M.P. EVANS GROUP PLC — Earnings Release 2019

Mar 31, 2020

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RNS Number : 1305I

M. P. Evans Group PLC

31 March 2020

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 2019.

The Group's 2019 annual report is available on its website at www.mpevans.co.uk .

Highlights

Financial

−  Profit for the year US$7.5 million (2018 US$7.2 million) 

−  Operating profit US$16.1 million (2018 US$19.5 million) 

−  Continuing EPS 11.6 US cents (2018 - 9.9 US cents) 

−  Proposed to maintain final dividend at 12.75p per share

Indonesian palm oil

−  Total crop processed more than 1 million tonnes 

−  Group crops increased 16% to 663,000 tonnes 

−  Average extraction rate in Group mills increased to 23.7% 

−  Crude-palm-oil production up to 232,000 tonnes 

−  Increase of 3,200 mature Group and scheme smallholder hectares in year 

−  65% of Group production certified sustainable; target 100% once Group processes all own crop 

Group value

−  Group equity value of £11.01 per share at 31 December 2019 

Commenting on the results, Peter Hadsley-Chaplin, executive chairman of MP Evans, said: "More than one million tonnes of crop processed, and an improved oil-extraction rate of 23.7%, did not translate into record profits in 2019 only on account of this year coinciding with a period of low crude palm-oil prices. Notwithstanding a background of rising demand, tight vegetable-oil supply and low stocks, the near-term picture is now clouded by the current Covid-19 pandemic. The board remains confident in the long-term demand for palm oil, and as a basic foodstuff, palm oil is well placed to be an early beneficiary of the economic rebound that is likely to occur as the pandemic recedes."

Enquiries:

M.P.Evans Group PLC	+44 (0)20 7796 4133 on 31 March 2020 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
finnCap	+44 (0)20 7220 0500
Tim Redfern
Chris Raggett
Hudson Sandler	+44 (0)20 7796 4133
Charlie Jack
Elfie Kent Francis Kerrigan

An analysts' meeting will be held today at 09.30 by video conference.

Results

A record year for production and revenue resulted in only a small increase in profit for the year. The weak CPO price in the second half of 2018 carried through into 2019 until near the end of the year, leading to lower profit margins. Operating profit was US$16.1 million compared with US$19.5 million in 2018 reflecting low CPO prices and a small increase in costs, but also a positive foreign-exchange movement compared with a loss in the previous year. Combined with higher interest costs, resulting from additional debt taken to finance the acquisition of shares from the Group's minority partner, and a lower tax charge, profit for the year rose by 4% to US$7.5 million.

After nearly ten months of low CPO prices, in October 2019, prices increased strongly through to the end of the year. This welcome movement did not prevent the average price of CPO for Indonesian exporters being the lowest for 13 years. The average price in 2019 for CPO delivered in Rotterdam was US$566 per tonne, 5% lower than the US$598 per tonne seen in 2018. The price increase in the last two months of the year was the result of CPO consumption consistently exceeding production through the year. At the beginning of the year, high stock balances and production growth were able to meet this increasing demand. However, as the year wore on, production growth fell and stocks unwound, so pressure for a price increase grew. By the end of 2019, the price of CPO was US$860 per tonne. Demand for palm-kernel oil did not increase in the same way as that for CPO, so the price for palm kernels received by the Group fell by 34% compared with the previous year in the face of plentiful supplies of its competitor coconut oil.

Dividend

An interim dividend of 5.00p per share (2018 - 5.00p per share) was paid on 1 November 2019, and the board is recommending a final dividend of 12.75p per share (2018 - 12.75p per share). This maintains dividends for the year in respect of normal operations at 17.75p per share.

The Group finds itself in the unusual position of proposing a dividend not covered by earnings for a second year in succession. The board's view is that it should maintain its long-standing policy of not reducing the dividend given the strong increase in crop and production projected over the coming years combined with the knowledge that the sector has experienced an extended period of low CPO prices for a commodity whose price moves in cycles. The board will monitor the evolving situation in respect of the coronavirus Covid-19 carefully in reaching its proposals for future dividends. It believes the anticipated increase in yield from its young plantations provides a basis for sustained future crop growth and, ultimately, enhanced dividends.

