REA Holdings Prefs
Following a poor trading statement in late August, the REA Holdings 9% pref has fallen to below par. REA Holdings are primarily a company specialising in palm oil and like most commodoties, is suffering from lower prices.
The pref is cumulative - I would appreciate any thoughts whether this represents good value against the risk. Preference shares have fallen of late in general due to potential changes in taxation but this specific share has fallen more than most.
The pref is cumulative - I would appreciate any thoughts whether this represents good value against the risk. Preference shares have fallen of late in general due to potential changes in taxation but this specific share has fallen more than most.
Comments
Regarding the REA Holdings prefs, last month's disappointing results have had a significant effect. The preference shares are now yielding over 9%.
The deferment of a decision on the 2015 dividend on the ordinary shares potentially removes the "prop" supporting payment of the next preference share dividend in December.
However I believe it will be paid for the following reasons:
1) It is cumulative, so there is no long-term benefit to the company in not paying the preference share dividend;
2) The company is still profitable (if only just!)
3) The company's financing plans still seem to have institutional backing
4) The plans for expansion/cost reduction are still in place
While I wouldn't want to risk buying the ordinary shares, IMO we have reached a "weak buy" situation on the preference shares. I say "weak" because the price may still drop further, and it would be a safer bet to wait until it becomes clear that the December dividend payment on the prefs will be made (although the price will probably rise as soon as this happens).
Since I wrote this the price of RE.B has fallen again, as I thought might be the case. I am very tempted to top up but will probably wait until nearer the next dividend date.
I am assuming that the plantations haven't been affected by the forest fires burning in Indonesia. If they had I would have thought an RNS would have been issued.
1) Dividends on the preference share have not been available in scrip form. However, the dividend on the ordinary share has been compulsorily paid 50% in cash and 50% in 9% preference shares (at par). Where investors have not wanted the preference share they have been placed in the market and the proceeds have been given to the shareholder.
2) Provision was made for issuance of £40 million of the new REA Senior 8.75% 2020 bond and it was offered in exchange for the £34.5 million 9.5% 2017 bond. What happened is that only £26 million was exchanged and no additional amount was sold. Therefore the outstanding amounts are approximately £26 million 8.75% and £9 million 9.5% and there has been no net increase of senior debt bonds.
I'll see if this can be added as an addendum to Bond of the Week.
Thank you for an incredibly well researched, and well written article on REA Holdings Prefs. I bought some a few months back and was umm-ing and ahh-ing about buying a few more. I think I will hang on a bit to see where commodities in general and palm oil in particular are likely to head.
I know your artciles are appreciated - not just here, but on other boards that refer to them, so please keep up the good work. What I like is the fact that you write when you have something to say, and don't just write because you feel you have to do so regularly.
007
I may take a punt in 3 months time, just before Xmas, at which time I would review
a) The 2015/6 El Nino event (Secondly we are about to have an El Nino weather event which historically has led to a dryer climate)
b) Crude Oil output from USA and its price
c) Palm Oil price
Alternatively, we could have a view on the Lloyds court case and their behaviour towards investors.
Palm oil prices have risen from their low point of 480 to 852.
Previous write-ups
http://www.fixedincomeinvestor.co.uk/x/analysis.html?type=bond-of-the-week&cat=analysis-comment&y=2015&aid=1426
http://www.fixedincomeinvestor.co.uk/x/analysis.html?type=bond-of-the-week&cat=analysis-comment&y=2015&aid=1408#
Been a long time since October 2015 (my last comment on this security)
I appreciate some risk with this holding, however I suspect their may be an opportunity for a capital gain over a 2-3 year period, the coupon income would also be welcome for that period. The holding is less than my usual quota at just 1% of total portfolio.
I suspect there is some price correlation with crude oil (bio-fuels)
Any additional comment?
So ethically Palm is a bit of a bad boy now but there again so is IPF and Provi. !
Yield of 11.5% tempting but needs to be reviewed and watched over rather than invest and forget i guess.
I totally agree with your assessment. With normal oil prices not that high, less need for greater bio-fuels (less substitution). Keeping clear of Rea Holding at present. Regarding IPF, I'm taking up the exchange, but likely to sell shortly afterwards, my guess
(finger in the air) some bad news will arrive this autumn regarding the Tax issues (then buy again on the lower bond price)
Just hope it's not the case for IPF as i have also exchanged and indeed applied for more new stock. Oh well too late now.
Shaunm indeed IPF need watching carefully but even if we can get 6 months at 7.75% p.a. that would be pretty good though i would be delighted to get 4 years out of it, just hope my nerves are strong. !
dandigirl, yes that or a merger with one of the financially stronger producers
1000 units @ 60p = £600 initial cost
Dividend payment 1000 * 5 (payments) @ 4.5p = £225
Sale at 90p provides £300 profit
Total Profit = £225 + 300 = £525 (525/600) = 87.50%
Hind, I agree with your assessment, Pref Holders are likely to be better off
Interims due late September should make for an interesting read.
CPO up at 570 having been a little higher.
Prefs 73.50 having fallen into the 60s.
Did have a small top-up in the mid 60s.
Happy to see our paper losses diminish but given that CPO is still below 600, unwilling to top up more at this price.
I have sold today.
"The group is now working on arrangements regarding refinancing of the £30.9 million nominal of 8.75 per cent sterling notes 2020 that fall due for repayment in August 2020.
"Provided that substantially all the sterling notes are successfully refinanced, crops continue to achieve budgeted levels and the CPO price is at least maintained around current levels, the directors intend to resume payment of cash dividends on the group's preference shares in 2020. The directors also plan progressively to catch up the arrears of dividend on the preference shares, commencing in 2020 with a payment of 1 per cent per share at the end of March 2020."
This sounds encouraging and should help the share price to recover further.
1. India: 9.2 million tonnes
2. Indonesia: 7.3 million tonnes
3. EU 28: 7.2 million tonnes
4. China: 5.8 million tonnes
5. Malaysia: 2.9 million tonnes
6. Pakistan: 2.5 million tonnes
7. Nigeria: 2.3 million tonnes
8. Thailand: 1.7 million tonnes
9. Bangladesh: 1.3 million tonnes
10. USA: 1 million tonnes
Transportation is going to be a big issue for the next of years for many types of goods, with ships not being allowed to dock due to restrictions, or delayed due to 14 days quarantine. It's not just the boats, it's the crew, many of whom are Chinese