Weak commodity prices dampen road to recovery

REA’s 1H’19 results showed a small, 3.1%, increase in own-crop production levels to 335,177mt and a 7.7% increase in CPO production to 96,514mt. Revenue for the period was up 17.5%, to $56.6m (1H’18: $48.2m), despite a plunge of more than 20% in the CIF palm oil price compared with 1H’18. The revenue increase was due partly to the sale of excess inventory carried forward from the end of 2018. REA continues to focus on improving its oil extraction efficiency, with an average OER of 22.9% in 1H’19; however, higher OERs are being achieved in some of the mills in recent months.

• FY production: FFB production has slowed vs. the group’s budget, as the oil palm trees enter a resting phase after a highly productive 2018. FFB ripening has also slowed due to recent dry weather across the sector. REA now expects FFB to fall short of its original expectation of ca.900,000mt in FY’19.
• Preference share dividend expected to resume in 2020: Against the backdrop of ongoing weak commodity prices, REA has implemented a series of cost-saving measures. It is deferring its preference share dividend payments for both Jun’19 and Dec’19, but hopes to resume the payments in 2020.
• Financing: Management recognises the need to deleverage REA’s indebtedness. Net debt was $209.0m at end-1H’19 vs. $189.6m in FY’18. Discussions with the bank have resumed; REA expects to convert a large portion of its rupiah borrowings to lower-rate dollar borrowings before end-2019, reducing the cost of borrowings and helping reduce some funding risk.
• Dollar notes and issue of equity: REA has issued an additional $3m of new 2022-dollar notes, which were subscribed to by one of the group’s customers, along with a supply agreement. REA has also announced the issuance of 3.441m new ordinary shares, at 145p per share, raising a further £4.9m.
• Investment summary: 2019 remains a difficult year for oil palm operators, with palms entering a resting phase in some producing regions. Coupled with a weak palm oil price, the sector index has fallen ca.33% since the start of 2017, or 18% since the recent Feb’19 peak. 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.