CEO's Review

Extracted from Annual Report 2017

Dear Shareholder,

Amidst challenging market conditions, your Group remained resilient. By leveraging on our solid foundation and tapping into opportunities to unlock value, we turned in sterling results for the year.

FINANCIAL PERFORMANCE

Boustead Plantations Berhad delivered a record profit of RM733 million for the year ended 31 December 2017, compared with RM276 million in the previous year. A key contributor to this substantial jump were gains realised on disposal of lands in Seberang Perai, Pulau Pinang, amounting to RM555 million. This was further supported by improved profit from operations, which rose to RM178 million on the back of better crop production and higher crude palm oil (CPO) prices. The Group registered RM760 million in revenue, up 7% from the year before.

Due to this exceptional performance and in line with our commitment to enhancing shareholder value, total dividend for the financial year was 19.5 sen per share. This represents a cumulative pay-out of RM312 million. To further reward shareholders we are issuing two bonus shares for every five existing shares held, pending shareholders' approval.

Earnings per share ended at 41.6 sen and net assets was RM1.59 per share, while market capitalisation was RM2.6 billion as at 31 December 2017

In order to strengthen our balance sheet, during the year we utilised proceeds from our land disposal as well as from our initial public offering to wind down borrowings to RM140 million from RM901 million. This saw our gearing ratio improve to a negligible level of 0.05 times.

MARKET REVIEW

The year started off on a high note as the CPO market sustained its strong momentum, with CPO prices hovering above RM3,200 per metric tonne (MT) in the first two months of 2017. CPO prices subsequently dropped however, as a result of an expected recovery in palm oil production, stagnating exports and a projected record soybean crop from Brazil.

CPO prices rallied to RM2,900 per MT in September, outperforming market expectations due to lower than anticipated palm oil production. This slowdown in production was attributable to a significant decline in oil extraction rate (OER), lower than expected yields, a growing number of old lower-yielding palms and ongoing labour shortages.

Malaysian CPO production for the full year grew by 15% compared with the previous year. At the same time, increased soybean production in Brazil and Argentina coupled with heightened soybean planting in the United States put pressure on soybean prices, which edged lower and subsequently had an impact on CPO prices.

The CPO market was impacted in the final quarter of the year after the Indian government announced a significant hike in import duty on edible oils, taking the market by surprise and causing CPO prices to drop to RM2,400 per MT. CPO import duty was raised to 30% from 15% while refined palm oil was raised to a staggering 40% from 25% previously.

Further dampening market sentiment was the European Union's (EU) move to curb imports of palm oil. Malaysian exports saw a slowdown in December as palm oil inventories rose to 2.73 million tonnes, the highest in more than two years.

Despite the tough backdrop, the Group achieved an average CPO price of RM2,810 per MT for the year, up by 9% from RM2,584 last year. Average palm kernel price improved to RM2,505 per MT, compared with RM2,460 per MT in the previous year.

OPERATIONS REVIEW

The Group's operations comprise 41 estates across Peninsular Malaysia, Sabah and Sarawak, with a combined land bank of 81,800 hectares (ha) and 10 palm oil mills. Total area under cultivation stood at 65,000 ha, consisting of 59,100 ha of mature areas and 5,900 ha of immature areas.

We invested RM34 million in capital expenditure in 2017. In addition to this, a total of RM37 million in replanting costs was utilised for replanting of 1,800 ha of oil palms as well as for upkeep of 4,100 ha of immature areas.

Fresh fruit bunches (FFB) production was 973,513 MT, a 7% improvement compared with last year. Average yield per ha increased to 16.7 MT compared with 15.6 MT in the previous year. With a total processing capacity of 425 MT FFB per hour at our palm oil mills, we processed 1,080,390 MT in 2017. This comprised 918,621 MT of FFB or 85% of which was from our own estates.

Average FFB production costs increased to RM313 per MT, primarily due to upkeep and maintenance costs incurred to meet Roundtable on Sustainable Palm Oil (RSPO) standards, higher minimum wages, coupled with reconstruction and maintenance of access roads in our Sabah estates. Milling costs also rose to RM78 per MT while average cost of palm oil production increased to RM1,731 per MT.

CPO production increased by 4% to 226,843 MT and palm kernel production was up by 6% to 46,896 MT. Average oil extraction rate (OER) was slightly lower at 21%. Nevertheless, this was higher than the Malaysian Palm Oil Board's (MPOB) national average of 19.7%, which also saw a drop compared with 20.2% last year, indicating an overall decline across the country. Kernel extraction rate was 4.3%, consistent with last year, although this was lower than the MPOB average of 4.9%.

The mechanisation of FFB harvesting and collection remains a key initiative to drive productivity, enhance efficiencies and reduce dependency on manual labour at our estates. To further improve labour productivity, we have extended the usage of hybrid carbon fibre poles for harvesting in tall palm areas. This harvesting tool is lighter, faster and can improve efficiency by up to 15% as compared with conventional aluminium poles.

Where terrain permits, motorised cutters continued to be used for harvesting young palms. Through the greater efficiency of the motorised cutters and speed of cutting fruit bunches, this can improve productivity by up to 30%.

