M.P. Evans Group PLC (MPE.L) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to the M.P. Evans interim results investor presentation. [Operator Instructions] The company may not be in a position to answer every question it receives during the meeting itself. However, the company will review all questions submitted today and publish responses where it is appropriate to do so. These will be available via your Investor Meet Company dashboard. I'd also like to remind you that this presentation is being recorded. Before we begin, I'd like to submit the following poll. And I'd now like to hand over to Peter Hadsley-Chaplin, Chairman of M.P. Evans. Good afternoon.

Thank you very much, Marc. And welcome, ladies and gentlemen. Thank you very much for tearing yourselves away from this sunny afternoon. And we're doing our best to emulate the tropics, which sadly we can't visit at the moment for obvious reasons, but we're hosting this from our Tunbridge Wells office. And this is our first IMC event, and we're delighted to welcome you. And so this is in following our interim results which were released yesterday. And what we plan to do is to take you through our presentation, which is you will see on the screen. It's available also on our website, as indeed is our interim report. And for those of you who are shareholders, you will be receiving this, the hard copy, very shortly in the next day or 2. And of course, a number of you are not shareholders. There will be quite a few who know very little about the company, so we're going to assume on this occasion a relatively low knowledge base and take you through slowly and giving you a little bit of background. I'm going to kick off the presentation with a few background comments, a bit of an overview. And then I will hand over to Tristan Price, our Chief Executive, who will talk about, first of all, the market, the palm oil market. And he will also talk a bit later about the operational aspects of the business. And Matthew Coulson, who's our Finance Director, will talk about the results themselves, about the financial aspects of the group. And then I will briefly wind up at the end. So without further ado, let us make a start on the presentation, going to the slide, “Who we are”. Well, we've been around a long time. We're over 150-year-old or so plantation company started in the 1870s, with our origins going back to tea, [indiscernible] as it was then; and rubber, [ Malaya ] as it was then. But cutting a long story short, in the last 10 or 15 years or so, our focus, our strategic focus, has increasingly been on sustainable. And that's a very important part of our business, sustainable Indonesian palm oil. And that's where our major growth has been in recent years. We have an established track record of both growth and financial returns. It's perhaps of interest to note that, in the last 25 years or more, we have maintained or indeed increased our dividend each year. We have not cut it. You'll see from the map that we have a number of different plantations in Indonesia. I won't go through them individually, but there are 3 in the northern part of Sumatra, one of which is a minority-held interest of a relatively small plantation, Kerasaan. The other ones are all majority owned; and those represent our older, more mature plantations that have been held in the group for many years. The other plantations, Bangka just off the coast of South Sumatra and the Musi Rawas project in the southern part of Sumatra, have been developed in the last 10 or 15 years, Musi Rawas most recently. And then we have 2 new projects in Kalimantan, the Kota Bangun project; and then to the northeast of that, the Bumi Mas project, which is also relatively new. But each of these has been, from the start, sustainably managed. We have an increasing reputation for operational excellence, and we have a strong balance sheet. We -- our gearing has gone up a little bit, but by most company standards, we have a very strong balance sheet and relatively low gearing, which will enable the continuing capital expenditure that Matthew will talk about and indeed possible further acquisitions. Due to the substantial plantings in the last 10 to 15 years, the average age of our oil palms is very young compared to most plantation companies. And these represent the rather exciting foundation for future crop growth in the next decade or so. We have an attractive earnings profile; and yet we seem to trade at quite a significant discount to our peers, our plantation peers, in Asia and for reasons which are not timely -- entirely explainable, perhaps because the plantation sector there gets more coverage because there are many more plantation companies there. Turning to the next slide. We have always been sensitive to issues surrounding sustainability, but this has been formalized through -- in the early 2000s soon after the roundtable for sustainable palm oil, the so-called RSPO, was formed. We became members of this early on. And then much more recently, in January of this year, we produced our first sustainability report. And there are 3 main pillars to this and indeed to our approach on sustainability in general. The first of these is to protect the environment; reduce, minimize greenhouse gas emissions; to protect the forests. There's no question about us clearing forests or anything remotely resembling forests. If we develop any new areas, these would be just scrubby wasteland areas. Or indeed, in the case of Musi Rawas, our most recent acquisition, this is largely an ex-rubber plantation area, so with fairly one crop in favor of another crop. In terms of our production itself, this is wholly in line with RSPO guidelines. For instance, on such a key thing as water, we ensure there is -- there are no pollutions. There's no water from our mills and no effluent going out into the river systems. And our oil palm and palm oil is fully traceable from both our group. That's our own majority-owned plantations. And from those smallholder projects which are attached to our new projects, which Tristan will talk a little bit more about later, all this produce is fully traceable. Talking of the -- of these local smallholder projects. This engenders a lot of goodwill, and it's an example of how important it is to engender goodwill vis-à-vis the local communities where we operate. Without the local communities', the local villages' support, we would be unable to operate. So this is vital, and we pride ourselves on the excellent relations we have with our local communities. Again, Tristan will talk more about that in a moment. We, of course, have a fair approach to labor and to our workforce and which we may touch on also a bit later. Just now we're taking a snapshot of where we stand in numbers. This is as at the end of 2019. We've been growing rapidly in the last number of years. And we will continue to grow, but where we stood at the end of 2019 was that we had 39,200 planted hectares of our own group oil palm. We had 12,200 planted hectares of those smallholder schemes I mentioned before attached to our newer group oil palm estates. We have largely planted up the land bank that we've acquired over the last number of years. It's more or less fully planted, but we have probably just over another couple of thousand hectares to go, and these are almost exclusively at the Musi Rawas project in the southern part of Sumatra. And this has been paused for reasons, again, which Tristan will explain but we're hoping will be resumed shortly so that we can complete the planting out of the land bank that we currently own, but it doesn't mean there won't be some possibilities to acquire more land in due course. We have just over 6,000 employees. We had in 2019 a revenue of just under $120 million, and the operating profit for the year was $16 million. Following the continued increase in crops and CPO production and our operating profit for the first half of $6 million compared to last year of $1 million, the Board has maintained the dividend, the interim dividend, that we are paying of 5p per share. This follows on from the maintained final dividend last year of 12.75p. As I just mentioned, it is our intention to continue at least to maintain annual dividends and, where possible, to increase them. And we hope that will be possible as income levels continue to rise in the future. So let me now pass across to Tristan to talk about the market side of palm oil.

