27th Apr 2005 17:17
R.E.A.Hldgs PLC27 April 2005 R.E.A. Holdings plc Commentary on preliminary results - 2004 Results Group profit on ordinary activities before taxation for 2004, as shown in theaccompanying consolidated profit and loss account, amounted to £4,685,000. Thisrepresents an increase of 126 per cent over the profit before tax of thepreceding year of £2,070,000. A higher percentage tax charge than in 2003 (when the tax charge was reduced bya number of non-recurring adjustments) nevertheless resulted in a profit aftertax and minority interests of £2,641,000, some 96 per cent higher than the£1,342,000 achieved in the preceding year. The increase in 2004 profits over those of 2003 would have been even greaterwere it not for the strength of sterling against the US dollar (the averageexchange rate was £1 = US$ 1.84 in 2004 against £1 = US$ 1.64 in 2003). Suchstrength negatively impacts the group because the group's produce is sold on thebasis of US dollar prices and the value realised in sterling terms is reducedwhen sterling strengthens against the US dollar. Operations The fresh fruit bunch ("FFB") crop for 2004 was 293,883 tonnes, representing98.4 per cent of budget and some 32 per cent ahead of the 222,713 tonnesharvested in 2003. Unusually, the crop of the first six months was almostidentical with that of the second six months. This reflected an extended drierspell in the second half although rainfall for the year as a whole at an averageof 3,877 mm across the estates compared well with 3,550 mm in 2003, a level thatwas already more than satisfactory for oil palm cultivation. The crude palm oil ("CPO") extraction rate for the year was 24.3 per centagainst the 24.9 per cent achieved in 2003. This lower rate reflected cropcollection difficulties during the heavy rains of the first half of the year andminor teething troubles in running in the second production line that was addedto the mill during 2003. Against industry norms, an extraction rate of in excessof 24 per cent is regarded as very satisfactory but, in the context of thegroup's operations, the directors believe that a rate of 25 per cent or betterought to be achievable. With less heavy rainfall in the second half of the yearand minor modifications to production flows, the extraction rate for the secondhalf of the year was markedly better than that of the first half. Work has started on site clearing in preparation for the construction of asecond oil mill which it is planned should be brought into operation in thelatter part of 2006. The new mill will eventually have a similar capacity to theexisting mill but will incorporate high efficiency boilers and turbines able topower a kernel crushing plant in which it is intended that all palm kerneloutput from both the existing and the new mill will be crushed to produce palmkernel oil and expeller. Tenders for the construction of both the new mill andthe kernel crushing plant have recently been awarded. Planting out of the first 3,000 hectares of the extension planting programmeinstituted in 2003 was completed in February 2005, having been slightly delayedby the drier weather of July to October 2004. A second 3,000 hectares isscheduled to be planted out during 2005 in conjunction with preparation of afurther 3,000 hectares for 2006 planting. In addition, it is hoped to plant aninitial 1,500 hectares of the group's new joint venture development adjacent tothe south eastern boundary of the group's existing operational area on thesouthern side of the Belayan river. Overall, this represents a major expansionprogramme but in 2005, to-date at least, the expansion works have been movingforward smoothly and as planned. Finance The year finally saw the completion of the debt restructuring of PT REA KaltimPlantations ("REA Kaltim"), the direct owner of the established East Kalimantanoperations. The key step towards achieving such completion was taken in April2004 when REA Kaltim drew down a new loan of US$ 11 million from PT Bank NiagaTbk and applied that loan in repaying its outstanding indebtedness toCommerzbank (South East Asia) Limited. At the same time, the group refinancedindebtedness of US$ 8.175 million owed to interests associated with Mr M EZukerman (the "MEZ group"). The restructuring was then completed when thoseremaining lenders to REA Kaltim who had not previously acceded to the debtrestructuring agreed to do so. To facilitate the REA Kaltim debt restructuring, the group purchased at adiscount certain loan balances owed by REA Kaltim thereby reducing the group'soverall indebtedness. The group's financial position has been furtherstrengthened both by reinvestment of retained profits and by the issue by thecompany during 2004 of some 2.8 million new 9 per cent cumulative preferenceshares. Of these, approximately one million shares were issued pursuant to ascheme to eliminate arrears of dividend on the then outstanding issuedpreference shares and the balance were issued for cash. A proportion of theresultant cash proceeds was applied in the repurchase of £250,000 nominal of thecompany's outstanding 4 per cent convertible loan stock 2012. The outstandingstock was further reduced by the conversion during the year into ordinary sharesof some £700,000 of the stock. With