M.P. EVANS GROUP PLC — Earnings Release 2018

Apr 2, 2019

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RNS Number : 7542U

M. P. Evans Group PLC

02 April 2019

M.P.EVANS GROUP PLC

M.P.Evans Group PLC ("MP Evans", "the Group" or "the Company"), a producer of sustainable Indonesian palm oil, announces its results for the year ended 31 December 2018.

The Group's 2018 annual report is available on its website at www.mpevans.co.uk/AR2018.

Highlights

Financial

−  Profit for the year US$7.2 million on lower palm-oil prices (2017 US$95.0 million, including US$68.0 million profit on sale of share in Agro Muko joint venture)

−  Operating profit US$19.5 million after uncrystallised foreign exchange loss of US$4.1 million

−  Continuing EPS 9.9 US cents (2017 - 41.8 US cents)

−  Proposed to maintain final dividend at 12.75p per share

Indonesian palm oil

−  Group crops increased 32% to 573,000 tonnes

−  Costs down by 14% to US$320 per tonne of palm product including depreciation and regional overheads

−  Group's high agronomic standards introduced at Bumi Mas, acquired in December 2017

−  Record production of crude palm oil: up 25% to 192,500 tonnes

−  77% of palm oil operations are RSPO certified with expectation of near 100% by 2023

−  Mill-building programme continuing

−  New planting of 1,500 hectares for Group; 600 for smallholders

−  Palm-oil price recovering in 2019

Group value

−  Net current assets of US$43.0 million at 31 December 2018

−  Group equity value of £11.33 per share at 31 December 2018

Commenting on the results, Peter Hadsley-Chaplin, executive chairman of MP Evans, said: "A record year for production of crude palm oil, which increased by 25%, but even this combined with falling costs could not outweigh a year of significantly lower palm-oil prices, so profit for the year fell to US$7.2 million."

Enquiries:

M.P.Evans Group PLC	+44 (0)20 7796 4133 on 2 April 2019 only
	Thereafter +44 (0)1892 516333
Peter Hadsley-Chaplin, Chairman
Tristan Price, Chief executive
Matthew Coulson, Finance director
Peel Hunt LLP	+44 (0)20 7418 8900
Dan Webster
George Sellar
Guy Pengelley
finnCap	+44 (0)20 7220 0500
Tim Redfern
Chris Raggett
Hudson Sandler	+44 (0)20 7796 4133
Charlie Jack
Bertie Berger
Elfie Kent

An analysts' meeting will be held today at 9.30 a.m. at the offices of Hudson Sandler, 25 Charterhouse Square

London EC1M 6AE 020 7796 4133.

Results

Whilst 2018 marked another record year for crops and production, profit was lower than in 2017 in the face of a weak crude palm oil ("CPO") price, especially during the second half of the year. Operating profit was US$19.5 million compared with US$34.0 million in the previous year, as lower operating costs per tonne of production were not enough to outweigh the reduction in the price of CPO. Furthermore, the Group incurred both a deferred-tax charge and a translational foreign-exchange loss in the year.  There was no repeat in 2018 of the US$68.0 million profit recorded in 2017 on selling the Group's Agro Muko palm-oil joint venture. Overall, profit for the year fell to US$7.2 million (2017 US$95.0 million).

Dividend

An interim dividend of 5.00p per share (2017 - 5.00p per share) was paid on 2 November 2018.  No special dividend was paid in 2018 (2017 - 10.00p per share) but the board is recommending a final dividend of 12.75p per share (2017 - 12.75p per share). This maintains dividends for the year in respect of normal operations at 17.75p per share.

Whilst, most unusually, the proposed dividend for the year is not covered by earnings, the board proposes this year to maintain its long-standing policy of a progressive dividend given the strong increase in crop and production projected over the coming years. The board's intention continues to be, where possible, to maintain or increase its normal dividend in future years. It believes the anticipated increase in yield from its young plantations and the acquisition of Bumi Mas provide a basis for sustained future crop growth and, hence, enhanced dividends.