Yes, indeed. Well, good afternoon. There are 3 slides in this part of our presentation that deal in turn with the price of CPO; perhaps the factors, secondly, that underlie the supply of vegetable oils, including CPO; and thirdly, on the demand side, what's been happening to the world demand with vegetable oil. But looking first at this slide, which illustrates what's happened to the price of CPO in the recent past, you can see very clearly how, after a period of weakness through 2019, that towards the end of that year, the price rose quite sharply. That was in response to a tightness in supply of world vegetable oils, including palm oil, combined with good demand particularly in Asia and a reduction in the level of world stocks. Those factors combined to lead to quite a rise in price towards the end of 2019. And indeed the price went back above its long-term average; and [ looped, fair said ], into 2020 and beyond [ the sort of an ] upswing in the commodity price cycle. Of course, it then ran immediately into COVID-19. And with the pandemic, the demand side of that balanced altered very dramatically; and the price, of course, fell as production and demand worldwide in many different areas fell sharply. What's quite noticeable, though, is that clearly Asia was where the COVID pandemic started, but it was also the place where the first signs of revival were noticeable. And quite quickly, as demand began to recover and trade began to recover, the price turned up, and when it did turn up, it turned up quite sharply. There was a sense that it had gone too far on the way down. And following the end of the interim period that we're discussing; the price has continued to strengthen and has resulted in a CPO price today of well above USD 700 per tonne in Rotterdam and quite firm. That price is expected to stay at or around this level certainly through to the end of this year and well into next year. Looking slightly more closely at the supply side, it's worth, I think, looking again at why we had experienced a downswing in the price. And that resulted from 2 years there in 2017 and 2018, where there was excess supply of vegetable oils more widely. So not only palm oil but also soybean oil and the other vegetable oils showed strong growth in supply. That glut of vegetable oil availability meant that, unsurprisingly, the prices for all of those oils was quite weak. 2019 was a turning point. Not only did palm oil growth shrink significantly, but the production of other vegetable oils actually fell. And it was that, that was the background to the increase in price towards the end of 2019. And that tightness of supply was expected to persist into 2020, and indeed there's nothing about COVID directly that affects that supply situation. If anything, there has been an increase of the sense that palm oil growth is worse than expected on the basis that a lot of Malaysian palm oil is harvested by non-Malaysians and that the travel restrictions imposed as a result of managing COVID-19 has meant that the availability of labor on plantations is reduced and made it difficult to Malaysia for then to harvest their fruit. Thinking about demand. This slide shows how resilient the increase in demand for vegetable oil more widely has been. It ticks along between 2% and 4% very regularly, at an average I would say not much less than 4%. And we expect it to be resilient too in response to the pandemic. Certainly, as a basic food, the demand in Asia has been reviving, and we expect that trend to continue. There is a question about how quickly the roughly 10% of palm oil that goes into the production of biodiesel, so palm oil as a fuel -- how quickly that sector of the market will recover, but the Indonesian government has a program to increase the use of palm biodiesel and is very committed to that program and has over the last months made it very clear that it not only wants to execute that program but wants to push on and actually develop even greater proportions of its transport fuel as biodiesel. So even in that sector, there is a sense that there is a demand that will revive, underpinning the demand for crude palm oil. At that point, I think I'd like to hand over to Matthew to talk about the interim results themselves.

