M P Evans Regulatory News (MPE)

M.P. EVANS GROUP PLC

M.P. Evans Group PLC ("MP Evans" or "the Group"), a producer of Indonesian palm oil, announces its unaudited interim results for the six months ended 30 June 2020.

highlights

· 16% increase in first-half crop

· 31% increase of CPO produced, including fresh fruit bunches bought in

· 23% increase in average price of CPO cif Rotterdam to US$648 per tonne

· Cost of palm product maintained at US$385 per tonne

· Operating profit US$6.0 million (2019 US$1.0 million)

· Interim dividend maintained at 5.00 pence per share

Post-period end

· Agreement to dispose of 70 hectares of land in Malaysia for US$24.1 million

Commenting on the results, the chairman of M.P. Evans, Peter Hadsley-Chaplin, said: -

"Excellent crop growth during the first half of 2020, combined with a marked increase in the price of CPO, produced a healthy increase in profit. Operating profit for the period was US$6.0 million compared with US%1.0 million in 2019. World demand for CPO is recovering from the immediate effects of the Covid-19 pandemic and, given both the crop and price prospects for the coming months, the Group is maintaining its interim dividend."

14 September 2020

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Overview

Operating profit for the first half of 2020 was US$6.0 million compared with US$1.0 million in the first half of 2019. This reflected an increase in gross profit from US$2.2 million to US$8.9 million as both prices and volumes increased. At the same time, cost per tonne remained the same. Overall, crop from the Group's areas rose by 16% during the first half of 2020 compared with the previous year, as did crop in the scheme-smallholder areas managed by the Group on behalf of smallholder co-operatives. There was a rather stronger increase, of 157%, in crop bought from third-parties following a decision in the middle of 2019 to promote purchases of outside crop. This increase occurred in all areas, but notably at Kota Bangun where the Group has been able to purchase fresh fruit bunches ("ffb") from other commercial operators who have not yet built their own mill. Altogether, therefore, the Group processed 34% more ffb than during the first half of 2019.

The Group holds itself to high operational standards in its plantations and its mills. This can be seen in the consistently high extraction rates that the Group achieves. This has continued to be the case in 2020: oil extraction in Group mills was 23.5%. By comparison with 2019, the Group's rate of oil extraction fell marginally, by 0.1%, as a result of a sharp increase in the proportion of independent smallholder fruit purchased by the Pangkatan mill. Whilst these purchases represent a profitable use of spare capacity at the mill, the quality of the bought-in ffb is lower than that produced in the Group's own areas and those of its scheme smallholders. This also affected the rate of palm-kernel extraction in Pangkatan.

The Group produced positive operating cash flow of US$4.5 million in the six months to June 2020 (2019 US$4.5 million) even after taking into account an increase in working capital of US$5.2 million. Capital investment of US$16.6 million was met through operating cash flows, planned use of the Group's cash balance and a small amount of additional debt. At the end of June, the Group's gross debt stood at US$97.7 million compared with US$94.5 million at the end of 2019. The Group continues to manage its debt in a careful and conservative manner. This has allowed it to continue its investment in new plantations and milling capacity at an optimal rate. The Group therefore expects substantially to complete the investment programme on its existing projects by the end of 2022, very significantly reducing demands on operating cash flow whilst crop and production levels are expected to continue to grow. If maintained, the recovery in CPO prices discussed under 'The palm-oil market' below would lead to a reduction in the Group's net debt position from its high point, funded from within existing facilities, reached during 2020.

Whilst not accounted for in the results to June 2020, following the end of the half the Group signed a conditional agreement to dispose of 70 hectares of land in Malaysia for US$23.5 million. This value was in line with the valuation published in its 2019 annual report. The proceeds will be paid over a three-year period and support investment in the Group's Indonesian oil-palm projects.

Covid-19 pandemic and other risks

The global Covid-19 pandemic has had little effect on the Group's operations. The wellbeing of our employees has remained a priority, and as soon as the widespread nature of the virus became known, preventative measures were quickly introduced to protect the Group's employees. These included restricting staff travel, limiting access to our plantations and putting the Jakarta office onto remote working. All estates and mills have continued to operate without interruption during the pandemic; its effect on the price of CPO is described in the section "The palm-oil market" below. In light of the potential for new risks to emerge as a result of the Covid-19 pandemic, the Group has reviewed its principal risks. It concluded there were no additional risks to those disclosed in the 2019 annual report.

Dividend

The board proposes to pay an interim dividend of 5.00 pence per share (2019 - 5.00 pence per share). As previously announced, the board intends, where possible, to increase or at least to maintain the level of normal dividends. The board plans to maintain this long-standing policy given the unusual circumstances leading to price weakness during the earlier part of the year, significant price increases since the middle of May, and strong increases in crop and production projected over the coming years.

The palm-oil market

The palm-oil price rose strongly at the end of 2019 and into the start of 2020. This 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. However, the price of crude palm oil fell sharply from the middle of February as the global Covid-19 pandemic took hold and bore down on demand and trade: exports of CPO during the first half of 2020 were 13% lower than a year earlier. Global CPO stocks began to build up again in the second quarter, having fallen in the first months of the year, but remain at a multi-year low. Hence, despite a background of tight supply of all major vegetable oils, the price reached a low point of US$510 per tonne cif Rotterdam in the middle of May. During June, trade in CPO picked up and the price recovered on a rising trend to reach US$585 at the end of the month. On average, the price of CPO cif Rotterdam during the first half of 2020 was US$648 per tonne, 23% higher than the US$528 per tonne recorded in the first half of 2019.

Palm-kernel-oil prices strengthened in 2020 compared with 2019. This was particularly noticeable at the beginning of the year, after which prices fell despite a sharp dip in production of its main competitor, coconut oil, during the second quarter.

Results for the period

Crops

In total, crops from the Group's own areas increased to 334,100 tonnes compared with 287,200 in the first half of 2019. The very high pace of crop growth during the first two months of the year moderated coming into the second quarter and then maintained a steady rate to finish the half 16% ahead of crops in the same period of 2019.

This increase in crop was due largely to continued strides being made at Bumi Mas, the Group's newest estate purchased in 2017, and at Musi Rawas. At Bumi Mas, improvements in agronomic standards as well as investment in the road network have allowed the Group to access, harvest and transport increasing ffb from this highly promising estate. In Musi Rawas, young areas continue to come into maturity and so are being harvested for the first time. The project is still young, so crop increase is coming off a low base at present but is expected to strengthen significantly over the coming years. Replanting carried out at the long-held Pangkatan group and Simpang Kiri estates is becoming visible in the crop figures.

Drier weather in the middle of 2019 affected the formation of ffb in Kota Bangun and, more acutely, in Bangka. Kota Bangun was able to achieve the same level of crop in 2020 as in 2019 whilst Bangka saw an 8% decline. Crop is expected to increase during the second half in both areas, but in Bangka over the year as a whole is likely to fall short of the levels achieved in 2019. In Kota Bangun, the second mill begins its commissioning later this month, and planting of areas previously affected by flooding, but now protected by bunds, is nearing completion. The mill at Bumi Mas is under construction. There is a risk that its planned completion in mid 2021 will be delayed due to travel restrictions imposed as a result of the Covid-19 pandemic.

At 16%, the level of crop increase from scheme smallholders was the same as that for the Group, rising to 84,600 tonnes. The Group's mills are designed to handle the Group's and scheme smallholders' crop at the point these plantings reach peak yield; up to this point the mills have spare capacity, which is being profitably used by buying in ffb from third parties. The Group purchased a significantly higher volume of ffb from third parties, notably in Kota Bangun and Pangkatan. In Kota Bangun, purchases from independent sources had been reduced in 2019 as the Group searched for reliable sources of ffb. Taking this into account, total crop increased by 34%.

Crop on the Group's 38%-owned associated-company estate, Kerasaan, was 29,400 tonnes during the first half of 2020, 8% higher than in the previous year as the estate is gradually increasing yield following replanting carried out between 2008 and 2012.

Production

The Group produced 124,800 tonnes of CPO in the first half of 2020, and 27,800 tonnes of palm kernels. Production of CPO was 31% higher than in the previous year; that of palm kernels 28% higher. These rates were lower than the increase in total ffb processed since the crop from newer areas is sold to outside mills which offer lower rates of extraction than the Group's own mills. Efficiency in the Group's mills has remained high. Aggregated extraction in its own mills was 23.5%, notwithstanding the significant tonnage of ffb bought from independent smallholders that is of a lower quality than the Group's own ffb. At Kota Bangun, the rate of palm-kernel extraction fell due to the crop from very young palms being purchased from outside which, as expected, contains smaller kernels.

Whilst the Group does not have its own mills at Bumi Mas, Musi Rawas and Simpang Kiri, it sells its ffb to local mills based on the commodity price for CPO and an assumed rate of extraction. To reflect the substance of this arrangement, oil produced from the crop grown on these estates has been included in CPO production. The extraction rate offered by third-party mills fluctuates in line with their own capacity and availability of crop generally.

Of the Group's production, 53% is certified sustainable palm oil. Certification is awarded to mills rather than for the crop, so as the Group's crop increases in areas where it does not yet have its own mills, this percentage will fall in the short term. However, the percentage of sustainable production will then rise as the Group constructs its own mills. The Group is committed to achieving full traceability of the CPO it produces, so is working with independent smallholders who want to supply it with ffb to achieve Roundtable for Sustainable Palm Oil ("RSPO") certification. By 2024, the Group anticipates that all of its production, other than from Simpang Kiri, will be certified sustainable. In the meantime, all of the Group's crop and that of its scheme smallholders is produced in full accordance with RSPO standards.

Crops, production and selling-price details for the estates controlled by the Group are as follows:-

Costs

The cost per tonne of palm product (CPO and palm kernels) produced from the Group's estates was US$385, the same level as in the first half of 2019. There was a small increase in unit costs associated with additional labour deployed to maintain newly-mature areas, and there was a significant increase in depreciation on mature plantation hectarage. These were offset by efficiencies in other areas and higher volumes of crop processed. As is usual, the unit cost is expected to fall during the second half of the year.

The cost of palm product from ffb supplied by smallholders attached to the Group's projects is a little higher than US$385, reflecting the high level of the commodity price of CPO at the beginning of the year, to which purchases of their ffb are pegged. This also affected the cost of palm product milled from independent smallholders' ffb, which was higher again than scheme smallholder production on account of these ffb inherently yielding less oil than ffb produced under the Group's management.

The Group has experienced falling unit costs as the young palms on its new projects matured and so crop volume and average bunch weight rose, irrespective of the CPO price. The Group's ability to convert ffb to palm oil and kernels at a diminishing cost per tonne demonstrates its position as an efficient low-cost operator. The Group projects increasing crop volumes in future, but is reaching a point in its development where the benefit of this increased volume on unit costs will largely be absorbed by cost inflation in production.

Mill-gate price

Compared with the low CPO prices that held sway during the first half of 2019, prices were significantly higher in the first half of 2020, as described in the section 'The palm-oil market' above. The average cif Rotterdam price for the period was US$648 or 23% higher than in the first half of 2019. The rise in the palm-oil price fed quickly through to the mill-gate price received by the Group. During the first half of 2020, the Group received on average US$533 per tonne of CPO, US$80 more than in the first half of 2019. At the same time, the average sustainability premium additionally received by the Group diminished by US$1 to US$8 per tonne.

