# REA Holdings Weak commodity prices dampen road to recovery

- Link: https://www.directorstalkinterviews.com/rea-holdings-weak-commodity-prices-dampen-road-to-recovery/412796475
- Published: 2019-10-28T16:21:57+00:00
- Author: Amilia Stone

**REA Holdings**‘ 1H’19 results showed a small, 3.1%, increase in own-crop production
levels to 335,177mt and a 7.7% increase in CPO production to 96,514mt. Revenue for
the period was up 17.5%, to $56.6m (1H’18: $48.2m), despite a plunge of more than
20% in the CIF palm oil price compared with 1H’18. The revenue increase was due 
partly to the sale of excess inventory carried forward from the end of 2018. REA
continues to focus on improving its oil extraction efficiency, with an average OER
of 22.9% in 1H’19; however, higher OERs are being achieved in some of the mills 
in recent months.

 * **FY production:** FFB production has slowed vs. the group’s budget, as the oil
   palm trees enter a resting phase after a highly productive 2018. FFB ripening
   has also slowed due to recent dry weather across the sector. REA now expects 
   FFB to fall short of its original expectation of ca.900,000mt in FY’19.
 * **Preference share dividend expected to resume in 2020:** Against the backdrop
   of ongoing weak commodity prices, REA has implemented a series of cost-saving
   measures. It is deferring its preference share dividend payments for both Jun’
   19 and Dec’19, but hopes to resume the payments in 2020.
 * **Financing:** Management recognises the need to deleverage REA’s indebtedness.
   Net debt was $209.0m at end-1H’19 vs. $189.6m in FY’18. Discussions with the 
   bank have resumed; REA expects to convert a large portion of its rupiah borrowings
   to lower-rate dollar borrowings before end-2019, reducing the cost of borrowings
   and helping reduce some funding risk.
 * **Dollar notes and issue of equity:** REA has issued an additional $3m of new
   2022-dollar notes, which were subscribed to by one of the group’s customers, 
   along with a supply agreement. REA has also announced the issuance of 3.441m 
   new ordinary shares, at 145p per share, raising a further £4.9m.
 * **Investment summary:** 2019 remains a difficult year for oil palm operators,
   with palms entering a resting phase in some producing regions. Coupled with a
   weak palm oil price, the sector index has fallen ca.33% since the start of 2017,
   or 18% since the recent Feb’19 peak. We expect REA Holdings to have ca.33,423
   mature ha by end-2019, as well as stronger agricultural production across the
   estates, and the plantations to be fully planted by end-2025.

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