R.E.A. Holdings (RE.L) Sustainable Growth
After two difficult years, REA put its operations back on a growth path in 2014.That revenues increased by nearly 14% in a year when the price of palm oil
weakened by 21%, and operating profits expanded by 32%, indicates that the
company is recovering from the setbacks of 2012 and 2013. Yet REA has more
to do, operating efficiencies, while still amongst the upper end of the palm oil
producer peer group, have room for improvement, and this is reflected in the
valuation. REA owns some of the best plantations in Asia and it possesses a
significant land bank that provides it with the opportunity to double the size of
operations, but over the last five years the pace of development has been
painfully slow. There are indications now that 2015 will mark a turn in the pace
of development. Peer group valuation analysis positions REA within the middle
of the valuation range. However REA has the potential to recover a higher
ranking as its growth potential is realised. The company offers two investment
vehicles in the form of the Ordinary shares yielding 4.9%, and the Cumulative
Preference shares yielding 7.2%. While the income attraction of the Preference
shares is compelling in a low interest rate environment, the Ordinary shares
should benefit from improving operational efficiencies, a strengthening
balance sheet and from any uplift in the CPO price, whenever that may be.Â
R.E.A. Holdings is principally engaged in the cultivation of oil palms in the province of East Kalimantan in Indonesia and in the production and sale of crude palm oil and crude palm kernel oil. Ancillary to these activities, Co. generates renewable energy from its methane capture plants to provide power for its own operations and also for sale to local villages via the Indonesian state electricity company. As of Dec 31 2016, Co. held interests in respect of two stone deposits and two coal mining concessions, all of which were located in East Kalimantan in Indonesia.
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