Fixed Interest Investments

In addition to a market capitalisation of some £144m for the REA Holdings’ ordinary shares, investors can also choose to invest for superior income opportunity amongst the company’s range of traded fixed interest securities. These securities include 9% Cumulative Preference shares with a market capitalisation in the region of £62m, a US$ Note programme with an issue value of some £35m and offering a coupon of 7.5%, and two Sterling Note issues of £8.3m and £31.85m, with coupons of 9.5% and 8.75% respectively.

• Strategy: REA Kaltim (REAK), the principal division of REA, is developing a bank of some 108,000 ha in East Kalimantan. At the current, accelerated rate of development, the proprietary plantations should be completed by 2020 at 60,000 ha (43,000 ha for end 2016). With some 6,600 ha of plasma plantations supplying its mills, REAK should have finished 2016, within the top 20 producers.
• Renewable Energy: With a high end profit margin (35%-50%), on supply of sustainable electricity from palm oil mill effluent, this distinct activity is on course for $0.8m of revenues in 2017 and has significant scope for growth. Although dependent on the palm oil operations for fuel, this almost unique activity within the sector, should enjoy an independent valuation.
• Valuation: REA’s fixed interest securities are trading close to par value at date of publication. REA’s debt instruments, currently offer superior returns compared with the majority of competing issues from plantation sector peers, and the Preference shares offer the 7th highest coupon amongst the LSE listed preference share issues.
• Risks: Agricultural risk (as shown by the El Nino weather pattern in 2015/16), commodity price risk, and country risk are constants of palm oil production. 1H gearing, at 72.5%, reflects both a capital structure more biased to debt than equity, the impact of tough operating conditions and a drive for growth.
• Investment summary: REA is developing and operating high quality plantation assets to produce sustainable palm oil. Against the background of tightening land availability in Indonesia and gathering consolidation within the sector, new partner DSN has acquired a 15% stake in REAK, with scope to attain 49% within 5 years (subject to agreement on price and shareholder approval).