Agriterra Ltd / Ticker: AGTA / Index: AIM / Sector: Agriculture

17 November 2017

Agriterra Ltd ('Agriterra' or the 'Company')

Interim Results

Agriterra Limited, the AIM listed African agricultural company, announces its results for the six months ended 30 September 2017.

Chair's Statement

I am pleased to provide an update on our performance in the first half of the 2018 financial year ('H1-2018'). As shareholders will be aware, the Company recently changed its accounting reference date to 31 March (from 31 May, with effect from 31 March 2017), to more effectively co-ordinate the Group's annual report and accounts with the business cycle of the Group's underlying operations. Accordingly, the comparative periods presented in this report are for the six month period ended 30 November 2016 ('H1-2017') and the 10 month period ended 31 March 2017 ('FY-2017').

Mozambique overview

As previously reported, during FY-2017 we focussed our efforts on our Grain and Beef operations in Mozambique, following the decision to dispose of our interests in the Cocoa operations in Sierra Leone, which was completed in June 2017 (as more fully described below). This focus reflects our assessment of the high growth potential of the Mozambican economy which, in the short to medium term, is expected to be supported by the development of the liquefied natural gas ('LNG') industry in the north of the country. Steps towards the development of the LNG industry have now been taken by the two major consortiums of companies (each of which intend to build their own LNG terminal), led on the one hand by ENI S.p.A and on the other by Anadarko Petroleum Corporation. More than US$30 billion is now expected to be invested in Mozambique's LNG sector to build capacity to produce 20 million tonnes per year of LNG, with the first exports, which are destined for Asian markets, due to start in 2021/22. This important development has already started to generate positive economic effects within Mozambique, both on a macro-economic level in terms of positive sentiment regarding the country's return to higher growth rates, as well as at the more granular level of anticipated demand for our products (in particular our beef).

In conjunction with these favourable market dynamics, economic conditions have also improved, with a strengthening of the Metical against both the US$ and South African Rand experienced early in the period, followed by a period of relative stability in the exchange rate at c.60 Metical / US$ and c.4.5 Metical / ZAR. Being a net importer of most goods, the effect of this has been to continue to put downward pressure on inflation in Mozambique - the annualised rate to 30 September 2017 was c.11% which compares to c.25% for the 12 months ended 31 December 2016, and 21% for the 12 months ended 31 March 2017. Despite the fall in inflation, interest rates remain high, with Standard Bank's prime metical lending rate remaining at 27.75% (28% at 31 March 2017). This persistently high lending rate has led us to take actions to decrease our outstanding loan and overdraft balances in the period as more fully described below.

The political environment has also continued to remain stable during the period, with the cease-fire agreement between FRELIMO and RENAMO remaining in place and an apparent willingness by these parties to arrive at resolutions to their primary discussion points in advance of the municipal elections to be held in October 2018 and the Presidential elections in 2019. Further, with a plentiful agricultural harvest in most agricultural commodities in 2017 (including maize), which is expected to repeat in 2018, poorer households are likely to see an improvement in living conditions.

New investment and use of funds

During the period the Group secured new investment of c.US$4.3m from Magister Investments Limited ('Magister') in exchange for a 50.01% shareholding in the Company. Full details regarding Magister were provided to shareholders in the Circular to Shareholders and Notice of General Meeting dated 14 August 2017.

This new funding is being deployed to strengthen the Group's position in Mozambique, with an initial investment of US$0.75m and US$0.25m into the Grain and Beef divisions respectively to reduce their outstanding bank financing. This repayment is in addition to an earlier repayment of US$0.4m in the Beef division following the Group's disposal of its Cocoa assets in Sierra Leone. The related saving in interest costs is expected to amount to approximately US$0.38m per annum, assuming interest rates remain at the current level.

Review 

Grain

H1-2018 has seen subdued demand for our maize flour, reflecting the relative abundance of maize during this bumper harvest season. The relative weakness in demand has resulted in a fall in sales volume to c.4,800 tonnes of maize flour in H1-2018 (H1-2017: c.12,600 tonnes) and c.7,700 tonnes of all maize products (H1-2017: c.16,500), with revenue decreasing in metical terms from Metical 421.5m to Metical 111.5m and US$ terms from US$5.76m to US$1.81m. EBITDA has therefore fallen to a loss of US$0.15m (H1-2017: profit of US$0.50m). The normal sales pattern is for demand to increase following the harvest, with peak maize flour sales between December and March; our operational team are closely monitoring market developments to ensure we are pricing our products correctly to maximise sales, and we hope to increase sales in the second half of the year.

