The effects of the extremely dry conditions impacting East Kalimantan during 2014 and 2015, can be seen in a 22% reduction in group harvests and more than a 29% reduction in 3rd Party supplied FFB. Yet 5,700 ha of new planting was achieved, taking the total planted area to a whisker under 42,800ha at end December 2016.

  • Strategy: REA Kaltim (REAK), the principal division of REA, is developing a land bank of some 108,000 ha in East Kalimantan. At the current, accelerated rate of development, the proprietary plantations should be completed by 2020 at circa 60,000 ha. With some 6,600 ha of plasma plantations supplying its mills, REAK should have finished 2016, within the top 20 producers.
  • Renewable Energy: With a high-end profit margin (35%-50%), on supply of sustainable electricity from palm oil mill effluent, this distinct activity is on course for $0.8m of revenues in 2017 and has significant scope for growth. Although dependent on the palm oil operations for fuel, this almost unique activity within the sector, should enjoy an independent valuation.
  • Valuation: In addition to a market capitalisation of some £137m for the REA Holdings’ ordinary shares, investors can also choose to invest for superior income opportunity amongst the company’s range of traded fixed interest securities. These securities include 9% Cumulative Preference shares with a market capitalisation in the region of £63m, a US$ Note programme with an issue value of some £35m and offering a coupon of 7.5%, and two Sterling Note issues of £8.3m and £31.85m, with coupons of 9.5% and 8.75% respectively.
  • Risks: Agricultural risk (as shown by the El Nino weather pattern in 2015/16), commodity price risk, and country risk are constants of palm oil production. 1H gearing, at 72.5%, reflects both a capital structure more biased to debt than equity, the impact of tough operating conditions and a drive for growth.
  • Investment summary: REA is developing and operating high quality plantation assets to produce sustainable palm oil. Against the background of tightening land availability in Indonesia and gathering consolidation within the sector, new partner DSN has acquired a 15% stake in REAK, with scope to attain 49% within 5 years (subject to agreement on price and shareholder approval).