Anglo-Eastern Plantations Regulatory News (AEP)

Anglo-Eastern Plantations Plc

("AEP", "Group" or "Company")

Final results for year ended 31 December 2020

The group comprising Anglo-Eastern Plantations Plc ("AEP") and its subsidiaries (the "Group"), is a major producer of palm oil and to a lesser extent rubber with plantations across Indonesia and Malaysia, amounting to some 128,000 hectares, has today released its results for the year ended 31 December 2020.

Financial Highlights

Enquiries:

Chairman's Statement

The Covid-19 pandemic, as declared by the World Health Organisation in early 2020, escalated into a worldwide crisis which has upended many lives and businesses. At the time of writing, more than three million deaths and over approximately one hundred and fifty million infections were recorded worldwide. At the peak of the pandemic, economic activities almost grounded to a halt as many people were forced to stay at home under strict measures imposed to curb the spread of the virus. In some countries where restrictions were eased to allow people to work and travel, second and third waves of infections have soared. Countries in Europe and South East Asia, facing the next wave of infections were forced to reintroduce stringent controls including lockdowns to slow the spread which threaten to overload their hospitals. Masks and social distancing are now part of everyday life. In Indonesia where most of AEP plantations are based, the number of people infected has exceeded one million while in Malaysia, the number of infections is still low comparatively but infections have surged from the third quarter of 2020. The significant upsurge of cases and the high fatalities in India, reported as a crisis, is of grave concern as it has spilled into the neighbouring countries and Indonesia and Malaysia are not far off logistically. Vaccination programmes have started in many countries and it will take enormous efforts on all fronts to recover from this global calamity.

Most businesses across Indonesia and Malaysia were adversely affected by the pandemic in 2020 and the upsurge including emergence of new variants of coronaviruses at the start of 2021 of which our operations in Indonesia and Malaysia are no exception. Although currently, the affected numbers of staff and field workers are not alarming, it is prudent to continue imposing vigilant measures, especially in Indonesia where our plantations are located in scattered regions, provinces and islands.

The Group's fresh fruit bunches ("FFB") production in 2020 reached 1.10 million mt, 7% higher than last year of 1.03 million mt due to improved weather. Rainfalls were satisfactory in most of the regions that the Group operated other than the first three months of the year. A moderate La Nina weather phenomenon brought heavy rainfall to coastal estates in North Sumatera and Malaysia towards the end of the year causing flash floods and some landslides. With mostly favourable weather, all regions reported between 6% to 12% higher FFB production. Production in South Sumatera was the exception where harvest declined sharply by 13% due to poor rainfall distribution. FFB bought-in from surrounding smallholders and plasma was 913,200 mt (2019: 907,100 mt), marginally more than 2019. The mills processed 1.97 million mt of FFB, 5% more than last year of 1.87 million mt. crude palm oil ("CPO") production, as a result, was 3% higher at 406,100 mt, compared to 394,700 mt in 2019.

CPO prices for the first half of the year were weak as expected due to the low economic activities during the pandemic which adversely affected demand. As the lockdown eased and international trade gradually resumed, prices rallied in the second half of the year. The export of Indonesian palm oil to the three key markets of India, China and European Union ("EU") in 2020 was reported to drop substantially during the pandemic. Despite the drop in international consumption, the strong rebound in prices was due to a combination of reasons. The continuation of Indonesian B30 biodiesel programme despite low crude oil prices, the low inventory caused by a lower FFB production and soaring soybean prices were the main contributors to the rally. A more detailed explanation is provided in the Strategic Report under Commodity Prices. The average CPO price ex-Rotterdam ended the year 28% higher at $723/mt, compared to $565/mt in 2019.

The higher FFB production and higher CPO prices meant that the Group's revenue was higher by 23% at $269.1 million, compared to $219.1 million achieved in 2019. The operating profit for the Group in 2020, before biological asset ("BA") movement almost quadrupled to $48.1 million, from $12.2 million reported in 2019. The earnings per share, before BA movement, increased by 120% to 77.67cts, from 35.37cts in 2019. The Group's operating profit after BA movement for 2020 was at $49.4 million after an upward BA movement of $1.3 million as compared to 2019 operating profit of $15.4 million after an upward BA movement of $3.3 million.

The Group's new planting for oil palm including plasma for 2020 totalled 2,190 ha compared to 1,757 ha last year. The new planting was mostly concentrated in the Bangka and Kalimantan regions where negotiations with owners over land compensation were concluded more efficiently. Another 785 ha was replanted in North Sumatera and Bengkulu during the year to replace trees with poor yield. In 2021, the Group plans to plant 3,800 ha of oil palm which includes replanting of 950 ha in Bengkulu.

The Group has four biogas plants with a combined capacity of slightly above five megawatts. The latest addition, Tasik Raja biogas plant, was commissioned in the fourth quarter of 2020. The Group generated 18,900 MWh of electricity in 2020 compared to 17,200 MWh last year. The revenue from the sale of surplus electricity was $970,000, 7% higher than last year of $908,000. The biogas operations were not spared by the pandemic as demand for power in Indonesia diminished with many businesses scaling or shutting down. They underperformed as the state owned company suspended the uptake of electricity from two of our plants while reducing the unit rate it purchased from another. The Group will continue the use of clean energy where possible to further reduce the mills' reliance on fossil fuels and to address growing calls to reduce greenhouse gas emissions which could threaten the long-term social acceptability and profitability of a palm oil company.  

With many countries battling against the pandemic, headlines and attention have been drawn away from EU threat to reduce the use of palm oil for biofuel in 2024 and to completely phase it out by the year 2030. The adverse perception of palm oil as an environmentally unfriendly and non-renewable source particularly in the EU has continued to feature in recent years, touching on issues including deforestation, emission of greenhouse gases, planting on peatland and land rights. AEP remains committed to No Deforestation, No Peatland, No Exploitation ("NDPE") policies. All supplies of FFB to our mills are traceable to their origins of supply chains and are not linked to illegal deforestation. There is growing pressure from buyers to avoid CPO with NDPE and High Conservation Values ("HCV") issues.

A prolonged resurgence of the Covid-19 pandemic, especially with many countries already on recession watch, remains a potential major risk to palm oil demand in both the food and energy sectors. Despite the availability of vaccines, a slower than expected rollout or a reduction in the effectiveness of vaccines could weaken consumer and business confidence and dampen economic recovery resulting in weaker trade and commodity prices.

I have mentioned earlier that one of the main reasons for the high CPO prices was the high domestic demand in Indonesia created by the government B30 biodiesel programme whereby it uses 30% fatty acid methyl esters made from palm oil to blend with the traditional fossil fuel. The soaring CPO prices meant that the Indonesian government had to pay ballooning biodiesel subsidies. It was inevitable that in December 2020, the Indonesian government raised the exports levy and tax on CPO. The export levy for palm oil exports was revised from a fixed rate of $55/mt to progressive rates linked to CPO prices. Under the new structure, export levy is payable from a minimum of $55/mt to $255/mt when the CPO prices range from $670/mt to above $995/mt. On top of this, the government also collects export tax of $33/mt up from $3/mt previously. Without the revision, the long term economic viability of the biodiesel programme in Indonesia is questionable amidst the low crude oil prices. This new structure would, at the same time, cap the exponential growth of profit due to soaring CPO prices.