In common with many agricultural products, the working capital requirements in the Grain division are significant, principally due to the natural cycle of maize purchases peaking between April and August, with peak maize flour sales in the latter half of the financial year. During H1-2018 we purchased c.19,900 tonnes of maize (H1-2017: c 24,700 tonnes), with a further c.1,900 tonnes purchased after the period end (H1-2017: c.2,300 tonnes) completing our maize purchasing requirements for the season. The Grain division's working capital is financed by bank facilities provided by Standard Bank which, with a current interest rate of 26.00%, continues to erode the overall profitability of the division. After an interest charge of US$0.40m (H1-2017: US$0.41m), loss before tax for the Grain division was US$0.6m compared to a profit of US$0.09m in H1-2017. In order to mitigate against this high interest cost, the Group has invested US$0.75m during the period in the working capital requirements of the Grain division to reduce its reliance on overdraft financing.

A key area for future improvements to the profitability of the Grain division is the commercial sale of animal feed products produced by our animal feed pelletiser (using maize bran, a by-product of the maize milling process). We have developed our own animal feed products which we will shortly begin to sell on a commercial basis to third party customers.

Beef

In respect of our Beef division, demand remains strong.  This is in part supported by the Metical which, despite having strengthened during the period, remains relatively weak, particularly against the South African Rand. Despite this strong demand, we have continued to maintain supply at c.178 tonnes a month of beef products, principally due to our ongoing efforts to improve the productivity in our feedlot where we are focussing on increasing the average stay of our animals to increase their weight. These efforts to improve feedlot productivity are in response to the reduction in internal animal stocks and the fact that traditional sources of supply from the rural community have not fully returned following the cessation of military activity in the country. Once the average stay of animals in the feedlot is increased, we expect to return to supplying approximately 230 tonnes a month of beef products from our existing operations. Due to this reduced supply, revenue has fallen slightly from US$2.64m in H1-2017 to US$2.26m in H1-2018 and operating loss has remained constant at US$0.78m (H1-2017: US$0.78m). After reduced finance costs of US$0.095m (H1-2017: US$0.14m), loss before tax for the Beef division was US$0.87m (H1-2017: US$0.92m).

Cocoa 

On 1 June 2017 the Group completed the disposal of its Cocoa division operating subsidiaries in Sierra Leone for US$0.5m. The Cocoa division principally comprised a 3,200 hectare cocoa plantation in the Kenema district of Sierra Leone, a 2,000m² warehouse, and related support infrastructure and vehicles. The purchasers were local Sierra Leone businessmen who have existing cocoa production, purchasing and distribution operations in country. The disposal proceeds were applied to reduce the Group's Beef division borrowing facilities in Mozambique and for general working capital purposes.

The Group recorded a profit on the disposal of the Cocoa division of US$0.15m, which was reduced by US$0.13m to US$0.02m following the recycling of translation differences previously reflected in the translation reserve.

Board and senior management changes

As a result of the investment by Magister, the Group re-structured the Board with the appointments of Mr. H Rudland, Mr. G Smith and Mr. B Scott. Mr. A Groves stepped down from the Board to focus on his other business interests.

Subsequent to the period end, Mr. D Cassiano-Silva announced his intention to step down from his position as Finance Director with effect from 31 December 2017. Mr. Cassiano-Silva will remain a Non-Executive Director of the Company thereafter. In order to ensure a period of smooth transition, the Company is in the final stages of agreeing terms with a candidate to assume responsibility for the Company's financial function during an interim period whilst the Company looks to hire a full time Mozambique based group finance director.  In addition, in November 2017 Mr. B Scott took on the position of acting Chief Executive Officer ('CEO') to support the local management team as they seek to implement the Company's development strategies; the Company intends to hire a permanent CEO (also based in Mozambique) in the coming months, at which point Mr. Scott will revert to his current position of Chief Operating Officer, Mozambique.

I would like to once again take this opportunity to thank Dan and Andrew for their considerable input into the development of the Company and wish Brendan the best in his new role.

Conclusion

The recent investment from Magister marks a new period for the Group during which we hope to benefit from the experience and connections of our new Board members in the wider Sub-Saharan Africa region. As we look to capitalise on the growth that will inevitably come from the development of the LNG industry in Mozambique, we hope to see improvements in the profitability of the Group and its ability to provide a positive return to shareholders.

