Anglo-Eastern Plantations Plc

("AEP", "Group" or "Company")

 

Final results for year ended 31 December 2022

 

The group comprising Anglo-Eastern Plantations Plc ("AEP") and its subsidiaries (the "Group"), is a major producer of palm oil and to a lesser extent rubber with plantations across Indonesia and Malaysia, amounting to approximately 128,000 hectares, has today released its results for the year ended 31 December 2022.

 

Financial Highlights

 

The Group key performance indicators ("KPI") as required in accordance with the requirements of s414C, Companies Act 2006 are as follows:

 

Continuing operations	2022 $m	2021 $m	Change %
Revenue	447.6	433.4	3%
Profit before tax:
-  before biological asset ("BA") movement	138.7	132.7	5%
-  after BA movement	132.9	137.1	(3%)
Basic Earnings per ordinary share ("EPS"):
- before BA movement	221.86cts	235.25cts	(6%)
- after BA movement	212.34cts	242.34cts	(12%)
Dividend (cents)	25.0cts	5.0cts

 

 

 

Enquiries:

 

Anglo-Eastern Plantations Plc
Dato' John Lim Ewe Chuan	+44 (0)20 7216 4621
Panmure Gordon (UK) Limited
Dominic Morley	+44 (0)20 7886 2954

 

 

 

Chairman's Statement

 

I was honoured to be appointed the Non-Executive Chairman by the Board of AEP on 8 July 2022, following the unexpected retirement of the then Chairman, Madam Lim Siew Kim. Sadly, Madam Lim passed away shortly after her retirement on 14 July 2022. Madam Lim was a board member for 29 years and through her leadership, as the Chairman, for the last 11 years has seen the Group grow in profitability and the business expanded to what it is today. Madam Lim's significant contributions to the Group were also acknowledged by many shareholders, whom at the time, expressed their heartfelt condolences as well as thanking Madam Lim for her leadership and AEP's achievements and success during her tenure on the Board. AEP will continue its strategy of expansion by increasing its planted areas to enhance shareholders' value, continuing the Board's strategy under Madam Lim's leadership. In addition, the Board is looking to expand AEP's business by acquiring brownfields and profitable plantations with its financial resources, as well as improving its profitability within the Group through rationalisation and divesting non performing estates and consolidation of AEP's shareholdings in its subsidiaries.

 

Madam Lim's family interests in AEP continues with Genton International Limited remaining a significant shareholder of AEP as well as with the appointment of Mr. Marcus Chan Jau Chwen, the son of Madam Lim, to AEP's Board as a Non-Independent Non-Executive Director. Marcus's appointment, together with all his credentials were announced to the market on 10 August 2022. Marcus's experience in financial advisory as well as business development, together with his youth and dynamism will add value to the Group.

 

During the year, the Board also appointed Ms. Farah Suhanah Tun Ahmad Sarji to AEP's Board as an Independent Non-Executive Director to replace me, as I was no longer deemed independent, after having served 9 years as an Independent Non-Executive Director. Farah's appointment, together with all her credentials were announced to the market on 20 October 2022. The Board continues to observe the need for diversity with the appointment of Farah who would add value to the Group, with her previous involvement in the palm oil plantation industry.

 

With two new appointments to the Board and its committees, the composition of the 3 committees is now as follows:

 

Audit Committee:

Lim Tian Huat, Chairman. (Senior Independent Non-Executive Director)

Farah Suhanah Tun Ahmad Sarji

 

Remuneration Committee:

Lim Tian Huat, Chairman

Farah Suhanah Tun Ahmad Sarji

 

Nomination and Corporate Governance Committee:

Farah Suhanah Tun Ahmad Sarji, Chairman

Lim Tian Huat

Marcus Chan Jau Chwen

 

Dato John Lim, the Executive Director, and I resigned from the above mentioned committees in line with the UK Corporate Governance Code.

 

The Group's FFB production from continuing operations in 2022 reached 1.12 million mt, 3% lower than last year of 1.15 million mt, mainly due to replanting ageing trees. Production in Bengkulu registered a decline of 12% due to replanting programme in the last two years which has reduced the matured plantings by 2,000 ha. The withholding of fertilizers for trees earmarked for replanting also contributed to a drop in yield. Normally we stop applying fertilizers two years prior to replanting. Crop production in Kalimantan was lower by 3% due to logistics problems and high incidence of abnormal fruit bunches. Public roads in Kurun township were closed for a month in the first quarter of 2022 because of extremely bad weather which affected the transportation of crops, which resulted in the temporary suspension of harvesting in KAP plantation for about a month. The public roads are still closed from time to time usually due to damages from incessant rain and overloading, especially by heavy trucks carrying coals. The lack of male flowers in SGM plantation also caused a higher incidence of abnormal bunches resulting in a lower crop yield as abnormal fruit bunches are stripped of its fruitlets before sending to the mill for processing leaving behind the empty fruit bunches ("EFB") in the field.

 

FFB bought-in from surrounding smallholders and plasma was 1.08 million mt (2021: 1.14 million mt), 5% lower than 2021. Our two mills in Bengkulu experienced a significant drop of 21% in external crop purchases. The reopening of a mill of one of our previous FFB suppliers, together with competitions and transport problems caused by heavy rain, which exceeded 500 mm a month, were the main reasons for lower purchases. In addition, our Tasik mill had to prioritize internal crops for processing leading to a reduction of external crop purchases as its storage capacity for CPO reached its limit during the export ban. The mills processed a combined 2.21 million mt of FFB, 4% lower than last year of 2.31 million mt. CPO production, as a result, was 4% lower at 455,600 mt, compared to 473,200 mt in 2021. 

 

CPO prices experienced contrasting fortune in 2022. Prices surged to record levels in the first half of the year following the outbreak of the war in Ukraine, unfavourable weather conditions in prime soybean producing countries and the export ban on CPO and refined palm oil in Indonesia. Prices weakened in the second half of the year after the export ban was lifted amidst a rise in global inventory of vegetable oil. The fear of worldwide recession also softened demand and dampened prices. A more detailed explanation is provided in the Strategic Report under Commodity Prices. The yearly average CPO price ex-Rotterdam, nevertheless, was 13% higher at $1,369/mt, compared to $1,211/mt in 2021.

