CEO's Review

Extracted from Annual Report 2016

Dear Shareholder,

The year 2016 was indeed demanding, with external market conditions impacting the plantation industry. Nevertheless, leveraging on our solid foundation and staying true to our commitment to unlocking value, the Group was able to turn in a strong performance.

FINANCIAL PERFORMANCE

Boustead Plantations Berhad recorded a profit of RM276 million for the year ended 31 December 2016, a significant jump compared with RM95 million in the previous year. This was achieved on the back of gains realised on disposal of lands in Kulaijaya, Johor, and the disposal of Boustead Sedili Sdn Bhd, amounting to a total of RM158 million. Profit from operations saw an impressive improvement due to higher palm product prices.

As part of our drive to deliver value to shareholders, total dividend for the financial year was 14.5 sen per share. This represents a total payout of RM232 million.

Earnings per share for the year stood at 14.2 sen and net assets was RM1.37 per share. The Group's market capitalisation came in at RM2.7 billion as at 31 December 2016, while our gearing ratio was recorded at 0.4 times.

Our cash position in 2016 remains healthy at RM420 million, this allows us significant financial flexibility to seize opportunity to acquire viable plantation assets.

MARKET REVIEW

At the beginning of the year we were faced with challenging headwinds, including a slowdown in demand for crude palm oil (CPO) coupled with high inventories, which impacted CPO prices. The CPO market started off the year at RM2,290 per metric tonne (MT) and continued to be under pressure as prices dropped to a low of RM2,175 per MT in January.

However, following the effects of the prolonged El Nino phenomenon which caused a longer than anticipated drought, CPO production was lower, resulting in palm oil stocks dropping to a multi-year low of 1.5 million tonnes. This saw a strong rebound for CPO prices, reaching a high of RM3,268 per MT in December 2016. The Malaysian Palm Oil Board's (MPOB) average CPO price for the year came in at RM2,653 per MT, up by 23% from the previous year.

Indonesia's biodiesel policy also contributed to stabilising CPO prices, with higher biodiesel consumption following the government push under its B20 biodiesel programme. Other factors which boosted CPO prices were the weakening Ringgit as well as higher crude mineral oil prices.

The Group achieved an average net CPO price of RM2,584 per MT, a 20% increase compared with RM2,148 per MT last year. Average palm kernel price rose by 60% to RM2,460 per MT.

OPERATIONS REVIEW

The Group operates a total of 41 estates spanning Peninsular Malaysia, Sabah and Sarawak as well as 10 palm oil mills.

Land bank stood at 82,500 hectares (ha) of which 64,500 ha is under cultivation, comprising mature and immature areas of 57,400 ha and 7,100 ha respectively. We reduced our area under cultivation by 1,200 ha in 2016, mainly owing to the disposal of Boustead Sedili Sdn Bhd.

In addition, the Group is acting as consultants for the construction of two palm oil mills and managing approximately 5,700 ha of oil palms for external parties.

Fresh fruit bunches (FFB) production for the year was 909,000 MT, down by 12% from last year, while average FFB yield per ha was 15.6 MT. With a combined processing capacity of 425 MT FFB per hour at our palm oil mills, we processed 1,012,000 MT in 2016, lower than the previous year due to the drop in FFB production. Of the total FFB processed, approximately 858,000 MT or 85% was from our own estates.

FFB production costs averaged at RM300 per MT, while milling costs increased to RM75 per MT due to lower FFB processed. Cost of palm oil production per MT averaged at approximately RM1,626.

CPO production was 218,000 MT, a reduction from last year. The Group's average oil extraction rate (OER) was 21.5%, marginally lower compared with 21.9% in the previous year. However, this was higher than MPOB's average of 20.2%.

Palm kernel production of 44,000 MT was also lower than last year while average palm kernel extraction rate (KER) stood at 4.4%. This was a slight decline compared with last year's average of 4.6%, as well as MPOB's average of 4.9% which saw a similar downtrend.

During the year, we maintained our focus on improving productivity and reducing operating cost with key initiatives. This included ongoing mechanisation of field operations, such as the usage of mechanical fertiliser spreaders, controlled droplet applicators and power sprayers for control of weeds, pests and diseases, and empty fruit bunches mulching using compartmental trailers.

We also continued with the mechanisation of harvesting activities, such as utilising motorised FFB cutters and carbon graphite fibre poles, as well as mechanical platform crop evacuation using mini tractors to collect FFB from harvesting platforms. These efforts have enabled us to reduce reliance on manual labour, as well as being more efficient.

Replanting will be one of our core focus areas in 2017. In line with this, approximately RM40 million is committed and 1,800 ha will be replanted. We expect our capital expenditure in 2017 to hover at RM58 million. Amongst others, this amount is expected to be utilised for the construction of housing for staff and workers, replacement and upgrades of plant and machinery.

Peninsular Malaysia

Our operations in Peninsular Malaysia comprise a land bank of 26,500 ha spanning 19 estates. Of this, 24,900 ha are planted with oil palms with an average age profile of approximately 13 years.

FFB production for the region dropped by 16% to 386,000 MT, while FFB yield averaged at 16.7 MT per ha.

The northern estates were severely impacted by the dry weather effects of the El Nino phenomenon until the second half of the year; achieving a yield of 14.8 MT per ha compared with 20.5 MT in 2015. The shortage of skilled harvesters for taller palms also hampered production to a certain extent.

In comparison, the southern estates fared better at 19.3 MT per ha compared with 22.0 MT per ha last year. Our key performer was the Telok Sengat Estate which recorded an average yield of 22.7 MT per ha.