Brexit became a reality as the UK exited the EU single market with an EU tariff and quota-free trade deal sealed to avert potential business chaos and uncertainties in the immediate future, although it maybe unlikely that AEP's business will be significantly affected by this. At present, I believe that people are generally more concerned about the continuing Coronavirus pandemic which has claimed many lives and disrupted the economy and livelihood not just in the UK but across the globe. With the availability of vaccine some communities believe there is hope that the world can gradually combat Covid-19 and over time will bring back normality or close to normality to our lives. However, it is unknown when will be the time or year that the above will come into reality.

In determining the amount of dividends to be paid to our shareholders, the Board in previous years had been consistent with a balanced approach to the requirement of funds in the Company in order to expand and enhance shareholders' value but at the same time cognisant of shareholders' wishes to have dividends as a form of income. As with last year the Board continues to have the regulatory obligation to ensure that the Group has adequate funds to continue as a going concern for the foreseeable future in a near worst-case scenario because of the uncertainty due to Covid-19. As a result of the current crisis in India, as well as the precautionary measures in Indonesia, the Board is of the opinion that the pandemic is far from over in the region where the Group's operations are, due to the mutations and variants more infectious than the initial virus that the world has been combating. With this in mind the Board has adopted a prudent view for the time being and has declared a final dividend of 1.0cts per share, in line with our reporting currency, in respect of the year to 31 December 2020 (2019: 0.5cts). In the absence of any specific instructions up to the date of closing of the register on 11 June 2021, shareholders with addresses in the UK will be deemed to have elected to receive their dividends in Pounds Sterling and those with addresses outside of UK will be deemed to have elected to receive their dividends in US Dollars. Subject to the approval by shareholders at the AGM, the final dividend will be paid on 16 July 2021 to those shareholders on the register on 11 June 2021.

This year's Annual General Meeting ("AGM") scheduled on 28 June 2021 will be held in Kuala Lumpur again because of practical reasons linked to this pandemic. Although shareholders are able to participate via Zoom, the Board is, nevertheless, conscious that shareholders would want to have personal interaction with Board members, normally at the AGM and therefore a meeting will be organised in London when it is appropriate to do so, with less formality, for shareholders to meet with some of the Board members.

On behalf of the Board of Directors, I would like to convey our sincere thanks to our management and employees of the Group for their dedication, loyalty, resourcefulness, commitment and contribution to the preservation of the Group's operation as a going concern during this extremely difficult and trying period. We would appreciate that they would continue to do so if local and global adversity were to worsen.

I would also like to take this opportunity to thank shareholders, business associates, government authorities and all other stakeholders for their continued confidence, understanding and support for the Group.

Madam Lim Siew Kim

Chairman

12 May 2021

Strategic Report

Introduction

The Strategic Report has been prepared to provide shareholders with information to complement the financial statements. This report may contain forward-looking statements, which have been included by the Board in good faith based on information available up to the time of approval of this report. Such statements should be treated with caution going forward given the uncertainties inherent with the economic and business risks faced by the Group.

Business Model

The Group will continue to focus on its strength and expertise, which is planting more oil palms and production of CPO. This includes replanting old palms with low yield, replacing old rubber trees with palm trees and building more mills to process the FFB. The Group has, over the years, created value to shareholders through expansion in a responsible way.

The Group remains committed to use its available resources to develop the land bank in Indonesia as regulatory constraints permit. The Indonesian government has, in recent years, passed laws to prioritise domestic investments and to limit foreign direct investments over national interest, including a limit of 20,000 ha per province and a national total of 100,000ha on the licensed development of oil palms for companies that are not listed in Indonesia or with less than a majority local ownership.

The Group's objectives are to provide appropriate returns to investors in the long-term from its operations as well as through the expansion of the Group's business, to foster economic progress in localities of the Group's activities and to develop the Group's operations in accordance with the best corporate social responsibility and sustainability standards.

We believe that sustainable success for the Group is best achieved by acting in the long-term interests of our shareholders, our partners and society.

Our Strategy

One of the Group's objectives is to provide an appropriate level of return to the investors and to enhance shareholder value. Profitability, however, is very much dependent on the CPO price, which is volatile and is determined by supply and demand. The Group believes in the long-term viability of palm oil as it can be produced more economically than other competing oils and remains the most productive source of vegetable oil in a growing population. Soybean crops would require up to eight times as much land to produce an equivalent weight of palm oil. It was reported that amongst the major oilseeds, oil palm occupies about 10% of the total agricultural land but contributes more than 40% of the world's supply of oils and fats.

The Group's strategies, therefore, focus on maximising yield per hectare above 22 mt/ha, minimum mill production efficiency of 110%, minimising production costs below $300/mt and streamline estate management. For the year under review, the Indonesian operations achieved a yield of 18.9 mt/ha, 133% mill efficiency and production cost of $280/mt. This compared favourably to 2019 where the Group achieved a yield of 18.1 mt/ha, 132% mill efficiency and production cost of $285/mt. Despite stiff competition for external crops from surrounding millers, the Group is committed to purchasing more external crops from third parties at competitive, yet fair prices, to maximise the production efficiency of the mills. With higher throughput, the mills would achieve economies of scale in production. A mill achieves 100% mill efficiency when it operates 16 hours a day for 300 days per annum.

In line with the commitment to reduce its carbon footprint, the Group plans to construct, in stages, biogas plants at all of its mills to trap the methane gas emitted from the treatment of palm mill effluents to generate electrical power and at the same time reduce the consumption of fossil fuel. It plans to sell the surplus electricity and progressively reduce the greenhouse gas emissions per metric ton of CPO produced in the next few years. It is commonly accepted that failure to address growing calls to reduce greenhouse gas emissions could threaten the long-term social acceptability and profitability of a palm oil company. The Group, however, has to put on hold future biogas projects as the state authorities have suspended the uptake of electricity from two of our biogas plants and reduced the electricity rate for the purchase from another plant due to a drastic drop in demand during the pandemic.

The Group will continue to engage and offer competitive and fair compensation to the villagers so that land can be cleared and be planted.

Financial Review

Performance of the business during the year

For the year ended 31 December 2020, revenue for the Group was $269.1 million, 23% higher than $219.1 million reported in 2019 due primarily to the higher CPO prices and higher production.

The Group's operating profit for 2020, before biological asset movement, almost quadrupled to $48.1 million, from last year of $12.2 million.

FFB production for 2020 reached 1.10 million mt, 7% higher than the 1.03 million mt produced in 2019. The overall yield for the Indonesian plantations was higher at 18.9 mt/ha (2019: 18.1 mt/ha) due to more consistent and better rainfall throughout the year coupled with an increased in matured areas to harvest. La Nina weather patterns brought flash floods to many areas towards the end of the year but the permanent damage to the trees was minimal, while damages to infrastructure such as roads and bridges were manageable. Young matured oil palms in North Sumatera grew well and reported a 13% higher crop production. Bengkulu region, which suffered the most from the effect of drought last year, recovered partially with production up by 6%.

FFB bought-in from local smallholders and plasma in 2020 was 913,200 mt (2019: 907,100 mt), 0.7% more compared to 2019. The supply of external crops was affected by greater competition from new mills in North Sumatera and lower productivity amongst smaller plantations as they reduced the fertilizer application during the period of low CPO prices. During the year, the Group's mills processed a combined 1.97 million mt of FFB, 5% more than last year of 1.87 million mt. CPO production, as a result, was 3% higher at 406,100 mt, compared to 394,700 mt in 2019.