 

The Group's revenue from continuing operation reached a record high of $447.6 million, 3% higher compared to $433.4 million achieved in 2021, despite the lower CPO production, as a result of the elevated CPO price for the first half of the year. The operating profit for the Group from continuing operations in 2022, before biological asset ("BA") movement, was higher at $132.9 million, from $129.3 million reported in 2021. The earnings per share, before BA movement from continuing operations, decreased by 6% to 221.86cts, from 235.25cts in 2021. The Group's operating profit after BA movement from continuing operation for 2022 was at $127.1 million after a downward BA movement of $5.8 million as compared to 2021 operating profit of $133.7 million after an upward BA movement of $4.3 million.

 

The Group's new planting for oil palm including plasma for 2022 totalled 952 ha compared to 1,701 ha last year. The new planting was mostly concentrated in the Kalimantan regions, where negotiations with owners over land compensation were concluded efficiently. Replanting of some 985 ha of oil palms in Bengkulu was accelerated during the year to replace trees with poor yield. Another 115 ha was replanted in North Sumatera. In 2023, the Group plans to plant 2,500 ha of oil palm which includes replanting of another 1,400 ha in Bengkulu and North Sumatera. Plasma planting for 2023 is estimated at 300 ha. 

 

The Group has four biogas plants with a combined capacity of slightly above five megawatts. The Group sold 23,900 MWh of surplus electricity in 2022 compared to 20,300 MWh last year. The biogas plants help trap and burn the more toxic methane gas emission from palm oil mill effluent ("POME") to generate green electricity and produce less harmful carbon dioxide in our efforts to reduce our carbon footprint. Methane has a higher heat-trapping potential than carbon dioxide and cutting its emission can have a positive impact on reining in global warming. The revenue from the sale of surplus electricity to the national grid was $1.16 million (2021: $999,000). Further investment in biogas plants in Indonesia is dependent on regional demand.  The Group also faces a unique situation where buyers kept reducing electricity rates as well as uptake. During the year, the Group reached a Build Own Operate Transfer ("BOOT") agreement with a third party for the construction of two BioCNG plants in North Sumatera. The BioCNG plants will draw methane from our existing biogas plants, purified and further compressed the gas for industrial use with an intention to replace the natural gas or fossil fuel for their boilers. The third party will fund the project costs estimated at $8.3 million and will retain the right to operate the plants for fifteen years. It will also pay the mills a share of the revenue from the sale of BioCNG. The first BioCNG plant is expected to be operational in the third quarter of 2023.        

 

During the year, AEP bought back shares in six of its subsidiaries in Indonesia for a consideration of $5.8 million, which will enhance shareholders' value in 2023 and onwards, together with a forgiveness of loans of $1.5 million to two minority shareholders. AEP will continue to buy back shares from its minority shareholders at a fair and competitive price as part of its consolidation of its shareholdings in the subsidiaries in Indonesia. The financial effect of a buy back going forward is to enhance earnings per share.

 

As mentioned in the 2021 Annual Report, AEP was in the process of selling three of its non-performing plantations in South Sumatera. Following from that, a memorandum of understanding ("MOU") was signed with a potential buyer from Indonesia in December 2022 for a period of exclusivity to conduct legal and financial due diligence. However, the potential buyer decided not to proceed following the completion of the due diligence. Since this transaction did not materialise, the book value of the three plantations for sale is further impaired by $5 million. The management is currently in discussion with another interested buyer and aimed to complete the sale of the three plantations as soon as practicable.         

 

In late 2022, the European Union ("EU") introduced a new law, the Deforestation Regulation ("EUDR") which is aim at preventing companies from placing products including commodities linked to deforestation and forest degradation in the EU market. Companies exporting their products to EU are required to provide proof that their products are deforestation free and are legal. Palm oil producers have over the years taken steps to meet EU requirements, including stepping up their national sustainable palm-oil certification standards and improving environmental protection. The latest EUDR, in addition to an EU renewable-energy directives announced in 2018, requires the phasing out of palm-based transportation fuels by 2030 does not bode well for the future of palm oil in EU, the third largest market for CPO. A stricter due diligence process will also add to the administrative burden and higher production costs.

 

AEP remains committed to No Deforestation, No Peatland, No Exploitation ("NDPE") policies. All supplies of FFB to our mills are traceable to their origins of supply chains and are not linked to illegal deforestation. We are aware of growing pressure from buyers to avoid CPO with NDPE and High Conservation Values ("HCV") issues.

 

In determining the amount of dividends to be paid to our shareholders, the Board has taken a balanced approach to the requirement of funds in the Company in order to expand through the acquisitions of brownfields, profitable plantations as well as consolidating its shareholdings in the subsidiaries in Indonesia to enhance shareholders' value but at the same time cognisant of shareholders' wishes to have dividends as a form of income. It is also a relief that the uncertainty caused by the Covid-19 pandemic is over and we are back to normalcy, other than the ongoing war in Ukraine, and therefore the Board's sentiments on added prudence and contingency in the past can be less stringent. In the light of the results achieved in the year, the Board has declared a final dividend of 25.0cts per share, in line with our reporting currency, in respect of the year to 31 December 2022 (2021: 5.0cts). In the absence of any specific instructions up to the date of closing of the register on 2 June 2023, shareholders with addresses in the UK will be deemed to have elected to receive their dividends in Pounds Sterling and those with addresses outside of UK will be deemed to have elected to receive their dividends in US Dollars. Subject to the approval by shareholders at the AGM, the final dividend will be paid on 7 July 2023 to those shareholders on the register on 2 June 2023.

 

The Board has also been receiving increasing requests from shareholders to buy back AEP's shares with the cash balance. The Board has in the past been reticent on share buy backs because of the lack of evidence that a buy back directly results in an increased share price, especially with the lack of liquidity of the Company's share and buy backs could cause the shares to be more illiquid. Nevertheless, the Board has taken on board shareholders' sentiments and will consider launching a modest buy back programme in a timely manner and at a efficient price. Further details will be communicated to shareholders in due course. The last time AEP bought back its shares was in 2007 with a purchase of 50,000 shares at £3.86 per share.

