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(extracted from Annual Report 2015)

On behalf of the Board of Directors, it gives me great pleasure to present the Company's Annual Report for the financial year ended 31 December 2015, our eighth full year of operation since our listing on the Main Market of Bursa Malaysia on 28 August 2007.

2015 was a challenging year in the light of the slowing global economy, low commodity prices and escalating cost of living. CPO price was hovering between RM1,800 per metric tonne (mt) and RM2,300 per mt, with an average of around RM2,100 per mt for the whole year. As a pure plantation company, we were adversely affected as over 99% of our revenue were contributed by sale of crude palm oil (CPO) and palm kernel (PK). Price mitigating measures though impact was marginal, were employed by the Group. In addition, we achieved several key milestone successes in the operation and management whilst maintaining our profitable position for the current financial year.

Key Highlights of the Year

Strategic Planning

In preparation for the future challenges, we have embarked on a Strategic Planning Exercise which sets a direction for the Group to proceed for the future.

The formulation of the Strategic Plan began with a "back to basics" programme in February 2015. The objective was to foster relationships, create a sense of teamwork and reiterate the importance of getting back to basics in all level of operations.

Building on this, we conducted strategic planning workshops in May and June 2015 to set the direction, set measurable goals and formulate a workable and achievable 5-year Strategic Plan. At the workshops, inputs from management and heads of department were garnered. The Strategic Plan covers all the necessary key strategies and initiatives to achieve our long term goals.

The Board's valuable inputs and approval were granted in the fourth quarter of 2015. The resulting strategic objectives were then incorporated into our budget for 2016 and plan years 2017 to 2020.

These will be cascaded down to lower level of operations on a continuing basis. The necessary monitoring and evaluation of progress is already in place, facilitated by the Estate Management System (EMS) as well as continuous reporting enhancement.

Expansion of Land Bank

We strongly believe that growth through the expansion of our land bank is crucial and will bring future benefits to the Group and thus we continuously source for expansion opportunities.

Bearing this philosophy in mind, we entered into a sale and purchase agreement in August 2015 to acquire 100% equity in a company which owns 3,050 hectare (ha) of land in the Mukah region. The completion of the purchase is currently pending fulfillment of condition precedent and is expected to be completed in first half of year 2016. Upon completion of the purchase, it will increase the Group's land bank by 7%. This will not only result in increase in FFB production in years to come, but also will increase throughput and utilisation rate of our Mukah Palm Oil Mill.

Expansion of Planted and Productive Hectarage

We continue with our new development and replanting programmes during the year. This is to enable us to move forward, to maintain an optimal age profile and to bring maximum FFB yield in years to come.

For this purpose, over 1,000 ha of land were cleared under replanting during the year. Besides, around 600 ha declared matured in 2015. These newly mature areas were planted within the last 2 to 3 years, are producing crops, underscoring the fact that whatever we plant now will benefit the Group in the near future.

The planting materials used in our new development and replanting programmes are our own high yielding seeds, purposely bred to suit the prevailing soil and climatic conditions in Sarawak. They are expected to show significantly greater yields compared to the previous planting materials used.

Furthermore, we emphasize on peat soil management, focus on water management and compaction to enable the palms give their greatest potentials upon maturity.

Recovery of encumbered areas

The Group has been facing on going disputes and encumbrances affecting over 8,000 ha. It is worth noting that the Group achieved a remarkable milestone during the year in resolving these issues. We were able to recover over 1,000 ha in the Central Region. These areas are currently undergoing rehabilitation and replanting.

Estate Management System (EMS)

The last few Financial Modules of our EMS went live in January 2015, enabling us to fully integrate the system, which comprises Estates, Mills, Procurement, Project Management and Financial Modules. The whole EMS system focuses on monitoring and reporting at various levels of operations, allowing real-time actions and decisions to be taken based on accurate and up-to-date information. The effects are already being seen in improved monitoring and reporting, increased productivity and better inter-departmental coordination.

In addition, during 2015, we introduced the first major enhancement to the EMS, the Budget Planning Module which was rolled out for preparation of our 2016 budget. We are also conducting ongoing enhancement of the Continuous Reporting Function, using the state-of-the-art Tableau platform, which provides easily understandable visual data and analytics tailored to each user's particular needs.

Estate Mechanisation

Estate mechanisation is a major priority for the Group, given the continuing manpower challenges faced by the entire oil palm industry. We are adopting a two-pronged strategy:

Mitigating Manpower Challenges

  1. Estate Operational Enhancement

    We are faced with a continuing shortage of semi-skilled and unskilled estate workers. To mitigate this, we continue to make strenuous efforts to enhance the living environment of workers, to provide high quality accommodation and good healthcare, education, recreation and communication facilities.

    On the other hand, in addition to fully commit to increased estate mechanisation, we restructure manning levels and work flows at our estates. We also emphasize the importance of practicing our existing, revised and new standard operating procedures with the view of continuous improvements to enable our work to be carried out in a more efficient and effective manner. The bottom line is a win-win situation for all concerned; the workers increase their income and the Group increases its revenue and productivity.

  2. Work Force Rationalisation

    Our permanent human capital is equally important for the Group's success. We continue our efforts in rationalising our workforce through reorganisation. This enables us to maintain an optimum level of organisation structure.