Profit before tax and after BA movement for the Group was $51.7 million, 174% higher compared to a profit of $18.9 million in 2019. The BA movement was a credit of $1.3 million, compared to a credit of $3.3 million in 2019. The BA movement was mainly due to a change in FFB price which was higher in 2020. The profit before tax was affected by reversal of impairment charge on land amounting to $2.0 million compared to a reversal of impairment charge on the development cost of the plantation amounting to $7.6 million and impairment on land amounting to $1.0 million in 2019. The profit before tax was also impacted by the expected credit loss from Plasma receivables amounting to $1.5 million in 2020 (2019: $6.1 million) attributed to the additional amounts allocated for plasma development during the year. Net finance income recognised in the income statement decreased from $3.2 million in 2019 to $2.6 million in 2020 due to lower interest rate. The tax expense increased from $2.7 million in 2019 to $13.7 million in 2020 mainly due to the increase in profit before tax. There was a loss of exchange in translation of foreign operations, recognised in other comprehensive income, totalling $5.5 million for 2020 against an exchange gain of $18.7 million in the previous year due to the slight weakening of Indonesian rupiah at the year end. The retirement benefits due to the employees at 31 December 2020, as calculated by a third party actuary, increased to $13.4 million from $11.3 million last year due to an increase in the number of full-time workers.

The average CPO price ex-Rotterdam for 2020 was $723/mt, 28% higher than 2019 of $565/mt.

Earnings per share before BA movement increased by 120% to 77.67cts compared to 35.37cts in 2019. Earnings per share after BA movement increased from 40.61cts to 80.32cts. Earnings per share have increased compared to 2019 due mainly to the increase in profit after tax.

Position of the business at the end of the year

The Group's balance sheet remains strong. As at 31 December 2020, the Group had cash and cash equivalents, net of borrowing of $115.2 million (2019: $76.6 million). The external bank borrowings as at the end of 2019 of $8.2 million were fully repaid in the year and the Group has no reliance on external financing. The net cash inflow from operating activities during the year was higher at $65.1 million by 346% compared to $14.6 million in 2019 due mainly to the more robust CPO prices and higher production. The net cash used in financing activities during the year was lower by 30% at $8.8 million compared to $12.5 million in 2019 due to the reduced level of borrowings at the beginning of the year to repay and the lesser amount of dividends paid. The cash position was higher in 2020 due to lower capex and development costs.

The lower additions to development costs for property, plant and equipment ("PPE") amounting to $21.1 million in 2020 (2019: $34.0 million) was due to reduced construction costs. The impairment reversal of $2.0 million in 2020 was related to land, whilst the impairment reversal in 2019 of $6.6 million was mainly related to the plantations. Amounts due from cooperatives under the Plasma scheme before expected credit loss was $24.6 million (2019: $19.1 million), an increase of 29% mainly due to the new planted area for Plasma during the year. Deferred tax assets reduced from $11.3 million in 2019 to $8.8 million and deferred tax liabilities reduced from $17.0 million in 2019 to $15.5 million mainly due to the reduction of tax rate from 25% to 22% in Indonesia. Inventories increased from $8.8 million in 2019 to $12.5 million in 2020 because of logistic problem in Bengkulu and Kalimantan which has since been resolved. Other working capital for trade and other receivables and payables increased by $10.5 million mainly due to more advances received from customers.

The tax recoverable for 2021 amounted to $51.7 million, 4% higher over the previous year of $49.5 million. The substantial tax recoverable is due to value added tax ("VAT") and corporate income tax ("CIT") paid which is refundable by the Indonesian tax authority after their tax audit. A detailed description is provided in note 8.

The Directors carried out assessments of our significant assets to determine whether such assets showed indicators of impairment as a result of the pandemic or wider climate change issues.

Viability Statement

The viability assessment considers solvency and liquidity over a longer period than for the purposes of the going concern assessment made. Inevitably, the degree of certainty reduces over this longer period.

The Group's business activities, financial performance, corporate development and principal risks associated with the local operating environment are covered under the various sections of this strategic report. In undertaking its review of the Group's performance in 2020, the Board considered the prospects of the Company, focusing on the strategy for growth via the expansion of its planted area in tandem with forecasting demand for CPO, over one and five-year periods. The process involved a detailed review of the 2021 detailed budget and the five-year income and cash flow projection. The one-year budget has a greater level of certainty and is used to set detailed budgetary targets at all levels across the Group. It is also used by the Remuneration Committee to set targets for the annual incentive. The five-year income and cash flow projection contains less certainty of the outcome but provides a robust planning tool against which strategic decisions can be made. The Board believed that to project beyond five years has more elements of uncertainties and therefore less reliable for making informed decisions.

The Board also considered the five-year cash flow projection under various severe but plausible scenarios, including the financial impact on the Group due to partial or total shutdown of its operations and the contraction of demand for palm oil resulting from the Coronavirus pandemic, and the need to support financially loss-making newly matured estates, together with the projected capital expenditure. On this basis and other matters considered and reviewed by the Board during the year, the Board has a reasonable expectation that the Group has adequate resources to continue in operation and meet its liabilities over the five years from 2021 to 2025.

Going Concern

As the Group is still facing a period of uncertainty due to the Coronavirus pandemic, the Directors carried out stress tests as required, to ensure that the Group has adequate resources in a worst-case scenario to remain as a going concern for at least twelve months from the date of this report.

The Directors have a reasonable expectation, having made the appropriate enquiries, that the Group has control of the monthly cash flows and that the Group has sufficient cash resources to cover the fixed cash flows for a period of at least twelve months from the date of approval of these financial statements. For these reasons, the Directors adopted a going concern basis in preparation of the financial statements. The Directors have made this assessment after consideration of the Group's budgeted cash flows and related assumptions including appropriate stress testing of identified uncertainties, specifically on the potential shut down of the entire operations from three to twelve months if all the plantations are infected with Coronavirus as well as the impact on the demand for palm oil with decreases of 50% to 100%. Stress testing of other identified uncertainties and risks such as commodity prices and currency exchange rates were also undertaken.

Business Review

Indonesia

The performance of the Indonesian operations is divided into five geographical regions.

North Sumatera

FFB production in North Sumatera, which aggregates the estates of Tasik, Anak Tasik, Labuhan Bilik ("HPP"), Blankahan, Rambung, Sg Musam and Cahaya Pelita ("CPA") produced 354,900 mt in 2020 about 13% above last year (2019: 314,600 mt). The increase in matured areas to 16,238 ha from 15,025 ha contributed to this higher production. A more consistent rainfall pattern and better harvest from young matured palms in Tasik also improved the annual yield to 21.6 mt/ha from the previous year of 20.9 mt/ha.

Implementation of integrated pest management ("IPM") in largescale replanting has sharply reduced the number of incidents of Rhinoceros beetle or Oryctes damage in Tasik and Anak Tasik. It was also observed that the average bunch weight for 2020 was significantly higher than the prior year which correlates with having fewer parthenocarpic and abnormal bunches.

Higher production can be expected in coming years due to new planting and recently replanted areas of 1,808 ha maturing next year and starting to bear fruits. In HPP, oil palms continued to recover from the desiccation of fronds as the affected area has reduced significantly to 98 ha from about 185 ha due to improved rainfall. Water gates and canals also provide better water management. About 232 ha in CPA was replanted in 2020 with raised platforms in flood prone areas to improve growth and help in the evacuation of fruits.