Similarly, our young palms in the Sungai Jernih Estate and Bebar Estate were holding fairly well at 16.3 MT per ha and 20.2 MT per ha respectively.

The average OER for Peninsular Malaysia mills was 22.0%, surpassing the MPOB average of 19.8%. Our Sungai Jernih Palm Oil Mill once again maintained the Group's highest OER for the year with 24.7%. In fact, our Sungai Jernih Palm Oil Mill received the Malaysian Palm Oil Industry (MPOI) Award from MPOB under the category, Highest OER Achievement (Own FFB Supply) 2015/2016 for Peninsular Malaysia.

Sabah

We operate 13 estates in Sabah with a total land bank of 29,500 ha, of which 27,200 ha are planted with oil palms with an average age profile of 14 years. The mature hectares for the region includes 533 ha of oil palms in Sugut that was acquired during the year.

The Sabah estates produced 384,000 MT FFB, 7% lower than the previous year, with an FFB yield of 16.6 MT per ha. This was mainly attributed to the severe dry spell in 2015 and 2016 which had lasting after-effects that impacted cropping patterns in the Sabah region. Crop for the first quarter was much lower than expected and only improved towards third quarter onwards. In addition, labour shortage remains an issue for the region.

Poor performance from tall palm areas in our Bukit Segamaha, LTT Sabah, Sutera and Nak Estates also contributed to the decline in yield. However, our G&G and Resort Estates were able to record satisfactory yields from tall palms.

In the case of our G&G Estate which we acquired in 2013, the implementation of good agricultural practices and high fertiliser input to boost growth was indeed effective, as the estate achieved a yield of 21.1 MT per ha, the highest for the Sabah region. FFB bin transportation introduced to the estate during the year further improved efficiency and reduced cost of operations.

Our Sabah mills achieved an average OER of 21.8% compared with 22.5% last year. However, this was higher than MPOB's average of 21.1%. Our Segaria Palm Oil Mill recorded the second highest OER within the Group with 24.6% and subsequently received the MPOI Award for the category, Highest OER Achievement (Own FFB Supply) 2015/2016 for Sabah.

Sarawak

Our Sarawak operations comprise a total land bank of 26,500 ha encompassing nine estates, with a planted area of 12,400 ha. The average age profile of the oil palms is approximately 19 years.

The Sarawak estates produced 139,000 MT FFB for the year, 17% lower than the previous year, while FFB yield was 11.5 MT per ha. The Sarawak mills achieved an average OER of 19.6%, falling short of last year's average and the MPOB average, both of which were 20.0%.

On-going field blockades continue to hamper operations and harvesting activities in our Kelimut, Sungai Lelak and Bukit Limau Estates. We were also impacted by acute labour shortages coupled with frequent, intermittent monsoon rain during the year.

From a legal standpoint, the land disputes have been resolved in our favour by the Courts. Unfortunately, some of the blockades have continued and we persevere in our efforts to engage with the local communities in order to achieve an amicable solution.

RESEARCH & DEVELOPMENT

The Group's research and development (R&D) initiatives, driven by our associate company Applied Agricultural Resources Sdn Bhd (AAR), have enabled us to implement good agricultural practices throughout our operations. In addition, we have concurrently adopted the latest technologies and innovations to address prevalent challenges faced by our plantations.

AAR's oil palm breeding programme strives to genetically improve oil palm planting materials and has seen great success. These superior planting materials have strengthened productivity for the Group by improving yields and OER. During the year, a total of 2,180 ha was replanted utilising AA Vitroa tissue culture and AA Hybrida II compact planting materials.

As part of our efforts to develop control measures for the Ganoderma infection using biocontrol agents, field testing is underway for a potential candidate. We are also looking into the use of beneficial microorganisms for oil palm cultivation and crop productivity.

AAR is a pioneer in the implementation of Global Positioning Systems in plantations and was among the first to adopt the use of Unmanned Aerial Vehicles (UAVs) or drones for the purpose of field mapping and assessment.

This also opened up a new paradigm in affordable remote sensing applications. Information and maps generated using UAVs or drones are commonly utilised by our plantations for drainage, road and infrastructure planning and planting operations, as well as to monitor the progress and quality of replanting programmes.

SUSTAINABILITY COMMITMENT

As a key participant in the industry, we are committed to leading by example by embracing sustainability across our operations. Not only does this contribute to our growth as a Group, it also enables us to safeguard the environment and have a positive impact on the communities surrounding our estates. As a reflection of our vision to achieve sustainable growth, we have incorporated a dedicated Sustainability Report within this Annual Report which details our sustainability initiatives in economic, environmental and social areas.

OUTLOOK

Prospects are optimistic for 2017, with CPO prices expected to remain supportive for the first half of the year as the sector enters into a low production cycle in addition to the reduced palm oil stocks. This, coupled with favourable crude mineral oil prices and the weak Ringgit, will likely see CPO trading within the price band of RM2,700 to RM3,300.

In the second half of 2017, we expect to see softer palm oil prices once the soybean crop in the United States and Brazil is harvested and the expected bumper crop of palm oil in Indonesia and Malaysia comes into fruition. This may result in a prolonged period of increased production of oilseeds and vegetable oil, which could lead to a buildup of stock.

Demand from India is likely to recover, following demonetisation in the country. At the same time, the direction of the palm oil market may be affected as new policies arise from the administration of the United States, which could have an impact on China's demand for soybean.

Overall, given that palm oil is a basic food commodity, we are confident that the sector will remain resilient and continue to see sustainable growth over the long-term.

FAHMY ISMAIL
Chief Executive Officer
23 February 2017

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