 

On behalf of the Board of Directors, I would like to convey our sincere thanks to our management and employees of the Group for their dedication, loyalty, resourcefulness, commitment and contribution to the Group.

 

I would also like to take this opportunity to thank shareholders, business associates, government authorities and all other stakeholders for their continued confidence, understanding and support for the Group.

 

 

 

Mr. Jonathan Law Ngee Song

Chairman

21 April 2023

 

 

 

Strategic Report

 

Introduction

The Strategic Report has been prepared to provide shareholders with information to complement the financial statements. This report may contain forward-looking statements, which have been included by the Board in good faith based on information available up to the time of approval of this report. Such statements should be treated with caution going forward given the uncertainties inherent with the economic and business risks faced by the Group.

 

Business Model 

The Group will continue to focus on its strength and expertise, which is planting more oil palms sustainably and production of CPO. This includes replanting low-yielding aging palms, replacing old rubber trees with palm trees and building more mills to process the FFB. The Group has, over the years, created value to shareholders through expansion in a responsible manner.

 

The Group remains committed to use its available resources to develop the land bank in Indonesia, together with acquisition of profitable plantations at strategic locations, as regulatory constraints permit. The Indonesian government has, in recent years, passed laws to prioritise domestic investments and to limit foreign direct investments over national interest, including a limit of 20,000 ha per province and a national total of 100,000 ha on the licensed development of oil palms for companies that are not listed in Indonesia or with less than a majority local ownership.

                                                                                                                            

The Group's objectives are to provide returns to investors in the long-term from its operations as well as through the expansion of the Group's business, to foster economic progress in localities of the Group's activities and to develop the Group's operations in accordance with the best corporate social responsibility and sustainability standards.

 

We believe that sustainable success for the Group is best achieved by acting in the long-term interests of our shareholders, our partners and society.

 

Our Strategy

One of the Group's objectives is to provide an appropriate level of return to the investors and to enhance shareholder value. Profitability, to a large extent, correlated to the CPO price, which is volatile and determined by supply and demand as well as the weather. The Group believes in the long-term viability of palm oil as it can be produced more economically than other competing oils and remains the most productive source of vegetable oil in a growing population. Soybean crops would require up to ten times as much land to produce an equivalent weight of palm oil. It has been reported that one hectare of land can produce up to 4 mt of CPO, much higher than rapeseed of 0.7 mt, sunflowers of 0.6 mt or even soybeans of 0.4 mt. In this regard, palm oil is far more sustainable than other edible vegetable oils.

 

The Group's strategies, therefore, focus on maximising yield per hectare above 22 mt/ha, minimum mill production efficiency of 110%, minimising production costs below $300/mt and streamlining estate management. For the year under review, the overall Indonesian operations achieved an FFB yield of 19.3 mt/ha, 136% mill efficiency and production cost of $349/mt. This compared unfavourably to 2021 where the Group achieved a yield of 19.8 mt/ha, 155% mill efficiency and a lower production cost of $296/mt. The drop in mill efficiency was due to the increase in milling capacity from 310 mt/hr to 340 mt/hr. Despite stiff competition for external crops from surrounding millers, the Group is committed to purchasing more external crops from third parties at competitive, yet fair prices, to maximise the production efficiency of the mills. With higher throughput, the mills would achieve economies of scale in production. A mill is deemed to achieve 100% mill efficiency when it operates 16 hours a day for 300 days per annum.

 

In line with the commitment to reduce its carbon footprint, the Group plans to construct, in stages, biogas and/or BioCNG plants at all its mills. The biogas plants will trap the methane gas emitted from the treatment of palm mill effluents to generate electricity to power its boilers which in turn reduces the consumption of fossil fuel while BioCNG will produce compressed, purified biogas. The mills plan to sell the surplus electricity. With more industrial use of BioCNG, the consumption of fossil fuel is expected to reduce and progressively reduce the greenhouse gas emissions per metric ton of CPO produced in the next few years. It is commonly accepted that failure to address growing calls to reduce greenhouse gas emissions could threaten the long-term social acceptability and profitability of a palm oil company.  The Group has also set metrics and targets to lower greenhouse gas emissions over time as detailed in the Decarbonisation modelling and high-level target setting.

 

The Group will continue to engage and offer competitive and fair compensation to the villagers so that land can be cleared and be planted.

 

Non-financial reporting statement

The Group has complied with the requirements of Section 414CB of the Companies Act 2006 by providing a wide range of non-financial information about employees, environmental and social matters in the table below and in our website:

 

Non-financial matter	Policies and standards which govern our approach
Business model	Business model and strategy Principal risks and uncertainties
Environmental matters	Principal risks and uncertainties: Country, regulatory and governance practices Principal risks and uncertainties: Weather and Environmental and conservation practices Indonesian Sustainable Palm Oil                                                                                                             Environmental, Social and Governance practices Management of Climate Risks Decarbonisation modelling and high level target setting Carbon Reporting Corporate Governance: Environmental and corporate responsibility Other responsible agricultural practices and sustainable policies can be found on our website
Employees and Health & Safety	Employees: Employment policies Directors' Remuneration Report: Employees engagement Workers are protected from exposure to occupational health and safety hazards that are likely to pose immediate risk of permanent injury, illness or fatality. Proper signages are in place at relevant spots to alert employees of safety. Workshops and training sessions on occupational safety and health care are regularly conducted.
Social matters	Principal risks and uncertainties: Covid-19 and other contagious diseases AEP has established clear policies and strict protocols for the control and prevention of the spread of Covid-19 and other contagious diseases within the workplace environment. There are requirements for mask wearing, social distancing and sanitising of the workplace regularly. AEP also privately funded vaccination programme within its plantations and employees are required to be compulsorily vaccinated. AEP also has strict procedures on testing at work and self isolation of its employees when necessary, together with home support for the affected ones to ensure full recovery before they resumed work.
Respect for human rights	AEP has clear policies of no exploitation of its employees, including complying with paying minimum wage. It does not practise child or forced labour in line with the Modern Slavery Statement referred to on its website. In addition, a whistle blowing policy is in place to allow any employee to raise concerns about unethical, illegal or questionable practices, in full confidence, without the risk of reprisal.
Anti-corruption and anti-bribery matters	Anti-corruption and anti-bribery policies and procedures are explained in the Directors' Report.