For further information please VISIT www.agriterra-ltd.com or contact:

Consolidated income statement

Consolidated Statement of comprehensive income

Consolidated statement of financial position

The unaudited condensed consolidated financial statements of Agriterra Limited for the 6 months ended 30 September 2017 were approved by the Board of Directors and authorised for issue on 17 November 2017. Signed on behalf of the Board of Directors:

Consolidated cash flow statement

1.             General information

Agriterra Limited ('Agriterra' or the 'Company') and its subsidiaries (together the 'Group') is focussed on the agricultural sector in Africa. Agriterra is a non-cellular company limited by shares incorporated and domiciled in Guernsey, Channel Islands.  The address of its registered office is Richmond House, St Julians Avenue, St Peter Port, Guernsey GY1 1GZ.

The Company's Ordinary Shares are quoted on the AIM Market of the London Stock Exchange ('AIM').

The unaudited condensed consolidated financial statements have been prepared in US Dollars ('US$' or '$') as this is the currency of the primary economic environment in which the Group operates.

2.             Basis of preparation

The condensed consolidated financial statements of the Group for the 6 months ended 30 September 2017 (the 'H1-2018 financial statements'), which are unaudited and have not been reviewed by the Company's auditor, have been prepared in accordance with the International Financial Reporting Standards ('IFRS'), as adopted by the European Union, accounting policies adopted by the Group and set out in the report for the 10 month period ended 31 March 2017 (available at www.agriterra-ltd.com). The Group does not anticipate any significant change in these accounting policies for the year ended 31 March 2018. References to 'IFRS' hereafter should be construed as references to IFRSs as adopted by the EU.

This interim report has been prepared to comply with the requirements of the AIM Rules of the London Stock Exchange (the 'AIM Rules'). In preparing this report, the Group has adopted the guidance in the AIM Rules for interim accounts which do not require that the interim condensed consolidated financial statements are prepared in accordance with IAS 34, 'Interim financial reporting'. While the financial figures included in this report have been computed in accordance with IFRSs applicable to interim periods, this report does not contain sufficient information to constitute an interim financial report as that term is defined in IFRSs.

The financial information contained in this report also does not constitute statutory accounts under the Companies (Guernsey) Law 2008, as amended. The financial information for the 10 month period ended 31 March 2017 is based on the statutory accounts for the period then ended. The auditors reported on those accounts. Their report was unqualified and did not include any statements of emphasis of matter.

The H1-2018 financial statements have been prepared in accordance with the IFRS principles applicable to a going concern, which contemplate the realisation of assets and liquidation of liabilities during the normal course of operations. Having carried out a going concern review in preparing the H1-2018 financial statements, the Directors have concluded that there is a reasonable basis to adopt the going concern principle.

3.             Segment information

The Executive Committee of the Group consider that the Group's operating activities during the period comprised the segments of Grain, Beef and Cocoa, all undertaken in Africa. In addition, the Group has certain other unallocated expenditure, assets and liabilities, either located in Africa or held as support for the Africa operations.

The following is an analysis of the Group's revenue and results by operating segment:

The segment items included within continuing operations in the consolidated income statement for the periods are as follows:

4.             Finance Costs

5.             Discontinued operations

The loss after tax arising on discontinued operations during the period is analysed by business operation as follows:

5.1.         Cocoa activities

Since September 2014, the Group's Cocoa division in Sierra Leone focussed its efforts on maintaining its cocoa plantation assets, while undertaking revenue generating logistics activities, principally providing assistance in the Ebola relief efforts. Sierra Leone was declared Ebola free in the year ended 31 May 2016; consequently, the logistics activities which were being undertaken to provide cash support for the Cocoa division reduced in scale such that the available income from these activities no longer substantially covered the costs of the Cocoa division.

Given the impact of Ebola on the West African region as a whole and the lack of investment appetite from traditional finance sources, the Board formed the view, after due investigations and careful consideration that the Group would be unlikely to be able to raise the finance to continue with the development of the cocoa plantation in the foreseeable future. In this context, the Board therefore believed that it was in the best interests of the Group to sell the Cocoa division to bolster the Group's cash reserves and to enable the Cocoa division to access other finance sources, such as dedicated development and sustainability funds.

As more fully described in the Chair's statement, the Cocoa division's operating companies were sold on 1 June 2017. Further details on the disposal of these subsidiaries are provided in note 7.

The Cocoa activities represented a business segment of the Group and accordingly the results of the Cocoa activities are presented as discontinued operations within the consolidated income statement. The amounts recorded in the consolidated income statement related to the Cocoa activities were as follows: