11,555 420,402 2,067 11,072 45,117 4,245 1,160 25,947 89,608 11,767 — 338,225 20,312 62 5,192 8,740 384,298 1,140 12,883 39,681 3,470 2,502 21,626 81,302 510,010 465,600 28,337 22,215 3,657 54,209 35,399 66,137 265 12,312 9,401 88,115 142,324 367,686 9,200 55,385 294,139 358,724 8,962 367,686 20,883 15,029 2,423 38,335 42,967 9,173 — 11,505 8,251 28,929 67,264 398,336 9,228 53,582 314,223 377,033 21,303 398,336 12,228 — 321,558 20,631 53 12,280 5,465 372,215 1,843 10,462 34,368 4,614 6,913 113,910 172,110 544,325 9,159 65,194 5,317 79,670 92,440 30,285 — 11,813 8,434 50,532 130,202 414,123 9,255 52,852 322,055 384,162 29,961 414,123 The financial statements on pages 56 to 83 were approved by the board of directors on 31 March 2020 and signed on its behalf by Tristan Price Chief executive 58 Matthew Coulson Finance director M.P. EVANS GROUP PLCANNUAL REPORT 2019 FINANCIAL STATEMENTS CONS0LIDATED STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2019 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 Reclassification Acquisition Transactions with owners At 1 January 2019 At 31 December 2019 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 Reclassification Acquisition 25 10 15 26 28 12 25 10 15 26 28 28 — — — 6 (34) — — — — — (28) 9,228 9,200 — — — 10 (37) — — — — — — 1,873 4,460 6,333 1,137 7,470 128 909 1,037 49 1,086 2,001 5,369 7,370 1,186 8,556 212 34 — (1,036) 592 — — (198) 53,582 55,385 — (2,286) (12,364) 1,036 51 (2,056) (9,834) (25,453) 314,223 294,139 218 (2,286) (12,364) — 643 (2,056) (9,834) (25,679) 377,033 358,724 — — — — — 2,056 (15,583) (13,527) 21,303 8,962 218 (2,286) (12,364) — 643 — (25,417) (39,206) 398,336 367,686 1,470 3,935 5,405 1,756 7,161 176 52 228 90 318 1,646 3,987 5,633 1,846 7,479 149 37 — (1,568) 466 — — — — (2,733) (12,725) 1,568 24 (9) 2,056 — 159 (2,733) (12,725) — 490 (9) 2,056 — — — (8,105) — — — (2,056) (343) 159 (2,733) (20,830) — 490 (9) — (343) Transactions with owners (27) (916) (11,819) (12,762) (10,504) (23,266) At 1 January 2018 – as previously stated Restatement* At 1 January 2018 – as restated At 31 December 2018 * Restated, see notes 15 and 27 9,255 — 9,255 9,228 54,382 (1,530) 52,852 53,582 323,397 387,034 29,961 416,995 (1,342) (2,872) — (2,872) 322,055 384,162 314,223 377,033 29,961 21,303 414,123 398,336 59 CONS0LIDATED CASH-FLOW STATEMENT For the year ended 31 December 2019 Net cash generated by operating activities Investing activities Purchase of property, plant and equipment Purchase of intangible assets Interest received Decrease in bank deposits treated as current-asset investments* Decrease/(increase) in receivables from smallholder co-operatives* Proceeds on disposal of property, plant and equipment Purchase of subsidiary undertaking Loan to related party Net cash used by investing activities Financing activities New borrowings Repayment of borrowings Lease liability payments Dividends paid to Company shareholders Dividends paid to non-controlling interest Purchase of non-controlling interests Exercise of Company share options Buy-back of Company shares Note 29 14 13 6 30 30 30 Net cash generated/(used) by financing activities Net increase/(decrease) 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 20 2019 US$’000 2018 US$’000 32,002 21,297 (46,531) (31,879) (721) 210 1,342 4,690 489 — (11,747) (52,268) 110,419 (46,134) (167) (12,364) — (25,417) 218 (2,286) 24,269 4,003 21,626 318 25,947 — 300 4,411 (4,668) 727 (49,167) — (80,276) — (9,159) — (12,725) (8,105) — 159 (2,733) (32,563) (91,542) 113,910 (742) 21,626 * Following a review of cash flows in the current year, both movements in receivables from smallholder co-operatives and changes in bank deposits treated as current asset-investments have been included in investing activities. Comparative amounts have been shown consistently, having previously been included in operating and financing activities respectively. 60 M.P. EVANS GROUP PLCANNUAL REPORT 2019On site review at Bumi Mas 61 61 NOTES TO THE CONSOLIDATED ACCOUNTS For the year ended 31 December 2019 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 30. 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$3,485,000 for the financial year ended 31 December 2019 (2018 profit of US$115,929,000). 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 Company’s subsidiary Bertam Consolidated Rubber Company Limited is exempt from the requirement to have an audit and prepare individual accounts. 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 new and amended standards issued by the International Accounting Standards Board (“IASB”) that became effective for the first time during the year ended 31 December 2019. The Group has assessed each of them, and concluded that the following standards and amendments have not had a material impact on the Group’s results or financial position. IFRS 16 Leases IFRIC 23 Uncertainty over income tax treatments 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 (b) New standards, amendments and interpretations issued but not effective for the year beginning 1 January 2019 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 17 Insurance contracts Amendments to references in the conceptual framework in IFRS Standards IFRS 3 (amendments) Definition of a business IAS 1 and IAS 8 (amendments) Definition of material IFRS 9, IAS 39 and IFRS 7 (amendments) Interest rate benchmark reform IAS 1 (amendments) Classification of liabilities as current or non-current 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 (including an assessment of the impact of Covid-19), 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 42. 62 M.P. EVANS GROUP PLCANNUAL REPORT 2019 3 Accounting policies continued (c) Basis of consolidation The Group financial statements consolidate the financial statements of the Company and all of its subsidiaries, and equity accounts 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 performance obligation is satisfied. (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 using the projected unit credit method, and charged to the income statement on the basis of individuals’ service at the balance-sheet date. Remeasurement by the actuary is included in equity, whilst all other movements in the liability, other than benefits paid, are recognised in profit or loss. (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 exercise period for market- priced options and at the start of the exercise 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. 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. Inputs to the fair value measurement of goodwill fall into ‘Levels 2 and 3’ in the IFRS categories. (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, 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 17). 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. 63 NOTES TO THE CONSOLIDATED ACCOUNTS continued 3 Accounting policies continued i) Intangible assets Intangible assets (other than goodwill) are stated at historical cost less amortisation. Software is written off over its estimated useful life on a straight line basis at 10% per annum. Estimated useful lives are reviewed at each balance-sheet date. (j) 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 initial costs are 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 on a straight line basis 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, as in the case of the UK office, no provision is made for depreciation. Construction in progress is measured at cost and is not depreciated. Depreciation commences once assets are complete and available for use. (k) Leases All leases are accounted for by recognising a right-of-use asset and a lease liability except for leases of low value assets and leases with a duration of 12 months or less. Lease liabilities are measured at the present value of lease payments over the term of the lease, and the right-of-use asset is measured at a corresponding amount. The asset is depreciated on a straight line basis over the lease term, and the lease payments are allocated to the lease liability and the interest implicit in the lease. (l) 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 2019. 