 

Financial Review

Performance of the business during the year

For the year ended 31 December 2022, the revenue for the Group from continuing operation was $447.6 million, 3% higher than $433.4 million reported in 2021 due primarily to the higher CPO prices. 

 

The Group's operating profit from continuing operation for 2022, before biological asset movement, was $132.9 million, 3% higher than last year of $129.3 million. The higher operating profit was due to higher CPO prices which also absorbed the higher operational costs. Transport and fertilizers costs in particular rose sharply during the year.   

 

FFB production for continuing operations for 2022 reached 1.12 million mt, 3% lower than the 1.15 million mt produced in 2021. The yield for continuing operations from Indonesian plantations was lower at 20.6 mt/ha (2021: 21.1 mt/ha) due to lower production in Bengkulu and Kalimantan plantations. The reasons for the lower production were explained on the Chairman's Statement.

 

FFB bought-in from local smallholders and plasma in 2022 was 1.08 million mt (2021: 1.14 million mt), 5% lower compared to 2021. The reasons for reduction in external crops purchases were explained on the Chairman's Statement. During the year, the Group's mills processed a combined 2.21 million mt of FFB, 4% lower than last year of 2.31 million mt. CPO production, as a result, was 4% lower at 455,600 mt, compared to 473,200 mt in 2021. Kernel production at 106,200 mt was 7% lower compared to 114,000 mt in 2021.

 

Profit before tax and after BA movement from continuing operation for the Group was $132.9 million, 3% lower compared to a profit of $137.1 million in 2021. The BA movement was a debit of $5.8 million, compared to a credit of $4.3 million in 2021. The debit BA movement was mainly due to the lower FFB price at 31 December 2022. The profit before tax included an impairment charge on plantations and impairment of land amounting to $0.6 million compared to a reversal of impairment charge on plantations and impairment of land amounting to $5.0 million in 2021. Net finance income recognised in the income statement increased from $3.2 million in 2021 to $4.9 million in 2022 due to higher deposits income, without interest expense. The tax expense increased from $25.7 million in 2021 to $31.5 million in 2022, notwithstanding the slightly lower profit, because of the utilisation of available losses in a few subsidiaries in Indonesia in 2021. 

 

The total loss on the discontinued operations was $5.8 million (2021: $28.4 million), made up of operating loss of $0.8 million (2021: $6.7 million). Based on the terms of the potential sale as mentioned in the Chairman's Statement, there was further write down of $5.0 million of the three plantations in South Sumatera in 2022 over and above of the write down of the three plantations' assets net of liabilities of $21.8 million in 2021. The loss from the discontinued operations was also impacted by the marginal changes in expected credit loss from Plasma receivables in 2022 (2021: $1.2 million) attributed to the lower amounts allocated for plasma development during the year.

 

The average CPO price ex-Rotterdam for 2022 was $1,369/mt, 13% higher than 2021 of $1,211/mt. The ex-mill price for 2022 averaged $845/mt, 9% higher than last year of $776/mt.

 

Earnings per share before BA movement from continuing operations decreased by 6% to 221.86cts compared to 235.25cts in 2021. Earnings per share after BA movement from continuing operations decreased from 242.34cts to 212.34cts.  Earnings per share have decreased mainly due to the decrease in profit after tax.

 

There was a loss of exchange in translation of foreign operations, recognised in other comprehensive income, totalling $55.0 million for 2022 against an exchange loss of $5.4 million in the previous year due to the weakening of the Indonesian rupiah at the year end. The retirement benefits due to the employees at 31 December 2022, as calculated by a third party actuary, decreased to $10.9 million from $11.5 million last year due to the impact from the weakening of the Indonesia rupiah and change in attribution method.

 

Position of the business at the end of the year

The Group's statement of financial position remains strong, with a cash and cash equivalents balance including short-term investments (see Note v) of $277.0 million and no external borrowing at the end of 2022. All material changes in statement of financial position and cash flows are listed in the following table:

 

	Note	31.12.2022 $000	31.12.2021  $000
Property, plant and equipment	i	252,414	260,532
Deferred tax assets	ii	1,832	4,324
Income tax liabilities	iii	(10,230)	(13,139)
Cash and cash equivalents	v, vi, vii	221,476	218,249
Short-term investments	v,vi, vii	55,566	1,439
Assets in disposal groups classified as held for sale	iv	9,000	13,210
Net cash generated from operating activities	v	120,511	131,346
Purchase of property, plant and equipment	vi	(34,026)	(26,374)
Net cash used in financing activities	vii	(9,523)	(1,028)

 

i.  The reduction in property, plant and equipment from $260.5 million in 2021 to $252.4 million was due to the loss in exchange in the translation of foreign operations.

 

ii. The movement in deferred tax assets was due to the utilisation of some of the losses against taxable profits during the year.

 

iii. The income tax liabilities are lower principally as a result of higher tax payment in 2022. A detailed explanation of income tax, including other taxes, is provided in note 8.

 

iv.  The assets in disposal groups classified as held for sale was lower due to a further write down of $5.0 million in 2022.

 

v. As at 31 December 2022, the Group had cash and cash equivalents of $221.5 million (2021: $218.2 million) and short-term investments known as fixed deposits of $55.6 million (2021: $1.4 million). The cash position, including fixed deposits, was higher in 2022 principally due to profits during the year and also to a recovery of $29.4 million from the Indonesian tax authorities for over payment of VAT. The net cash inflow from operating activities during the year was lower at $120.5 million by 8% compared to $131.3 million in 2021 mainly due to higher tax paid.

 

vi.  The development costs for property, plant and equipment ("PPE") was higher in 2022 amounting to $34.0 million (2021: $26.4 million) due to higher capital expenditure and construction costs.

 

vii. The net cash used in financing activities during the year was higher at $9.5 million compared to $1.0 million in 2021 due to the acquisition of non-controlling interests during the year and higher dividend paid.