Great, thank you, Tristan. And good afternoon, everyone. So as Tristan said, it's time to look at the results themselves for the first half of 2020. And as you can see there, the story for the first half is one of significant increases across the board. So let's start with the top line. Let's start with revenue and, as you can see there, revenue up by more than 60% in the first half of the year. Now I always like to say that our -- determining our revenue is fundamentally a pretty straightforward exercise. It's a case of taking the production that we achieved, the CPO, the crude palm oil production that we achieved; and multiplying it by the average price that we achieved for that oil. And as you can see, both were up significantly in the first half of 2020. So production up by more than 30%. And then whilst, as we saw on one of those previous slides, there was some volatility in CPO pricing in the first half of the year, on average the price was up 23% compared to the first half of 2019. So the average price, c.i.f. Rotterdam, for the first half of the year was just under $650 per tonne. And you take those 2 together, and that's what drives the more than 60% increase in revenues. So where we achieved $46 million of revenue in the first half of 2019, so we achieved more than $75 million of revenue in the first half of this year. And it's really the increase in price that then determines the rest of the income statement and, as you can see, a significant increase in gross profit. So gross profit was $2 million in the first half of 2019, up substantially to just under $9 million for the first half of 2020, an increase in margin overall from 5% to 12%. And important to note that our production costs per tonne stayed level at $385 in the first half of the year, and that's production costs per tonne for areas where we have our own milling facilities. This all feeds down the income statement, and you can see the impact on operating profit. So operating profit that was $1 million in the first half of last year becomes $6 million in the first half of 2020. So moving on, I guess one other income statement point to make relates to tax, an important point to be aware of. So in the first half of this year, the Indonesian government announced a reduction in the headline rate of corporation tax, where for a number of years the headline rate of tax in Indonesia has been 25%. They announced in 2020 the rate would fall to 22%, and then it falls again in 2021 to 20%, so very good news for us given where we generate our profit. And as you can see, our total tax charge for the first half of the year was under $1 million. Moving on to look at the balance sheet; important to note the position with regards to net debt, a very small increase in net debt in the first half of the year. So net debt of $85 million at the end of the first half, so as I say, a very small increase; and gross debt of $97 million. Important to note that, if we make the assumption that CPO prices continue at or around a $700 per tonne level, and I think -- as you can see from the previous chart, we don't think that's a particularly unreasonable assumption to take, but if we make that assumption, that -- actually net debt peaks during the current year, peaks around now, based on our current investment program. And we would expect to see net debt really starting to fall quite significantly from 2021 onwards. One thing that particularly helps that, of course, is a disposal that we announced just after the end of the first half of the year. So we announced in July that we'd agreed to sell some land in Malaysia, our Bertam Estate land, around 70 hectares, for over $20 million. And we expect to be receiving that proceeds over the course of the next couple of years. A final point to note, on cash generation. We continue to be absolutely cash generative, and you can see the figures on the slide there. And that supports our capital investment program. You can see that we've invested more than $16 million in the first half of the year, and we continue to invest in our ongoing program of capital investment. And we'll talk some more about that in a few minutes, and a very important program we've got to complete around our existing plantations to make sure we've built out everything that we need to do. But at that point, I will pass back to Tristan to talk some more about [ our projects ].