Palm-oil market

The average price of CPO in 2018 was US$598 per tonne, 16% lower than the US$714 in 2017. The fall in price was concentrated during the second half of the year as a widespread surge in production of CPO coincided with plentiful supplies of competing vegetable oils. This led to a significant build-up of CPO stocks and downward pressure on prices. Despite measures introduced by Indonesia to stimulate the production of domestic biofuel using palm oil, year-end world stocks of palm oil reached a record level of 15.1 million tonnes. However, the price of CPO had reached a low point of US$440 per tonne in the middle of November before climbing strongly to finish the year at US$508 per tonne. The price of palm-kernel oil, and hence that of palm kernels which the Group sells, experienced similar pressures but without the mitigating use of the oil as a feedstock for biofuel production. As a result, the price received by the Group for palm kernels in 2018 fell by 28% compared with the previous year.

Strategic developments

The Group has become well established as a producer of sustainable Indonesian palm oil. During 2018, the Group continued to consolidate its position in line with its strategy of controlling all its operations and wherever possible milling its own crop of fresh fruit bunches ("ffb"). The Group already has three mills: at Pangkatan, Bangka and in Kota Bangun, which are all certified by the Roundtable on Sustainable Palm Oil ("RSPO"). A second mill in Kota Bangun is being constructed and is expected to go into operation at the end of 2020. It will be followed by new mills at Bumi Mas and Musi Rawas, so that by the end of 2023 the Group plans to have six mills in operation where, little more than ten years earlier, it had only a single mill at Pangkatan. In this way the Group is extracting the best possible returns from its land and oil-palm plantings, increasing value for shareholders.

Currently, 77% of the Group's production is certified sustainable palm oil. This percentage will rise as the Group constructs its own mills and works with third-party smallholders wanting to supply it with ffb to achieve certification by the Roundtable for Sustainable Palm Oil ("RSPO"). Before the end of 2023, the Group anticipates that all of its production, other than from Simpang Kiri (too small an estate to warrant construction of a mill), will be certified sustainable.

The Group's strategy of controlling all its operations means it is best able to draw on its excellent operational management team, with a proven track record of developing and improving estates in the most effective, productive and sustainable way. A strong balance sheet enables the Group to maintain its planned programme of investment in development projects notwithstanding a cyclical fall in the price of CPO. The need to build roads, permanent housing and water-management infrastructure, quite apart from the construction of mills, represents a significant commitment for a number of years after the palms in its new projects are planted. A strong balance sheet also allows the Group to acquire incremental hectarage for planting around its existing projects, or to provide working capital loans to support the creation or extension of smallholder co-operative areas attached to its own hectarage.

Operational developments

The Group's crops increased by 32% in 2018; by 48% on the smallholder areas attached to its new projects. This maintained the momentum experienced during the first half of the year as the Group increased the areas of palms being harvested and its existing areas continued to mature, giving rise to higher yields. The increase in crops was concentrated in the newer estates at Kota Bangun and Bangka. The latter in particular had a very strong year, with crops increasing by 48% in the Group's area and 41% in the associated smallholder co-operatives. The Group also benefited from the crop harvested at Bumi Mas, the estate in East Kalimantan acquired in December 2017, and the first full year of harvesting at Musi Rawas in South Sumatra. Allowing for a small fall in ffb bought from third parties, the Group processed 27% more crop than in the previous year.

		2018	Increase / (decrease)	2017
		Tonnes	%	Tonnes
Ffb crops
Own crop
Kota Bangun		200,400	36	147,600
Bangka		133,500	48	90,200
Pangkatan group		161,100	2	157,400
Bumi Mas		38,700	-	-
Musi Rawas		4,700	1,075	400
Simpang Kiri		34,600	(11)	38,900
		573,000	32	434,500
Smallholder co-operative crop
Kota Bangun		84,600	40	60,500
Bangka		57,700	41	40,800
Bumi Mas		5,700	-	-
Musi Rawas		1,600	-	-
		149,600	48	101,300
Outside crop purchased
Kota Bangun		13,500	(20)	16,800
Bangka		81,000	(5)	85,400
Pangkatan group		12,000	(25)	16,100
		106,500	(10)	118,300
Total crop		829,100	27	654,100

At the beginning of 2018, the Group took operational control of the estate at Bumi Mas acquired at the end of December 2017. There was some disruption to production of ffb during the first half of the year as the Group's management introduced its high agronomic and operating standards. However, production strengthened during the second half of the year. The board believes the plantings in Bumi Mas have excellent potential which will be fulfilled once the estate is fully brought up to Group standards over the next 12 months or so. A significant investment in workers' housing and roads was made during the year, and this programme of investment will continue, not least with a tender process for the construction of a mill expected to begin before the end of 2019. This estate is expected quickly to contribute to the anticipated acceleration of future growth in Group crops, currently led by its existing young projects in Bangka and at Kota Bangun.

