REA Finance B.V.: Half year report

REA Finance B.V., Amsterdam

HALF YEARLY REPORT 2019

Management herewith presents to the shareholder the half yearly report and condensed annual accounts of REA Finance B.V. (hereinafter the "Company") for the six-month period ended 30 June 2019.

General

The Company is a private company with limited liability incorporated under the laws of the Netherlands and acts as a finance company. The ultimate holding company is R.E.A. Holdings plc (hereinafter "REAH"), London, United Kingdom. The REAH Group is principally engaged in the cultivation of oil palms in the province of East Kalimantan in Indonesia and in the production of crude palm oil and by-products from fruit harvesting from its oil palms.

Overview of activities

At 1 January 2019 and 30 June 2019 the Company had outstanding £30,852,000 8.75 per cent guaranteed sterling notes 2020 (the "2020 sterling notes") and a loan of  £31,327,000 to REAH bearing interest at 8.9283 per cent. The 2020 sterling notes and the loan are repayable on 20 August 2020.

During the period under review the Company received interest on the loan from the Company to REAH and paid interest to the holders of the 2020 sterling notes and to REAH.

Results 

The net asset value of the Company as at 30 June 2019 amounts to £981,941 (30 June 2018: £934,012). The net result for the period of six months ended 30 June 2019 is a profit of £17,836 (30 June 2018: £13,862).

Risks and uncertainties

The principal risks and uncertainties facing the Company relate to the due performance by REAH of its obligations under the loan agreement with the Company. Any shortfall in performance would impact negatively on the Company's ability to perform its obligations to the holders of the 2020 sterling notes.  Further details of these risks and uncertainties were set out on page 5 of the Company's annual report and accounts for the year ended 31 December 2018 (the "2018 Annual report"), a copy of which is available on REAH's website at www.rea.co.uk.

To date there has been no subsequent change in the principal risks and uncertainties facing the business, or in the arrangements designed to limit the extent of the principal risks.

Risk management objectives

The Company's risk management objectives were set out on page 5 of the 2018 Annual Report, and there has been no subsequent change.

Related party transactions

There has been no change to related party transactions since 30 June 2019.

Future outlook

In the Financing and Outlook sections of the Interim management report included in the REAH Half yearly report 2019, the directors of REAH included the following:

The group's annual strategic report noted that the group was in discussions with its Indonesian bankers regarding the provision of an additional loan of $11.0 million to fund 2019 capital expenditure on the group's mills and, in effect, refinance bank loan repayments falling due in 2019. Unfortunately, these discussions had to be temporarily suspended pending receipt by the bank of the 2018 audited accounts of REAK and its subsidiaries, which REAK has only very recently been able to submit to the bank. This is because the unexpected dissolution of the group's former Indonesian audit firm and transfer of the REAK audit to a successor firm significantly delayed completion of the audit of the accounts in question. Discussions with the bank regarding the group's future funding are now being resumed.

In the meanwhile, the group has been engaged in discussions with its customers regarding the provision of funding in exchange for forward commitments of CPO and CPKO (but on a basis that pricing will be fixed at time of delivery on an agreed basis by reference to then prevailing prices). Supply arrangements recently agreed with one customer will result in that customer subscribing to $3 million of new 2022 dollar notes for a total consideration of $3 million in cash reflecting the value of the notes, the value of the CPO supply arrangements agreed by the group and an agreement by the company to repurchase the notes should the supply arrangements terminate. It is expected that formal agreements in relation to these arrangements will be executed, and that the new dollar notes will be issued, before 31 October 2019. Discussions regarding arrangements for other customer funding are continuing.

Once the customer funding arrangements referred to above have been concluded, the group intends to formulate proposals for the refinancing of the £31.9 million nominal of sterling notes 2020 which fall due for repayment in August 2020. Provided that CPO prices continue to recover, the group also plans, as noted under "Dividends" above, to be able to submit proposals to preference shareholders to deal with the arrears of preference dividend and to resume payment of cash dividends.

The group recognises that implementation of the above proposed transactions will require additional equity.

The rate of growth in demand for vegetable oils is now exceeding the rate of growth in supply. This situation is expected to continue with increasing use of bio-diesel in vegetable oil producing countries, a number of different factors limiting supplies of the principal vegetable oils and, in particular, as respects palm oil, increasing constraints on the expansion of oil palm hectarage as a result of sustainability concerns. CPO stocks are being absorbed and this is already being reflected in an improvement in the CPO price. The group agrees with the view of professional commentators that CPO prices are likely to go higher.