To further improve accessibility into areas with narrow terraces or soggy grounds, compact flotation tyre transporter vehicles were used for in-field FFB collection and to facilitate mulching of empty fruit bunches. Additional mini-tractors were mobilised for FFB collection in hilly areas. We have in place at five of our estates bin transportation systems, which are integrated with in-field and main-line mini tractors for crop evacuation, to further reduce manual labour requirements.

In addition, we introduced a smart fertiliser spreader which features in-built calibration equipped with sensors and a Global Navigation Satellite System (GNSS) as well as internet capabilities at our Telok Sengat Estate.

We are also evaluating the performance of a tractormounted boom sprayer with GPS that was launched in Telok Sengat Estate in February 2018, for circle spraying of weeds in mature areas. If successful, this mechanised system will be able to overcome limitations faced by existing types of equipment in our estates.

Along with this, as part of our biological pest control measures, we introduced barn owls at our Sabah estates to reduce rat population. This was initially implemented at our Segaria Estate in 2014 and produced encouraging results in terms of curbing the rat population as well as generating savings for chemical baiting. We are confident that this will have a positive outcome as the initiative has also proven effective in most of our Peninsular estates.

Peninsular Malaysia

We have a land bank of 25,800 ha in Peninsular Malaysia, comprising 19 estates. A total of 24,200 ha is planted with oil palms with an average age profile of 13 years.

In 2017, FFB production for the region was 428,546 MT, reflecting an increase of 11% from the previous year. Average FFB yield per ha was 19.4 MT

Most of our estates achieved encouraging results, with the exception of a few small estates which are still recovering from the adverse effects of 2015/16 El Nino. Our topyielding estates were in the northern region, namely Batu Pekaka, Bukit Mertajam and Malaya, which produced average yields of 22.7 MT per ha. This represents a significant 44% increase from the previous year.

The young mature palms on our east coast estates, namely Sungai Jernih and Bebar, also achieved strong yields averaging 21.2 MT per ha, up by 16% from last year. Meanwhile, the southern estates of Chamek and Telok Sengat saw a 2% increase with average yields of 22 MT per ha.

Our Peninsular Malaysia mills recorded an average OER of 21.1%, slightly lower than last year's 22%. However, this was higher than the MPOB average of 19.2%. Once again, Sungai Jernih Palm Oil Mill, achieved the highest OER for the Group at 23.8%. The mill received industry recognition, winning the Anugerah Khas Alam Sekitar (Kategori Industri Sawit) - Komitmen Tertinggi Rakan Alam Sekitar Negeri Pahang award from the State Department of Environment.

In line with our cost optimisation measures and due to its low FFB crop intake, we are closing down the operations of our Lepan Kabu Palm Oil Mill in Kuala Krai, Kelantan, in the first quarter of 2018.

As part of our commitment to sustainability, Trong Business Unit successfully attained RSPO certification in 2017, while Sungai Jernih Business Unit continues to maintain RSPO certification. Along with this, Sungai Jernih Business Unit is on track to obtain Malaysian Sustainable Palm Oil (MSPO) certification by 2018.

Sabah

Our operations in Sabah comprise 13 estates with a total land bank of 29,500 ha, of which 27,200 ha are under oil palm cultivation. The average age profile of our oil palms in Sabah is approximately 14 years.

FFB production for the Sabah estates improved by 7% to 411,776 MT, while average yield per ha stood at 17.3 MT per ha. Production was hampered by adverse weather conditions, particularly for estates located in the Sugut region which were impacted by heavy rains, leading to flooding in some areas and damaging main access and field roads. This further hindered evacuation of FFB. Shortage of skilled harvesters is also an ongoing challenge.

Resort Estate was the best performer, recording an average yield of 25.8 MT per ha. This was driven by sufficient harvesters and the introduction of new harvesting tools for tall palm areas. The Segaria and G&G Estates also turned in solid performances with average yields exceeding 22 MT per ha.

Our Sabah mills recorded an average OER of 21.3%, compared with 21.8% last year. This surpassed the Sabah MPOB average of 20.6%. Leading this was our Segaria Palm Oil Mill which achieved a commendable OER of 23.2%.

LTT Sabah Estate was awarded with RSPO certification in 2017. We also successfully renewed RSPO certification for our Nak Business Unit, while the Segaria Business Unit is expected to receive RSPO certification by the first half of 2018.

Sarawak

Our nine estates in Sarawak cover a combined land bank of 26,500 ha, with a planted area of 13,600 ha. The average age profile of our oil palms in Sarawak is 20 years.

The Sarawak estates produced 133,191 MT FFB in 2017, a 4% decline from the previous year. Average yield per ha was 10.8 MT. Harvesting operations were hindered by extremely high rainfall, labour shortages, ongoing native customary rights land disputes and blockades in Kelimut, Maong, Sungai Lelak and Bukit Limau estates.

In a positive development, the blockade at our Sungai Lelak Estate was successfully removed and rehabilitation works to normalise operations were carried out. While harvesting operations resumed in July 2017, this was impacted by shortage of harvesters.