In 2020, the two mills in North Sumatera produced 124,900 mt of CPO (2019:138,000 mt) from a throughput of 629,200 mt (2019: 680,900 mt). Tasik Raja mill broke its record by processing almost 10% higher FFB in 2020 at 455,000 mt (2019: 415,400 mt) due mainly to better internal crop production, raising the mill utilization to 158%. Oil Extraction Rate ("OER"), however, was lower at 20.02% (2019: 20.12%) possibly due to the dura contamination from external crops that made up 38% of the total crops processed. Dura crops with thinner mesocarp normally have an oil content of 18% or lower. The operation at this mill was briefly interrupted when two workers tested positive for Covid-19 which resulted in mass precautionary screening and a reduction in staffing levels. The Blankahan mill on the other hand had a bad year processing 34% less FFB at 174,200 mt (2019: 265,600 mt) due to lower external crop purchases reducing mill utilization from 138% to 91% this year. The emergence of new mills in the region posted intense competition. Outside crops that made up 73% of the total crops processed by the mill in the previous year dropped to 58% in 2020. Internal crop production was also lower as the average age of trees reached 26 years with replanting to be carried out soon. Replanting in Blankahan is delayed as the yield had been consistently high in the past years averaging 26 mt/ha due to good soil condition.

The two biogas plants in North Sumatera did not perform up to expectation in 2020. Blankahan biogas plant had a disappointing year. It sold about 2,500 MWh (2019: 2,200 MWh) of surplus electricity and generated $151,800 (2019: $140,800) in revenue before state authorities suspended the uptake of electricity from the middle of the second quarter of the year. Tasik biogas plant, which was commissioned in the fourth quarter of 2020, was unable to sell the surplus electricity as the national grid suspended the uptake following the shutdown of many economic activities during the Coronavirus pandemic.

The sales from the biomass plant were also lower in 2020 at $427,100 compared to $733,100 last year, as the plant exported 26% less dried long fibres at 4,930 mt compared to 6,690 mt last year. The drop in demand due to the pandemic had also dampened selling prices which had fallen by as much as 55%. Buyers also complained about higher shipment cost as containers were stuck at port due to shortage of manpower to clear them.

Bengkulu

FFB production in Bengkulu, which aggregates the estates of Puding Mas ("MPM") and Alno produced 304,000 mt (2019: 287,300 mt), 6% more than 2019. Production from Bengkulu region has improved by 6% as rainfall normalised to 4,000mm in 2020 (2019: 2,860mm) with higher yield at 18.2 mt/ha from 16.9 mt/ha last year.

MPM and Sumindo mills processed a combined 672,200 mt (2019: 587,000 mt) of FFB in 2020 due to higher internal crop production as well as higher external crop purchases. External crop purchases increased by 22% to 344,700 mt from 283,200 mt last year as production in the region recovered from moisture stress the previous year increasing mill utilization to 133% from 116% last year. CPO production for the year was 10% higher at 138,200 mt (2019: 125,300 mt) with OER for the two mills averaging 20.6%, lower from 21.4% last year. External crops made up 51% of the throughput compared to 48% in 2019.

About 1,000 ha of palms will be replanted from next year as the palms in Alno and MPM reached the average age of 18 and 21 years respectively. The replanting is also fast tracked as the dura palms constituted a significant portion of the planted areas. Fruits from dura palms have thin mesocarp which ultimately produce less oil.

The MPM biogas plant sold over 9,600 MWh (2019: 9,300 MWh) of surplus electricity, 3% higher and generated $444,300 in revenue (2019: $442,400). The biogas plant performed below its optimum two megawatt capacity due to frequent breakdowns in the old transmission lines and also lower demand. The authorities renewed the contract to purchase electricity from the biogas plant for another two years to 2023 with the same rate. It was due to expire in the first quarter of next year.

South Sumatera

FFB production in South Sumatera, which aggregates the estates of Karya Kencana ("KKST"), Empat Lawang ("ELAP") and Riau Agrindo ("RAA") produced 34,200 mt (2019: 39,400 mt), 13% lower than 2019. In South Sumatera, the drought unfortunately continued from last year. Annual rainfall in South ELAP was 1,530 mm (2019: 1,330 mm) which also experienced eight months where rainfall fell below the minimum of 150 mm per month for healthy crop production. The yield in South Sumatera reflected the dry conditions which diminished further to 6.3 mt/ha from 7.4 mt/ha the previous year.

During the year about 16,600 new palms were spot planted in South Sumatera boosting the stems per hectare to 101 trees from the target of 105 trees. It incurred higher planting cost as frequent resupply of young palms was needed due to damages by cattle owned by local villagers that roam the plantation freely for grazing. Trenching and fencing the plantation were explored but were deemed as not economical. Discussions with the local villagers were not productive and, as any strained relationship can be detrimental in the long run, the management decided instead to fence individual young plants to protect them. With higher CPO prices, more FFB thefts were reported in 2020 as the region faced high unemployment during the pandemic. The management has stepped up increased security patrols.

Riau

FFB production in the Riau region, comprising Bina Pitri estates, produced 133,200 mt in 2020 (2019: 129,400 mt), 3% higher than 2019. Rainfall was higher at 2,850 mm (2019: 2,649 mm). The yield for the year was slightly higher at 27.3 mt/ha from last year of 26.6 mt/ha. Over 2,800 ha would be replanted from 2023 to 2026 as 78% of the palms are between the ages of 23 to 26 years. Flash floods interrupted harvesting towards the end of the year as heavy rain burst the river banks.

Despite the 8% higher external crop purchase at the mill at 225,300 mt compared to 208,600 mt last year, the mill utilization rate dropped to 125% from 156% last year. The mill upgrade was finally completed in 2020 with the milling capacity improved to 60 mt/hr from 45 mt/hr previously. Overall CPO production was higher by 3% to 69,100 mt compared to 66,800 mt in 2019. Despite the high yield, the region is contaminated by dura palms which made up 63% of the crops processed by the mill. The mill therefore had a low OER of 19.3% compared to 19.8% in the previous year.

Bangka

FFB production in the Bangka region, comprising Bangka Malindo Lestari estates, produced 8,700 mt in 2020 (2019: 6,000 mt), 45% higher than 2019. Higher crop was due to a larger harvestable area and more palms having reached peak maturity. Yield improved from 11.2 mt/ha to 13.5 mt/ha in 2020. With new planting in 2020 totalling 706 ha (2019: 651 ha), the total planting including plasma in Bangka has reached 2,856 ha (2019: 1,994 ha).

Kalimantan

FFB production in Kalimantan which comprises of the Sawit Graha Manunggal ("SGM") and Kahayan Agro Plantation ("KAP") estates was 249,500 mt in 2020 (2019: 231,400 mt) 8% higher than 2019 as more palms matured and reached the peak production age. The average age of palms in SGM and KAP were nine and four years respectively. During the year 583 ha of palms matured in SGM and KAP leading to its first harvest. The yield in Kalimantan recovered to 18.6 mt/ha from a low of 18.0 mt/ha last year as rainfall was consistent throughout the year at 3,448 mm per annum an improvement from last year of 2,864 mm. Lower yield was experienced last year due to prolonged drought and haze in the region which shifted crop pattern especially on sandy soil dominated areas. SGM experienced several occasions of flash flood with no lasting damages as it cleared within days.

New planting in SGM and KAP is expected to reach 1,000 ha next year. The long-term prospect for Kalimantan remains bright.

SGM continued with its mechanization of infield collection of harvested crops by the purchase of light all-terrain vehicles called Quick which are cheaper and easier to maintain. Additional units will be added to the current fleet to help with the crops evacuation.