the completion of the REA Kaltim debt rescheduling and the elimination ofdividend arrears on the preference shares, the group is now current on allobligations. However, implementation of the group's planned planting programme(as referred to above) will require substantial investment. This could place astrain on the group's cash resources if, as could happen, CPO prices fall andthe group remains obliged to make substantial further reductions in its existingindebtedness before the cash flow from the extension planting programmematerialises. Accordingly, the group is currently seeking to negotiate new debtfinancing which would replace a substantial proportion of its existingindebtedness, provide additional liquidity and establish greater contingencymargins in projected future cash flows. Litigation 2004 saw some escalation in the dispute between the group and the MEZ group withthe receipt of a letter threatening to add new proceedings in Jersey to thelegal proceedings in New York that were instituted by the MEZ group in 2001.Notwithstanding recent repetition of this threat, it is now expected that therewill be a mediated discussion of the disputed issues in the second half of 2005. The directors retain their previously expressed view that the actual andthreatened legal proceedings against the group by the MEZ group have no genuinemerit but the directors accept that it would be in the best interests of thecompany if the position of the MEZ group in relation to its contingententitlement to further interest from REA Kaltim (amounting to some US$ 3 millionat 31 December 2004) and its 12 per cent minority shareholding in MakassarInvestments Limited was resolved. The directors are unable to judge whether,absent judicial determination of the MEZ group's claims against the group andthe group's potential counterclaims, a resolution is possible but a mediateddiscussion of the disputed issues may at least offer a forum for exploringresolution. Dividends The fixed semi-annual dividends on the 9 per cent cumulative preference sharesthat fell due on 30 June and 31 December 2004 were duly paid and, as alreadynoted, all arrears of dividend on the preference shares were eliminated during2004 by a scheme involving the issue of further preference shares. Absent anunforeseen material adverse change in the group's circumstances, the directorsintend that all future semi-annual dividends on the preference shares should bepaid as these arise. The arrears of preference dividends having been eliminated, there is now nolegal impediment to the payment of ordinary dividends. However, the groupcontinues to face significant potential demands on cash both for its plannedplanting programme and for scheduled debt repayments (although a successfulconclusion to the current negotiations for new debt financing would spread thecash requirements for the latter). In addition, with the present possibilitythat there may be mediated discussions with the MEZ group and that thosediscussions could result in a settlement of the disputes with the MEZ group, thedirectors must have regard to the funding obligations to which any suchsettlement would give rise. Against this background, the directors haveconcluded that they cannot recommend payment of an ordinary dividend in respectof 2004 and that, until such time as there is greater certainty as to thegroup's future cash flows, it would be imprudent to give any indication as towhen the payment of ordinary dividends might be resumed. The directors remaincommitted to the restoration of ordinary dividends as soon as the directorsbecome confident that the group's cash flow can support such dividends. Prospects Although the drier period experienced during the second half of 2004 could havecaused some moisture stress, the directors are hopeful that the good rainfallreceived over 2004 as a whole will mean that the East Kalimantan operations willyield normally during 2005. On that basis, the FFB crop for 2005 has beenbudgeted at 331,000 tonnes although disruption to operations caused by severeflooding from the Belayan and Mahakam rivers following exceptionally heavyrainfall during April 2005 could mean that this target may prove a littleambitious. The CPO market presents a slightly uncertain picture with good current offtakebeing tempered by the uncertainties of a significant overhang of uncrushedsoybean resulting from the record soybean crops harvested in the United Statesand Brazil in the past year. Against this, increasing production of biodiesel isresulting in significantly greater industrial usage of vegetable oils. CPO prices at the start of 2005 fell below US$ 400 per tonne CIF Rotterdam buthave since recovered back to the US$ 420 to US$ 440 range. Higher world freightrates have in the past twelve months increased the differential between CIF andFOB values but CPO prices of over US$ 400 per tonne CIF still provide the groupwith more than acceptable margins. Accordingly, the directors expect that 2005will prove another good year. Looking beyond 2005, it must be recognised that the group is dependent upon asingle commodity and that commodity markets are inherently cyclical.Accordingly, fluctuations must be expected in the group's results and there islittle that the group can do