Palm-oil market

Against a backdrop of low prices, demand for palm oil grew strongly in 2019. Production too increased, to a record 76 million tonnes. Rising production was not enough to satisfy burgeoning demand for palm oil as a food and as a constituent of biodiesel, notably in Indonesia itself where crude- palm- oil ("CPO") consumption increased by 20%. As a result, stocks of CPO fell sharply during the year from the high levels they had reached at the end of 2018. Increasing demand and lower stock levels saw the volume of trade in CPO rebound during 2019: 60% of trade in vegetable oils was palm oil.

In Indonesia and Malaysia, the world's largest palm-oil producers, production increased by 1 million tonnes (some 2%) in 2019, a more modest increase than in 2018. In both countries the average yield per hectare fell slightly. Production growth attenuated significantly in the second half of the year. Disease in Latin America and volcanic eruptions in Papua New Guinea lay behind near stagnant production in the rest of the world. At the same time, there was a significant increase in the imports of CPO by China, India and the EU during 2019. This was especially marked in China, partly the consequence of African swine fever. These developments took place at a time when global production of other vegetable oils barely increased. The total increase in world production of vegetable oils in 2019 was 2 million tonnes, half of which was from CPO.

Consumption of CPO exceeded production in each quarter of 2019. At the beginning of the year, high stock balances and production growth were able to meet increased demand. However, as the year wore on, production growth fell and stocks unwound. This became clear at the end of October, when the price of CPO increased dramatically, finishing the year at US$860 per tonne. Notwithstanding the strong upward price movement in the last two months of the year, the average price for the year was US$566, US$32 (5%) lower than in 2018.

Strategic developments

The Group has continued to implement its strategy to focus on developing and operating majority-held plantations to produce sustainable Indonesian palm oil. The Group's approach to making decisions for the long term is suited both to a long-lived plant such as the oil palm and to the thinking needed to make the right choices for a sustainable future.

In September 2019, the Group was able to take a further step in executing its strategy by acquiring additional shares in its Indonesian operating subsidiaries previously held by one of its minority partners. This had the effect of expanding the number of high-quality and environmentally-sound planted hectares owned by the Group. The acquisition was fully funded by taking on additional debt of US$25.4 million. In this way, the Group successfully consolidated its ownership at a price of US$9,500 per hectare that represented an attractive and low-risk return to shareholders. As part of this transaction, the Group's long-standing Indonesian partner, PT Austindo Nusantara Jaya ("ANJ"), sold all of its holdings in Group companies. The board is grateful to ANJ for their support over many years and wishes them well in the future. At the same time, the Group looks forward to a long and fruitful relationship with a new Indonesian partner, Mr Praba Madhavan, a like-minded individual with wide experience in the commodity sector.

Wherever possible, the Group mills its own crop of fresh fruit bunches ("ffb"). It already operates three of its own mills, at Pangkatan, Kota Bangun and Bangka. A second mill at Kota Bangun, needed to process the increasing crop from the maturing plantings on this project, is on track to be commissioned in the middle of 2020. Work is also already under way at Bumi Mas to construct a mill, which is expected to be operating in mid-2021. As it increases the amount of its own crop that it mills itself, the Group will be able to report a higher level of certified sustainable production. Furthermore, where it buys ffb from independent smallholders, the Group is committed to working with them to ensure their ffb can be certified as sustainable under the new RSPO Independent Smallholder Standard.

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 the Group's plantations notwithstanding the cyclical rise and 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 on its new projects are planted. A strong balance sheet also allows the Group to acquire incremental hectarage for planting around its existing projects.

Operational developments

Projected growth in the Group's crop persists. 2019 was the first year in which the Group processed more than 1 million tonnes of ffb. The total crop processed increased by 21%. The Group's crops rose by 16% and those of its 'scheme' smallholders (those attached to the Group's projects) by 15%. The rise in crop was particularly pronounced at Bumi Mas, where the operating standards introduced by the Group are visibly having a positive effect. At a lower volume, the crop at Musi Rawas is also growing at a good rate as this project's original plantings increasingly come into harvesting. Crop purchased from independent smallholders increased by 56% to 166,000 tonnes as the Group sought to make best use of the spare capacity at its three mills.