The purchase of external and plasma crops in SGM reached 68,900 mt in 2020 which was higher by 41% compared to 49,000 mt last year. The total external and plasma crop at the SGM mill made up 22% of the total crops processed from 18% last year. With the throughput at the mill reaching 312,000 mt (2019: 268,700 mt), the mill utilization rate increased to 144% from 124% last year producing 73,900 mt of CPO, 14% more than 2019 of 64,600 mt. OER for the mill averaged 23.7% for the year compared to 24.1% last year and continue to outperform the rest of the mills in the Group. The lower OER for the year was likely due to parthenocarpic bunches and forced ripening of the fruits after long periods of hot weather followed by rain showers. Under such condition the mesocarp of the fruits turned yellow with lower oil content.

The SGM biogas plant generated 19% more electricity in 2020 at over 6,800 MWh (2019: 5,700 MWh) worth $373,700 (2019: $325,100). The contract to purchase electricity, which will expire in the first quarter of next year, was extended by the authorities to 2022 with the electricity rate reduced by 12% due to a drop in power demand in the region.

During the year, with international borders mostly closed to non-essential travelling, the Malaysian based agronomist could not make monthly field visits to underperforming estates in Indonesia to provide advice on optimizing field disciplines and improving crop yields. The Board believes that the closer monitoring of field performance once international travel restriction relax will result in improvements in the crop yield.

Overall bought-in crops for Indonesian operations including plasma were 0.7% higher at 913,200 mt for the year 2020 (2019: 907,100 mt). The average OER for our mills was marginally lower in 2020 at 20.6% in 2020 (2019: 21.1%).

Malaysia

FFB production in 2020 was 11% higher at 18,600 mt, compared to 16,700 mt in 2019. Several other plantations in East Malaysia had to stop operations temporarily as their workers tested positive for Covid-19 however we are pleased to say that our operation was not affected. The Malaysian government imposed a freeze on the intake of foreign workers from March 2020 to prevent the spread of the virus and to encourage displaced locals to fill vacancies in the plantation. The situation was exacerbated as foreign workers who returned home after their work contracts expired could not be replaced. Substantial shortage of workers hampered not only field maintenance and application of fertilisers but harvest resulting in crop losses. Towards the end of the year end, the La Nina weather pattern brought heavy rain resulting in massive flooding and landslides damaging roads and bridges which needed costly repairs. The palms, with an average age of 23 years, faced declining yield as the fertiliser program was not followed. The Malaysian plantation in 2020 generated a profit before tax after BA movement of $0.1 million compared to loss before tax after BA movement of $0.9 million in 2019. The plantation obtained its Malaysian Sustainable Palm Oil ("MSPO") certification in January 2021.

The financial performance of the various regions are reported in note 6 on segmental information.

Commodity Prices

The CPO ex-Rotterdam price started the year at $878/mt (2019: $517/mt) and trended downward for the first five months of the year as international borders were closed and Coronavirus induced lockdown of major economic activities spread across the world dampening demand. The price was lowest in May 2020 at $496/mt before a sharp turnaround as major economies reopened after the first wave of the pandemic. The price peaked in December 2020 at $1,029/mt before ending the year at $1,014/mt (2019: $856/mt), averaging $723/mt for the year, 28% higher than last year (2019: $565/mt). The strong rebound in prices was due to a combination of reasons. The Indonesian B30 biodiesel programme continues to be the main driver of CPO prices. The increase in domestic absorption of CPO through biodiesel mandate reduces global supply and eventually boosts prices. The pent up demand for palm products after the initial lockdown amidst an environment of lower crop production and lower CPO inventory also pushed prices higher. At the end of November 2020, the Indian government reduced temporarily the import duty on CPO by 10% which made palm oil more competitive against alternative soft oils. This was short lived as the government in February 2021 revamped its tax structure for import of major vegetable oils with additional tax of 5.5% imposed on palm oil which made it less competitive going forward. Stronger soy bean prices due to uncertain weather conditions in soybean producing countries also helped to lift CPO prices higher. The strong CPO prices are expected to last at least until the end of first quarter 2021 as potential pullback is expected from rising vegetable oil production. The high prices, however, could lower demand and encourages a shift to alternative vegetable oils. The Chairman's Statement earlier mentioned major changes made by the Indonesian government in CPO export tax levy and tax in December 2020. Palm oil's discount to its main rival, soybean oil, has contracted to the smallest margin in a decade for the major part of the year reducing its traditional appeal as a cheaper vegetable oil especially in price sensitive markets. The discount, however, widened in the first quarter of 2021 as soybean prices soar again. It has been reported that palm oil will face more headwinds in the coming year as China imports more soybean to power an aggressive expansion of the country's hog industry recently devastated by the African swine fever. The crushing of soybeans produces soybean oil and meals, the latter being used to feed the hogs.

Over a period of ten years, CPO price has touched a monthly average high of $1,284/mt in 2011 and a monthly average low of $472/mt in 2018. The monthly average price over the ten years is about $771/mt.

Rubber prices averaged $1,356/mt for 2020 (2019: $1,272/mt). Our small area of 262 ha of mature rubber contributed a revenue of $0.6 million in 2020 (2019: $0.7 million). Rubber continues to struggle with low prices. Our rubber trees are also affected by fungus disease called Pestalotiopasis sp fungus which causes abnormal defoliation that severely lowers latex production. Production in the year was also affected by the uneven wintering which caused the under application of ethereal to simulate latex production.

Corporate Development

In 2020, the Group opened up new land and planted 2,190 ha (2019: 1,757 ha) of oil palm mainly in Kalimantan and Bangka, boosting planted area including the smallholder cooperative scheme, known as Plasma, by 3% to 73,600 ha (2019: 71,481 ha). Another 785 ha was replanted in North Sumatera and Bengkulu. In 2021, the Group plans to plant 3,800 ha of oil palm which includes replanting of 950 ha in Bengkulu. Opening of new land for planting can be cumbersome and requires written approval from local authorities, submission of environment impact assessments and meetings with local communities.

As mentioned in the Business Review, the fourth biogas plant in Rantau Prapat costing $3.8 million was commissioned in the fourth quarter of 2020. Unfortunately, it was unable to sell the surplus electricity as the national grid has suspended the uptake following the shutdown of many economic activities during the Coronavirus pandemic. An appeal, however, has been made to the ministry in charge of renewable energy. The management is exploring all opportunities to maximise the use of the biogas plant including bottling the BioCNG for Indonesian domestic consumption.

The civil and structural works for the seventh mill in North Sumatera costing $6.7 million has been awarded and mobilization work started towards the end of the year. The contractor has started to build a temporary jetty and housing at the site. Mechanical works estimated to cost another $6 million are expected to be tendered by early next year. The project is earmarked for completion by 2022.

The upgrade of the Bina Pitri mill was finally completed in 2020 improving its milling capacity from 45 mt/hr to 60 mt/hr at a cost of $2.3 million.

Our feasibility study concluded that it is more profitable to build a mill in KAP to support its operation due to high logistics costs. KAP is currently transporting the FFB some 600km to SGM mill or, when this becomes too arduous such as during the monsoon season, the fruits are sold locally to third parties. The Group plans to build a 45 mt/hr mill with two storage tanks of 5,000 mt each with minimum spare machineries costing an estimated $12 million.