  3. Building the Future

    Our SP Training Centre, which was set up and accredited under the National Dual Training System in 2013 is our major Corporate Social Responsibility (CSR) initiative to provide subsidised plantation training to young people. SP Training Centre produced 30 apprentices who graduated in August 2014 and 26 apprentices who graduated in August 2015 respectively.

    These graduates, we believe, will contribute positively to the palm oil industry. Therefore, by providing them adequate training, they are able to have a bright future and create a rewarding career development path for themselves.

Other Activities

Our other business segments - Laboratory services, seed production, cattle integration and property investment offer valuable synergies but currently contribute negligibly to the Group's revenue.

Financial Performance

For the financial year ended 31 December 2015, the Group recorded a revenue of RM334 million compared with RM390 million in the preceding year, a decrease of 14 % or RM56 million. The Group's profit before tax stood at RM22 million compared to RM70 million for 2014. Profit attributable to owners of the Company was RM21 million in 2015 compared to RM61 million in 2014.

Discussion Of Performance

Overview

The less desirable financial performance compared to 2014 was due to the ongoing plunge in global market prices for CPO and PK.

Lower profit before tax and profit attributable to owners of the Company for the current financial year was also due to reversal of the previous year's impairment loss on deposits paid for acquisition of equity interest in four plantation companies, amounting to RM28.5 million, which was recognised as other non operating income in 2014.

Realised Average Selling Prices

The realised average selling price for CPO of RM2,125 per mt was lower than 2014 of RM2,351 per mt. Similarly, the realised average selling price for PK was RM1,469 per mt in 2015 compared to RM1,575 per mt in 2014. Lower CPO and PK realised average selling price was in line with the weakening global market prices for CPO and PK.

FFB Production & Yield

Production of fresh fruit bunches (FFB) from our estates for the year was 280,304 mt compared to 289,076 mt in 2014, while yield was recorded at 11.38 mt per ha in 2015 against 11.60 mt per ha in 2014. Lower production volume was due to adverse weather conditions in quarter 1,2015 combined with reduction in mature areas due to replanting efforts in a few estates.

CPO & PK Production

The FFB processed by our mills was 647,701 mt for the year 2015 against 678,789 mt processed in 2014. Output of CPO was 132,542 mt while PK was 29,354 mt. Oil extraction rate was recorded at 20.46% whereas kernel extraction rate was 4.53%.

Sales Volumes of CPO and PK

The Group recorded sale volumes for CPO and PK at 132,640 mt and 29,607 mt respectively. This was a decline of 6% and 2% respectively compared to sales volumes in 2014. Lower sale volumes were in line with lower CPO and PK production during the year.

In Conclusion

The Board believes the Group's financial performance for the year in review was satisfactory in the light of weakening CPO and PK prices during the year.

Nevertheless, the Board and the Management are well aware of the challengingly low CPO price environment and therefore, continuously carry out mitigation measures which provide a notable cushioning effect. Such initiatives include but are not limit to increase in productivity, minimise wastage, costs containment and rationalisation of workforce.

Dividends

Despite our difficult position, we would like to reward our shareholders to recognise their continuous support. The Company declared a first interim, single tier dividend of 4.5 sen per share, totalling approximately RM12.6 million, in respect of the financial year ended 31 December 2015, which was paid to shareholders on 30 March 2016. In the Board's opinion, this offers short term financial returns whilst maintaining cash reserves for future growth and operational requirements.

Prospects for 2016 and Beyond

Risk Factors

Economy: The global economy is expected to remain challenging during the coming financial year. Malaysia's growth rate is expected to range between 4% and 4.5% for 2016. Despite major challenges ie vulnerable global economy, depreciation of Ringgit Malaysia and uncertain commodity prices, Malaysia is stable with strong economic fundamentals and remains competitive.

CPO Prices: The rise in CPO price in Quarter 1 of 2016 evidenced an anticipated improvement in CPO price outlook for 2016. The prolonged dry weather due to El Nino is expected to adversely impact the palm oil production.

Prospects and Outlook

There is little cause for pessimism regarding the future of palm oil industry. We believe that the Malaysian palm oil industry outlook remains positive both in a mid-term and long-term perspective due to its strong fundamental.

Nevertheless, we view such challenging times as a valuable opportunity to enhance our competitive position. We do not intend to slow down our efforts to grow our business, but instead to strengthen and reinforce them for the benefit of our esteemed stakeholders and continue to pursue value creation potentials for our shareholders. We will continue to seek growth opportunities through acquisitions and partnerships. We will continue to focus on organisational enhancement through conduct of modernisation and operational enhancement aggressively and comprehensively.

Appreciation

We would like to convey our sincerest thanks to our shareholders for their continued support and belief in Sarawak Plantation Berhad. We would also like to thank all the State and Federal Government Ministries, Departments, Statutory Bodies and Regulatory Agencies who have offered us such close cooperation and support during 2015, along with other relevant authorities.

Heartfelt thanks are also due to our joint venture partners, vendors, consultants, professional advisors, service providers and community neighbours for their goodwill and unstinting efforts. Last but not least, we would like to reserve the warmest thanks to our directors and all the employees of SPB for their hard work and professionalism.

Thank you,

Datuk Amar Abdul Hamed Bin Sepawi
Chairman