 

Viability Statement

The viability assessment considers solvency and liquidity over a longer period than for the purposes of the going concern assessment made. Inevitably, the degree of certainty reduces over a longer period.

 

The Group's business activities, financial performance, corporate development and principal risks associated with the local operating environment are covered under the various sections of this strategic report. In undertaking the review of the Group's performance in 2022, the Board considered the prospects of the Company, focusing on the strategy for growth via the expansion of its planted area in tandem with forecasting demand for CPO, over one to five-year periods. The process involved a detailed review of the 2023 detailed budget and the five-year income and cash flow projection. The one-year budget has a greater level of certainty and is used to set detailed budgetary targets at all levels across the Group. It is also used by the Remuneration Committee to set targets for the annual incentive. The five-year income and cash flow projection contains less certainty of the outcome but provides a robust planning tool against which strategic decisions can be made. The Board believes that to project beyond five years has more elements of uncertainties and therefore less reliable for making informed decisions.

 

The Board also considered the five-year cash flow projection under various severe but plausible scenarios, including the financial impact on the Group due to partial or total shutdown of its operations and the contraction of demand for palm oil resulting from the Coronavirus pandemic or any other contagious diseases, as outlined in the Strategic Report under Going Concern, and the need to support if any financially loss-making newly matured estates, together with the projected capital expenditure. The Group also factored in the impact of the price increase of materials and fertilisers primarily as a result of the conflict in Ukraine.  In arriving at the conclusion that the Group has adequate resources to continue in operation and meet its liabilities in the next five years, the Board has assumed a worst case scenario of CPO price at its lowest average of $500/mt and that demand for CPO dropped by 50%. The Board has also factored in that half of the total plantations could be shut down for six months due to infectious disease such as Covid-19. The assumptions applied are linked to risk of CPO price fluctuation, risk of a substitute for oil palm and a pandemic from an infectious disease. On this basis and other matters considered and reviewed by the Board during the year, the Board has a reasonable expectation that the Group has adequate resources to continue in operation and meet its liabilities over the five years from 2023 to 2027.

 

Going Concern

The Directors have carried out stress tests, factoring in the identified uncertainties and risks such as commodity prices and demands post pandemic, together with the current economic issues of high inflation, rising interest rates and cost of living crisis, to ensure that the Group has adequate resources in a worst-case scenario to remain as a going concern for at least twelve months from the date of this report.

 

The Directors have a reasonable expectation, having made the appropriate enquiries, that the Group has sufficient cash resources to cover the Group's operating expenses for a period of at least twelve months from the date of approval of these financial statements. For these reasons, the Directors adopted a going concern basis in the preparation of the financial statements. The Directors have made this assessment after consideration of the Group's budgeted cash flows and related assumptions including appropriate stress testing of identified uncertainties, specifically on the potential shut down of the entire operations from three to twelve months if all the plantations are infected with an infectious disease as well as the impact on the demand for palm oil with decreases of 50% to 100%. Stress testing of other identified uncertainties and risks such as commodity prices and currency exchange rates were also undertaken.

 

Business Review

Indonesia

The performance of the Indonesian operations was divided into six geographical regions.

 

North Sumatera

FFB production in North Sumatera, which aggregates the estates of Tasik, Anak Tasik, Labuhan Bilik ("HPP"), Blankahan, Rambung, Sg Musam and Cahaya Pelita ("CPA") produced 423,900 mt in 2022 about 6% above last year (2021: 400,800 mt). The higher yield in newly matured estates in Tasik and the increase in matured areas to 18,465 ha from 18,047 ha contributed to the higher production. All plantations in North Sumatera performed better in 2022 except for Musam and HPP where harvest was down by 11% and 5% respectively. The withdrawal of fertilizers for areas meant for replanting has resulted in a lower yield in Musam while 10% of the trees in HPP were infected with Ganoderma which has affected the output of fruits. Notwithstanding the lower yield in Musam and HPP, the annual yield in North Sumatera improved to 22.8 mt/ha from the previous year of 22.2 mt/ha. 115 ha was replanted in Musam in 2022. Replanting in Blankahan is temporary deferred as the yield had been consistently high in the past years averaging 26 mt/ha due to good soil condition.  

 

In 2022, the two mills in North Sumatera produced 148,100 mt of CPO (2021:136,900 mt) from a throughput of 738,400 mt (2021: 698,800 mt). The Blankahan mill showed some improvement by processing 24% more FFB in 2022 at 244,500 mt (2021: 196,900 mt) due to higher external crop purchases, raising the mill utilization to 127% from 103% in the previous year. OER, however, was low at 18.9% (2021: 18.8%) possibly due to the dura contamination from external crops that made almost 70% of the total crops processed. Dura crops with thinner mesocarp normally have an oil content of 18% or lower. The Tasik mill processed marginally lower crops at 493,900 mt (2021: 501,900 mt) as it prioritized its own crop for processing during the export ban as the storage tanks reached their maximum storage capacity. External crop purchases as a result dropped to 144,700 mt from 177,600 mt in the previous year, reducing mill utilization from 174% in 2021 to 171% in 2022. OER for the Tasik mill improved to 20.6% (2021: 19.9%) as it processed higher percentage of internal crop. 

 

The two biogas plants in North Sumatera did not perform up to their potential in 2022, due to the lack of demand and the reduction in selling price to the National Grid by 9%. The Blankahan plant sold about 6,500 MWh (2021: 1,900 MWh) of surplus electricity and generated $354,100 (2021: $114,100) in revenue. The Group has explored other opportunities for this plant and has recently commissioned a BioCNG.

 

The sales from the biomass plant were lower in 2022 at $23,500 compared to $335,800 last year, with exports of 460 mt of dried long fibres compared to 4,710 mt last year. The average selling price had fallen by 25% due to the significant drop in demand caused by the zero covid policy in China resulting in disruption in productions and logistics. In view of the poor demand, the Group decided to cease its biomass production from the second quarter of 2022 as it was no longer profitable to produce the fibres from EFB.

 

Bengkulu

FFB production in Bengkulu, which aggregates the estates of Puding Mas ("MPM") and Alno produced 269,500 mt (2021: 307,400 mt), 12% lower than 2021 mainly due to the reduction of matured palms as a result of replanting. Rainfall was 3,600 mm in 2022 (2021: 3,500 mm) and was particularly heavy in the last quarter of the year causing transportation problems and interrupting harvesting activities culminating to a lower yield at 18.1 mt/ha from 19.6 mt/ha last year.

 

MPM and Sumindo mills processed a combined 668,500 mt (2021: 807,000 mt) of FFB in 2022, 17% lower than 2021 due to lower internal crop production as well as lower external crop purchases. External crop purchases decreased by 21% to 365,500 mt from 464,800 mt last year decreasing the mill utilization to 116% from 160% in the prior year. The significant drop in utilization rate was due to the increase of milling capacity of the Sumindo mill from 45 mt/hr to 60 mt/hr. CPO production for the year was 17% lower at 136,000 mt (2021: 164,300 mt) with OER for the two mills averaging 20.3% compared to 20.4% last year. External crops made up 55% of the throughput compared to 58% in 2021. The remaining processed crop was purchased from other group companies.

 

985 ha palms were replanted in 2022 with new generation planting materials. Although the trees in Bengkulu averaged 17 to 18 years of age, 5,500 ha of palms would need to be replanted from 2023 to 2026 due to the poor yield from Dura palms which formed a significant portion of the planted areas. Fruits from dura palms have thin mesocarp which ultimately produce less oil.

 

The MPM biogas plant sold over 10,500 MWh (2021: 10,300 MWh) of surplus electricity, 2% higher and generated $474,700 in revenue (2021: $484,900). The lower revenue was due to a weaker Indonesian Rupiah when translated into dollar. The biogas plant was down for almost a month as a severe storm in the second quarter of 2022 ripped off the membrane of the lagoon digester and technicians were unavailable to repair the membrane due to the long festive holidays.

 

Riau

FFB production in the Riau region, comprising Bina Pitri estates, produced 135,000 mt in 2022 (2021: 139,600 mt), 3% lower than 2021. Rainfall was lower at 2,480 mm (2021: 2,620 mm) and was below 150 mm per month for three months. The yield for the year was slightly lower at 28.0 mt/ha from last year of 28.7 mt/ha. Although 79% of the palms are between the ages of 25 to 28 years, the planned replanting program for 2,800 ha is temporarily deferred due to their high yield.   

 

Although the mill external crop purchase was higher by 1% at 268,000 mt compared to 266,600 mt last year, the mill utilization rate decreased slightly to 140% from 141% last year due to the lower internal crop production. Overall, the CPO production was marginally lower at 77,200 mt compared to 77,500 mt in 2021. Despite the high yield, the region is contaminated by dura palms which made up 66% of the crops processed by the mill. The mill therefore had a low OER of 19.2% similarly low of 19.1% in the previous year.

 

Bangka

FFB production in the Bangka region, comprising Bangka Malindo Lestari estates, produced 12,900 mt in 2022 (2021: 11,100 mt), 16% higher than 2021. The higher crop was due to a larger harvestable area and more palms having reached peak maturity. Rainfall averaged 1,835 mm in the year with 5 months where rainfall was below 150 mm per month compared to 2,370 mm previous year. The yield as a result declined slightly from 13.4 mt/ha to 12.1 mt/ha in 2022. With new planting in 2022 totalling 63 ha (2021: 160 ha), the total planting including plasma in Bangka reached 3,099 ha (2021: 3,036 ha).

 

Kalimantan

FFB production in Kalimantan which comprises the Sawit Graha Manunggal ("SGM") and Kahayan Agro Plantation ("KAP") estates was 273,800 mt in 2022 (2021: 281,500 mt), 3% lower than 2021. During the year, 638 ha of palms matured in SGM and KAP leading to its first harvest. Production in Kalimantan was lower due to logistics problems and high incidence of abnormal fruit bunches as mentioned on the Chairman's Statement. The abnormal fruit bunches were caused by lack of male flowers and as a solution the estate has started breeding and releasing weevils to help with the pollination. As explained on the Chairman's Statement, abnormal fruit bunches were stripped of its fruitlets leaving behind the EFB in the fields resulting in a lower reported harvest. The yield in Kalimantan declined to 18.4 mt/ha from 19.8 mt/ha last year. Wetter-than normal weather prevailed in KAP at 4,794 mm (2021: 4,490 mm) while rainfall in SGM was also higher at 2,438 mm (2021: 2,320 mm).

 

New planting in SGM and KAP is expected to reach 800 ha next year. The long-term prospect for Kalimantan remains bright.

 

The purchase of external and plasma crops in SGM reached 132,200 mt in 2022 which was higher by 17% compared to 112,800 mt last year. The total external and plasma crop at the SGM mill made up 33% of the total crops processed from 29% last year. With the throughput at the mill reaching 402,400 mt (2021: 393,300 mt), the mill utilization rate decreased to 140% from 182% last year producing 94,300 mt of CPO, slightly lower than 2021 of 94,500 mt. The decrease in utilization rate was due to the increase of milling capacity from 45 mt/hr to 60 mt/hr. OER for the mill averaged 23.4% for the year compared to 24.0% last year and continues to outperform the rest of the mills in the Group.

 

The SGM biogas plant generated 15% less electricity in 2022 at over 6,900 MWh (2021: 8,100 MWh) worth $331,000 (2021: $399,900). The lower power generation was due to the shutdown of the gas engine in the second quarter of 2022 for a major overhaul after 20,000 hours of operation. A delay in procuring of spare impeller for the turbocharger further delayed the completion for over a month. As in the case of Blankahan biogas plant, the National Grid reduced the rate marginally for electricity purchased from the end of first quarter of 2022.

 

South Sumatera - discontinued operations

FFB production in South Sumatera, which aggregates the estates of Karya Kencana ("KKST"), Empat Lawang ("ELAP") and Riau Agrindo ("RAA") produced 46,300 mt (2021: 37,200 mt), 24% higher than 2021. Better rainfall and more matured palms contributed to a higher harvest. Low annual moisture remains a real threat in this region which retards growth as the plantations are located behind a mountain range sheltered from the Indian Ocean. Annual rainfall in North ELAP increased to 1,399 mm (2021: 1,095 mm). The higher yield of 7.6 mt/ha (2021: 6.5 mt/ha) in South Sumatera reflected improved conditions but still below the commercially viable benchmark.