On behalf of the Board

Dato' John Lim Ewe Chuan

Executive Director, Corporate Finance and Corporate Affairs

12 May 2021

Directors' Responsibilities

The Directors are responsible for preparing the annual report and the financial statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors are required to prepare the Group financial statements in accordance with International Accounting Standards ("IAS") in conformity with the requirements of the Companies Act 2006 and in accordance with International Financial Reporting Standards ("IFRSs") adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the EU. The Directors have elected to prepare the Company financial statements in accordance with FRS 101 Reduced Disclosure Framework under the UK Generally Accepted Accounting Practice ("UK GAAP"). Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the income statement for the Group for that period.

In preparing these financial statements, the Directors are required to:

· select suitable accounting policies and then apply them consistently;

· make judgements and accounting estimates that are reasonable and prudent;

· state whether they have been prepared in accordance with applicable accounting standards, subject to any material departures disclosed and explained in the financial statements;

· prepare a Strategic Report, a Directors' Report and Directors' Remuneration report which comply with the requirements of the Companies Act 2006; and

· make an assessment of the Company and Group's ability to continue as a going concern.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

After making enquiries, the Directors have a reasonable expectation that the Company and the Group have adequate resources to continue operations for the foreseeable future.

Website publication

The Directors are responsible for ensuring the annual report and the financial statements are made available on a website. Financial statements are published on the Company's website in accordance with the legislation in the UK governing the preparation and dissemination of financial statements, which may vary from legislation in other jurisdictions. The maintenance and integrity of the Company's website is the responsibility of the Directors. The Directors' responsibility also extends to the ongoing integrity of the financial statements contained therein.

Directors' responsibilities pursuant to Disclosure and Transparency Rules 4 ("DTR4")

All of the Directors confirm to the best of their knowledge:

· The Group financial statements have been prepared in accordance with IFRSs as adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the EU and Article 4 of the IAS Regulation and give a true and fair view of the assets, liabilities, financial position and income statement of the Group.

· The Strategic Report in the annual report includes a fair review of the development and performance of the business and the financial position of the Group, together with a description of the principal risks and uncertainties that they face.

· The annual report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information necessary for shareholders to assess the Company's performance, business model and strategy.

On behalf of the Board

Dato' John Lim Ewe Chuan

Executive Director, Corporate Finance and Corporate Affairs

12 May 2021

Consolidated Income Statement

For the year ended 31 December 2020

* The total column represents the IFRS figures and the result before BA movement is an Alternative Performance Measure ("APM"). We have opted to additionally disclose this APM as the BA movement is considered to be a fair value calculation which does not appropriately represent the Group's result for the year.

Consolidated Statement of Comprehensive Income

For the year ended 31 December 2020

Consolidated Statement of Financial Position

As at 31 December 2020

Company Number: 1884630

Consolidated Statement of Changes in Equity

For the year ended 31 December 2020

Consolidated Statement of Cash Flows

For the year ended 31 December 2020

Notes

1 Basis of preparation

AEP is a company incorporated in the UK under the Companies Act 2006 and is listed on the London Stock Exchange. The registered office of AEP is located at Quadrant House, 6th Floor, 4 Thomas More Square, London E1W 1YW, UK. The principal activity of the Group is plantation agriculture, mainly in the cultivation of oil palm in Indonesia and Malaysia, of which Indonesia is the principal place of business.

The financial information does not constitute the company's statutory accounts for the years ended 31 December 2020 or 2019. Statutory accounts for the years ended 31 December 2020 and 31 December 2019 have been reported on by the Independent Auditor. The Independent Auditor's Reports on the Annual Report and Financial Statements for the years ended 31 December 2020 and 31 December 2019 were unqualified, did not draw attention to any matters by way of emphasis, and did not contain a statement under 498(2) or 498(3) of the Companies Act 2006.

Statutory accounts for the year ended 31 December 2019 have been filed with the Registrar of Companies. The statutory accounts for the year ended 31 December 2020 will be delivered to the Registrar in due course.

The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been consistently applied to all years presented, except as detailed in the following paragraph.

Basis of preparation

The financial statements have been prepared in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and in accordance with International Financial Reporting Standards ("IFRSs") adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the EU.

The Directors have a reasonable expectation, having made the appropriate enquiries, that the Group has control of the monthly cash flows and that the Group has sufficient cash resources to cover the fixed cash flows for a period of at least twelve months from the date of approval of these financial statements. For these reasons, the Directors adopted a going concern basis in preparation of the financial statements. The Directors have made this assessment after consideration of the Group's budgeted cash flows and related assumptions including appropriate stress testing of identified uncertainties, specifically on the potential shut down of the entire operations from three to twelve months if all the plantations are infected with Coronavirus as well as the impact on the demand for palm oil with decreases of 50% to 100%. Stress testing of other identified uncertainties and risks such as commodity prices and currency exchange rates were also undertaken.

Changes in accounting standards

a) New standards, interpretations and amendments effective in the current year

The following amendments are effective for the first time for accounting periods beginning on or after 1 January 2020 in these financial statements:

• Amendments to references in the conceptual framework in IFRS Standards

• IAS 1 and IAS 8 (amendments) Definition of material

These new and amended standards and Interpretations that apply for the first time in these financial statements have not significantly impacted the Group as they are either not relevant to the Group's current activities or require accounting which is consistent with the Group's existing accounting policies.

b) New standards, interpretations and amendments not yet effective.

The following new standards, interpretations and amendments are effective for future periods (as indicated) and have not been applied in these financial statements:

• Annual improvements to IFRS Standards 2018-2020 (1 January 2022, not yet endorsed)

• IAS 1 (amendments) Classification of liabilities as current or non-current (1 January 2023, not yet endorsed)

• IAS 1 (amendments) and IFRS Practice Statement 2 Disclosure of Accounting Policies (1 January 2023, not yet endorsed)

• IAS 8 (amendments) Definition of Accounting Estimates (1 January 2023, not yet endorsed)

None of the above new standards, interpretations and amendments are expected to have a material effect on the Group's future financial statements.

2 Accounting policies

(a) Basis of consolidation

The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company (its subsidiaries) made up to 31 December each year. The Company controls a subsidiary if all three of the following elements are present; power over the subsidiary, exposure to variable returns from the subsidiary, and the ability of the investor to use its power to affect those variable returns. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date control ceases. In respect of cooperatives under the Plasma scheme, the Group has not consolidated these results on the basis that the Company does not have control over those entities.

(b) Business combinations

The consolidated financial statements incorporate the results of business combinations using the purchase method. In the consolidated statement of financial position, the acquiree's identifiable assets, liabilities and contingent liabilities are initially recognised at their fair values at the acquisition date. Acquisitions of entities that comprise principally land with no active plantation business do not represent business combinations, in such cases, the amount paid for each acquisition is allocated between the identifiable assets/liabilities at the acquisition date.

(c) Foreign currency

The individual financial statements of each subsidiary are presented in the currency of the country in which it operates (its functional currency), being the currency in which the majority of their transactions are denominated, with the exception of the Company and its UK subsidiaries which are presented in US Dollar. The presentation currency for the consolidated financial statements is also US Dollar, chosen because, as internationally traded commodities, the price of the bulk of the Group's products are ultimately linked to the US Dollar.

On consolidation, the results of overseas operations are translated into US Dollar at average exchange rates for the year unless exchange rates fluctuate significantly in which case the actual rate is used. All assets and liabilities of overseas operations are translated at the rate ruling at the balance sheet date. Exchange differences arising on re-translating the opening net assets at opening rate and the results of overseas operations at actual rate are recognised directly in equity (the "exchange reserves"). Exchange differences recognised in the income statement of Group entities' separate financial statements on the translation of long-term monetary items forming part of the Group's net investment in the overseas operation concerned are reclassified to the exchange reserves if the item is denominated in the presentational currency of the Group or of the overseas operation concerned.