The cost reduction initiatives referred to under "Agricultural operations" above are expected to result in some savings in the second half of 2019, but those savings will be limited as the initiatives are being implemented over a period of several months and, in some cases, result in immediate one off costs. Nevertheless, those savings that are achieved, combined with the normal weighting of annual crops to the second half and the higher CPO prices currently prevailing, are expected to result in a material improvement in the results reported by the group for the second half, subject to CPO prices remaining at current levels for the remainder of 2019.

For 2020 and subsequent years, the group is aiming to achieve savings, when measured against 2019 budgeted costs, of not less than $10 million per annum.

With good crop levels and yields being maintained, some potential for further improvements to extraction rates and the impact of increased prices on a lower cost base, the directors look forward to the group's return to profitability.

Statement of directors' responsibilities

The sole director of the Company is Corfas B.V. The director confirms that this condensed set of half-year annual accounts has been prepared in accordance with Dutch Generally Accepted Accounting Principles as applicable to interim reports, and that the interim management report herein includes a fair review of the information required by the Disclosure and Transparency Rules of the Financial Conduct Authority, paragraph DTR 4.2.7.

Amsterdam,  27 September 2019

Corfas B.V.

Balance Sheet at 30 June 2019

Profit and Loss account for the period of six months ended 30 June 2019

Notes to the accounts for the period of six months ended 30 June 2019

General

The Company was incorporated as a private company with limited liability under the laws of the Netherlands on 7 November 2006 and has its statutory seat in Amsterdam, the Netherlands. The ultimate holding company is R.E.A. Holdings plc in London, United Kingdom. The principal activity of the Company is to act as a finance company, and its place of business is at Amstelveenseweg 760, 1081 JK Amsterdam, the Netherlands.

The functional currency of the Company is GBP, which is also the presentation currency of the accounts.

Basis of preparation

The condensed financial information for the period of six months ended 30 June 2019 comprises the unaudited results for the six months ended 30 June 2019 and 30 June 2018 together with the audited annual accounts for the year ended 31 December 2018 on which the auditors gave an unqualified report and did not draw attention to any matters by way of emphasis.

The condensed half-year annual accounts for the period of six months ended 30 June 2019 have been prepared in accordance with accounting principles generally accepted in the Netherlands and in conformity with provisions governing annual accounts as contained in Part 9 of Book 2 of the Dutch Civil Code, and should be read in conjunction with the audited annual accounts for the year ended 31 December 2018.

The same accounting policies, presentation and methods of computation are followed in this condensed set of half-year annual accounts as applied in the Company's latest audited annual accounts.

Exchange rates

The exchange rates used are:

1. Fixed assets - loan to parent company

R.E.A. Holdings plc ("REAH"), the Company's parent company, is a company incorporated in the United Kingdom whose share capital is listed on the London Stock Exchange.

The loan to REAH bears interest at 8.9283 per cent and is repayable on 31 August 2020. The loan represents the on-lending of proceeds from the issue of the 8.75 per cent guaranteed sterling notes 2020 (the "2020 sterling notes").

2. 2020 sterling notes

The sterling notes are listed on the London Stock Exchange and are irrevocably and unconditionally guaranteed by REAH and R.E.A. Services Limited ("REAS"), a subsidiary of REAH incorporated in the United Kingdom. The 2020 sterling notes are repayable on 20 August 2020.

3. Shareholder's equity 

The authorised share capital of the Company amounts to EUR 90,000 divided into 90,000 shares of EUR 1 each, of which 18,000 shares have been issued and fully paid-up. The share capital is recorded at the rate of exchange at the balance sheet date. At 30 June 2019 the rate was 1 GBP = 1.12 EUR (30 June 2018: 1 GBP = 1.13 EUR).

4. Corporate income tax

OTHER INFORMATION

Shareholder information

The Company's report and condensed half-year annual accounts for the six months ended 30 June 2019 (the "half yearly report") is available for downloading from REAH's website at www.rea.co.uk.

Statutory rules relating to the appropriation of results

In accordance with article 18 of the Company's articles of association, and Book 2 of the Dutch Civil Code, the allocation of profits accrued in a financial year shall be determined by the general meeting. If the general meeting does not adopt a resolution regarding the allocation of the profits prior to or at latest immediately after the adoption of the annual accounts, the profits will be reserved.

The general meeting has the authority to make distributions. If the Company is required by law to maintain reserves, this authority only applies to the extent that the equity exceeds these reserves. No resolution of the general meeting to distribute shall have effect without the consent of the management board. The management board may withhold such consent only if it knows or reasonably should expect that after the distribution, the Company will be unable to continue the payment of its debts as they fall due.

Subsequent events

No events have occurred since the balance sheet date which would change the financial position of the Company and which would require adjustment of or disclosure in, the half yearly report and condensed half-year annual accounts now presented.