Thank you, Matthew. Starting a look at the operations, I think the right place to begin is with crops because crops continue to be on an upward growth path. That's a result of the planting that's been carried out over the last, well, more than 10 years; and results from not only increasing areas being brought into maturity for the first time but the increasing yield as the palms age. Palms have a very strongly increasing yield from when they are first brought into maturity or into production and at about 3 years old after they're planted. And that rises very strongly then to when they're about 9 or 10 years old, where they reach their peak production, and maintain that over the next sort of 8 or 9 years before they gradually -- the yield gradually falls. So we're benefiting from 2 things in the planting that we've done. We're benefiting from more area that's mature, and we're benefiting from this very strongly upward trend in the yield on the younger [ plants ]. As a result, the fresh fruit bunch crop in our own areas was 16% higher than in the first half 2019, as it was in the scheme smallholder areas. These are smallholder areas that are attached to our projects, where the smallholders form a cooperative that asks us to plant the land on their behalf and to manage the land on their behalf. And they then benefit from the revenue because the fruit from those cooperatives is sold back to us for milling at a government-supervised price. So those were up by 16%, but there has been a dramatic increase also in fruit bought from independent smallholders and third parties. We took a conscious decision in the middle of 2019 to buy more fruit from these sources in order to use up spare capacity in our mills. As a result, the total crop that we actually have for processing increased by 34%. But the engine room of the growth in our areas is the projects at Bumi Mas and Musi Rawas, which are growing extremely strongly. The older projects at Bangka and Kota Bangun didn't produce so much crop during the first half of this year due to a dry spell in 2019 that affected both areas, not so seriously in Kota Bangun where it definitely fell within the sort of a normal range of weather variability. And indeed the range duly returned. And [ crop has begun ] to swing up again through, we're expecting, third quarter, to the -- an improvement in the fourth quarter, a significant improvement. The effect in Bangka is going to last a little bit longer because the dry spell is a little bit more prolonged, and therefore the recovery period is a little bit more prolonged too. We think, over time, Bangka produces the sort of crop we would hope for it because, after a dry spell, you tend to get a period of super productivity as the palms in some senses catch up with the periods where they were semi dormant. That means that over time the crop is on average what you would want, but in individual years or indeed, as we're talking about now, individual 6-month periods, the crop can be a bit more variable. Unsurprisingly, that increase in crop has led to a strong increase in production, a 31% increase in production of crude palm oil to 125,000 tonnes. And that's because we continued to get very good extraction rates. On average, they were 23.5% for the group's 3 mills. And that was only a touch lower, a 10 further percentage point lower than the same period last year. And that was despite taking in the significant volumes of crop from outside. However, it's not the same quality as our own crop. That was particularly seen at Pangkatan. And it can be seen in the relevant tables of the interim report, how its extraction rate fell from 23.1% to 22.6%, as a very significant increase of independent smallholder fruits came into the mill. In terms of costs in the operational area. They were the same in the first half of 2020 as they had been in the first half of 2019. And as last year, we would expect the costs to fall through the second half of the year. That's because some of the costs that we incurred fall earlier in the year and so the effect of that is eventually spread out through the year. It's a timing point but also because the crop in the second half of the year tends to be slightly higher than in the first half of the year. So again, that helps the unit costs in terms of looking at the year as a whole. We have for some time now been experiencing falling unit costs. And we're making the point that, after a long period of falling unit costs, we are now approaching the point where the effects of extra volume that are extremely helpful when looking at that will no longer outweigh the natural inflationary pressures that you experience in any productive operation, wages increases and the increase in price of other inputs that we need. A final point on costs is that, at $385 per tonne of palm product, we're quoting an extremely full cost measure that reflects all of the costs of our regional office in Jakarta; as well as the 3 subregional offices, small subregional offices, that we have. It really incorporates all of our local costs. And it's a point to bear in mind if you're comparing M.P. Evans with other plantation companies. And if you look at the cash costs, then that's significantly lower than that rather full cost that we've just looked at and is closer to below $300 a tonne, $280 per tonne of palm product. And we do all of this in a sustainable manner. I think Peter has emphasized that we're a producer of sustainable Indonesian palm oil. We wanted to explain why -- if we're a producer of sustainable Indonesian palm oil, why only 53% of our oil is RSPO certified. And the reason for that is that the RSPO certifies mills. It doesn't certify hectarage, so whilst all of our hectarage is farmed in full compliance with the RSPO standards, we don't get a certificate to demonstrate that until we build mills into our areas. So as we build mills, that percentage will rise very sharply. We're also running a program to qualify independent smallholders as being RSPO certified, in line with a new standard published by the RSPO at the end of last year. Overall, we have an objective to reach 100% certification, and we should be significantly on the way to that by the time we get to the end of 2023 and into 2024. A point we've made before, but we're a zero-waste operation. We use our empty bunches and we use them to create compost, which reduces our need for inorganic fertilizers. We capture methane from our mill effluent and use that to generate electricity that we use to power our own operations and also sell surplus electricity to the Indonesian power grid. On the social side, we have extremely strong relationships with our local communities, not least through those smallholder cooperative schemes but also in the provision of facilities that are not only for staff and workers but such as sporting facilities or clinics and schools. We invest in training of our own staff and to some extent also in the local communities where we operate, and we make sure that there is good progression for our local staff within our Indonesian operations. The last point on sustainability I wanted to address was that we have paused planting at Musi Rawas. In response to an improvement, a change in RSPO standards that took place at the end -- right at the end of 2018. It was clarified at about Easter 2019 that those changes, those upgrading that have taken place to the RSPO standards was to be applied retrospectively, so whilst we have been developing Musi Rawas in full compliance with the RSPO standards, we paused and spent the time to demonstrate that our planting there was also in compliance with the new upgraded RSPO standard. We have put together all of the necessary paperwork for that and submitted it to the RSPO, and we're now waiting for a green light from them to continue with the planting there, but we believe we're going to be able to plant everything that we expected on that project because it is essentially replacing an old rubber project with oil palm. So replacing [ a crop with a crop ]. This is a view of what the future may look like. I think here we have a chart of the crop that has come off our areas since the new projects really began to produce crop. And it shows that strong growth with the memory of the severe El Niño in 2015, '16, now a memory as growth has returned to its path; and shows how we expect to reach the 1 million tonne mark in 2021 and carry on growing at that point up to the end of the 2020s. We should emphasize that this is from palms that are already planted. These are from our existing areas and palms already planted, with the small exception of that conclusion to the planting in Musi Rawas which we do assume takes place, but other than that, this is from existing projects. Should we take on any other areas, that would be in addition to the picture that you see there. And a final word from me is about our capital spending on our building of new mills. Clearly, all of that crop that turned into production also requires milling, and the mills allow us to extract the absolute maximum value from our fruit. Not only that, but it gives us the opportunity also to fill up any spare capacity with third-party fresh fruit bunches. We have 3 mills. We have the Pangkatan in North Sumatra; on Bangka; and one mill of Kota Bangun in East Kalimantan. But today is a very propitious day in that the second mill in Kota Bangun actually began commissioning earlier today, in the morning, in Indonesia, and so that would be our fourth mill. And we are already well underway in terms of constructing our mill at Bumi Mas. The groundworks are complete. The civil works have begun, and fabrication of the mill is already well underway in different factories in Indonesia and Malaysia. That is expected to come into commission in the middle of next year, although we accept there is a risk, given the travel restrictions imposed to manage COVID-19, that, that may slip. But after that, we have the sixth and final mill from the current developments which we expect to build at Musi Rawas, and that will begin in 2022 and finish in the second half of 2023. At that point, the development of the -- that started really in 2005 of the new projects at -- of Bangka, at Kota Bangun and Musi Rawas and in Bumi Mas would be complete. And after the spending of the $60 million, which is largely on those mills that we just talked about, that would really bring our capital spending program to conclusion; and therefore, just at the point where the crop is continuing to grow, as we saw above, would produce a significant amount of free cash flow for the group to invest in further areas and to distribute to its shareholders. So at that point, I'd like to hand back to Peter, who has some comments to conclude.

