Dear reader
Since writing about REA Prefs in December an update is well overdue. A brief update was given earlier this year and the FY23 results will be published in due course.
Higher Selling Prices
Palm oil is now selling at 4,325 Ringgit (US$935) a tonne, compared to 3,700 in my prior article. By historical standards that’s not a high price but it’s certainly bounced from its recent lows.
That’s great because R.E.A. sell crude palm oil (CPO) and crude palm kernal oil (CPKO).
Sale of Assets
In other news REA has a joint venture partner called DSN. They operate a plantation called Kaltim. DSN has purchased a further 20% share in the JV for $50m consideration. Kaltim is a young plantation and made a P&L loss of $5.2m in 2022. Moreover, because the Kaltim asset is valued at $200m gross in REA’s books there’s a $10m gain on disposal.
DSN may gradually, over the period to 30 June 2028, seek to increase its participation in Kaltim to an eventual level of 49 per cent. Any such increase will be subject to agreement on price and terms as well as consents and approvals.
The proceeds are being part used to pay accrued dividends to Preference Shareholders (72m in issue) of 11.5p per share so this amounts to $10.5m
The remaining $39.5m will be used to pay down net debt which as at 31/12 was down to $188.6m. That means debt is down by a quarter since last June.
The $50m is based on:
(a) $10,500 for each planted hectare owned by the continuing REA Kaltim group (some 31,000 hectares), subject to certain minor exclusions and to a deduction of $6,000 per hectare in respect of 515 hectares to reflect the prospective release of such hectarage to an unrelated third party for coal mining
(b) $12.5 million in respect of the net present value of future economic benefits from the two biogas plants owned by REA Kaltim. The valuation of $10,500 per hectare includes the value attributed to related property, plant and equipment, including the continuing REA Kaltim group's three oil mills and the transhipment terminal.
But there are other asset sales in the offing.
Another plantation called CDM (Cipta Davia Mandiri) is potentially to be bought by DSN too. They have 1st right of refusal, but only have until 31/05/24 to decide.
This would be worth a further $25m and is a non-core asset for REA due to its location. Its sale would reduce debt further to $124m.
The most expensive debt (8.75%) is also the debt which is due to mature the soonest, in 2025. There are $40m of sterling notes and it would appear these can be fully repaid from proceeds.
Progress with the Coal and Stone concessions (whom owe REA $60.5m) is a further boost.
Sustaining Capital
Following substantial investment over the past few years in expansion of the group's newest oil mill and in renovation of its other two mills, all three mills are operating with good reliability. Processing capacity should remain ample for some time for the group's own FFB crops and for the volume of FFB expected to be purchased from third parties. Whilst the mills will continue to require regular replacement and upgrading of mill machinery, the annual investment entailed should now stabilise at a lower level than was needed for the expansion and renovation.
Sustainable Palm Oil
REA is seeking to improve the revenue that it generates from sustainability.
The first objective is increasing the proportion of its total CPO and CPKO that can be sold as sustainable. To this end it is seeking to obtain certification for 3rd party FFB suppliers - sustainability has to be demonstrable through the entire value chain. It also has had to provide remediation in respect of historical land clearing and development.
The second objective is to initiate discussions with potential customers for sustainable oil. The aim here is to be negotiate higher prices for oil which is fully certificated as sustainable.
There is a Sustainable Palm Oil Transparency Toolkit assessment by the Zoological Society of London which assesses palm oil producers, processors and traders on their organisation, policies and practices with respect to environmental, social and governance disclosures. In the 2023 assessment, published in November 2023, DEA’s score increased from 87.0 per cent to 88.7 per cent, compared with an average score of 47.2 per cent, ranking the group 12th out of the 100 palm oil companies assessed.
Conclusion
The completion of the partial sale to DSN is a positive. Debt is being brought down and the preference dividend is being brought up to date.
A recovering price for Palm Oil, sustainability accreditation, progress with the coal and stone concessions and prospectively the sale of CDM will all be positive for REA.
Having increased by 15% during 2024 this fell by 15% on the 28th March.
This is due to the accrued 11.5p dividend which goes ex-dividend tomorrow.
Given there’s 9p of 2024 dividends still to go, this pref should yield 25.6% to shareholders in 2024. (11.5p+9p/80p ask)
Meanwhile not only is there potential for profit to recover strongly, as price recovers and the crop grows in value through sustainability, but big chunks are being taken out the debt - further boosting profitability.
This is not advice
Oak
DSN have a major integral wood business so buying REA wholesale could offer considerable synergies beyond just palmoil
Ps OB; thanks for highlighting that toolkit - a great resource.
https://www.spott.org/