Strong production continues; deferred 1H pref. dividend

REA’s FY’18 results showed a marked recovery in the group’s FFB production, up 50.8% YoY, to a record level of 800,050mt; CPO production increased by over 51%, to 217,721mt. However, revenue was up only 5.2%, to $105.5m ($100.2m); crop growth was strong but results were significantly dampened due to commodity prices, with the palm oil price hitting a 10-year low, at $440/mt, in November 2018. The CPO price suffered a 17% drop to an average $596/mt for 2018, and the PKO price plunged 27.2% for the year. With the PBJ transaction completed, REA is focusing on raising production efficiency and planting out the remaining land bank should funding become available.

• FFB production:  Despite the slightly muted start to 2018, REA’s FFB production has recovered to record levels since 2Q’18 – partly due to FFB production pattern recovery, and partly due to REA’s much-improved harvesting process and fertiliser regime, started in 2H’16. REA expects FFB production of ca.900,000mt in FY’19; our expectation is slightly lower.
• PBJ and financing position:  In August 2018, REA closed the sale of its PBJ estate to Malaysian operator KLK for $85m, or ca.$11,333/planted ha. The transaction transformed the group’s operation into a more geographically concentrated development project, as well as releasing some balance sheet pressure.
• Financing:  Management recognises the need to deleverage REA’s indebtedness. Net debt, with the sale of PBJ, was $189.5m at end-FY’18, from $211.7m in FY’17. Net debt to equity was 72.5%, down from 76.5% in FY’17. A further reduction in cost of borrowings should help reduce some funding risk.
• Valuation:  Palm plantation stocks have fallen out of favour with investors in recent years, due largely to weak commodity prices. The Asian Palm Oil Plantation Index fell 12.8% since Jan’18, while the Asian palm plantation sector saw an 18.8% valuation decrease, ending Jun’19 at $10,933/planted ha vs. $13,468/planted ha at end-Dec’17.
• Investment summary:  For investors attracted by palm oil assets, now could be an opportunistic time to review this sector, with the sector valuation down ca.12.8% since the beginning of 2017. We expect REA to have ca.33,423 mature ha by end-2019, as well as stronger agricultural production across the estates, and the plantations to be fully planted by end-2025.