	2019	Increase/  (decrease)	2018
	Tonnes	%	Tonnes
Crop
Own crop
Kota Bangun	194,000	(3)	200,400
Bangka	128,900	(3)	133,500
Pangkatan group	164,300	2	161,100
Bumi Mas	122,000	215	38,700
Musi Rawas	15,400	228	4,700
Simpang Kiri	38,700	12	34,600
	663,300	16	573,000
Scheme smallholder crops
Kota Bangun	87,300	3	84,600
Bangka	57,500	-	57,700
Bumi Mas	19,600	244	5,700
Musi Rawas	7,700	381	1,600
	172,100	15	149,600
Independent smallholder crop  purchased
Kota Bangun	39,600	193	13,500
Bangka	105,200	30	81,000
Pangkatan group	21,300	78	12,000
	166,100	56	106,500
Total crop	1,001,500	21	829,100

The Group prides itself on the extraction it achieves from its ffb. Overall, the Group's extraction rate rose to 23.7% in its own mills from 23.5% in 2018. This was the case even though the Group processed significantly more crop bought from independent smallholders, which is not the same quality as its own crop or that of its scheme smallholders. Following last year's dip to 23.9% in the oil-extraction rate in its Bumi Permai mill in Kota Bangun, caused by high-capacity utilisation leading to longer maintenance intervals, in 2019 the extraction rate at this mill climbed back to 24.6%. The Group's other mills maintained good rates of oil- and kernel-extraction. In total, the Group produced 230,000 tonnes of CPO, 20% more than in 2018.

		Increase/
	2019		(decrease)	2018
Production	Tonnes		%	Tonnes
Crude palm oil
Kota Bangun	79,000		11	71,400
Bangka	67,400		7	63,200
Pangkatan group	42,800		7	39,900
	189,200		8	174,500
Bumi Mas	29,500		224	9,100
Musi Rawas	4,800		300	1,200
Simpang Kiri	8,400		9	7,700
	42,700		137	18,000
	231,900		20	192,500
Palm kernels
Kota Bangun	17,000		15	14,800
Bangka	16,200		7	15,100
Pangkatan group	10,100		5	9,600
	43,300		10	39,500
Bumi Mas	6,800		240	2,000
Musi Rawas	1,100		267	300
Simpang Kiri	1,800		6	1,700
	9,700		143	4,000
	53,000		22	43,500
Extraction rates	%		%	%
Crude palm oil
Kota Bangun	24.6		3	23.9
Bangka	23.1		-	23.2
Pangkatan group	23.1		-	23.1
	23.7		1	23.5
Bumi Mas	20.9		2	20.4
Musi Rawas	20.6		7	19.2
Simpang Kiri	21.8		(2)	22.3
Palm kernels
Kota Bangun	5.3		6	5.0
Bangka	5.6		2	5.5
Pangkatan group	5.4		(2)	5.5
	5.4		2	5.3
Bumi Mas	4.8		4	4.6
Musi Rawas	4.6		(4)	4.8
Simpang Kiri	4.8		(4)	5.0

At Bumi Mas, good progress was made in bringing the project up to the Group's standards. Roads were strengthened and improved, and housing for workers and staff built. Work to restore plantings which had been neglected was carried out, which contributed to the strong increase in crop from this project. At Musi Rawas, planting since development began reached 8,000 hectares, of which 5,700 were for the Group and 2,300 for its scheme smallholders. In addition, land compensation had been paid on 1,300 hectares and further hectares had been surveyed, which is a necessary precursor to the land being available for planting. However, during 2019, the Roundtable for Sustainable Palm Oil ("RSPO") adopted a change to its standards which affects new planting. Development at Musi Rawas was paused to allow the Group time to assess the new standards and ensure that it complied with them. In the Group's own areas and in those of its scheme smallholders, planting is carried out in rigorous compliance with RSPO standards to ensure the fruit will be certified as being produced sustainably. It is anticipated that planting at Musi Rawas can resume by mid-2020.

At the end of 2019, the Group managed 51,600 hectares of oil palm on behalf of itself and its scheme smallholders, of which effective ownership by the Group's shareholders, taking account of minority-shareholder interests, amounted to 37,100 hectares.

Group valuation

Acquisition of some shareholdings from the Group's minority partner, as well as continuing development, produced an increase in the total US Dollar value of the Group's plantations during the year. This was counterbalanced by an increase in debt used to purchase the minority holdings and a reduction in the value of Malaysian property, leaving the Group's equity valuation at the end of 2019 at £11.01, slightly lower than a year earlier.