 

With higher CPO prices, more FFB thefts were reported in 2022 as the region faced high unemployment during the pandemic. The management has stepped-up security patrols to combat thefts and transgression in the plantations in South Sumatera.

 

With the continuing problems of rainfall, sub-optimal terrains, security and non productive dialogues with the local villages, the Board arrived at a decision to discontinue its operations in South Sumatera in 2021 and has put the three plantations for sale in the open market as a going concern. The Board has arrived at its decision as a result of the low crop yield which is unlikely to improve and the continuing losses incurred in the region, notwithstanding the significant investments and efforts over the years.

 

Overall bought-in crops for the Indonesian operations, including plasma, were 5% lower at 1.08 million mt in 2022 (2021: 1.14 million mt). The average OER for our mills was marginally higher at 20.6% in 2022 (2021: 20.5%).

 

Malaysia

FFB production in 2022 was 23% lower at 9,300 mt, compared to 12,000 mt in 2021. The plantation continued to experience a substantial shortage of workers which hampered not only field maintenance and application of fertilisers but harvesting, resulting in crop losses. Although the international borders reopened in April 2022, attrition of workers continued until the last quarter of the year. Recruitment for new workers was bogged down by bureaucracy in some government departments. New workers are expected to arrive in the first quarter of next year. In addition, the under application of fertilisers at 13% of the recommended dosage resulted in undernourished plants and poor yield. The palms, with an average age of 25 years, faced declining yield and stems per hectare. The poor yield was also due to the damage caused by wild elephants. The Malaysian plantation generated a profit before tax after BA movement of $0.3 million in 2022, compared to a profit before tax after BA movement of $0.4 million in 2021.   

 

The financial performance of the various regions is reported in note 6 on segmental information.

 

Commodity Prices

2022 was a year of two halves for CPO prices, with record prices in the first half of the year followed by much lower prices for the second half. The price trend was the complete opposite in 2021.

 

The CPO price ex-Rotterdam started the year strongly at $1,350/mt (2021: $1,014/mt) and gradually trended upwards to peak in March 2022 at $2,000/mt before dropping to a low of $930/mt in early October 2022. It recovered slightly to end the year at $1,020/mt. Ex-Rotterdam price averaged $1,369/mt for the year, 13% higher than last year (2021: $1,211/mt). Our average ex-mill price for 2022, which is lower than ex-Rotterdam price with the attributed logistic costs, was at $845/mt, 9% higher than last year of $776/mt.

 

The rally in the first three months of 2022 was partly due to the unfavourable weather conditions in prime soybean-producing countries which adversely affected the supply of soybean oil, of which CPO is the closest substitute. The war in Ukraine contributed significantly to the increase in CPO prices as it disrupted the global supply of edible oil. Russia and Ukraine produced the majority of the world's sunflower oil, which made up about 9% of all vegetable oil consumed globally. Indonesia, the world largest producer of CPO, imposed an export ban on CPO and refined palm oil from 28 April 2022 to 22 May 2022, in its effort to bring down the prices of its domestic cooking oil, added more volatility to CPO prices.

 

CPO prices started to weaken after Indonesia reversed its export ban in May 2022. The Indonesian government reduced export tax and waived levies for several months in its effort to flush out and reduce its stockpile of palm oil following the lifting of the export ban also sent prices even lower. The movement in CPO prices are greatly influenced by Indonesian government export policy. The higher CPO production in the third quarter of 2022 led to a higher oil inventories and with the declining soybean oil prices further depressed CPO prices.  The fear of worldwide recession caused by inflationary pressure arising from higher commodity prices also dampened demand for CPO in the second half of the year. The softening of demand from China, as a result of Beijing's zero-Covid policy to stop the spread of virus, weighed in on the commodity prices. China is the second largest buyer of CPO after India. Supply worries due to heavy rain and floods, disrupting harvest and transport of crops in both Indonesia and Malaysia during the year end monsoon season, pushed CPO price to close the year on a positive note.

 

Over a period of ten years, CPO price has touched a monthly average low of $472/mt in November 2018 and a monthly average high of $1,857/mt in March 2022. The monthly average price over the ten years was about $816/mt.

 

Rubber prices averaged $1,431/mt for 2022 (2021: $1,637/mt). Our small area of 262 ha of mature rubber contributed a revenue of $0.6 million in 2022 (2021: $0.7 million). Rubber continues to struggle with low prices. Lower tappable trees due to wind damage and dry bark were the main reasons for the low rubber production.

 

Corporate Development

In 2022, the Group opened up new land and planted 952 ha (2021: 1,701 ha) of oil palm mainly in Kalimantan and South Sumatera, boosting planted area including the smallholder cooperative scheme, known as Plasma, by 1% to 76,095 ha (2021: 75,204 ha). Another 1,100 ha was replanted in Bengkulu and North Sumatera. In 2023, the Group plans to plant 2,500 ha of oil palm which includes replanting of 1,400 ha in North Sumatera and Bengkulu. Opening of new land for planting can be cumbersome and requires written approval from local authorities, submission of environment impact assessments and meetings with local communities. All new plantings are carried out following the HCSA guidelines and are verified by accredited consultants. 

 

Old quarters for workers throughout the plantations were progressively modernised in 2022 at a cost of $143,000. Another $1.7 million is budgeted for 2023 for renovations and refurbishments to provide better comfort for workers. The management has also initiated talks with the relevant authorities to speed up electrification of two remote locations in Bengkulu and Kalimantan where our plantations are located. The number of users in these locations may, however, be small and may not justify the high cost of laying transmission lines. As an alternative solution, the management is looking at the cost of installing solar panels to provide electricity during the day when the generator sets are off to ensure continuous electricity supply and to ensure comfort of our employees and families. Some $300,000 has been set aside for this purpose.     

