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REVIEW OF OPERATING ACTIVITIES

OIL PALM
Oil palm division contributed 66% of the Group’s revenue. The division recorded a profit before tax of RM45.0 million which is 226% of the Group’s total. The average FFB price was RM495 per MT, a decrease of 9% while CPO price was at RM2,498 per MT, a 10% decrease.

FFB production for the year increased by 6% to 1,069,340 metric tonnes (MT) from the previous year’s 1,009,447 MT as 75% of our trees are in their prime. As at 30 June 2018, the weighted average palm age is 9 years. We expect our FFB yield (MT) per hectare to improve and consequently reduce our cost of production.

With the completion of our fourth CPO mill, we are now able to process FFB from all of our estates except for Simalau plantation. We managed to cut cost on transportation and more importantly, preserve the freshness of our FFB for processing. The Group’s palm oil mills produced 174,593 MT of CPO and 31,851 MT of palm kernel (PK).

During the year, we sold some of our FFB to third parties resulting in the reduction of utilization rate in Daro Jaya CPO Mill. Mills’ utilization rate will continue to improve in line with the increment of our FFB production. We will impose stringent control over operational efficiency and FFB input quality. With further fine-tuning, we expect the production volume and Oil Extraction Rate (OER) to improve further in the next financial year. We remain optimistic about the long term prospects of the palm oil industry despite the current low CPO price. We will endeavor to lower our cost of production by enhancing our yield and productivity so that we are poised to reap better profits in the event the CPO prices start to trend upwards.

LOGGING
Sales of logs contributed about 10% of the total Group’s revenue. The average export price for logs remained stable at USD275 per m3 largely due to the tightening of log supply and the ongoing demand from our key market segments. More stringent control by the government also helped in stabilizing log prices.

We are in the midst of undertaking Sustainable Forest Management Certification. We foresee gradual improvement in our log production along with progress in the certification process and recent approvals from authority to extract logs from the salvage logging area. During the year, India continues to be our largest log export destination with 93% of export sales. The rest of the market was shared by Taiwan and Korea at 4% and 3% respectively. We will continue to export logs in the coming financial year as we foresee the market demand for tropical logs to remain robust and timber prices to sustain due to supply constraint. USD against MYR is expected to remain strong in the near future which is favorable to our export sales in terms of currency exchange. To better manage our forest, we will select species with higher value for harvesting and maintain vigilant controls on the cost of production. Increased attention will also be given to logistical planning to ensure that logs extracted are delivered within the shortest time frame possible to preserve their freshness and maintain their quality for premium prices.

WOOD MANUFACTURING
The division contributed about 24% to the total revenue of the Group. Plywood sales volumes decreased by 5% YoY, while the average selling prices increased by 18%. For Veneer, sales volume decreased by 56% and the average selling prices increased by 11%.

The production volume for plywood and veneer decreased primarily due to log supply constraint. This coupled with the rising cost of operation resulted in the increase in our unit cost of production.

During the year, Korea was our largest export destination, accounting for 34% of the total plywood exports of the Group, closely followed by Japan and China. Other markets include Taiwan, Middle East, India and Australia.

The market for plywood and veneer has been challenging ever since the economic downturn. To maximize our revenue and to retain our existing markets, we maintained our strategy in producing more high value products mix. The downsizing of our plywood manufacturing facility was in response to market conditions and limited timber resources.

Our focus will be on large importing countries such as South Korea, Japan, and China / Hong Kong. The Group will adopt a dynamic strategic approach in an increasingly competitive global environment, taking into account the decreasing resources, the volatility of foreign exchange rates and crude oil prices. The Group will strengthen its current measures to maintain and enhance its competitive edge. These include harnessing its existing production technology towards improving operational efficiency and product quality, and being innovative in producing more value-added products for niche markets to enhance performance.

REFORESTATION
The Group has planted 31,648 hectare of forest plantation. During the financial year, the progress of tree planting and maintenance works were carried out according to our planned work schedules. A total of 2,059,929 seedlings were planted under the Industrial Tree Planting Method and the new chemical weed control regime. The average survival rate of the E. Pellita seedlings at one month is above 90%.

The division is not expected to contribute to earnings in the short term given that the planted forest has a gestation period of 12 to 15 years before it can be ready for commercial harvesting. The challenge of the Group is to improvise silvicultural practices, better wood properties, pest and disease control and recruitment of field workers. We place great emphasis on stringent quality control over new plantings and their maintenance so as to improve the survival rate and optimum growth of planted trees.

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