to mitigate such fluctuations. What the group cando, and is doing, is expand its planted hectarage and, through that expansion,progressively increase its productive capacity. Whilst such progressive increasecannot be guaranteed to offset the negative effects of price reductions during acyclical downturn, the directors believe that, viewing the returns of the groupover each commodity cycle as a whole, the present development programme offersthe prospect of increasing returns for many years to come. CONSOLIDATED PROFIT AND LOSS ACCOUNTFOR THE YEAR ENDED 31 DECEMBER 2004 Unaudited 2004 2003 £000 £000Turnover 16,052 13,781Cost of sales (7,530) (7,469) ------ ------Gross profit 8,522 6,312Administrative expenses (2,359) (2,236) ------ ------Group operating profit 6,163 4,076Disposal of fixed assets and investments - continuing 7 24Disposal of fixed assets and investments - discontinued - (281)Interest receivable and similar income 157 165Interest payable and similar charges (1,642) (1,914) ------ ------Profit on ordinary activities before taxation 4,685 2,070Tax on ordinary activities (1,320) (345) ------ ------Profit on ordinary activities after taxation 3,365 1,725Minority interests - equity (528) (203)Minority interests - non-equity (196) (180) ------ ------Profit for the financial year 2,641 1,342Non-equity dividends (639) (513) ------ ------Retained profit for the year 2,002 829 ------ ------ Earnings per share - basic 10.1p 5.1pEarnings per share - fully diluted 7.6p 3.7p All operations in both years are continuing except where stated. CONSOLIDATED BALANCE SHEET31 DECEMBER 2004 Unaudited 2004 2003 £000 £000Fixed assetsTangible fixed assets 52,174 50,238 ------ ------Current assetsStocks 1,248 1,346Debtors 3,307 3,710Investments 1,067 -Cash 1,061 6,790 ------ ------ 6,683 11,846Creditors falling due within one year (6,631) (15,244) ------ ------Net current assets/(liabilities) 52 (3,398) ------ ------Total assets less current liabilities 52,226 46,840 ------ ------Creditors: falling due after more than one yearConvertible debt (2,837) (3,463)Other creditors (13,402) (15,312)Provision for liabilities and charges (deferred tax) (2,107) (288) ------ ------Net assets 33,880 27,777 ------ ------Capital and reservesCalled up share capital 13,533 10,376Share premium account 3,858 4,665Capital redemption reserve 3,240 3,240Warrants 1,164 1,212Revaluation reserve 852 (384)Other reserve - 1,027Profit and loss account 6,362 3,333 ------ ------Shareholders' funds 29,009 23,469Equity minority interests 2,721 2,002Non-equity minority interests 2,150 2,306 ------ ------Total capital employed 33,880 27,777 ------ ------Shareholders' funds may be analysed as follows:Equity interests 20,506 16,737Non-equity interests 8,503 6,732 ------ ------ 29,009 23,469 ------ ------ CONSOLIDATED STATEMENT OF RECOGNISED GAINS AND LOSSESFOR THE YEAR ENDED 31 DECEMBER 2004 Unaudited 2004 2003 £000 £000Profit for the financial year 2,641 1,342Currency translation adjustments (1,688) (2,175)Revaluation adjustments 2,924 2,325 ----- ----- 3,877 1,492 ----- ----- CONSOLIDATED CASH FLOW STATEMENTFOR THE YEAR ENDED 31 DECEMBER 2004 Unaudited 2004 2003 £000 £000Net cash flow from operating activities 5,694 7,259 ----- -----Returns on investments and servicing of financeInterest received 54 165Interest paid (800) (1,914)Preference dividends paid (639) (257) ----- ----- (1,385) (2,006) Taxation (118) (11) Capital expenditure and financial investmentPurchase of tangible fixed assets (3,420) (4,675)Purchase on investments (1,067) -Sale of tangible fixed assets 15 40Sale of investments - 597 ----- ----- (4,472) (4,038)Equity dividends paid - -Cash (outflow)/inflow before management of liquidresources and financing (281) 1,204 Management of liquid resources 5,908 (4,226) FinancingIssue of ordinary share capital and expenses 47 4,901Issue of preference share capital and expenses 1,600 -Net increase/(repayment) of debt over one year 520 (2,619)Net (repayment) of debt up to one year (6,974) -Finance lease repayments (411) (244) ----- ----- (5,218) 2,038 Increase/(decrease) in cash in the year 409 (984) NOTES TO PRELIMINARY RESULTS Basis of preparation The financial statements have been prepared in accordance with accountingstandards applicable in the United Kingdom. The principal accounting policieshave been applied consistently. Segment information In the tables below, the group's turnover, net assets and profit before taxationare analysed by geographical area. No analysis of these items is provided bybusiness class as the group only operates within the agricultural sector withany other income being incidental to that activity. Net assets are allocated tothe area in which the activity related to the assets is located. Unaudited 2004 2003 £'m £'mTurnover by geographical origin:United Kingdom 0.1 0.2Indonesia 16.0 13.6 ---- ---- 16.1 13.8 ---- ----Turnover by geographical destination:United Kingdom 0.1 0.2Indonesia 11.4 10.4Other Asia 4.6 3.2 ---- ---- 16.1 13.8 ---- ----Net assets by geographical origin:United Kingdom (2.3) (2.5)Indonesia 36.2 30.3 ---- ---- 33.9 27.8 ---- ---- Unaudited 2004 2003 £000 £000Profit by geographical origin:United Kingdom (1,423) 956Indonesia 6,101 1,371 ----- ----- 4,678 2,327Disposal of assets