CEO’s Review

Corporate Information  CEO’s Review

Extracted from Integrated Report 2021

Dear Shareholder,

The year 2021 proved to be both operationally challenging yet financially rewarding for Boustead Plantations Berhad (BPB or the Company and its subsidiaries, collectively referred to as the Group). As pandemic- imposed movement restrictions continued from 2020, the labour shortage became more acute and was felt during the harvesting season.

This, together with inclement weather, particularly in the first quarter, had a notable impact on key metrics such as fresh fruit bunch (FFB) production and yield. More than compensating for this, all-time high crude palm oil (CPO) prices contributed to the Group’s revenue crossing the RM1 billion mark for the first time, accompanied by record-high profits. Given our results, we managed to improve our gearing ratio and enhance our earnings per share more than five-fold year on year, while our market capitalisation surged to RM1.5 billion as at 31 December 2021.

Despite the decrease in FFB production and yield, we are beginning to see some early wins from our Plantation Performance Improvement Programme (PPIP). During the year, our refreshed management team also worked hard to develop a new five-year blueprint to revamp and revitalise the Group. This roadmap has been crafted to be aligned with Boustead Holdings Berhad (BHB)'s Reinventing Strategy, focused on strengthening the core business and generating new income streams. Adhering to the action plans outlined as we strive to attain clearly defined goals, we are gearing up to truly reinvent BPB to become a sustainable technology-based plantation company.

Financial Overview

For the year 2021, the Group recorded a revenue of RM1.1 billion, which marks a significant 38% increase from the RM763 million achieved in 2020. This was mainly the result of CPO and palm kernel (PK) price hikes – with the average CPO price increasing by 54% year on year to RM4,341 per MT, and that of PK escalating by 79% to RM2,922 per MT. Added to this, as a result of strategic marketing, we enhanced our CPO selling price by 16% to RM5,044 per MT in the fourth quarter of 2021 compared to RM4,331 per MT in the third quarter of the year.

Boosted by higher revenue, our profit before tax and zakat came in at RM345 million, which was 316% higher than the RM83 million recorded in 2020. Our profit after tax and zakat, meanwhile, increased by 612% from RM34 million to RM242 million.

As a result of our performance, our earnings per share increased from 1.9 sen in 2020 to 10.8 sen while our net dividend per share increased from 1.0 sen to 8.35 sen. It is with great pride to note that our dividend for the year, of RM187 million, will be the highest since 2017.

Operational Overview

An underlying challenge at BPB has been the age profile of our estates, with about 48% of our palm assets in the above- 20-years bracket, and only 27% in their production prime. In order to address the issue, we embarked on an Asset Rebalancing programme. Our strategy involves the disposal of selected plantations with the aim of reducing hectarage from the above 20-years bracket. We will also carry out an accelerated replanting programme in the next two years covering approximately 2,000 ha to 5,000 ha per year. This is in addition to our ongoing PPIP under which we have initiated a 25-year Replanting Programme (RP25). In 2021 itself, we managed to complete replanting no less than 2,057 ha of our estates.

Further enhancing our yield, we have been using high-quality planting materials developed by our research and development associate, Applied Agricultural Resources Sdn Bhd (AAR). The focus of AAR is not only to develop superior planting materials such as the DxP AA Hybrida 1S and VITROA ramet, but also to provide expertise in sustainable agronomic practices. More recently, it has been guiding us in the areas of smart farming as well as other agriculture- related science disciplines to help us enhance our general agricultural practices.

Among AAR’s key developments in 2021 was the identification of endophytic nitrogen-fixing microbes and phosphate solubilising microbes which could potentially help to reduce our dependence on inorganic fertilisers thus minimise negative impacts on the environment, while bringing down our production cost. Our aim is to colonise our estates with beneficial microbes to revitalise soil health, promote palm growth and yield with reduced use of inorganic nutrients in a more sustainable manner. An added benefit would be reduced supply chain risks, given the global shortage of fertilisers in recent years, which was exacerbated in 2021 due to international logistics issues.

With the Asset Rebalancing programme and AAR’s support, we aim to enhance our FFB yield across all estates in the shortest possible time.

Our estates and mills in Sungai Jernih Business Unit currently serve as BPB’s Centres of Excellence; it is here that we roll out our mechanisation programmes before implementing them in other regions. With the assistance of engineering experts, we have adopted various equipment that are contributing to greater efficiencies in harvesting operations, in- field crop evacuation and external crop transportation – covering about 60% to 70% of our planted areas currently. Meanwhile, other solutions have been implemented to improve in-field infrastructure, mature weeding, manuring, pest management and better treatment of effluents.