 

The construction of the seventh mill in HPP, North Sumatera has been delayed by frequent lockdowns caused by the pandemic, affecting the deployment of manpower at the construction site, as well as fabrication of equipment. Unusual heavy rain in fourth quarter caused flooding and soft soil condition delaying mobilization of heavy machineries for the construction of effluent treatment tanks. Construction work in exposed areas were stopped frequently to ensure safety of workers during the periods of heavy rainfall. Cost of construction has spiralled to about $23 million as the mill, located on peat area has to be built according to strict specifications laid out by environmental laws in Indonesia. The conventional anaerobic lagoon constructed from earth is not permitted on peat land due to possible seepage of effluent and contamination of ground water. A purpose-built treatment plant is required to treat the effluent from the mill to a quality specified for discharge to the water course 7.5km away. The effluent plant also includes two 4,000 mt anaerobic digesters and two 1,200 mt aeration tanks. A decanter for solid removal and oil recovery was also added to reduce the number of tanks required which in turn reduced the high cost of concrete piles for its foundation. Steel, cement, transport and equipment costs have increased substantially driving up the project costs. The project is earmarked for completion by the first half of 2023.

 

Our feasibility study concluded that it is more profitable to build a mill in KAP in Kalimantan to support its operation due to high logistic costs. KAP is currently transporting the FFB some 600km to SGM mill or, when this becomes too arduous during the monsoon season, the fruits are sold locally to third parties. The Group plans to build a 45 mt/hr mill with two storage tanks of 4,000 mt each with minimum spare machineries at an estimated cost of $13 million. Due to the hilly terrain and steep ravines, the choice for a mill site is limited. After careful consideration, a potential site had been selected. The soil investigation was completed and the Environmental Impact Assessment ("EIA") is now in progress which is likely to be completed in the second quarter of 2023. The earthworks will commence after EIA approval. 

 

To improve transport of FFB in our plantations and help deliver the FFB to the mills, the Group purchased 54 units of dump trucks costing $1,816,000 in 2022. In 2023 we have budgeted another $741,000. This is necessary amidst rising logistic cost as independent transport companies especially in Kalimantan cannot supply adequate trucks to transport our harvest as many trucks are diverted to carry coal which pay better transport rates.  In addition, the Group spent $699,000 to improve the field roads and connectivity between estates and mills by building new bridges. The Group has budgeted to spend a further $4.7 million in 2023 to improve and maintain our roads for better connectivity.        

 

Two old and worn-out vertical sterilisers/pressure vessels in Bina Pitri mill are in stages of replacement from the third quarter of 2022 and will be completed in the first half of 2023 at a cost of $370,000. An additional two more units are scheduled for replacement before the end of next year for the same cost. A similar undertaking will also be conducted in Sumindo mill costing $280,000 to replace the thinning of sterilizers shell. An additional bulking silo for storing kernel with a capacity of 400 mt will be built at the Bina mill at a cost of $140,000.

 

The fabrication and installation of an additional 45,000 kg/hour steam boiler in the SGM mill costing $980,000 was completed in the third quarter of 2022. This second boiler is required to back-up the mill operation to avoid any disruption as the mill enters its seventh year of operation. The mill is projected to process up to 400,000 mt of FFB in 2023. Two additional units of vertical sterilizers, complete with FFB feeding and discharge conveyors, will be constructed in 2023 at an estimated cost of $650,000 to cope with the increase throughput of crops. An additional oil storage tank with a capacity of 4,000 mt estimated at $275,000 will be added to the present four units to increase SGM storage capacity to 13,000 mt to avoid over capacity in instances of delays in the collection by tanker ships.  

 

The export ban of CPO early this year has resulted in the costly reduction of external crop purchases in Tasik mill as it had to prioritise internal crop processing due to limited storage facilities of 5,000 mt. Consequently, the Group has allocated $275,000 to expand its storage facilities in Tasik mill in 2023.

 

The construction of the oil recovery system in MPM mill at a cost of $1 million will be completed in the second quarter of 2023 after some delay in delivery of imported equipment. This system extracts residual oil from raw effluent as well as reducing fine solid contents in the effluent. The system, when fully operational, is reportedly to be able to improve the OER by 0.2% to 0.3%. As the mill processes up to 400,000 mt of FFB annually, it could potentially recover up to 800 mt of CPO per year.  The reduction of solids in the raw effluent will result in less silting in the effluent treatment ponds after extraction of biogas in the anaerobic lagoon.

 

 

 

On behalf of the Board

Dato' John Lim Ewe Chuan

Executive Director

21 April 2023

 

 

 

Directors' Responsibilities

 

The Directors are responsible for preparing the annual report and the financial statements in accordance with UK adopted international accounting standards and applicable law and regulations.

 

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required to prepare the Group financial statements in accordance with UK adopted International Accounting Standards ("IAS") and have elected to prepare the company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom Accounting Standards and applicable law) ("UK GAAP"). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss for the Group for that period. 

 

In preparing these financial statements, the Directors are required to:

·    select suitable accounting policies and then apply them consistently;

·    make judgements and accounting estimates that are reasonable and prudent;

·    state whether they have been prepared in accordance with UK adopted international accounting standards, subject to any material departures disclosed and explained in the financial statements;

·    prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Company will continue in business; and

·    prepare a Directors' Report, a Strategic Report and Directors' Remuneration Report which comply with the requirements of the Companies Act 2006.

 

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006.

 

They are also responsible for safeguarding the assets of the company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities. The Directors are responsible for ensuring that the annual report and accounts, taken as a whole, are fair, balanced, and understandable and provides the information necessary for shareholders to assess the group's performance, business model and strategy.

 

Website publication

The Directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial statements are published on the Company's website in accordance with the legislation in the UK governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company's website is the responsibility of the Directors.  The Directors' responsibility also extends to the ongoing integrity of the financial statements contained therein.

 

Directors' responsibilities pursuant to Disclosure and Transparency Rules 4 ("DTR4")

The Directors confirm to the best of their knowledge:

·    The financial statements have been prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit and loss of the Group.

·    The annual report includes a fair review of the development and performance of the business and the financial position of the Group and Company, together with a description of the principal risks and uncertainties that they face.

 

 

 

On behalf of the Board

Dato' John Lim Ewe Chuan

Executive Director                                

21 April 2023