On disposal of a foreign operation, the cumulative exchange differences recognised in the exchange reserves relating to that operation up to the date of disposal are transferred to the income statement as part of the profit or loss on disposal.

All other exchange profits or losses are credited or charged to the income statement.

(d) Revenue recognition

The Group derives its revenue from the sale of CPO, palm kernel, FFB, shell nut, biomass products, biogas products and rubber slab. Revenue for CPO, palm kernel and shell nut are recorded net of sales and related taxes and levies, including export taxes and recognised when the delivery order is issued to a purchaser. The delivery order is not issued until goods are paid for. Revenue for FFB, biomass and biogas are recognised upon delivery. Sales of rubber slab are recognised on signing of the sales contract, this being the point at which control is transferred to the buyer.

The transacted price for each product is based on the market price or predetermined monthly contract value. There is no right of return nor warranty provided to the customers on the sale of products and services rendered.

(e) Tax

UK and foreign corporation tax are provided at amounts expected to be paid or recovered using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date.

The directors consider that the carrying amount of tax receivables approximates its fair value.

(f) Dividends

Equity dividends are recognised when they become legally payable. The Company pays only one dividend each year as a final dividend which becomes legally payable when approved by the shareholders at the next annual general meeting.

(g) Property, plant and equipment

All items of property, plant and equipment are initially measured at cost. Cost includes expenditure that is directly attributable to the acquisition of the items. After initial recognition, all items of property, plant and equipment except land and construction in progress, are stated at cost less accumulated depreciation and any accumulated impairment losses.

Plantations comprise of the cost of planting and development of oil palm and other plantation crops. Costs of new planting and development of plantation crops are capitalised from the stage of land clearing up to the stage of maturity. The costs of immature plantations consist mainly of the accumulated cost of land clearing, planting, fertilising and maintaining the plantation, borrowing costs and other indirect overhead costs up to the time the trees are harvestable and to the extent appropriate. Oil palm plantations are considered mature within three to four years after planting and generating average annual CPO of four to six metric tons per hectare. Immature plantations are not depreciated.

The Indonesian authorities have granted certain land exploitation rights and operating permits for the estates. The land rights are usually renewed without significant cost subject to compliance with the laws and regulations of Indonesia therefore, the Group has classified the land rights as leasehold land. The leasehold land is recognised at cost initially and is not depreciated. Costs include the initial cost of obtaining the location permits and subsequent payments to compensate existing land owners plus any legal costs incurred to acquire the necessary land exploitation rights. Location permits are subsequently carried at fair value while the subsequent amounts are carried at cost until the exploitation rights have been awarded, at which point they will also be carried at fair value. Fair value is determined based on periodic valuations on an open market basis by a professionally qualified valuer. These revaluations are made with sufficient regularity to ensure that the carrying amount does not differ materially from that which would be determined using fair value at the end of the reporting period. Changes in fair value are recognised in other comprehensive income and accumulated in the revaluation reserve except to the extent that any decrease in value in excess of the credit balance on the revaluation reserve, or reversal of such a transaction, is recognised in income statement. On the disposal of a revalued estate, any related balance remaining in the revaluation reserve is transferred to retained earnings as a movement in reserves.

Construction in progress is stated at cost. The accumulated costs will be reclassified to the appropriate class of assets when construction is completed and the asset is ready for its intended use. Construction in progress is also not depreciated until such time when the asset is available for use.

Interest on third party loans directly related to field development is capitalised in the proportion that the opening immature area bears to the total planted area of the relevant estate. Interest on loans related to construction in progress (such as an oil mill) is capitalised up to the commissioning of that asset. These interest rates are booked at the rate prevailing at the time.

Plantations, buildings and oil mills are depreciated using the straight-line method. All other property, plant and equipment items are depreciated using the double-declining-balance method. The yearly rates of depreciation are as follows:

Plantations - 5% per annum

Buildings - 5% to 10% per annum

Oil Mill - 5% per annum

Estate plant, equipment & vehicle - 12.5% to 50% per annum

Office plant, equipment & vehicle - 25% to 50% per annum

(h) Biological assets

Biological assets comprise an estimation of the fair value less costs to sell of unharvested FFB at balance sheet date. Changes in the fair value of biological assets are charged or credited to the income statement within the cost of sales.

(i) Leased assets

The Group assesses whether a contract is or contains a lease, at inception of the contract. The Group recognises a right-of-use asset and a corresponding lease liability with respect to all lease arrangements in which it is the lessee, except for short-term leases (defined as leases with a lease term of 12 months or less) and leases of low value assets (such as tablets and personal computers, small items of office furniture and telephones). For these leases, the Group recognises the lease payments as an operating expense on a straight-line basis over the term of the lease unless another systematic basis is more representative of the time pattern in which economic benefits from the leased assets are consumed.

The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted by using the rate implicit in the lease. If this rate cannot be readily determined, the lessee uses its incremental borrowing rate.

Lease payments included in the measurement of the lease liability comprise:

Fixed lease payments (including in-substance fixed payments), less any lease incentives receivable.

The lease liability is presented as a separate line in the consolidated statement of financial position.

The lease liability is subsequently measured by increasing the carrying amount to reflect interest on the lease liability (using the effective interest method) and by reducing the carrying amount to reflect the lease payments made.

The right-of-use assets comprise the initial measurement of the corresponding lease liability, lease payments made at or before the commencement day, less any lease incentives received and any initial direct costs. They are subsequently measured at cost less accumulated depreciation and impairment losses.

Right-of-use assets are depreciated over the shorter period of lease term and useful life of the underlying asset. If a lease transfers ownership of the underlying asset or the cost of the right-of-use asset reflects that the Group expects to exercise a purchase option, the related right-of-use asset is depreciated over the useful life of the underlying asset. The depreciation starts at the commencement date of the lease.

The right-of-use assets are presented together in property, plant and equipment in the consolidated statement of financial position. The Group applies IAS 36 to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss as described in the 'Property, Plant and Equipment' policy.

Land rights are held at fair value and revalued at the balance sheet date.

(j) Impairment

An assessment of indicators of impairment over the Company's assets is undertaken annually on 31 December. Where the carrying value of an asset exceeds its recoverable amount (i.e. the higher of value in use or fair value, less costs to sell), the asset is written down accordingly. Impairment charges are included in the income statement, except to the extent they reverse gains previously recognised in other comprehensive income. Reversal on impairment loss would be recognised if, and only if, there has been a change in the estimates used to determine the asset's recoverable amount since the last impairment test was carried out. Reversal on impairment losses will be immediately recognised in the income statement.

(k) Inventories

Inventories are initially recognised at cost, and subsequently at the lower of cost and net realisable value. In the case of processed produce for sale which comprises palm oil and kernel, cost represents the monthly weighted-average cost of production and appropriate production overheads. Estate and mill consumables are valued on a weighted average cost basis.

(l) Financial assets

The Group's financial assets measured at amortised cost comprise trade and other receivables and cash and cash equivalents in the consolidated statement of financial position. All the Group's receivables and loans are non-derivative financial assets with cash flows that are solely payments of principal and interest. They are recognised at fair value at inception and subsequently at amortised cost as this is what the Group considers to be most representative of the business model for these assets.