Thank you very much, Tristan. So let me just make a few comments about the key aspects, I suppose, of our business. First of all, it is the focus on majority-owned Indonesian plantations producing sustainable palm oil. We have a strong balance sheet which will enable our planning for continued expansion, and so this will allow us to complete our capital expenditure program that Matthew has referred to and the potential for some further acquisition as well. We are extracting the maximum value from our Malaysian property assets. As Matthew touched on, we have entered into an agreement to sell Bertam Estate into Bertam Properties. And of course, we own a 40% share of Bertam Properties. We'll be taking net proceeds over $21 million from that sale, but Bertam Properties will in turn develop the land that's been bought from ourselves and turn that into housing and other commercial developments and in turn make that into profitable transactions. And we will, as we've done for the last 25 years or so since we first sold the land to Bertam Properties, take our share of the dividends from Bertam Properties as they continue to develop and sell the remaining parcels of land. We can look forward to a significant increase in crop and revenue from our existing plantations right through to the end of the 2020s. We can also look forward to increasing dividends alongside yields, with capital growth, so exciting prospects for the next decade or so. And indeed we continue to have confidence in the prospects for palm oil both in the shorter and the longer term. So that concludes our presentation. A number of you have very kindly submitted some questions. There were 8 or 9 which were submitted before the start of this presentation and I see there would be 1 or 2 which have come in during the course of it. And we'll do our best to answer as many as we can. We'll start with those that have been submitted in advance, but first I want to say thank you so much to all of you for kindly submitting. And that's much appreciated, some interesting questions. So Marc, I think…