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. (m) 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. Young seedlings are included within nurseries as part of inventory, and their cost is transferred to immature planting within property, plant and equipment when they are planted out in the field. (n) 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 2019 FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED ACCOUNTS 3 Accounting policies continued (o) 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, and other than the Group’s investments in unlisted shares are carried at amortised cost. Financial assets at fair value through profit or loss – the Group’s investments in unlisted shares (other than associated undertakings) are classified as fair value through profit or loss and stated at fair value, with gains and losses recognised directly in the income statement. 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 related parties and smallholder co-operatives. Balances 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 expected credit losses, 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. (p) 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. (q) 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. (r) 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 23); and • Depreciation of leasehold land (note 14). Key estimates • • • • Determination of retirement benefit obligations (note 24). Carrying value of deferred-tax assets relating to losses (note 23); Valuation of biological assets – growing produce (note 17); Carrying value of goodwill (note 13); and 65 NOTES TO THE CONSOLIDATED ACCOUNTS continued 4 Segment information The Group’s reportable segments are distinguished by location and activity: palm-oil plantations in Indonesia and property development in Malaysia. PLANTATION INDONESIA US$’000 PROPERTY MALAYSIA US$’000 OTHER US$’000 TOTAL US$’000 2019 Continuing operations Revenue Gross profit/(loss) Gain on biological assets Foreign-exchange gain Other administrative expenses Other income Operating profit Finance income Finance costs Profit before tax Tax Profit after tax 119,250 17,100 927 1,121 (44) 458 201 (589) (6,471) — — — — — — — — — Share of associated companies’ profit after tax 799 1,074 91 (56) — 40 (3,422) — 202 (3,158) (712) — *119,341 17,044 927 1,161 (3,466) 458 16,124 403 (3,747) 12,780 (7,183) 5,597 1,873 7,470 Profit for the year Consolidated total assets Assets Investments in associates Consolidated total liabilities Liabilities Other information Additions to property, plant and equipment Additions to intangible assets Depreciation Amortisation 461,851 3,933 465,784 53,334 47,155 721 15,318 112 — 17,620 17,620 26,606 — 26,606 488,457 21,553 510,010 — — — — — 88,990 142,324 8 — 22 — 47,163 721 15,340 112 * US$85.5 million of revenue (71.7%) was from sales to 4 customers (27.0%,17.8%,14.0% and 12.9% respectively). 66 M.P. EVANS GROUP PLCANNUAL REPORT 2019FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED ACCOUNTS PLANTATION INDONESIA US$’000 PROPERTY MALAYSIA US$’000 OTHER US$’000 TOTAL US$’000 108,445 26,583 (703) (3,448) (181) 646 291 (1,026) (12,167) — — — — — — — — — 4 Segment information continued 2018 Continuing operations Revenue Gross profit/(loss) Loss on biological assets Foreign-exchange 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 864 606 Profit for the year Consolidated total assets Assets Investments in associates** Consolidated total liabilities Liabilities Other information Additions to property, plant and equipment Depreciation 402,855 3,587 406,442 61,489 31,875 14,441 — 16,725 16,725 — — — * US$69.5 million of revenue (64.0%) was from sales to four customers (18.0%, 16.8%, 14.9% and 14.3% respectively). ** Restated, see notes 15 and 27. 5 Employees Employee costs during the year Wages and salaries Social security costs Current service cost of retirement benefit (see note 24) Other pension costs Share-based payment charge 108 (58) — (608) (2,759) 6 9 (404) (490) — 42,433 — 42,433 *108,553 26,525 (703) (4,056) (2,940) 652 19,478 300 (1,430) 18,348 (12,657) 5,691 1,470 7,161 445,288 20,312 465,600 5,775 67,264 4 33 31,879 14,474 2019 US$’000 19,133 1,801 1,457 114 643 2018 US$’000 16,204 1,630 1,576 105 490 23,148 20,005 67 NOTES TO THE CONSOLIDATED ACCOUNTS continued 5 Employees continued Average monthly number of persons employed (including executive directors) Estate manual Local management United Kingdom head office 2019 Number 2018 Number 6,010 91 7 6,108 5,211 99 7 5,317 Details of directors’ remuneration required by the Companies Act 2006 are shown within the directors’ remuneration report on page 49 and form part of these audited financial statements. 6 Finance income Interest receivable on bank deposits Interest receivable on related party loans 7 Finance costs Interest payable on bank loans and overdrafts 8 Profit before tax Profit before tax is stated after charging: Depreciation of property, plant and equipment Amortisation of intangible assets Auditors’ remuneration Employee costs (note 5) The analysis of auditors’ remuneration is as follows: Fees payable to the Company’s auditor and their associates for services to the Group* Audit of UK parent Company Audit of consolidated financial statements Audit of overseas subsidiaries Total audit services Taxation advisory services Total non-audit services 2019 US$’000 2018 US$’000 210 193 403 300 — 300 2019 US$’000 3,747 2018 US$’000 1,430 2019 US$’000 2018 US$’000 15,340 14,474 112 341 — 416 23,148 20,005 25 132 158 315 — — 23 119 229 371 7 7 * In addition to the above, US$26,000 (2018 US$38,000) were payable to other firms for the audit of subsidiary companies. 68 M.P. EVANS GROUP PLCANNUAL REPORT 2019FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED ACCOUNTS 9 Tax on profit on ordinary activities United Kingdom corporation tax charge for the year Relief for overseas taxation Overseas taxation Adjustments in respect of prior years Total current tax Deferred taxation – origination and reversal of temporary differences (see note 23) 2019 US$’000 637 (637) — 6,548 — 6,548 635 7,183 2018 US$’000 448 (448) — 5,799 3 5,802 6,855 12,657 The standard rate of tax for the year, based on the United Kingdom standard rate of corporation tax, was 19% (2018 – 19%). The standard rate of Indonesian tax was 25% (2018 – 25%). The actual tax charge is higher than the standard rate for the reasons set out in the reconciliation below. Profit on ordinary activities before tax Tax on profit on ordinary activities at the standard rate Factors affecting the charge for the year Profits taxed at higher standard tax rate Losses no longer available Unrealised Indonesian exchange differences not included in Group profit Withholding tax on overseas dividends and interest Adjustment relating to intercompany loan relationships Utilisation of losses brought forward Unrelieved losses Other differences Total tax charge 2019 US$’000 12,780 2,428 1,553 — 2,467 74 223 (27) 296 169 2018 US$’000 18,348 3,486 3,038 5,331 (341) 38 — (663) 1,367 401 7,183 12,657 In addition to the above, the Group recognised tax of US$0.2 million (2018 US$0.1 million) on retirement benefit obligation remeasurement gains recorded in other comprehensive income. 