Current trading and prospects

Crop in the first two months of 2020 is ahead of last year in all regions. Compared with last year, the Group has also purchased significantly more ffb from independent smallholders. The Group changed its policy in the middle of 2019 to purchase more outside fruit, so the rate of growth of outside purchases will not be sustained for the year 2020 as a whole. At the end of February, total crop processed was 180,000 tonnes, 47% more than the 122,000 tonnes processed during the first two months of 2019. The details are set out in the following table:- 

	2 months ended		2 months ended
	29 February 2020	Increase	28 February 2019
	Tonnes	%	Tonnes
Group	107,100	23	87,200
Scheme smallholders	27,500	27	21,600
Independent smallholders	45,600	240	13,400
	180,200	47	122,200

The Group's crop is rising due to the young age of its palms, an average of 7 years. The upward trend in crop is expected to last until the end of the decade. This would be further augmented by the acquisition or development of new project areas. 

As reported above, the price of CPO strengthened considerably in the last two months of 2019. The rise was prompted by expectations of modest vegetable-oil supply increases during 2020 failing to match increased demand, combined with depleted stock levels compared with recent years. This development takes place against a background of tight supply of all the major vegetable oils. In the longer term, insufficient levels of replanting in Malaysia and a reduction in new Indonesian planting are likely to curb growth in production. Average yield per hectare for the industry in 2019 stagnated in Malaysia and declined slightly in Indonesia.

Whilst these benign forces remain in place, the near-term position has been clouded by the outbreak of Covid-19 in China that, at the date of this report, had spread across most of the globe. The impact of this outbreak remains uncertain, but it has already had a negative effect on global economic growth and the short-term demand for palm oil, which may persist. The CPO price declined during February to a low of US$640 per tonne, falling a little further to US$595 at the end of March. It is possible that widespread infection within Indonesia could reach the Group's workforce and bring with it the possibility that it could temporarily reduce the Group's capacity to harvest or mill ffb and so reduce the expected growth in its production. Notwithstanding the uncertainties surrounding Covid-19, 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 that the outlook remains encouraging.

Peter Hadsley-Chaplin

Chairman

CONSOLIDATED INCOME STATEMENT

For the year ended 31 December 2019

	2019	2018
	US$'000	US$'000
Continuing operations
Revenue	119,341	108,553
Cost of sales	(102,297)	(82,028)
Gross profit	17,044	26,525
Gain/(loss) on biological assets	927	(703)
Foreign-exchange gains/(losses)	1,161	(4,056)
Other administrative expenses	(3,466)	(2,940)
Other income	458	652
Operating profit	16,124	19,478
Finance income	403	300
Finance costs	(3,747)	(1,430)
Profit before tax	12,780	18,348
Tax on profit on ordinary activities	(7,183)	(12,657)
Profit after tax	5,597	5,691
Share of associated companies' profit after tax	1,873	1,470
Profit for the year	7,470	7,161
Attributable to:
Owners of M.P. Evans Group PLC	6,333	5,405
Non-controlling interests	1,137	1,756
	7,470	7,161
	US cents	US cents
Continuing operations
Basic earnings per 10p share	11.6	9.9
Diluted earnings per 10p share	11.5	9.8
	Pence	Pence
Basic earnings per 10p share
Continuing operations	9.0	7.4

CONSOLIDATED BALANCE SHEET

As at 31 December 2019

Company number: 1555042
	2019	2018*	2017*
	US$'000	US$'000	US$'000
Non-current assets
Goodwill	11,767	11,767	12,228
Other intangible assets	1,433	-	-
Property, plant and equipment	368,744	338,225	321,558
Investments in associates	21,553	20,312	20,631
Investments	66	62	53
Deferred-tax asset	5,284	5,192	12,280
Trade and other receivables	11,555	8,740	5,465
	420,402	384,298	372,215
Current assets
Biological assets	2,067	1,140	1,843
Inventories	11,072	12,883	10,462
Trade and other receivables	45,117	39,681	34,368
Current-tax asset	4,245	3,470	4,614
Current-asset investments	1,160	2,502	6,913
Cash and cash equivalents	25,947	21,626	113,910
	89,608	81,302	172,110
Total assets	510,010	465,600	544,325
Current liabilities
Borrowings	28,337	20,883	9,159
Trade and other payables	22,215	15,029	65,194
Current-tax liability	3,657	2,423	5,317
	54,209	38,335	79,670
Net current assets	35,399	42,967	92,440
Non-current liabilities
Borrowings	66,137	9,173	30,285
Trade and other payables	265	-	-
Deferred-tax liability	12,312	11,505	11,813
Retirement-benefit obligations	9,401	8,251	8,434
	88,115	28,929	50,532
Total liabilities	142,324	67,264	130,202
Net assets	367,686	398,336	414,123
Equity
Share capital	9,200	9,228	9,255
Other reserves	55,385	53,582	52,852
Retained earnings	294,139	314,223	322,055
Equity attributable to the owners of
M.P.Evans Group PLC	358,724	377,033	384,162
Non-controlling interests	8,962	21,303	29,961
Total equity	367,686	398,336	414,123

