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.

Comments

  • I guess we don't have any experts on palm oil or the Indonesian economy on this forum which is probably as expected. Whilst a 9% yield always gets me interested, I tend to have a quick look at opportunities like this and then go back to something a little less risky and that I can better analyse/understand. I did buy some Raven Russia 11% Prefs a couple of years ago which with hindsight I should have left alone (they are yielding around 9% as well if you also happen to be interested in Russian commercial property/warehouses!). I guess anything like this is a bit of a gamble and is going to be volatile.
  • There is some discussion of this in the Preference Shares Sell-off thread in General Bond Discussion. It is in the wrong place of course as preference shares are stocks not bonds. My own contribution (made on Sep 7th) was as follows:

    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.
  • Following yesterday's Bond of the Week I was rung up by someone I know well who has been involved in placing REA bonds and prefs. He thought my piece was balanced and fair but pointed out a couple of errata. I am very happy therefore to make the following corrections:

    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.
  • Oliver,

    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
  • Oliver, much appreciated
    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
  • If Oliver does not have anything to say about bonds he could say so in the column, and then have a rant about some other issue, it is usuallly very amusing!
    Alternatively, we could have a view on the Lloyds court case and their behaviour towards investors.
  • With palm oil prices increasing I thought I make a small purchase at 99p (yield 9%)
    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)
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