Cash and cash equivalents consist of cash in hand and short-term deposits at banks with an original maturity not exceeding three months. Bank overdrafts are shown within loans and borrowings under current liabilities on the balance sheet.

The Group considers a trade receivable or other receivable as credit impaired when one or more events that have a detrimental impact on the estimated cash flow have occurred. Trade and other receivables are written off when there is no expectation of recovery based on the assessment performed. If the receivables are subsequently recovered, these are recognised in income statement.

The Group use three categories for those receivables which reflect their credit risk and how the loss provision is determined for those categories. These include trade receivables using the simplified approach and debt instruments at amortised costs other than trade receivables and financial guarantee contracts using the three-stage approach.

(m) Financial liabilities

All the Group's financial liabilities are non-derivative financial liabilities.

Bank borrowings and long-term development loans are initially recognised at fair value and subsequently at amortised cost, which is the total of proceeds received net of issue costs. Finance charges are accounted for on an accruals basis and charged in the income statement unless capitalised according to the policy as set out in the property, plant and equipment policy.

Trade and other payables are shown at fair value at recognition and subsequently at amortised cost.

(n) Deferred tax

Deferred tax assets and liabilities are recognised where the carrying amount of an asset or liability in the balance sheet differs from its tax base except for differences in the initial recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects neither accounting nor taxable profit.

The Group recognises deferred tax liabilities arising from taxable temporary differences on investments in subsidiaries, except where the Group is able to control the reversal of the temporary differences and it is probable that the temporary difference will not reverse in the foreseeable future.

Recognition of deferred tax assets is restricted to those instances where it is possible that taxable profit will be available against which the difference can be utilised.

Deferred tax is recognised on temporary differences arising from property revaluation surpluses or deficits.

Deferred tax is determined using the tax rates that are enacted or substantively enacted at the balance sheet date. Deferred tax is charged or credited in the income statement, except when it relates to items charged to other comprehensive income, such as revaluations, in which case the deferred tax is also dealt with in other comprehensive income.

(o) Retirement benefits

Defined contribution schemes

Contributions to defined contribution pension schemes are charged to the consolidated income statement in the year to which they relate.

Defined benefit schemes

The Group operates a number of defined benefit schemes in respect of its Indonesian operations. These schemes' surpluses and deficits are measured at:

• The fair value of plan assets at the reporting date; less

• Plan liabilities calculated using the projected unit credit method discounted to its present value using yields available on high quality corporate bonds that have maturity dates approximating to the terms of the liabilities; plus

• Past service costs; less

• The effect of minimum funding requirements agreed with scheme trustees.

Remeasurements of the net defined benefit obligation are recognised in other comprehensive income. The remeasurements include:

• Actuarial gains and losses;

• Return on plan assets (interest exclusive); and

• Any asset ceiling effects (interest inclusive).

Service costs are recognised in other comprehensive income and include current and past service costs as well as gains and losses on curtailments.

Net interest expense / (income) is recognised in the income statement, and is calculated by applying the discount rate used to measure the defined benefit obligation / (asset) at the beginning of the annual period to the balance of the net defined benefit obligation / (asset), considering the effects of contributions and benefit payments during the period.

Gains or losses arising from changes to scheme benefits or scheme curtailment are recognised immediately in the income statement. Settlements of defined benefit schemes are recognised in the period in which the settlement occurs. 

(p) Treasury shares

Consideration paid or received for the purchase or sale of the Company's own shares for holding in treasury is recognised directly in equity, where the cost is presented as the treasury shares. Any excess of the consideration received on the sale of treasury shares over the weighted average cost of shares sold is taken to the share premium account.

Any shares held in treasury are treated as cancelled for the purpose of calculating earnings per share.

(q) Financial guarantee contracts

Where the Company and its subsidiaries enter into financial guarantee contracts and guarantee the indebtedness of other companies within the Group and/or third party entities, these are accounted for under IFRS 9. The details of financial guarantee contracts are disclosed in note 25.

(r) Critical accounting estimates and judgements

The Group makes certain estimates and assumptions regarding the future. Estimates and judgements are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions. The estimates and assumptions that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

Judgements

• Assessment of de-facto control of cooperatives under Plasma scheme (see note 2(a) and note 26)

• Classification of land as leasehold with no depreciation charged (see note 11)

Estimates and assumptions

• Impairment of plantation assets - estimate of future cash flows and determination of the discount rate and other assumptions (see note 11)

• Expected credit losses ("ECL") on amounts due from cooperatives under Plasma scheme - determination of possible outcomes and their weighted probability (see note 12)

• Carrying value of income tax receivables - determination of historic recovery rates (see note 8)

• Income taxes and deferred tax - provisions for income taxes in various jurisdictions (see note 8 and note 18)

• Recognition of deferred tax on losses - estimate of future profitability of respective entities (see note 18)

• Retirement benefits - actuarial assumptions (see note 19)

• Fair value measurement - a number of assets and liabilities included in the Group's financial statements require measurement at, and/or disclosure of, fair value. The fair value measurement of the Group's financial and non-financial assets and liabilities utilises market observable inputs and data as far as possible. Inputs used in determining fair value measurements are categorised into different levels based on how observable the inputs used in the valuation technique utilised are (the 'fair value hierarchy'):

- Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities;

- Level 2 - inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

- Level 3 - unobservable inputs for the asset or liability.

The classification of an item into the above levels is based on the lowest level of the inputs used that has a significant effect on the fair value measurement of the item. Transfers of items between levels are recognised in the period they occur.

The Group measures the following assets at fair value:

- Revalued land - Property, plant and equipment (note 11)

- Biological assets (note 14)

The Group measures the following assets at amortised cost, however disclosure of fair value is given in accordance with IFRS7 and IFRS 13:

- Non-current receivables due from non-controlling interests (note 12)

- Non-current receivables due from cooperatives under Plasma scheme (note 12)

For more detailed information in relation to the fair value measurement of the items above, please refer to the applicable notes.

3 Revenue

Disaggregation of Revenue

The Group has disaggregated revenue into various categories in the following table which is intended to:

• Depict how the nature, amount and uncertainty of revenue and cash flows are affected by timing of revenue recognition; and

• Enable users to understand the relationship with revenue segment information provided in note 6.

There is no right of return and warranty provided to the customers on the sale of products and services rendered.

4 Finance income and expense

5 Profit before tax

6 Segment information

Description of the types of products and services from which each reportable segment derives its revenues

In the opinion of the Directors, the operations of the Group comprise one class of business which is the cultivation of plantation in Indonesia and Malaysia. From the cultivation of plantation, the Group produced the crude palm oil and associated products such as palm kernel, shell nut, biomass products, biogas products and rubber.

Factors that management used to identify reportable segments in the Group

The reportable segments in the Group are strategic business units based on the geographical spread. Operating segments are consistent with the internal reporting provided to the Board of Directors. The Board of Directors is responsible for allocating resources and assessing the performance of the operating segments. The Board decision is implemented by the Executive Committee, that is made up of a Senior General Manager in Malaysia, the President Director, the Chief Operating Officer, Finance Director and the Engineering Director.

Measurement of operating segment profit or loss, assets and liabilities

The Group evaluates segmental performance on the basis of profit or loss before tax calculated in accordance with IFRS but excluding BA movement.

Inter-segment transactions are made based on terms mutually agreed by the parties to maximise the utilisation of Group's resources at a rate acceptable to local tax authorities. This policy was applied consistently throughout the current and prior period.

The Group's assets are allocated to segments based on geographical location.