10 Dividends paid and proposed 2019 interim dividend – 5.00p per 10p share (2018 interim dividend 5.00p) 2018 final dividend – 12.75p per 10p share (2017 final dividend 12.75p) 2019 US$’000 3,519 8,845 12,364 2018 US$’000 3,504 9,221 12,725 Following the year end, the board has proposed a final dividend for 2019 of 12.75p per 10p share, amounting to US$9.0 million. The dividend will be paid on or after 19 June 2020 to shareholders on the register at the close of business on 24 April 2020. 69 NOTES TO THE CONSOLIDATED ACCOUNTS continued 11 Basic and diluted earnings per share The calculation of earnings per 10p share is based on: Profit for the year attributable to the owners of M.P. Evans Group PLC Average number of shares in issue Diluted average number of shares in issue* 2019 US$’000 6,333 2019 NUMBER OF SHARES 54,599,417 54,875,441 2018 US$’000 5,405 2018 NUMBER OF SHARES 54,787,105 55,058,331 * 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. 12 Acquisition On 4 September 2019, the Group effectively acquired a further 2,200 planted hectares by purchasing additional shareholdings in its own operating subsidiaries from one of its minority partners. The acquisition cost was US$25.4 million, funded by taking on additional debt. The Group acquired an additional 15% interest in both PT Pangkatan Indonesia and PT Evans Lestari, and acquired an additional 20% interest in both PT Surya Makmur and PT Aceh Timor Indonesia. As the Group had already been consolidating the results of the companies in which further interests were acquired, a reduction to non-controlling interests has been recognised, with the excess of consideration allocated to reserves. Acquisition cost Reduction in non-controlling interests (note 28) Reserves 13 Intangible assets Cost At 1 January 2019 Transfer from property, plant and equipment Additions At 31 December 2019 Accumulated amortisation At 1 January 2019 Transfer from property, plant and equipment Charge for the year At 31 December 2019 2019 US$’000 25,417 (15,583) 9,834 GOODWILL US$’000 SOFTWARE US$’000 TOTAL US$’000 11,767 — — 11,767 — — — — — 831 721 1,552 — 7 112 119 11,767 831 721 13,319 — 7 112 119 Net book value at 31 December 2019 11,767 1,433 13,200 Cost and net book value At 31 December 2018 11,767 — 11,767 During the year, software with a net book value of US$0.8 million, which had previously been recorded within property, plant and equipment, was transferred to intangible assets. Goodwill is carried at cost. Of the balance above, a significant amount (US$10.6 million) relates to the Group’s project at Bumi Mas, with the remainder relating to the Group’s projects at Kota Bangun, Bangka, and at Sennah Estate (part of the Pangkatan group). 70 M.P. EVANS GROUP PLCANNUAL REPORT 2019FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED ACCOUNTS 13 Intangible assets continued Key estimate A review for goodwill impairment has been undertaken by comparing the carrying value of the relevant cash generating units with fair value less cost of disposal. Fair value less cost of disposal has been obtained by reference to independent valuations of the Group’s property assets conducted at the end of 2019 (see page 92). It used a 30-year forecast period, to reflect the long-term nature of the asset, pre-tax discount rates of 16-19%, and a mill-gate price for CPO rising over three years from US$560 to a long-term average of US$610 per tonne. A decrease in the CPO price assumption of 5-10% would result in a range between no and full impairment of the goodwill relating to Bumi Mas. 14 Property, plant and equipment Cost or valuation At 1 January 2019 Transfer to intangible assets Additions Re-classification Exchange differences Disposals Accumulated depreciation At 1 January 2019 Transfer to intangible assets Charge for the year Exchange differences Disposals At 31 December 2019 LEASEHOLD LAND US$’000 PLANTING US$’000 BUILDINGS US$’000 PLANT EQUIPMENT & VEHICLES US$’000 CON- STRUCTION IN PROGRESS US$’000 TOTAL US$’000 101,339 189,227 73,068 48,621 7,495 419,750 — 4,742 — 2 — — 15,246 — — (261) — 632 10,262 2 (869) (831) 3,920 1,056 — (1,564) 51,202 — 22,623 (11,318) — — (831) 47,163 — 4 (2,694) 18,800 463,392 112 32,231 23,452 25,730 At 31 December 2019 106,083 204,212 83,095 — 17 — — 129 — 7,234 — (259) 39,206 165,006 Net book value at 31 December 2019 105,954 Cost or valuation At 1 January 2018 Additions Acquisition Re-classification Exchange differences Disposals 99,837 1,724 171,635 18,319 5 — (3) — — — (224) (727) At 31 December 2018 101,339 189,227 73,068 Accumulated depreciation At 1 January 2018 Charge for the year Exchange differences Disposals At 31 December 2018 267 32 — (187) 112 Net book value at 31 December 2018 101,227 26,328 6,334 — (431) 32,231 156,996 19,133 4,555 (4) (232) 23,452 49,616 — 4,601 2 (703) 27,352 55,743 70,118 387 — 2,673 (4) (106) (7) 3,488 — (1,250) 27,961 23,241 46,875 3,277 — 194 (1) (1,724) 48,621 23,526 3,553 (1) (1,348) 25,730 22,891 — — — — — 81,525 (7) 15,340 2 (2,212) 94,648 18,800 368,744 2,347 8,172 — (2,867) — (157) 7,495 — — — — — 390,812 31,879 5 — (8) (2,938) 419,750 69,254 14,474 (5) (2,198) 81,525 7,495 338,225 Included in planting is immature planting of US$36,349,000 (2018 US$45,860,000) which is not depreciated 71 NOTES TO THE CONSOLIDATED ACCOUNTS continued 14 Property, plant and equipment cotinued 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$105,428,000 (2018 US$100,716,000). As at 31 December 2019, the Group had entered into contractual commitments for the acquisition of property, plant and equipment of US$8,135,000 (2018 US$7,552,000). Depreciation is charged to cost of sales, other than US$20,000 (2018 US$29,000) charged to other administrative expenses. At 31 December 2019, the Group accounted for one right-of-use asset (2018 – no assets) as a lease under IFRS 16. The net book value of the asset was US$0.5 million. The lease has a three-year term with fixed payments, and the lease liability is included in note 21. 15 Investments in associates Details of the Group’s subsidiary and associated undertakings are given on page 90. The Group’s associated companies are both unlisted. Share of net assets At 1 January Exchange differences Profit for the year Dividends received At 31 December Unrealised profit - deferral on land sales to associate 2019 US$’000 23,020 200 1,873 (1,036) 24,057 (2,504) 21,553 2018* US$’000 23,503 (385) 1,470 (1,568) 23,020 (2,708) 20,312 * During the year US$0.2 million (2018 US$0.2 million) was released relating to profit on land previously sold to one of the Group’s associated undertakings. Previously, the deferred amount was recorded within the Group’s revaluation reserve, and a prior year adjustment has been recorded to reclassify it as a reduction from investment in associates. The impact of the adjustment is to reduce net assets and total equity at 31 December 2018 by the US$2.7 million shown above, and there is no impact on the consolidated income statement or cash flows. At the beginning of 2018, the impact of the adjustment on the balance sheet is to reduce the Group’s investment in associated undertakings by US$2.9 million, with a corresponding change in reserves, as disclosed in the consolidated balance sheet on page 58. 