Okay. And so -- yes. That's very kind of you, Peter. Thank you so much. [Operator Instructions] I'd like to remind you that a recording of this presentation, along with a copy of the slides and the published Q&A, will be accessed via your Investor Meet Company dashboard. Investor feedback is also important to the company. And immediately post this presentation, you'll be redirected for the opportunity to provide feedback in order that the company can better understand your views and expectations.

So I guess we've had, as you said, a number of questions. I will couple 2 of these together because they have both a very similar nature. And the first question is: With your new mills coming on this year and next, what capacity of your own crop can you process? And how beneficial is processing yourself? And the other question, I guess, around capacity is which palm oil mill are you building first, Bumi Mas or Musi Rawas? Are you able to quantify the benefit of -- the latest palm oil mill to complete will have, apart from enabling a bigger amount of our palm oil production to be certified as sustainable produce? What is the scheduled completion date for the other mill?

I'll take that one. I think we concluded the presentation with a little piece on the mill. So just to reiterate that the second Kota Bangun mill is being completed right now. We expect the Bumi Mas mill, which is next, to be completed in the middle of next year; and the Musi Rawas mill to be completed in the second half of 2023. So that would bring us to the -- to 6 mills. And the benefits of processing ourselves are primarily to get better margin. I think we do declare in the interim report. We show what source of an oil extraction you're paid for if you sell your fruit. The way the contract works is the miller will give you an assumed rate of oil extraction for your fruit, and that is around 20% generally. We know we have excellent fruit. And we could expect to get extraction rates of 25% and more from our own fruit, so the difference is what we're giving away to the third-party mill. So the -- a primary reason is to improve margin by getting the maximum value or the maximum oil, [ literally ] squeeze the maximum out of our own fruit, but there's also a strategic point in that a fresh fruit bunch is perishable so that, if you don't mill your own fresh fruit bunches, you lose some market power. And anybody who is buying from somebody who has a perishable good can make themselves vulnerable, particularly in remoter areas where there may not be strong competition to take the fruit from you. So those are the benefits. The -- there -- clearly there is the benefit on sustainability too, but primarily this is about margin and it's about capturing the maximum value that we can from the fruit that we produce. I think within that question there was a point about, well, how much of your own fruit are you going to be able to process. And the answer is, [ well, I hope you ] realize that, by the time we get to 2023, it should be 100% because that's the purpose of building these mills. But by 2022, we should -- before we build the Musi Rawas mill, we should be upper sort of the mid-80s percent, I would think, of our total production.

The following question we have is what are the catalysts or levers available to increase production outside maturity of the crop.

I think there are 3 points on that. There are ways. I think the first one is about operational excellence. So it's about making sure that you get the most from the crop that you have. And partly, you want to maximize the crop itself, so that's about making sure that the field conditions are good, that the road network is excellent so that allows you to put fertilizer in, to make sure that the fertilizer is applied properly and in the right quantities so that you're actually getting the palms to produce at the maximum that they can. I think there's also something around making sure that you harvest them at the right moment. There is quite a big difference between harvesting overripe or underripe fruit and harvesting it at the right point. So that again is about harvesting discipline. It's about having enough harvesters. It's about making sure that they come around frequently enough and therefore that you're harvesting your fresh fruit bunches at the optimum point. Actually [indiscernible] I got to my points 2 and 3, but I quit. The road network is key because you -- the road network helps you to evacuate your fruits and get it to the mill. If you can't run your trucks over the road network in wet weather, then you can't evacuate your fruit and get it to mill. So it's about operational excellence, firstly. Secondly, an obvious point perhaps, but you can actually just buy independent smallholder fruit. So if you're not generating all of the fruit yourself that you need to fill your mill, you can add to it by buying independent smallholder fruit, and that increases your CPO production. And the last strategy would be to buy additional pieces of land. Where you have spare capacity, you could then buy additional land, with a view to using the output from that to feed your mill. So those are the 3 points, I would say, operational excellence, lots of points of detail but repeatedly, buy outside fruit or buy new land.