and investments 7 (257) ----- ----- 4,685 2,070 ----- -----Interest payable and similar charges:Interest payable on bank loans and overdrafts 1,134 1,833Interest payable on other loans 375 1,209 ----- ----- 1,509 3,042Interest capitalised (606) (1,128) ----- ----- 903 1,914Realised loss on repayment of long term intra-groupforeign currency loans 739 - ----- ----- 1,642 1,914 ----- ----- Unaudited 2004 2003 £000 £000Taxation:UK corporation tax charge - -Relief for overseas tax - - ----- ----- - -Overseas tax 118 57Adjustments in respect of prior periods - - ----- -----Total current tax 118 57Deferred tax 1,202 288 ----- -----Tax charge on profit on ordinary activities 1,320 345 ----- ----- Contingent liability In November 2001, Bodley Investment Company, M.E. Zukerman & Co. Incorporatedand M.E. Zukerman Investment Limited ("the plaintiffs"), being entitiesassociated with Mr M. E. Zukerman, commenced an action in New York against thecompany and two of its directors personally ("the defendants") asserting claimsfor fraud, fraudulent inducement, breach of contract, promissory estoppel andtortious interference in relation to a purported oral agreement between thecompany and the plaintiffs to cause Makassar Investments Limited ("Makassar")and / or PT REA Kaltim Plantations ("REA Kaltim") to pay a return of 30 per centper annum on monies totalling US$ 13.65 million originally lent to REA Kaltimby, or with the support of, the plaintiffs (which monies, plus current interest,were repaid in 2004). The company entered into no such agreement as is alleged by the plaintiffs.Accordingly, the directors consider that the claims are without merit. On thebasis of legal advice received, the defendants filed a motion to have the claimsdismissed in their entirety. A New York magistrate judge (to whom the motion fordismissal was referred) recommended, in September 2002, that, save for one minorcomponent of one claim for fraud, all claims for fraud, fraudulent inducementand tortious interference should be dismissed but that the remaining claims,which are all contract related, should proceed against the company (on thegrounds that such claims could not be dismissed without investigation of thefactual background which is not possible on a motion for dismissal). Theplaintiffs have objected to the magistrate's recommendations as respects most ofthe claims recommended for dismissal and the defendants have objected asrespects the magistrate's recommendation to retain the minor component of oneclaim for fraud. A final ruling on these matters is still awaited. In addition, in June 2004, solicitors acting for Bodley Investment Company andThe Zukerman Family Trust (another entity associated with Mr M.E. Zukerman) intheir capacity as shareholders in Makassar ("the dissident shareholders") wroteto the company and Makassar Participation plc ("MP"), claiming that the affairsof Makassar had been conducted in a manner which was unfairly prejudicial to thedissident shareholders' interests and threatening that, absent satisfactoryproposals to resolve the matter, the dissident shareholders would commenceproceedings in Jersey for, amongst other things, orders that the boards ofMakassar and REA Kaltim be reconstituted to include equal representation of thedissident shareholders, that substantially all of the Makassar shares acquiredby MP in 2002 be redeemed or disenfranchised, that the 2002 and 2003 Makassarrights issues be set aside and that the dissident shareholders be entitled tobring civil proceedings on behalf of Makassar against certain directors ofMakassar and the company in respect of alleged breaches of duty and abuses ofmajority control. Having reviewed this latest claim against the history of Makassar and REAKaltim, the funding thereof and the company's dealings with Mr M. E. Zukermanand entities associated with him, the directors believe, based on legal advicereceived, that this latest claim is also without merit. Nevertheless, andnotwithstanding a recent repetition of the threat that the dissidentshareholders will commence proceedings in Jersey, it has been agreed inprinciple that an attempt should be made to resolve the disputes the subject ofthe actual New York proceedings and the threatened Jersey proceedings by way ofmediation. It is expected that mediated discussions to this end will take placein the second half of 2005. Announcement based on draft financial statements The financial information set out in the announcement does not constitute thecompany's statutory financial statements for the year ended 31 December 2004 or2003. The financial information for the year ended 31 December 2003 is derivedfrom the statutory financial statements for that year which have been deliveredto the Registrar of Companies. The auditors reported on those accounts; theirreport was unqualified and did not contain a statement under s237 (2) or (3) ofthe Companies Act 1985. The statutory financial statements for the year ended 31December 2004 will be finalised on the basis of the financial informationpresented by the directors in this preliminary announcement and will bedelivered to the Registrar of Companies following the company's annual generalmeeting. This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
R.e.a.hldgs.