72 M.P. EVANS GROUP PLCANNUAL REPORT 2019FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED ACCOUNTS 15 Investments in associates continued The summarised results of the Group’s associated undertakings and the Group’s aggregate share of their summarised results are shown below: 2019 KERASAAN US$’000 BERTAM PROPERTIES US$’000 TOTAL US$’000 KERASAAN US$’000 BERTAM PROPERTIES US$’000 2018 TOTAL US$’000 5,659 2,102 4,371 8,071 (1,503) (589) 10,350 (38%) 2,150 799 1,661 3,067 (571) (224) 3,933 26,201 2,687 28,422 30,073 (3,946) (4,240) 50,309 (40%) 10,480 1,074 11,369 12,029 (1,578) (1,696) 20,124 12,630 1,873 13,030 15,096 (2,149) (1,920) 24,057 6,129 2,275 4,534 6,078 (656) (516) 9,440 (38%) 2,329 864 1,723 2,309 (249) (196) 3,587 19,929 1,514 26,293 35,802 (9,314) (4,199) 48,582 (40%) 7,972 606 10,518 14,321 (3,726) (1,680) 19,433 10,301 1,470 12,241 16,630 (3,975) (1,876) 23,020 Total Revenue Profit after tax Non-current assets Current assets Current liabilities Non-current liabilities Net assets Group share Revenue Profit after tax Non-current assets Current assets Current liabilities Non-current liabilities Carrying value at 31 December 16 Investments Financial assets at fair value through profit or loss (unlisted) At 1 January Revaluation gain Exchange differences At 31 December 17 Current biological assets Ffb prior to harvest 2019 US$’000 2018 US$’000 62 1 3 66 53 10 (1) 62 2019 US$’000 2018 US$’000 2,067 1,140 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. The gain or loss shown in the consolidated income statement represents the net movement in the fair value of ffb prior to harvest during the year. 73 NOTES TO THE CONSOLIDATED ACCOUNTS continued 17 Current biological assets continued 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$17.6 million. The Group has never included ffb prior to harvest in its internal reporting and decision-making. 18 Inventories Processed produce for sale Estate stores Nurseries 19 Trade and other receivables Current assets Trade receivables Receivable from smallholder co-operatives Loans to related parties Other receivables Prepayments and accrued income Non-current assets Costs to be allocated to smallholder co-operatives Loans to related parties Trade and other receivables analysed by currency of receivable: Indonesian Rupiah US Dollar Sterling Malaysian Ringgit 2019 US$’000 6,760 2,925 1,387 11,072 2019 US$’000 3,032 29,250 385 10,117 2,333 45,117 — 11,555 11,555 44,061 12,207 400 4 2018 US$’000 5,048 6,497 1,338 12,883 2018 US$’000 893 25,200 — 12,205 1,383 39,681 8,740 — 8,740 44,933 3,299 181 8 Sales of palm oil are made for cash payment in advance of delivery. The Group makes full provision against invoices outstanding for more than 30 days. At 31 December 2019 there was no provision for impairment of trade receivables (2018 US$nil). The directors consider the carrying amount of trade and other receivables approximates their fair value. 56,672 48,421 74 M.P. EVANS GROUP PLCANNUAL REPORT 2019FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED ACCOUNTS 19 Trade and other receivables continued 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. It also provides financial guarantees for some bank loans provided to its associated smallholders. 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. The Group’s expected credit loss on its trade and other receivables and financial guarantees is not material. The Group applies the simplified approach in IFRS 9 to determining expected credit losses on trade receivables, taking account of their similar risk characteristics and the Group’s experience. In assessing expected credit losses on non-trade receivables and financial guarantees under IFRS 9, the Group considers the long-standing relationship with its stakeholders, the ongoing trading of its associated smallholders, and its ability to continue to recover balances in a planned and controlled manner. 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 2019 US$’000 9,679 19,571 29,250 — 29,250 2018 US$’000 7,304 17,896 25,200 8,740 33,940 During the year, the Group made finance available to enable its new minority partner to acquire a 5% interest in a number of the Group’s Indonesian subsidiary companies. The balance is repayable on demand. However, the Group, at its discretion, anticipates recovering the balance over a longer period based on profit distribution from the subsidiary companies, and has classified the majority of the balance as non-current accordingly. At the end of the year, the balance outstanding on the related party loans was US$11,940,000 (2018 US$nil). 20 Cash and other liquid resources Cash and cash equivalents Current-asset investments 2019 US$’000 25,947 1,160 27,107 2018 US$’000 21,626 2,502 24,128 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 21 Trade and other payables Current liabilities Trade payables Amounts owed to associated undertakings Lease liabilities Other payables Non-current liabilities Lease liabilities (due in 1-2 years) 2019 US$’000 14,024 18 200 7,973 22,215 265 265 2018 US$’000 7,243 20 — 7,766 15,029 — — The average credit period taken for trade purchases is 50 days (2018 – 39 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. 22 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 2019 US$’000 2018 US$’000 94,474 30,056 28,337 11,006 49,159 5,972 66,137 94,474 91,005 3,469 94,474 32,083 13,985 53,765 6,007 105,840 20,883 5,327 3,009 837 9,173 30,056 26,336 3,720 30,056 21,863 5,844 3,631 898 32,236 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 share certificates, land titles and fixed assets. The net book value of property, plant and equipment used as security for bank loans is US$145.2 million (2018 US$107.1 million). At the year end the Group had undrawn available credit facilities of US$34.6 million (2018 US$125.0 million). The weighted-average interest rate paid on bank loans in the year was 5.0% (2018 – 6.5%). The analysis of anticipated cash outflows above is based on interest and exchange rates in force at the balance-sheet date. 76 M.P. EVANS GROUP PLCANNUAL REPORT 2019 FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED ACCOUNTS 23 Deferred tax The following are the major deferred-tax liabilities and assets recognised by the Group and movements thereon: At 1 January 2019 (Charge)/credit to income statement Exchange differences At 31 December 2019 At 1 January 2018 (Charge)/credit to income statement Acquisition of subsidiary Exchange differences At 31 December 2018 ACCELERATED TAX DEPRECIATION US$’000 RETIREMENT- BENEFIT OBLIGATIONS US$’000 OTHER TIMING DIFFERENCES US$’000 (5,786) (796) (222) (6,804) (4,678) (1,386) — 278 (5,786) 2,061 (32) 73 2,102 1,944 229 — (112) 2,061 (2,588) 193 69 (2,326) 3,201 (5,698) 113 (204) (2,588) TOTAL US$’000 (6,313) (635) (80) (7,028) 467 (6,855) 113 (38) (6,313) Other timing differences relate to losses, with the exception of the deferred tax liability of US$10.6 million that arose in 2017 on the acquisition of PT Bumi Mas Agro. Certain deferred-tax assets and liabilities have been offset. The following is the analysis of deferred-tax balances (after offset) for financial reporting purposes: Deferred-tax assets Deferred-tax liabilities 2019 US$’000 5,284 (12,312) (7,028) 2018 US$’000 5,192 (11,505) (6,313) 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$494,289,000 (2018 US$461,369,000). 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$18,009,000 (2018 US$17,029,000). 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$57,939,000 (2018 US$61,168,000) 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$31,590,000 (2018 US$33,795,000) of such losses. No deferred-tax asset has been recognised in respect of the remaining US$26,349,000 (2018 US$27,372,000) due to the unpredictability of future profit streams and due to the 5-year time limit on utilisation of tax losses in Indonesia. In the normal course of business, both in the UK and Indonesia, the Group has a number of matters under discussion with local tax authorities. The Group is satisfied, based on external tax advice, that appropriate tax treatments have been applied. The likely impact of any change in treatment would be to restrict the availability of the Group’s unused tax losses. 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$0.2 million. 77 NOTES TO THE CONSOLIDATED ACCOUNTS continued 23 Deferred tax continued 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$2,730,000 (2018 US$2,249,000). No asset has been recognised in respect of these differences due to the unpredictability of future profit streams. 24 Retirement-benefit obligations The Group’s only obligation relates to an unfunded, non-contributory, post-employment statutory benefit scheme in Indonesia. A lump sum is paid to employees on retirement or on leaving the Group’s employment. This terminal benefit is accrued by the Group based on an annual actuarial review and charged in the income statement on the basis of individuals’ service at the balance-sheet date. Retirement is assumed at the earlier of age 55 years or 30 years’ service. Standard Indonesian mortality assumptions are used, and no allowance is made for internal promotion. The main assumptions used to assess the Group’s liabilities are: Discount rate Salary increase per annum Reconciliation of scheme liabilities: Current-service cost Interest cost Past service cost Effect of settlement Actuarial gain Less: Benefits paid out Movement in the year At 1 January Exchange differences At 31 December 2019 % 7.55 8.00 2018 % 8.25 8.00 2019 US$’000 2018 US$’000 1,457 676 — — (928) 1,205 (384) 821 8,251 329 9,401 1,576 568 103 (750) (836) 661 (344) 317 8,434 (500) 8,251 Key estimate The main assumptions used to assess the Group’s liabilities are shown in the table above. Changing one of them by 1% in either direction would have the effect of increasing or decreasing the Group’s liabilities by between US$0.9 million and US$1.1 million. 78 M.P. EVANS GROUP PLCANNUAL REPORT 2019 FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED ACCOUNTS AUTHORISED NUMBER ALLOTTED, FULLY PAID AND VOTING NUMBER AUTHORISED £’000 ALLOTTED FULLY PAID AND VOTING US$’000 87,000,000 54,677,872 8,700 — — 50,000 (266,652) — — 87,000,000 54,461,220 8,700 87,000,000 54,883,451 8,700 — — 75,000 (280,579) — — 87,000,000 54,677,872 8,700 9,228 6 (34) 9,200 9,255 10 (37) 9,228 25 Share capital At 1 January 2019 Issued during the year Redeemed during the year At 31 December 2019 At 1 January 2018 Issued during the year Redeemed during the year At 31 December 2018 During the year, as the result of the exercise of share options, the Company issued 50,000 10p shares for US$218,000 cash consideration. In addition, the Company bought back and cancelled 266,652 10p shares for a total cost of US$2,286,000 (an average of 670 pence per share). 26 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 2019 WEIGHTED- AVERAGE EXERCISE PRICE (PENCE) 244.2 0.0 335.0 207.4 472.7 NUMBER OF SHARE OPTIONS 407,320 41,548 (50,000) 398,868 175,000 2018 WEIGHTED- AVERAGE EXERCISE PRICE (PENCE) 253.5 0.0 159.5 244.2 446.0 NUMBER OF SHARE OPTIONS 439,680 42,640 (75,000) 407,320 200,000 The weighted-average share price at the date of exercise for share options exercised during the year was 335p. The options outstanding at 31 December 2019 had a weighted-average remaining contractual life of 5.1 years and exercise prices in the range of nil to 520p. The Group recognised total expenses of US$643,000 related to equity-settled share based payments (2018 US$490,000). Details of the directors’ share options are set out in the directors’ remuneration report on pages 48 to 50. 79 NOTES TO THE CONSOLIDATED ACCOUNTS continued 27 Reserves SHARE- PREMIUM ACCOUNT US$’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 At 1 January 2019 31,370 549 4,248 766 1,188 15,434 Profit for the financial year Exchange differences Retirement-benefit obligations Issue of shares Share buy-back Dividends paid Dividends from associates Share-based payments Acquired from minority Reclassification (note 28) — — — 212 — — — — — — — 1 — — — — — — — — — — — — 34 — — — — — — — — — — — — — — — — — — — — — — 592 — — 1,873 143 — — — — (1,036) — — — 27 — (16) — — — — — — — — TOTAL US$’000 RETAINED EARNINGS US$’000 53,582 314,223 1,873 128 — 212 34 — 4,460 262 647 — (2,286) (12,364) (1,036) 1,036 592 — — 51 (9,834) (2,056) At 31 December 2019 31,582 550 4,282 766 1,780 16,414 11 55,385 294,139 At 1 January 2018* 31,221 Exchange differences Retirement-benefit obligations Issue of shares Share-based payments Share buy-back Group reconstruction Reclassification (note 28) Dividends from associates Profit for the financial year Dividends paid — — 149 — — — — — — — 551 (2) — — — — — — — — — 4,211 766 722 15,802 (421) 52,852 322,055 — — — — 37 — — — — — — — — — — — — — — — — — — 466 — — — — — — (270) 448 176 (569) — — — — — — (1,568) 1,470 — — — — — — — — — — — 149 466 37 — — (1,568) 1,470 621 — 24 (2,733) (9) 2,056 1,568 3,935 — (12,725) At 31 December 2018* 31,370 549 4,248 766 1,188 15,434 27 53,582 314,223 * The revaluation reserve has been restated for the treatment of deferred profit on land sales (see note 15). The previous treatment resulted in a reserve release (and a corresponding debit to other comprehensive income) each year, but these amounts are no longer required under the revised treatment. In addition, a historic deficit on the revaluation reserve of US$1.3 million has been transferred to retained earnings. The nature and purpose of each reserve is indicated by its name. 28 Non-controlling interests At 1 January Share of profit in the year Dividends paid Reclassification* Share of retirement benefit credited to other comprehensive income Minority acquisition (note 12) Acquisition At 31 December 2019 US$’000 21,303 1,137 — 2,056 49 (15,583) — 8,962 2018 US$’000 29,961 1,756 (8,105) (2,056) 90 — (343) 21,303 * At 31 December 2018 US$2,056,000 was reclassified from non-controlling interests to retained earnings to reflect the Group’s effective interest in its operating subsidiaries at that point. It was subsequently reclassified back to non-controlling interests during 2019 when ownership was transferred to the Group’s new minority partner (see note 12). 80 M.P. EVANS GROUP PLCANNUAL REPORT 2019FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED ACCOUNTS 28 Non-controlling interests continued In accordance with Indonesian law, the Group is required to have a minority partner in each of its plantation operations. The minority share of profit for the year and Group equity, allocated by operation, is shown in the following table: Kota Bangun Bangka Pangkatan Group Bumi Mas Musi Rawas Simpang Kiri 29 Note to the consolidated cash-flow statement Operating profit Biological (gain)/loss Disposal of property, plant and equipment Release of deferred profit Depreciation of property, plant and equipment Amortisation of intangible assets Remeasurement of investment Retirement-benefit obligations Share-based payments Dividends from associated companies Operating cash flows before movements in working capital (Decrease)/increase in inventories Increase in receivables Increase/(decrease) in payables Cash generated by operating activities Income tax paid Interest paid Net cash generated by operating activities PROFIT US$’000 78 512 885 (128) (288) 78 1,137 2019 EQUITY US$’000 1,747 2,473 2,777 1,935 (24) 54 8,962 PROFIT US$’000 (108) 935 1,198 (356) (75) 162 1,756 2018 EQUITY US$’000 1,674 1,931 14,148 — 319 3,231 21,303 2019 US$’000 2018 US$’000 16,124 19,478 (927) (7) (204) 703 13 (164) 15,340 14,474 112 (1) 1,846 643 580 33,506 1,811 (545) 6,986 41,758 (6,009) (3,747) 32,002 — (10) 2,122 490 1,568 38,674 (2,421) (3,920) (2,092) 30,241 (7,514) (1,430) 21,297 81 NOTES TO THE CONSOLIDATED ACCOUNTS continued 30 Analysis of movements in net (debt)/funds CASH AND CASH EQUIVALENTS US$’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 2019 21,626 2,502 (20,883) (9,173) (5,928) Net increase in cash and cash equivalents New borrowings Repayment of borrowings Change in deposits Reclassification Foreign-exchange movements At 31 December 2019 4,003 — — — — 318 25,947 — — — (1,342) — — 1,160 — (35,000) 46,134 — (18,455) (133) (28,337) — 4,003 (75,419) (110,419) — — 18,455 — (66,137) 46,134 (1,342) — 185 (67,367) At 1 January 2018 113,910 6,913 (9,159) (30,285) 81,379 Net decrease in cash and cash equivalents Repayment of borrowings Change in deposits Reclassification Foreign-exchange movements At 31 December 2018 31 Financial instruments (91,542) — — — (742) 21,626 — — (4,411) — — 2,502 — 9,159 — (21,112) 229 (20,883) — — — 21,112 — (9,173) (91,542) 9,159 (4,411) — (513) (5,928) 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 22), 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 debt of US$67,367,000 (2018 US$5,928,000) and equity attributable to the owners of the parent Company of US$358,724,000 (2018 US$377,033,000). The board intends to fund its continuing Indonesian expansion by a combination of the Group’s cash and other liquid resources, 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 held at amortised cost, with the exception of its other investments shown in note 16, which are classified as financial assets at fair value through profit or loss. 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 significant 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. 82 M.P. EVANS GROUP PLCANNUAL REPORT 2019FINANCIAL STATEMENTS NOTES TO THE CONSOLIDATED ACCOUNTS 31 Financial instruments continued The currency profile of the Group’s monetary assets, excluding trade and other receivables (the currency profile of which is given in note 19), are as follows: US Dollar Indonesian Rupiah Sterling Malaysian Ringgit Australian Dollar 2019 US$’00 13,304 13,493 152 158 — 2018 US$’000 10,606 10,913 1,933 496 180 27,107 24,128 The currency profile of the Group’s monetary liabilities, excluding trade and other payables, is shown in note 22. 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$5.4 million (2018 US$5.2 million). 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 22. Group borrowings are at variable rates of interest linked to LIBOR, and so is exposed to changes in underlying interest rates. Based on current borrowing, management estimates that for every 1% increase or decrease in interest rates, Group profit for the year and net assets would decrease or increase by US$0.8 million (2018 US$0.3 million). 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 22. 32 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 49. The directors’ participation in the executive share-option schemes and long-term incentive scheme is disclosed on page 50. The Group received dividends from its associated companies during the year. These are set out in note 15. The Group made finance available to its new minority partner during the year. This is set out in note 19. 83 PARENT-COMPANY BALANCE SHEET As at 31 December 2019 COMPANY NUMBER: 1555042 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 2019 US$’000 858 15,799 16,657 162,225 5,375 167,600 184,257 8,232 159,368 — 8,232 2018 US$’000 871 15,799 16,670 180,202 2,091 182,293 198,963 3,215 179,078 2,449 5,664 176,025 193,299 9,200 38,887 127,938 176,025 9,228 38,049 146,022 193,299 The Company recorded a loss for the year of US$3,485,000 (2018 profit US$115,929,000). The financial statements on pages 84 to 89 were approved by the board of directors on 31 March 2020 and signed on its behalf by Tristan Price Chief executive Company number: 1555042 Matthew Coulson Finance director 84 M.P. EVANS GROUP PLCANNUAL REPORT 2019 PARENT-COMPANY FINANCIAL STATEMENTS PARENT-COMPANY STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2019 Loss for the year Total comprehensive expense for the year Issue of share capital Dividends Share buy-back Credit to equity for equity-settled share-based payments Transactions with owners At 1 January 2019 At 31 December 2019 Profit for the year Total comprehensive expense for the year Issue of share capital Dividends Share buy-back Credit to equity for equity-settled share-based payments Transactions with owners At 1 January 2018 At 31 December 2018 SHARE CAPITAL US$’000 OTHER RESERVES US$’000 — — 6 — (34) — (28) 9,228 9,200 — — 10 — (37) — (27) 9,255 9,228 — — 212 — 34 592 838 38,049 38,887 — — 149 — 37 466 652 37,397 38,049 RETAINED EARNINGS US$’000 (3,485) (3,485) — (12,364) (2,286) 51 (14,599) 146,022 127,938 115,929 115,929 — (12,725) (2,733) 24 (15,434) 45,527 146,022 TOTAL US$’000 (3,485) (3,485) 218 (12,364) (2,286) 643 (13,789) 193,299 176,025 115,929 115,929 159 (12,725) (2,733) 490 (14,809) 92,179 193,299 85 NOTES TO THE PARENT-COMPANY ACCOUNTS For the year ended 31 December 2019 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, and the address of its registered office is given on page 96. The Group’s principal activities are shown in the strategic report on page 12. 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 Company is domiciled in the UK. The principal accounting policies have been consistently applied and 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, 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. Going concern The financial statements have been prepared on a going-concern basis. The directors have conducted a review of projected cash flows, concluding that the Company has sufficient projected funds to continue its business in the medium term. Further details are given in the report of the directors on page 42. 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, reduced by appropriate allowances for expected credit losses. 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. Critical accounting judgements and key sources of estimation uncertainty The critical judgements and accounting estimates relevant to the consolidated financial statements are shown in note 3 to the consolidated financial statements on page 65. The directors have concluded that there are no critical judgements and accounting estimates in the preparation of the parent-Company accounts. 86 M.P. EVANS GROUP PLCANNUAL REPORT 2019PARENT-COMPANY NOTES 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 2019 of US$3,485,000 (2018 profit US$115,929,000). The Company’s main source of income is dividends from subsidiary companies. The auditors’ remuneration for audit services was US$25,000 (2018 US$23,000). iii Employees Employee costs during the year Wages and salaries Social security costs Pension costs Shared-based payments 2019 US$’000 2018 US$’000 1,608 208 55 219 2,090 1,562 344 58 152 2,116 As recorded in the directors’ remuneration report on page 49, wages and salary costs include bonuses paid to the directors in respect of 2019 and 2018. Average monthly number of persons employed Staff Directors iv Property, plant and equipment Cost At 1 January 2019 Additions Disposals At 31 December 2019 Accumulated depreciation At 1 January 2019 Charge for the year Disposals At 31 December 2019 Net book value at 31 December 2019 Net book value at 31 December 2018 NUMBER NUMBER 4 3 7 4 3 7 LAND AND BUILDINGS US$’000 PLANT, EQUIPMENT & VEHICLES US$’000 834 — — 834 — — — — 834 834 226 9 (59) 176 189 20 (57) 152 24 37 TOTAL US$’000 1,060 9 (59) 1,010 189 20 (57) 152 858 871 87 NOTES TO THE PARENT-COMPANY ACCOUNTS continued v Investments in subsidiaries Subsidiary undertakings At 1 January and 31 December 2019 The following companies are the principal direct subsidiary companies of M.P. Evans Group PLC: M.P. Evans & Co. Limited Sungkai Holdings Limited US$’000 15,799 HOLDING % 100 100 COUNTRY OF OPERATION UK UK Holdings are all of ordinary shares. The directors believe the carrying value of investments is supported by their underlying net assets. Details of all subsidiary companies are shown on page 90. vi Trade and other receivables Amounts owed by subsidiary undertakings Other debtors Prepayments and accrued income vii Trade and other payables Borrowings Other creditors viii Called-up share capital See note 25 to the consolidated financial statements. 2019 US$’000 2018 US$’000 161,681 179,519 445 99 588 95 162,225 180,202 2019 US$’000 7,449 783 8,232 2018 US$’000 2,449 766 3,215 88 M.P. EVANS GROUP PLCANNUAL REPORT 2019PARENT-COMPANY NOTES TO THE PARENT-COMPANY ACCOUNTS ix Reserves SHARE- PREMIUM ACCOUNT US$’000 CAPITAL- REDEMPTION RESERVE US$’000 MERGER RESERVE US$’000 OTHER RESERVES US$’000 TOTAL US$’000 RETAINED EARNINGS US$’000 At 1 January 2019 31,370 4,057 1,434 1,188 38,049 146,022 Issue of shares Share buy-back Share-based payments Profit for the year Dividends* 212 — — — — — 34 — — — — — — — — — — 592 — — 212 34 592 — — At 31 December 2019 31,582 4,091 1,434 1,780 38,887 — (2,286) 51 (3,485) (12,364) 127,938 At 1 January 2018 31,221 4,020 1,434 Issue of shares Share buy-back Share-based payments Loss for the year Dividends* 149 — — — — — 37 — — — — — — — — 722 — — 466 — — 149 37 466 — — At 31 December 2018 31,370 4,057 1,434 1,188 38,049 * See note 10 to the consolidated financial statements. 37,397 45,527 — (2,733) 24 115,929 (12,725) 146,022 89 SUBSIDIARY AND ASSOCIATED UNDERTAKINGS As at 31 December 2019 SUBSIDIARY UNDERTAKINGS Details of the subsidiary undertakings as at 31 December 2019 are as follows: 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 2019 % OF SHARES HELD 2018 COUNTRY OF INCORPORATION COUNTRY OF OPERATION FIELD OF ACTIVITY 95 95 51 95 90 95 95 95 95 95 95 95 51 95 90 80 80 80 80 80 Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Indonesia Production of CPO and PK Indonesia Production of CPO and PK Indonesia Production of CPO and PK Indonesia Production of CPO and PK Indonesia Production of CPO and PK Indonesia Production of CPO and PK Indonesia Production of CPO and PK Indonesia Production of CPO and PK Indonesia Production of CPO and PK Indonesia Production of CPO and PK PT Evans Indonesia 100 100 Indonesia Indonesia Provision of agronomic and management-consultancy services Production of oil-palm ffb and property development Bertam Consolidated Rubber Company Limited M.P. Evans & Co. Limited* Sungkai Holdings Limited* Sunrich Plantations Pte Ltd PT Surya Makmur PT Aceh Timor Indonesia 100 100 England and Wales Malaysia 100 100 100 95 95 100 100 100 75 75 England and Wales United Kingdom Holding company England and Wales United Kingdom Holding company Singapore Indonesia Indonesia Singapore Holding company Indonesia Holding company Indonesia Holding company The shareholdings in the above companies represent ordinary shares. Other than the companies marked *, all shareholdings are held indirectly. The registered offices for all Indonesian companies is Graha Aktiva, Suite 1001, Jl HR Rasuna Said Blok X-1 Kav 03, Jakarta 12950 Indonesia, for Sunrich Plantations Pte Ltd is 50 Raffles Place #06-00, Singapore Land Tower, Singapore 048623, and for all UK companies is the Group’s registered office as shown on page 96. KEY: CPO = crude palm oil, PK = palm kernels, ffb = fresh fruit bunches ASSOCIATED UNDERTAKINGS Details of the associated undertakings as at 31 December 2019 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 Bertam Properties Sdn. Berhad. RM 60.00m 38 40 Indonesia Malaysia Indonesia Production of oil-palm ffb Malaysia Property development The registered office of PT Kerasaan Indonesia is Forum Nine Building, 10th Floor, Suite 1-11 Jl.Imam Bonjol No.9, Medan-20112, North Sumatra, Indonesia and the registered office of Bertam Properties Sdn. Berhad is 1st Floor, Standard Chartered Bank Chambers, Lebuh Pantai, 10300 Pulau Pinang, Malaysia. 90 M.P. EVANS GROUP PLCANNUAL REPORT 2019 OTHER INFORMATION ANALYSIS OF INDONESIAN PLANTATION LAND AREAS As at 31 December 2019 The information on pages 91 to 96 does not form part of the audited financial statements. PLANTED HECTARAGE1 Subsidiaries – oil palm Kota Bangun Bumi Mas Bangka Musi Rawas2 Pangkatan group Simpang Kiri Total Group share of subsidiaries’ land 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 GROUP SCHEME SMALLHOLDERS OWNERSHIP % MATURE HA IMMATURE HA TOTAL HA MATURE HA IMMATURE HA TOTAL HA 4,299 1,175 2,849 886 335 191 1,032 1,460 4,634 1,366 3,881 2,346 9,209 3,018 12,227 95 95 90 95 95 95 9,546 6,443 5,604 1,763 6,404 1,703 31,463 29,610 2,317 880 1,092 1,049 531 3,966 565 746 7,949 7,526 10,638 7,492 6,135 5,729 6,969 2,449 39,412 37,136 - - 2,317 880 30,490 7,526 38,016 32,343 7,949 40,292 1. All of the Group’s areas in Bangka, the Pangkatan group, Simpang Kiri and Bumi Mas have a final land license (“HGU”), as does all of the associate’s area at Kerasaan. At Kota Bangun the Group has HGUs covering 10,800 hectares; the remaining areas here 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 2019 The information in the following table provides a directors’ estimate of the Group equity value at 31 December 2019 utilising, except where indicated, an independent valuation of the Group’s properties performed at the end of 2019. 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 Bangun1 Bumi Mas Bangka1 Musi Rawas Pangkatan group1 Simpang Kiri Smallholders Kota Bangun Bumi Mas Bangka Musi Rawas Associates Kerasaan Total Indonesia MALAYSIAN PROPERTY Bertam Estate3 Bertam Properties Total Malaysia Net debt2 Other assets and liabilities4 Total equity value Equity value (£ per share5) Notes: 95 95 90 95 95 95 95 95 90 95 38 10,638 7,492 6,135 5,729 6,969 2,449 39,412 4,634 1,366 3,881 2,346 12,227 220,500 128,000 121,800 109,800 112,600 27,900 720,600 26,100 5,900 14,100 15,500 61,600 20,700 17,100 19,900 19,200 16,200 11,400 18,300 5,600 4,300 3,600 6,600 5,000 2,317 33,100 14,300 100 40 n/a n/a 209,475 121,600 109,620 104,310 106,970 26,505 678,480 24,795 5,605 12,690 14,725 57,815 12,578 748,873 21,990 50,000 71,990 (67,686) 38,498 791,675 11.01 1. Market value per planted hectare includes value of mills on the related estates. 2. Net debt is taken as cash and other liquid resources less borrowings from the 31 December 2019 balance sheet, attributable to the owners of M.P. Evans Group PLC. 3. Bertam Estate has been included at a directors’ estimate of its value taking into account prevailing property market conditions. 4. Other assets and liabilities are taken as net assets minus plantation and property-related assets, minus net cash from the 31 December 2019 balance sheet, attributable to the owners of M.P. Evans Group PLC. 5. Amount per share is calculated using the year-end exchange rate and year-end shares in issue (see note 25). 