A record year for crop also meant a record year for Group CPO production, which rose by 25% to reach 192,500 tonnes. Ffb processed in the Group's own mills represented 90% of this total, with the balance comprising ffb milled under contract by third parties, including at Musi Rawas and Bumi Mas where the Group does not yet have its own mills. During 2018, the Group was able to continue purchasing significant quantities of ffb from third-party smallholders, particularly in Bangka, albeit at a slightly lower level than in 2017.

		2018	Increase/(decrease)	2017
		Tonnes	%	Tonnes
Production and extraction: Group and third-party mills
Production
Crude palm oil
Kota Bangun		71,400	28	55,600
Bangka		63,200	26	50,000
Pangkatan group		39,900	-	39,800
		174,500	20	145,400
Bumi Mas		9,100	-	-
Musi Rawas		1,200	-	-
Simpang Kiri		7,700	(10)	8,600
		18,000	109	8,600
		192,500	25	154,000
Palm kernels
Kota Bangun		14,800	47	10,100
Bangka		15,100	29	11,700
Pangkatan group		9,600	(2)	9,800
		39,500	25	31,600
Bumi Mas		2,000	-	-
Musi Rawas		300	-	-
Simpang Kiri		1,700	(11)	1,900
		4,000	111	1,900
		43,500	30	33,500
Extraction rates		%		%
Crude palm oil
Kota Bangun		23.9	(3)	24.7
Bangka		23.2	-	23.1
Pangkatan group		23.1	1	22.9
		23.5	-	23.6
Bumi Mas		20.4	-	-
Musi Rawas		19.2	-	-
Simpang Kiri		22.3	-	22.3
Palm kernels
Kota Bangun		5.0	11	4.5
Bangka		5.5	2	5.4
Pangkatan group		5.5	(4)	5.7
		5.3	4	5.1
Bumi Mas		4.6	-	-
Musi Rawas		4.8	-	-
Simpang Kiri		5.0	2	4.9

The Group continues to perform well in comparison with its peers regarding extraction rates. Overall, the Group achieved an extraction rate of 23.5% compared with 23.6% in the previous year. Whilst there was a small improvement in extraction rates in the Pangkatan and Bangka mills, there was a fall in the extraction at Kota Bangun from 24.7% in 2017 to 23.9% in 2018. This came about since the Group's single mill in Kota Bangun had to work at a very high level of capacity utilisation in order to process the surging crop in this area through the middle of 2018. This resulted in longer maintenance intervals which in turn made itself felt in lower extraction rates. Once the peak crop had passed, the backlog of maintenance work was done and, by the end of 2018, extraction rates had returned to levels experienced in 2017.  This improvement is expected to persist in 2019. The availability of a second mill in this area during 2020 will allow the Group to maintain high extraction rates, even at times of unusually high crop.

The Group continues to make good progress in planting its development area at Musi Rawas in South Sumatra, where areas, largely of old rubber, are being replanted to oil palm. The Group planted 2,100 hectares during the year, of which 1,500 hectares were for itself and 600 for its associated smallholder co-operatives. At the end of the year, a total of 7,300 hectares had been planted. Planting in Kota Bangun and Bangka is now substantively complete, although the Group will continue to invest in incremental hectarage where this becomes available. The accelerated replanting programme in North Sumatra referred to in previous reports continued at a good pace as it approaches its expected completion in 2022. At the end of 2018, the Group's share of its subsidiaries' planted areas stood at 34,200 hectares.

Group valuation

Continuing development of the Group's Indonesian plantations, notably at Musi Rawas, has produced a small increase in the total US Dollar value during the year. With the benefit of a small increase in the US Dollar:sterling exchange rate, the Group's equity valuation rose by 3% to £11.33 per share.