The next question, rather lengthy in nature, so just bear with me. Palm oil prices in recent years seem to have spent lengthy periods below the monthly 10-year average price of $790, quoted in the 2019 REA annual report, perhaps due to, with the benefit of hindsight, excessive supply. Do you now think we are due a period of palm oil prices staying above that price for a lengthy period if only to maintain the average? Are there too many variables involved in making forecasting palm oil prices anything but a mug's game? Is the backwardation of -- on the futures market anything to be concerned about?

Thank you. Well, I think we -- I think the average -- the long-term average price has been falling [ recently ]. We would obviously be delighted if it were a [ fixed theme ] and we could look forward to -- we can look forward to a prolonged period of prices at higher than that level. I think what it does demonstrate is that we've been through a downswing in the commodity price cycle that I talked a little bit about in the piece on the market earlier, so we do feel that we could expect an upswing in the price. I would like to say exactly where that will go or how long it will stay, but we do feel we're in an up phase of that. In terms of how easy is it to sort of forecast the CPO price, I would say a mug's game is possibly the right conclusion because you can't forecast the CPO market in isolation. You also have to look at the competing vegetable oils. So you're immediately looking at forecasting not only CPO, for which there is famously patchy data, notably for Indonesia, but you also have to look at the other major vegetables oils, soybean oil, rapeseed oil or some flaxseed oil. And you have to take a view about all of those and you have to take a view about transport costs and to some extent also [ tariff ] from trade considerations before seeing where that all comes out. I think it's an extremely difficult thing to do. In terms of backwardation, I don't think that's something that's a matter of concern. I think people, given all of the uncertainties around the future path of supply of vegetable oils, will tend to be cautious in terms of the future prices, but in the short term -- and particularly, crude palm oil refineries have to run at capacity for them to be viable. And so if you're short in the feedstock, immediately that can lead to short-term price increases just in order to get hold of the material that you need. So I mean I don't think it's something -- that it's something that people should be concerned about.

Next question. Given the Indonesian government's expressed intention to alter the export tax on palm oil to take in more revenues and the effect that this has subsidizing the downstream processing industry for palm-derived products, are you not tempted to move into this area if only to recover some value from the export levy and the export tax paid or from the revenue forgone from not exporting? What are the minimum capital requirements for moving into this area?

Perhaps if I can respond to this question. Certainly, moving downstream and particularly into refining is something that the group has previously investigated. Particularly on the question about capital requirements, the minimum capital requirement for moving into refining is somewhere in the order of $20 million, but I think, perhaps more importantly, it's the minimum input of CPO for refining that is key here. And in order to run a refinery, we would estimate that it's in excess of 150,000 tonnes per annum of CPO that would be required as inputs to the refinery. Now whilst we do produce more than that per annum as a group total, it's our geographical diversity across Sumatra and East Kalimantan that would work against us in terms of being able to run a refinery. So it wouldn't make sense for us at the current time to move downstream. Clearly, it's something that we could continue to keep under review as the group continues to expand, but it's not something for us right now.

Given some 5.5 tonnes of CPO per mature hectare, producers of palm oil struggle to turn a profit at the operating level. Do you think the Indonesian government has the balance of taxation right on palm oil producers, taking into account the export levy, the export tax, the corporate rate of tax and the 5-year time limit on losses-carried-forward regime?

I guess, first of all, on this question, just an observation: the -- a sort of statement at the beginning saying that some producers who are achieving 5.5 tonnes of oil per hectare are struggling to achieve an operating profit. Perhaps those producers need to take a careful look at their cost base to see why that is, first of all. But just an observation on the assertion in the question, but I guess really the question is a tax question, isn't it? So on the tax point, I guess I'd make 2 key observations. First of all, in the presentation I've mentioned the fact that the corporation tax rate in Indonesia is falling, coming down from 25% to 20% over a couple of years. And of course, as I said, that's something we very much welcome. I think the other point to note, and it's been highlighted in the question, is the 5-year time limit on carrying forward losses. Of course, that's different to the approach in the U.K., where there is the option to carry forward effectively indefinitely. And yes, that does create some challenges in a long-term business-like oil palm, so I think that's a fair observation built into the question.