For palm kernels, the Group received US$289 per tonne, somewhat higher than the US$254 in the previous year, following a modest recovery in the price of palm-kernel oil. In addition, the Group received US$9 per tonne in both periods in sustainability premia available for suitably certificated kernels.

Planting

Essentially all of the Group's new planting is at Musi Rawas. Development here remains paused to allow the Group time to assess the new RSPO standards introduced in 2019 and obtain the RSPO's confirmation that it complies with them. This is necessary for the ffb from these areas to be certified as being produced sustainably. As a result of this, the only new planting was 28 hectares in Kota Bangun. In North Sumatra, no replanting is planned for 2020.

New land

The Group is exploring the acquisition of additional hectarage close to its existing projects to bring them to an optimal size. The Group's experience is that 10,000 hectares of oil palm with a 60-tonne mill provides a unit that is both big enough to provide economies of scale in production and administration, and small enough to allow the careful scrutiny by field management needed to maintain high standards. The Group's projects in Bangka and Musi Rawas, including scheme-smallholder areas, are of this size and the board is seeking eventually to extend the Kota Bangun project from the current 15,000 hectares towards the equivalent of two 10,000-hectare units.

Associated company: Malaysia

Bertam Properties Sdn. Berhad ("Bertam Properties"), 40% held, broke even in the six months to June 2020 compared with the Group's share in profit of US$0.5 million for the equivalent period in 2019. A break-even result for 2020 demonstrates a certain continuing resilience in the market for the types of properties developed by Bertam Properties, and of the Penang region, as compared with the general slowdown in the Malaysian property market overall.

Result

As a result of the operational outcomes described above, gross profit for the first half of 2020 was US$8.9 million, US$6.7 million higher than the US$2.2 million recorded for the same period in 2019. Operating profit for the period was US$6.0 million, six times higher than that recorded for the first half of 2019. Net finance costs of US$1.6 million were similar to the previous year. The rate of corporation tax in Indonesia decreased on 1 January 2020 from 25% to 22%, and will decrease to 20% from 2021 onwards. After interest, tax and its share in the profits of associated companies, the Group made a profit of US$4.3 million compared with a loss of US$0.5 million in 2019.

CURRENT TRADING AND PROSPECTS

During July 2020, CPO prices strengthened from just below US$600 per tonne to reach a high point of US$740 per tonne. Since then the price has fluctuated, mainly trading within a band of US$700 to US$720 per tonne. At the end of the first week of September, the price stood at US$720 per tonne against the anticipated background of tight supply of all major vegetable oils and recovery in demand, notably in India and China, following the shock of the Covid-19 pandemic. Overall, production increase in palm oil is expected to slow compared with 2019. The likely positive impact of this on prices may be at least partly counterbalanced by a lower demand for palm biodiesel in the face of low mineral-oil prices. The forward markets for CPO anticipate further price increases before the end of the year and a price holding firm into 2021.

The strong pace of the Group's crop growth during the first half of the year abated somewhat during the third quarter. This was as its estates in Bangka and Kota Bangun felt the effects of a dry period in, respectively, the middle quarters of 2019, and the end of 2019 and the early months of 2020. The conditions in these areas have also had some impact on the availability of crop to buy from third parties, so the Group will not in the second half of 2020 match the volume of third-party crop purchased in the equivalent period in 2019.Crop volumes are, however, expected to improve during the fourth quarter. The Group has put measures in place in respect of Covid-19, and does not expect the pandemic to affect its ability to harvest ffb or produce CPO. The increasing maturity of the Group's palms in all areas provide the basis for significant growth in crop into the middle of decade, and hence rising revenue, even without the acquisition of any further hectarage. The Group anticipates increasing production of certified sustainable palm oil as it completes the development of its new projects.

The board remains confident that the fundamentals of the palm-oil market continue to be encouraging. Vegetable oil is a basic foodstuff and increasing demand from a growing world population looks likely to persist. In the longer term, insufficient levels of replanting in Malaysia and a reduction in new Indonesian planting are likely to curb growth in production. Palm oil delivers by far the highest yield per hectare of all the vegetable oils and has the lowest cost of production. Hence, the board remains of the view that palm oil is well placed to benefit from rising global demand for vegetable oil and, therefore, that the outlook for the Group remains positive.