Meanwhile, our estates in Sibu experienced high rainfall for most of the year, which impacted crop production. We have reorganised harvesting and crop evacuation operations to compensate for the shortage of harvesters in the year ahead.

Our mills achieved an OER of 19.8%, marginally higher than the previous year, although this was lower than MPOB's average of 20%.

RESEARCH & DEVELOPMENT

Research and development (R&D) plays a crucial role in the sustainable growth of the Group. Led by our associate company Applied Agricultural Resources Sdn Bhd (AAR), our R&D efforts enable us to tackle key challenges in the oil palm plantation industry.

This includes increasing efficiency and yields through AAR's oil palm breeding programme. AAR clonal and semi-clonal planting materials are well-established and supported by active breeding programmes. They are also well received by the market.

Progressive testing of the next generation AA Hybrida II planting materials demonstrated superiority against AA Hybrida I, achieving a 15% higher oil yield. This is equivalent to a 57% increase in oil yield compared to AA DxP, our firstgeneration planting materials. A planting density trial is being carried out to examine the possibility of increasing the oil yield of AA Hybrida II further. To date, we have replanted a total of 21,916 ha with high oil-yielding clonal planting materials.

We continue to achieve high OER at our mills, processing crops produced from tissue culture ramets. This clearly illustrates the success of our applied research in tissue culture. AAR's tissue culture laboratory continuously produces quality ramets through stringent quality controls and well-adhered tissue culture protocols. The laboratory has been certified ISO 9001:2008 since 2009.

While efforts to address the growing concerns of pathogens are continuing particularly on Ganoderma infection mitigation, research into the use of beneficial microbes to enhance the oil palm growth is ongoing in multilocation field trials. It was demonstrated that it is possible to reduce fertilisers by as much as 25% by inoculating endophytic microbes to the young palms.

GPS is an integral tool in oil palm agro-management. Technologies such as drones have been adopted by our oil palm estates for various operations including mapping, palm census and monitoring purposes.

SUSTAINABILITY COMMITMENT

Sustainability is all the more important for BPB as a company with operations which are deeply embedded in the eco-system. Our sustainability vision of Achieving Strategic Growth, Safeguarding the Environment has not faltered and we strive to lead by example.

Our progress and achievements for the year in the areas of economic, environment and social are detailed in our Sustainability Report in this Annual Report. We remain focused on driving our existing initiatives and at the same time strengthening our commitments towards achieving sustainability in all aspects of our business.

OUTLOOK

As part of our strategy to expand our land bank, we embarked on the proposed acquisition of 11,600 ha of land comprising five plantation estates within the district of Labuk and Sugut, Sabah. This represents a viable opportunity for the Group as the estates are located in close proximity to our existing estates, which will enable us to benefit from greater economies of scale.

Upon completion of this proposed acquisition, our total land bank will increase by 14% to 93,400 ha. This represents an increase of 15% in total planted area to 75,000 ha. The estates have a robust age profile, with 64% of the oil palms in their prime maturity between 10 to 20 years, which is a peak production period. Meanwhile, 10% of the palms are young mature palms between 4 to 9 years, which bodes well for our long-term prospects.

In tandem with expanding our plantation land, we are focused on unlocking value and ensuring effective usage of our land bank. In line with this, we are undertaking the proposed disposal of three parcels of land comprising 139 ha in Seberang Perai Utara, Pulau Pinang. This is in addition to the previous year's disposal of 678 ha of land.

Given the strategic location of the land which is in close proximity to urban development, we are able to realise the capital appreciation of the lands by disposing of them at a substantial premium over the net book value.

In 2018, we have allocated RM77 million for capital expenditure to be utilised mainly for implementation of dust particulate reduction measures in our mills in compliance with environmental regulations, as well as construction of workers' quarters, specifically at our Sabah estates. In addition to this, a total of RM49 million will be invested in replanting efforts for 2,400 ha of oil palm and upkeep of immature areas.

The plantation sector is heading for crosswinds in 2018. CPO prices are expected to remain supportive in the first quarter of the year, when output is seasonally low. Overall however, the CPO market is expected to be subdued in 2018. With full recovery expected post-El Nino, total global palm oil production is anticipated to increase by 5% to 67.5 million tonnes in the year ahead, which will put pressure on CPO prices.

Meanwhile, global palm oil consumption is forecast to increase by only 1.5 million tonnes to 63 million tonnes in 2018, on the back of abundant crops for other edible oils and slowing demand growth from traditional palm oil buyers.

While the EU's measures to ban palm oil-based biofuel by 2020 have dimmed market sentiments somewhat, we are hopeful that this will be reviewed to reach an optimistic outcome.

On a positive note, Indonesia's biodiesel mandate is expected to absorb the increase in output and support CPO prices over the long-term. This is further supported by Indonesia's CPO fund as well as rising consumption of palm oil-blended fuels. India is also expected to resume their CPO imports once stock reserves dwindle and their domestically-produced oil becomes insufficient to meet demand growth.

Although market conditions remain challenging, by building on our strong fundamentals and strategic growth plans, we are confident we will be able to maintain our momentum and drive the Group forward in the year ahead.

FAHMY ISMAIL
Chief Executive Officer
1 March 2018

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