Given most palm oil producers at present don't have an ROCE of 11% and given rupiah bank interest charges are about 11%, do you feel the Indonesian government realizes its own fiscal policy is hurting debt-funded palm oil producers?

Okay, on this question, first of all, clearly, high interest rates are a barrier to investment across all sectors, not just an individual one. And again I can't comment on other producers, but if I look at our own case, then we're not entirely debt funded, as I'm sure has come across in our presentation. We have relatively what we would consider modest levels of debt. And I think the other critical point to note is the debt that we do have is not rupiah denominated. We have U.S. dollar borrowings, and our U.S. dollar borrowings are at substantially lower interest rates than the 11% referred to in the question.

We've got 2 final questions before we have a look, I guess, at those ones [ submitted ] and obviously mindful of the time as well. So the next question is: Just as a matter of interest, and it's not very important, but what are the typical CapEx requirements for a 5,000-hectare estate planted up from seed until it becomes cash flow positive? And at what triage does this occur at? Assuming a sustainable long-term ex mill-gate palm oil price of $610, like the one used in the [indiscernible] valuation report, what does an ex mill-gate price of $610 translate to when expressed as a c.i.f. Rotterdam price?

Okay. So there are a few sort of separate questions here. I'll try and pick them all up. Firstly, on the costs of development. Development costs can be very sensitive to land compensation costs, but we would broadly expect costs of development to be in an $8,000 to $10,000 per hectare range, somewhere of that order. There would be further costs for building a mill to service an estate, build costs, say, $15 million to $18 million. We wouldn't necessarily expect to build a mill of that expense for a 5,000-hectare project. We would think of that more to support a 10,000-hectare project, so you then think about spreading that, say, [ of ] $1,500 per hectare across a 10,000-hectare project. Within the question, there was a point about, yes, at what point does the project become cash flow generative. Again that depends. Critically, it will depend upon the rate of planting for the project, but as a rule of thumb, we would think somewhere around year 6, to give an indication. And I think the final part of the question related to the relationship between mill gate prices and c.i.f. Rotterdam prices. To give as a rule of thumb, at current prices we would think about a difference of around $100 per tonne made up of the export levy and made up of freight and insurance charges. So around $100 million, but the difference would go up a little bit as prices increase, as the export tax starts to kick in on a progressive basis as prices go up. But based on current prices, think of a rule of thumb of around $100 difference.

That's brilliant. And finally, can you talk a bit about the Penang property market and what effect lockdown is having?

Perhaps I'll take this last question. Well, like property markets across the entire world, I think it's certainly been affected by the lockdown situation both in Malaysia and in Penang specifically. Although, having said that, Penang has always been an affluent part of Malaysia. And the effect in Penang, I think, is less severe than in other parts of Malaysia. There are apparently some stimulus measures which are going to come into play to help to assist the property markets such as a freeze on stamp duties and measures such as that, which are likely to come into force next year, but in the meantime, we -- of course, as I, we've touched on earlier, we agreed the sale of Bertam Estate to Bertam Properties, and that was agreed prior to the start of the lockdown. It was actually formalized afterwards. So that deal remained intact. As far as Bertam Properties itself is concerned, actually although the top end of the market has been quite significantly affected, further down the line, I understand that, the lower- to medium-cost housing, there's still quite good interest and quite good demand for values of sort of MYR 500,000, MYR 600,000 and below. That's a sort of GBP 100,000 to GBP 125,000 level and below. There's still good interest there. So that's looking cautiously encouraging there. Now I do know, Marc, how our time stands. I know [indiscernible]. I mean thank you very much for the further questions which have come through. Do we have time to answer some of [ these ]?

Yes, of course. So perhaps -- obviously, I know you haven't had a long time to look at these questions, particularly the more recent ones that have come through, but perhaps if you want to select a few of those. And of course, just to remind investors that all the questions submitted today will be reviewed by the company, and of course, responses will be published where it's appropriate to do so. So if I could perhaps just hand back to you and if I could ask you just to read the question as well as give your response just on the basis that investors can't see other investor questions.