UNAUDITED CONSOLIDATED INCOME STATEMENT

FOR THE SIX MONTHS ENDED 30 JUNE 2020

UNAUDITED CONSOLIDATED BALANCE SHEET

AS AT 30 JUNE 2020

*restated - see note 2

UNAUDITED STATEMENT OF CHANGES IN CONSOLIDATED TOTAL EQUITY

FOR THE SIX MONTHS ENDED 30 JUNE 2020

*restated - see note 2

UNAUDITED CONSOLIDATED CASH-FLOW STATEMENT

FOR THE SIX MONTHS ENDED 30 JUNE 2020

*restated - see note 2

NOTES TO THE INTERIM STATEMENTS

FOR THE SIX MONTHS ENDED 30 JUNE 2020

Note 1 General information

The financial information for the six-month periods ended 30 June 2020 and 2019 has been neither audited nor reviewed by the Group's auditors and does not constitute statutory accounts within the meaning of section 434 of the Companies Act 2006. The financial information for the year ended 31 December 2019 is abridged from the statutory accounts. The 31 December 2019 statutory accounts have been reported on by the Group's auditors for that year, BDO LLP, and have been 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.

Note 2 Accounting policies

The consolidated financial results have been prepared in accordance with International Financial Reporting Standards (IFRS and IFRIC interpretations) issued by the International Accounting Standards Board (IASB) as adopted by the EU, and with those parts of the Companies Act 2006 applicable to companies preparing accounts under IFRS.

The accounting policies of the Group follow those set out in the annual financial statements at 31 December 2019. The Group has made a number of critical accounting judgements and key estimates in the preparation of this interim report, and they remain consistent with those set out in note 3(r) to the 2019 annual financial statements.

In the 2019 annual financial statements, adjustments were made to the treatment of certain financial reporting items, without any impact on reported profit or cash. For consistency, the same adjustments have been made to the comparative figures reported here for the six months to 30 June 2019. Specifically:

· US$1.4 million of software has been adjusted from property, plant and equipment to intangible assets;

· US$2.6 million of deferred profit relating to land previously sold to an associate has been adjusted from revaluation reserve to investments in associates, and at the same time a US$1.3 million debit has been adjusted from the revaluation reserve to retained earnings; and

· In the cash flow statement movements in receivables from smallholder co-operatives and changes in bank deposits treated as current-asset investments have been included in investing activities, having previously been included in operating and financing activities respectively.

Note 3 Segment information

The Group's reportable segments are distinguished by location and product: palm-oil plantation crops in Indonesia and property development in Malaysia.

Note 4 Dividends

Subsequent to 30 June 2020, the board has declared an interim dividend of 5.00p per 10p share. The dividend will be paid on or after 6 November 2020 to those shareholders on the register at the close of business on 16 October 2020.

Note 5 Share capital

During the period the Company issued 182,320 10p shares for US$23,000 cash consideration with the intention to satisfy the exercise of share options. In addition, the Company bought back and cancelled 153,287 10p shares for a total cost of US$1,155,000.

Note 6 Analysis of movements in cash flow

Note 7 Exchange rates

Note 8 Post-balance sheet event

On 20 July 2020, the Group entered into a conditional agreement to sell 70 hectares of land owned by its wholly-owned subsidiary, Bertam Consolidated Rubber Limited, to Bertam Properties Sdn Berhad, a Malaysian property-development company in which the Group has a 40% shareholding. Total consideration is 99.9 million Malaysian Ringgit (approximately US$24.1 million at current exchange rates), with 10% paid on signing of the agreement, 50% paid once the sale conditions are completed (expected to be March 2021), and the remaining balance over the next two years.