After two difficult years, REA Holdings plc LON:RE put its operations back on a growth path in 2014. That revenues increased by nearly 14% in a year when the price of palm oil weakened by 21%, and operating profits expanded by 32%, indicates that the company is recovering from the setbacks of 2012 and 2013. Yet REA has more to do, operating efficiencies, while still amongst the upper end of the palm oil producer peer group, have room for improvement, and this is reflected in the valuation. REA owns some of the best plantations in Asia and it possesses a significant land bank that provides it with the opportunity to double the size of operations, but over the last five years the pace of development has been painfully slow. There are indications now that 2015 will mark a turn in the pace of development. Peer group valuation analysis positions REA within the middle of the valuation range. However REA Holdings LON:RE has the potential to recover a higher ranking as its growth potential is realised. The company offers two investment vehicles in the form of the Ordinary shares yielding 4.9%, and the Cumulative Preference shares yielding 7.2%. While the income attraction of the Preference shares is compelling in a low interest rate environment, the Ordinary shares should benefit from improving operational efficiencies, a strengthening balance sheet and from any uplift in the CPO price, whenever that may be.
Readers should note that REA Holdings plc is preparing to publish its second Sustainability Report later in 2015. The production of palm oil competes with the rainforest within the tropical belt and for this reason it has attracted opposition. Within the sector REA sets best in class standards for sustainability, including the setting aside of more than 20,000 ha for conservation, and the establishment of a separate operating unit (KON) to manage its conservation programme. Moreover the company has raised the bar on the sustainability of palm oil production with the generation of electricity from palm oil mill effluent to meet its internal requirements and for sale to local communities who were previously without supply. Readers will note that 33% of the fertiliser requirement derives from estate produced organic compost and that building
bricks and other estate items are manufactured with palm oil production by‐products. For investors focused on participation in ethically directed companies, REA’s 2015 Sustainability Report is recommended reading.
You can download the complete REA Holdings report by Hardman & Co here: REA Holdings plc April 2015