More recently, AAR has made significant advances in the use of drones to enhance plantation management. In 2018, it developed a spot spraying drone to control rhinoceros beetles. In 2021, we set up our own drone team to accelerate the adoption of drone applications. To date, the team has completed the creation of an aerial digital map of our estates and mills. We have also begun to redesign the infrastructure at replanting areas using drones, improving land use efficiency and increasing the number of palm stand per hectare. Going forward, we seek to use drones more extensively in managing our end to end estate operations.

Since the pandemic, we have been beset by another key challenge, namely the shortage of labour. Close to 77% of our estate and mill workers are foreigners. When the pandemic broke out in 2020, many of them continued to stay and work with us. However, a significant number returned to their home countries in 2021 when the opportunity arose. In order to make up for the loss, we sought to recruit more locals while initiating a Boustead Green Army (BGA) programme to provide income-generating opportunities to retired officers from the armed forces.

Oil Extraction Rate 2021

21.2

"We maintained a strong oil extraction rate (OER) of 21.2%, which was higher than the Malaysian Palm Oil Board industry average of 20.1% as well as our own OER of 21.1% in 2020".

Despite our concerted efforts, we were still left with a labour shortfall of about 25% for the year as a whole. Fortunately, we were able to mitigate the impact of this to an extent via enhanced mechanisation across our operations.

Nevertheless, severe floods at the beginning of the year and delayed effects of low fertiliser application in 2019, led to an 8% drop in FFB production from 1,001,557 MT in 2020 to 923,471 MT. More positively, as a result of having prepared for the anticipated monsoon at the end of 2021, we were able to get through this typically low-yield season with lower losses than normal. CPO production was 0.6% higher in the fourth quarter of 2021 than in the same quarter of 2020, supported by higher FFB production in November and December 2021 compared to the same two months in 2020.

Meanwhile, the quality of our FFB was validated as we maintained a strong oil extraction rate (OER) of 21.2%, which was higher than the Malaysian Palm Oil Board industry average of 20.1% as well as our own OER of 21.1% in 2020. This was driven by higher extraction rates from our mills in Peninsular Malaysia and Sabah, which more than compensated for the lower OER in Sarawak, where the Group has our highest concentration of aged palms.

Asset Monetisation

We have also begun the process of rebalancing our asset portfolio. Among others, this entails disposing of low-yield estates and acquiring premium assets, i.e. estates with palms in their prime. Our objective is to optimise our cash flow in order to pare down our borrowings and meet our working capital requirements, strengthening our balance sheet for future growth via the acquisition of new plantations and generation of new income streams.

Based on this approach, in January 2022 we completed the disposal of our 664 ha Kulai Young Estate to SIPP Power Sdn Bhd. Net proceeds after real property gain tax from the sale of RM389 million will be channelled towards repaying bank borrowings.

Towards Greater Sustainability

As a palm oil producer, we are aware of our need to operate responsibly to ensure minimal negative impact on the environment and biodiversity, while also protecting the rights of our workers and the well-being of the local communities. Towards this end, all 10 of our business units are Malaysian Sustainable Palm Oil certified and six of them also have the Roundtable on Sustainable Palm Oil (RSPO) stamp of approval. For the remaining four BUs, we expect two units to be audited and RSPO certified by 2022, and the remaining two in 2023.

In line with our sustainability commitment, we are also exploring ways in which we can make a positive contribution towards a low-carbon economy. In 2015, we set up a biogas plant at our Telok Sengat Palm Oil Mill to capture methane from our palm oil mill effluent and convert it into electricity for use in milling operations.

Further promoting renewable energy, in September 2021 we entered into a conditional land lease agreement with Next Generation Oil Sdn Bhd (NextGen) through which we are to lease approximately 520 ha of our land in Telok Sengat Estate for algae cultivation. NextGen has developed a particular strain of algae which has the potential to contribute to Malaysia’s renewable energy agenda. At the same time, one of the by-products, algae cake, can be used as a natural fertiliser for our estates.

Talent Development

One of my first tasks upon being appointed Chief Executive Officer in July 2021 was to put together a strong senior management team comprising individuals with the required experience and expertise in the different areas of plantation management. With this team’s support, we are now looking to build our talent pipeline. A training manager has been brought on board recently to assess our skills needs and develop programmes to ensure these are met.

At the same time, various engagement programmes are being organised between senior management and all employees. I personally meet with and coach our

younger executives on a weekly basis, and have informal teh tarik sessions with more experienced executives. We also engage regularly with our cadet planters, and invite industry leaders to give talks to inspire our employees to adopt an ambitious, performance-oriented mindset.

