Balance Sheet

Review Of Performance

Review of Group Performance

Revenue and Gross Margin: Group revenue grew 82% to Rp11.8 trillion, representing an increase of Rp5.3 trillion as compared to a year ago (with consolidated results of Lonsum for only 2 months in 2007). The improvement in revenue was mainly due to higher palm oil prices and increased palm oil sales volume. The sales volume of crude palm oil (CPO) in 2008 was 730 thousand metric tons, as compared to 361 thousand metric tons in the previous year. This was mainly due to contribution from Lonsum and organic growth. The cooking oil sales volume in 2008 grew by 14% to 424 thousand metric tons driven by increased demand for consumer-pack cooking oil in the Indonesian market. This growth was encouraging given the volatility of the CPO prices and the prevailing difficult market conditions.

All our divisions achieved better revenue and operating profit (excluding fair value gain or loss on biological assets) in 2008. Plantations Division again contributed more than 90% of our operating profit. Overall gross profit margin for full year 2008 was 34.9%, better than 30.2% in the previous year.

Plantations Division registered total revenue of Rp6.8 trillion, up from Rp2.7 trillion a year ago (+154%) mainly due to incremental contribution of Rp3.3 trillion from Lonsum and higher CPO volume growth. Cooking Oils and Fats Division likewise recorded encouraging growth of 49% driven largely by higher selling prices and volume growth in consumer pack cooking oil in the Indonesian market. Commodities division posted revenue growth of 42% due to higher export volume of crude coconut oil and increase in average selling price of copra-based and palm-based products.

Gain/(loss) arising from changes in fair values of biological assets: In accordance with the Singapore Financial Reporting Standards ("SFRS") No. 41, "Agriculture", biological assets are stated at fair value less estimated point-of-sale costs (estimated selling costs). Gains or losses arising from the changes in fair values of the biological assets at each reporting date are included in the consolidated income statement for the period in which they arise.

Notwithstanding the above, it is the practice of the Group to engage an independent firm of valuers to prepare the valuation of the biological assets (which primarily comprise oil palm and rubber plantations) on a semi-annual basis. The valuations were prepared based on the discounted net future cash flows of the underlying plantations. The expected net future cash flows of the underlying plantations are determined using the forecasted market prices of the related agricultural produce.

As a result of the significant decline in the prices of CPO during the second half of 2008 and the prevailing overall adverse global economic conditions, the Group posted loss arising from changes in the fair values of biological assets of Rp1,593 billion and Rp947 billion in the last quarter of 2008 and on full year basis, respectively.

The significant fair value loss on biological assets are driven mainly by the natural gradual decline in the fair values of biological assets over the years due to the realization of the projected cash flows; and changes in assumptions used in the independent valuations particularly in projected CPO selling prices and discount rate.

Profit from Operations: The Group achieved respectable profit growth in 2008 with operating profit (excluding fair value gain or loss on biological assets) of Rp2.8 trillion compared to Rp1.4 trillion in last year (+104.0%). This was principally on account of the strong CPO price during the first half of 2008, positive contribution from Lonsum and better operating margin in cooking oil division. The improved profit was however negated by (i) increased selling expenses arising from higher freight cost and Indonesia export taxes of Rp156 billion, (ii) higher G&A expenses mainly due to the inclusion of new subsidiaries and wage inflation; and (iii) higher other operating expenses resulting from net loss on foreign exchange of Rp229 billion.

Profit Before Tax (PBT): PBT excluding non-cash items relating to fair value gain or loss on biological assets and goodwill was Rp2.5 trillion, up from Rp1.4 trillion a year ago (+81.2%). The full impairment of goodwill of Rp4.8 billion in 2008 was related to the new subsidiaries acquired in Dec 2008 (ie. TST). While the full impairment of goodwill of Rp76.3 billion in 2007 arose from the difference between the deemed cost of acquisition and fair value of the Company's net assets at the reverse acquisition date.

Net Profit After Tax (NPAT): The Group posted a NPAT of Rp1.1 trillion in 2008, up 7.3% compared to last year. NPAT excluding the non-cash items relating to the fair value gain or loss on biological assets (net of associated tax effects) and impairment of goodwill was Rp1.7 trillion, 86.7% higher than last year.

Review of Financial Position

The Group's net assets stood at Rp11.0 trillion as at 31 December 2008, increased by 11.8% from Rp9.8 trillion a year ago. Net asset value per share improved by 11.4% to Rp5,506 as at 31 December 2008.

Total non-current assets increased from Rp14.9 trillion as at 31 December 2007 to Rp16.5 trillion as at 31 December 2008 due to:

  1. Decline in biological assets primarily due to loss arising from the changes in fair values of biological assets during the year (as explained in Para 8 above). The decline was partially offset by new plantings during the year;
  2. Increase in property, plant and equipment mainly from purchase of equipment, construction of housing and infrastructure in plantations, as well as the consolidation of new subsidiaries acquired in Year 2008 (ie. LPI, Hijau Group and TST). Similarly, the increase in prepaid land premiums and deferred land right acquisition costs was largely relating to the acquisition of new subsidiaries during the year.
  3. Increase in other non-current assets was mainly due to higher advances for plasma projects and advances for the acquisitions of minority interest in SAIN and Mitra. The said acquisitions of minority interests in SAIN and Mitra were completed in February 2009.
Total current assets increased by Rp0.5 trillion to Rp4.4 trillion as at 31 December 2008 mainly due to stronger cash position of Rp2.4 trillion, attributable to higher net cash flows generated from operations net of purchase of assets and other investments. The increase was partially offset by the decline in inventories particularly by-products, stearine, and copra-based and palm-based products.

Non-current interest bearing loans and borrowings increased from Rp0.7 trillion as at December 2007 to Rp3.9 trillion as at December 2008 mainly due to the refinancing of US$160 million and Rp1.0 trillion of 1-year bridging loan facilities to 5-year term loan in the second quarter of 2008. As a result, short-term loans and borrowing declined substantially following the aforesaid refinancing exercise.

Deferred tax liabilities decreased by Rp0.4 trillion to Rp1.6 trillion mainly due to the reversal of the deferred tax effects associated with the loss arising from changes in fair values of biological assets, and the effects of the change in Indonesian tax rates from the current 30% to (i) 28% effective for fiscal year 2009; and (ii) 25% effective for fiscal year 2010 and beyond.

Commentary On Current Year Prospects

2008 was a challenging year for oil palm plantation owners given the volatility in the CPO prices, which started the year strongly and peaked at US$1,249 a ton (CIF Rotterdam) in March 2008. As the global financial crisis triggered a major correction in commodities prices, CPO prices fell in the second half of 2008 to end the year at US$503 a ton. In addition, the prices of raw materials, in particularly fertilizers and fuels also increased substantially in 2008.

We expect 2009 to continue to be a volatile year for commodity prices. However, we have seen some easing of the prices of raw materials at the beginning of 2009. We will continue to manage our balance sheet and cash flows prudently, while exercising prudent cost management and investing strategically in our future growth.

The strength of our integrated business model, and the growth of our plantation business together with our low cost of production, positions us well to face the challenges ahead. Our operational strength and commitment to research and development, and our world class seed breeding operations, will enable us to continually implement and improve best practices for sustainable development of our plantations.

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