* Restated - see note 3.

CONSOLIDATED CASH-FLOW STATEMENT

For the year ended 31 December 2019

	2019	2018
	US$'000	US$'000
Net cash generated by operating activities	32,002	21,297
Investing activities
Purchase of property, plant and equipment	(46,531)	(31,879)
Purchase of intangible assets	(721)	-
Interest received	210	300
Decrease in bank deposits treated as current-asset investments*	1,342	4,411
Decrease/(increase) in receivables from smallholder co-operatives*	4,690	(4,668)
Proceeds on disposal of property, plant and equipment	489	727
Purchase of subsidiary undertaking	-	(49,167)
Loan to related party	(11,747)	-
Net cash used by investing activities	(52,268)	(80,276)
Financing activities
New borrowings	110,419	-
Repayment of borrowings	(46,134)	(9,159)
Lease liability payments	(167)	-
Dividends paid to Company shareholders	(12,364)	(12,725)
Dividends paid to non-controlling interest	-	(8,105)
Purchase of non-controlling interests	(25,417)	-
Exercise of Company share options	218	159
Buy-back of Company shares	(2,286)	(2,733)
Net cash generated/(used) by financing activities	24,269	(32,563)
Net increase/(decrease) in cash and cash equivalents	4,003	(91,542)
Net cash and cash equivalents at 1 January	21,626	113,910
Effect of foreign-exchange rates on cash and cash equivalents	318	(742)
Cash and cash equivalents at 31 December	25,947	21,626

* Restated - see note 3.

Notes

1.             Dividends paid and proposed

	2019	2018
	US$'000	US$'000
2019 interim dividend - 5.00p per 10p share (2018 interim dividend 5.00p)	3,519	3,504
2018 final dividend - 12.75p per 10p share (2017 final dividend 12.75p)	8,845	9,221
	12,364	12,725

Following the year end, the board has proposed a final dividend for 2019 of 12.75p per 10p share, amounting to US$9.0 million.

	2019	2018
Ex-dividend date	23 April 2020	22 April 2019
Record date	24 April 2020	23 April 2019
Dividend payable on or after	19 June 2020	21 June 2019

2.             Basic and diluted earnings per share

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

		2019		2018
	2019	Number	2018	Number
	US$'000	of shares	US$'000	of shares
Profit for the year attributable to the owners
of M.P. Evans Group PLC	6,333		5,405
Average number of shares in issue		54,599,417		54,787,105
Diluted average number of shares in issue*		54,875,441		55,058,331

*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 a previous year, the Group sold land to one of the Group's associated companies, and in accordance with accounting requirements, deferred a proportion of the profit arising until the associated company sold the related land. Previously, the deferred amount was recorded within the Group's revaluation reserve, and a prior year adjustment has been recorded to reclassify it as a reduction from investment in associates. The impact of the adjustment is to reduce net assets and total equity at 31 December 2018 by US$2.7 million, and there is no impact on the consolidated income statement or cash flows. At the beginning of 2018, the impact of the adjustment on the balance sheet is to reduce net assets and total equity by US$2.9 million.

In addition, in the consolidated cash flow statement, following a review of cash flows in the current year, both movements in receivables from smallholder co-operatives and changes in bank deposits treated as current asset-investments have been included in investing activities. Comparative amounts have been shown consistently, having previously been included in operating and financing activities respectively.

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 435 of the Companies Act 2006. The statutory accounts for the financial year ended 31 December 2019 have been reported on by the Group's auditors, BDO 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 2019 annual report is available on the Group's website and will be despatched to shareholders on or before 9 April 2020. Printed copies of the Group's 2019 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 5 June 2020.

By order of the board

Katya Merrick

Company Secretary

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