92 M.P. EVANS GROUP PLCANNUAL REPORT 2019FIVE-YEAR SUMMARY Production Crude palm oil Palm kernels Crops Oil-palm fresh fruit bunches Own crops Scheme smallholder crops Independent smallholder crop purchased Indonesian associated-company estates Average sale prices Crude palm oil – Rotterdam cif per tonne Exchange rates US$1 = Indonesian Rupiah – average – year end US$1 = Malaysian Ringgit – average – year end £1 = US Dollar – average – year end OTHER INFORMATION 2019 Tonnes 2018 Tonnes 2017 Tonnes 2016 Tonnes 2015 Tonnes 231,900 53,000 192,500 43,500 154,000 33,500 125,600 26,200 112,000 22,700 663,300 172,100 166,100 1,001,500 54,200 US$ 566 14,142 13,883 4.14 4.09 1.28 1.32 573,000 149,600 106,500 829,100 51,700 US$ 598 14,234 14,380 4.04 4.13 1.34 1.27 434,500 101,300 118,300 654,100 50,000 US$ 714 13,382 13,568 4.30 4.05 1.29 1.35 399,300 92,400 52,000 543,700 384,000 US$ 700 13,303 13,473 4.14 4.49 1.35 1.24 US$’000 83,864 24,384 19,215 423,900 100,700 37,700 562,300 382,100 US$ 622 13,390 13,785 3.91 4.29 1.53 1.47 US$’000 72,528 15,059 6,769 Revenue Gross profit Profit before tax US$’000 US$’000 US$’000 119,341 17,044 12,780 108,553 26,525 18,348 116,536 36,246 35,070 Basic earnings per share 11.6 9.9 164.9 56.1 43.4 US cents US cents US cents US cents US cents Dividends per share: Normal Special Total PENCE PENCE PENCE PENCE PENCE 17.75 — 17.75 17.75 — 17.75 17.75 10.00 27.75 15.00 5.00 20.00 8.75 — 8.75 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 358,724 32,002 377,033 21,297 387,034 20,723 323,400 22,888 300,009 20,231 93 NOTICE OF MEETING The board is monitoring closely the evolving Covid-19 situation and the related guidelines from governmental authorities, including with regard to the potential impact on attendance at the AGM. In the light of the recent government prohibition of gatherings of more than two persons we are proposing that two directors should be the sole persons attending the meeting and that no admission of any other person will be permitted. The government has stated that it will review the prohibition in mid-April and we shall notify shareholders of any resulting change to these plans on our website www.mpevans.co.uk. Given the current prohibition on attendance at the AGM, we would strongly urge shareholders to submit proxy votes as described below. Delivery of a proxy vote will not preclude shareholders from attending and voting in person at the AGM should the government withdraw the prohibition so that we are able to allow admission by the time of the meeting. NOTICE IS HEREBY GIVEN that the annual general meeting of M.P. Evans Group PLC will be held at 3 Clanricarde Gardens, Tunbridge Wells, TN1 1HQ on Friday 5 June 2020 at 10am for the following purposes: AS ORDINARY BUSINESS RESOLUTION ON FORM OF PROXY 1 2 3 4 5 6 7 8 9 To receive and consider the report of the directors and the audited consolidated financial statements for the year ended 31 December 2019. To receive and consider the directors’ remuneration report as set out in the annual report and accounts for the financial year ended 31 December 2019. To elect Darian McBain as a director. To re-elect Philip Fletcher as a director. To re-elect Jock Green-Armytage as a director. To re-elect Bruce Tozer as a director. To re-elect Matthew Coulson as a director. To declare a final dividend. To appoint BDO LLP as auditors and to authorise the directors to determine their remuneration. No 1 No 2 No 3 No 4 No 5 No 6 No 7 No 8 No 9 AS SPECIAL BUSINESS To consider and, if thought fit, pass the following resolution as a special resolution: RESOLUTION ON FORM OF PROXY 10 That the Company is hereby generally and unconditionally authorised to make market purchases (within No 10 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 5,440,381; 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 2021 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 31 March 2020 94 M.P. EVANS GROUP PLCANNUAL REPORT 2019 OTHER INFORMATION NOTES Please note that, as stated above, pursuant to the current government ban of public gatherings two directors will attend the meeting to form a quorum thereat and that no admission of any other person will be permitted. The government has stated that it will review the prohibition in mid-April and we shall notify shareholders of any resulting change to these plans on our website www.mpevans.co.uk. The notes below are to be construed as subject to this restriction. 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 (but subject to the restrictions stated above). 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 3 June 2020 (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). Alternatively, you may appoint a proxy electronically. If you wish to submit your form of proxy via the internet, you will need your Control Number, Shareholder Reference Number (‘SRN’) and Personal Identification Number (‘PIN’) which are printed on the Form of Proxy. To appoint a proxy via the internet, you should log on to the Computershare website at www.investorcentre.co.uk/eproxy. You will be asked to agree to the terms and conditions for electronic proxy appointment. It is important that you read these terms and conditions as they set out the basis on which proxy appointment via the internet shall take place. This electronic address is provided only for the purpose of communications relating to electronic appointment of proxies. 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 3 June 2020 (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 31 March 2020, the Company’s issued share capital consisted of 54,403,818 shares carrying one vote each. Therefore the total number of voting rights in the Company as at that date was 54,403,818. 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 (but please note that this will not apply whilst the prohibition on persons travelling to the Company’s registered office remain in force). 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. 9) Members have the right to require notice of a resolution to be moved or a matter to be included in the business of the meeting. 10) Given the restrictions on attendance at the meeting as stated above, members are invited to send any questions which they may have on matters concerning the business of the meeting by post to the Company’s registered office (marked for the attention of the Company Secretary) or by email to katya.merrick@mpevans.co.uk. The Company will endeavour to respond to such requests but no answer need be given if: (i) to do so would involve the disclosure of confidential information; (ii) the answer has already been given on a website in the form of an answer to a question; or (iii) it is undesirable in the interests of the Company that the question be answered. 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. 95 M.P. EVANS GROUP PLC ANNUAL REPORT 2019 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 Jock M Green-Armytage, BA MBA *† Senior independent, chair of audit and remuneration committee Philip A Fletcher, FCA * MANAGING AGENT IN MALAYSIA Straits Estates Sdn. Berhad Loke Mansion, 147 Lorong Kelawei, 10250 Penang INDEPENDENT AUDITORS BDO LLP 2 City Place, Beehive Ring Road, Gatwick, West Sussex RH6 0PA Bruce C J Tozer, BSc MSc MBA *† Independent REGISTRARS Computershare Investor Services PLC Darian McBain, BE MSc PhD *† Independent * Member of the audit committee † Member of the remuneration committee The Pavilions, Bridgwater Road, Bristol BS99 6ZZ t +44 (0)3707 071 176 w www.computershare.com PRINCIPAL BANKERS OCBC Bank 18 Jalan Tun Perak, 50050 Kuala Lumpur, Malaysia AmBank Group 55 Jalan Raja Chulan, 50200 Kuala Lumpur, Malaysia NatWest 89 Mount Pleasant Road, Tunbridge Wells, Kent TN1 1QJ NOMINATED ADVISER AND JOINT BROKER Peel Hunt LLP Moor House, 120 London Wall, London EC2Y 5ET JOINT BROKER finnCap 60 New Broad Street, London EC2M 1JJ SOLICITORS Hogan Lovells International LLP Atlantic House, 50 Holborn Viaduct, London EC1A 2FG PUBLIC RELATIONS ADVISERS Hudson Sandler LLP 25 Charterhouse Square, London EC1M 6AE 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 

Continue reading text version or see original annual report in PDF format above