New talent with new technology-based skills and competencies will be developed. This is important to support the Company’s aspiration to be a sustainable technology-based plantation player. Along with digitalisation, the way in which the Company will operate is set to change as we adopt more technology-based tools and equipment in planning, managing and monitoring our operations.

Our New Roadmap

While our financial performance has been extremely encouraging, we recognise that there is still much scope to enhance various operational parameters while restructuring our asset portfolio for optimum returns. Towards this end, and in line with the Reinventing Boustead strategy, we have developed a new five-year roadmap. Approved by the Board in December 2021, the roadmap focuses on better plantation management and the accelerated adoption of digitalisation and technology as we also grow into new areas such as agribusiness.

In terms of plantation management, a key focus area will be yield enhancement, which is to be achieved via the disposal of our aged plantation estates as well as accelerated replanting in Sabah. We expect these initiatives to shift the age profile of our assets such that about 32% of our plantations will be in their prime, 33% pre-prime, and only 36% past prime.

Crops identified for our technology-based agribusiness include chili and ginger in the short- term, pineapple in the mid-term, and mushrooms as well as forest species in the long-term. We will develop a sustainable commercial forest in areas which are not suitable for oil palm planting. This bodes well with our environmental, social and governance drive to commercially reforest certain undeveloped land. Supporting our diversification into agribusiness, our Centre of Excellence in Sungai Jernih Business Unit will be focusing on the implementation of best agricultural practices.

To accelerate the process of digitalising in our operations, three projects have been identified, namely: Data Extraction and Exploration for Plantation (DEEP), a Precision Agricultural Practices Project and a Digital Office Environment System. DEEP will encompass the implementation of Internet of Things smart sensors, automated drones, mechanical tree climbers, robotic harvesters and electrical FFB cutters, among others.

We recognise the need to enhance our capital management in order to support this transformation, hence will seek to refinance some of our outstanding loans while conducting fundraising exercises to raise more capital in order to strengthen our balance sheet.

Outlook

As we enter the year 2022, the Omicron COVID-19 variant is spreading rapidly, causing a spike in number of cases worldwide. Fortunately, it is not particularly virulent and hospitalisation rates have been under control. Consequently, international borders have been opening up, and analysts believe the Malaysian Government will be allowing foreign workers back into the country from the second quarter of 2022 onwards. In December 2021, the Malaysian and Bangladesh Governments also signed a Memorandum of Understanding on opening the doors to Bangladeshi workers.

While this will be a huge boon to the plantation sector, aging palm tree profiles in Malaysia and Indonesia (two of the world’s largest CPO producers and exporters), low levels of fertilisation due to rocketing prices, as well as inclement weather present a scenario that indicates production levels will remain thwarted during the year, perhaps even longer.

Meanwhile, demand for palm oil will continue to be high, driven by China and India. China’s palm oil consumption is expected to increase due to lower supply of rapeseed oil and soybean oil. The strong sentiment at the moment is on the war between Russia and Ukraine, which has led to uncertainties in the edible oil market. India’s palm oil purchase is likely to be spurred by recovering hospitality and food and beverage industries, as well as lower import duties. Overall, global demand for palm oil is expected to be 6.5% higher in 2022 than it was in 2021. Given this scenario, most experts anticipate CPO prices to remain buoyant for at least the first half of 2022, and to average at around RM4,500 per MT for the year.

Leveraging what we expect to be supportive CPO prices, BPB will forge ahead with our strategic blueprint to transform into a sustainable, technology- based plantations company.

Despite the labour shortage, production has been stable in the first quarter of 2022 and we expect to be able to start filling up our manpower needs by the second quarter of the year. As heavy rains and floods are becoming more frequent, we will be enhancing our water management with better solutions such as drainage. In preparation for the possibility of droughts as a result of climate change, we will also enhance our water conservation effort such as installing gravity-flow water pumps to be able to channel stored water to areas that need it.

Meanwhile, with profits earned in 2021, we will settle more of our debts while embarking more aggressively into our asset rebalancing programme.

Financially, we remain bullish and are confident that we will be able to repeat our financial success in 2022 – aided by positive CPO prices and recognition of the sale of Kulai Young Estate in our financial accounts.

Finally, as a responsible organisation, we will increase our focus and effort on integrating environmental, social and governance considerations into our direction, strategies and decision-making. Our ultimate objective is to be a sustainable company with progressive policies and a robust culture of integrity.

ZAINAL ABIDIN SHARIFF
Chief Executive Officer
14 April 2022