Current trading and prospects

Crops during the first two months of 2019 have been ahead of last year in all regions. The Group's crop is rising due to the young age of its palms, an average of 7 years. This is a consequence of the development of its projects in Bangka and East Kalimantan over the last ten years and the recent acquisition of Bumi Mas. The upward trend in crop is expected to last until the end of the next decade. This would be further augmented by the acquisition or development of new project areas.

The recent growth in world palm-oil production is expected to slow in 2019. At the same time, soybean crushing, of which palm oil's main competitor, soy oil, is a by-product, has been reduced by uncertainty over the trading relationship between the USA and China.  Furthermore, the South American soybean crop is expected to decline in 2019. In respect of demand, the increase in world consumption of vegetable oil in 2019 is projected to exceed the increase in production. Stocks of CPO have fallen during the first two months of 2019, and this trend is expected to continue. The average CPO price cif Rotterdam rose from US$508 per tonne at the beginning of the year to US$520 per tonne at the end of March. The futures market for CPO anticipates significant further price increases. The board is of the view that palm oil, because of its high yield and low cost of production, is well placed to benefit from increasing demand for vegetable oil and hence the outlook remains encouraging.

Peter Hadsley-Chaplin

Chairman

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2018

	2018	2017*
	US$'000	US$'000
Continuing operations
Revenue	108,553	116,536
Cost of sales	(82,028)	(80,290)
Gross profit	26,525	36,246
(Loss)/Gain on biological assets	(703)	47
Foreign-exchange (losses)/gains	(4,056)	365
Other administrative expenses	(2,940)	(3,068)
Other income	652	360
Operating profit	19,478	33,950
Finance income	300	2,147
Finance costs	(1,430)	(1,027)
Profit before tax	18,348	35,070
Tax on profit on ordinary activities	(12,657)	(11,244)
Profit after tax	5,691	23,826
Share of associated companies' profit after tax	1,470	3,205
Profit for the year from continuing operations	7,161	27,031
Profit for the year from discontinued operations	-	68,018
Profit for the year	7,161	95,049
Attributable to:
Owners of M.P. Evans Group PLC	5,405	91,129
Non-controlling interests	1,756	3,920
	7,161	95,049
	US cents	US cents
Continuing operations
Basic earnings per 10p share	9.9	41.8
Diluted earnings per 10p share	9.8	41.6
Continuing and discontinued operations
Basic earnings per 10p share	9.9	164.9
Diluted earnings per 10p share	9.8	164.1

*Restated for the introduction of IFRS 15 - see note 3.

CONSOLIDATED BALANCE SHEET

As at 31 December 2018

	2018	2017*
	US$'000	US$'000
Non-current assets
Goodwill	11,767	12,228
Property, plant and equipment	338,225	321,558
Investments in associates	23,020	23,503
Investments	62	53
Deferred-tax asset	5,192	12,280
Trade and other receivables	8,740	5,465
	387,006	375,087
Current assets
Biological assets	1,140	1,843
Inventories	12,883	10,462
Trade and other receivables	39,681	34,368
Current-tax asset	3,470	4,614
Current-asset investments	2,502	6,913
Cash and cash equivalents	21,626	113,910
	81,302	172,110
Total assets	468,308	547,197
Current liabilities
Borrowings	20,883	9,159
Trade and other payables	15,029	65,194
Current-tax liability	2,423	5,317
	38,335	79,670
Net current assets	42,967	92,440
Non-current liabilities
Borrowings	9,173	30,285
Deferred-tax liability	11,505	11,813
Retirement-benefit obligations	8,251	8,434
	28,929	50,532
Total liabilities	67,264	130,202
Net assets	401,044	416,995
Equity
Share capital	9,228	9,255
Other reserves	54,948	54,382
Retained earnings	315,565	323,397
Equity attributable to the owners of
M.P.Evans Group PLC	379,741	387,034
Non-controlling interests	21,303	29,961
Total equity	401,044	416,995

*Restated for the introduction of IFRS 15 - see note 3.

CONSOLIDATED CASH-FLOW STATEMENT

For the year ended 31 December 2018

	2018	2017
	US$'000	US$'000
Net cash generated by operating activities	16,629	20,723
Investing activities
Purchase of property, plant and equipment	(31,879)	(29,533)
Interest received	300	2,147
Proceeds on disposal of property, plant and equipment	727	67
Purchase of subsidiary undertaking	(49,167)	(39,589)
Disposal of associated undertaking	-	99,769
Net cash (used)/generated by investing activities	(80,019)	32,861
Financing activities
Repayment of borrowings	(9,159)	(9,552)
Decrease in bank deposits treated as current-asset investments	4,411	7,349
Dividends paid to Company shareholders	(12,725)	(19,995)
Dividends paid to non-controlling interest	(8,105)	-
Exercise of Company share options	159	506
Buy-back of Company shares	(2,733)	(9,188)
Net cash used by financing activities	(28,152)	(30,880)
Net (decrease)/increase in cash and cash equivalents	(91,542)	22,704
Net cash and cash equivalents at 1 January	113,910	91,405
Effect of foreign-exchange rates on cash and cash equivalents	(742)	(199)
Cash and cash equivalents at 31 December	21,626	113,910

Notes

1.             Dividends paid and proposed

	2018	2017
	US$'000	US$'000
2017 special dividend - 10.00p per 10p share	-	7,155
2017 final dividend - 12.75p per 10p share (2016 final dividend - 12.75p)	9,221	9,180
2018 interim dividend - 5.00p per 10p share (2017 interim dividend 5.00p)	3,504	3,660
	12,725	19,995

Following the year end, the board has proposed a final dividend for 2018 of 12.75p per 10p share, amounting to US$9.3 million. 

	2018	2017
Ex-dividend date	22 April 2019	19 April 2018
Record date	23 April 2019	20 April 2018
Dividend payable on or after	21 June 2019	22 June 2018

2.             Basic and diluted earnings per share

The calculation of earnings per 10p share is based on:-

	2018	2018	2017*	2017
		Number of		Number of
	US$'000	shares	US$'000	shares
Profit for the year attributable to the owners of
M.P. Evans Group PLC	5,405		91,129
Average number of shares in issue		54,787,105		55,255,776
Diluted average number of shares in issue**		55,058,331		55,545,708

* Restated for the introduction of IFRS 15 - see note 16

** The difference between the number of shares in issue and the diluted number of shares relates to unexercised share options held by directors and key employees of the Group.

3.             Prior year adjustment

In accordance with IFRS 15, the Group's associate, Bertam Properties, changed its accounting policy for recognising revenue from January 2018. Previously, revenue from construction contracts on developed property was recognised in full at completion of a sale. From 1 January 2018, this continued to be the case for commercial properties. However, in accordance with the five-step model in IFRS 15, for certain residential properties, revenue is now recognised proportionately over the contract period due to the contract terms in Malaysia. A prior period adjustment has been made to reflect this change in accounting policy using the retrospective method. The impact of the change has been to increase the Group's investment in associates and associated reserves at 1 January 2017 by US$2.4 million, and increase the Group's share of associated companies' profit after tax for the year ended 31 December 2017 by US$0.6 million. Opening reserves at 1 January 2018 have therefore increased by US$3.0 million. The increase in basic earnings per share for the year ended 31 December was 1.1 US cents.

4.             Financial information

The financial information has been derived from the Company's audited accounts but does not itself constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The statutory accounts for the financial year ended 31 December 2018 have been reported on by the Group's auditors, PricewaterhouseCoopers LLP, and will be filed with the Registrar of Companies. The report of the auditors thereon was unqualified and did not contain a statement under section 498(2) or (3) of the Companies Act 2006, nor did it contain any matters to which the auditors drew attention without qualifying their audit report.

5.             International Financial Reporting Standards

This announcement is based on the Group's financial statements which were prepared in accordance with International Financial Reporting Standards ("IFRS"), as adopted by the European Union.

6.             Distribution timetable

The Group's 2018 annual report is available on the Group's website and will be despatched to shareholders on or before 5 April 2019. Printed copies of the Group's 2018 annual report will be available from the Company, 3 Clanricarde Gardens, Tunbridge Wells, Kent TN1 1HQ. The annual general meeting will be held on Friday 14 June 2019.

By order of the board

Katya Merrick

Company Secretary

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