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The Group and the industry fared poorly in FY2017. Exploration and Production, particularly in the offshore oil and gas industry, has collapsed in the face of sustained weak oil prices. The container and bulk cargo market is recording very low to historic low charter rates as a result of China and the Asia-Pacific’s slowdown. Even LNG charter rates are under tremendous pressure despite a record amount of LNG being carried. As a capital goods provider to these industries shipbuilding, repair and conversion has inevitably suffered.
In FY2017 we held our own in terms of Revenue recording only a 6.1% decline. However, we had to sacrifice margins. In some cases, we only able to achieve single digit margins.
Regretfully, when an industry undergoes a recession, the capital values fall, credit risk rises and the number of negative one-off surprises increases. Our results for the year, very much reflects this. In FY2017 we had to reduce the value of our assets by $35.9 million due to the reduction in their market value. In FY2017 we provided $18.4 million against debtors. In FY2017 other one off losses including the cost of the debt restructuring and cancellations amounted to $16.4 million. In fact, if these one off items were excluded, the Group would have made a loss before tax of only $0.6 million.
Group revenue of $77.8 million for the 3 months ended 30 June 2017 ("4Q FY2017") was $20.9 million (21.2%) lower compared to the corresponding period in FY2016 ("4Q FY2016"). For the 12 months ended 30 June 2017 (“FY2017”), the Group revenue was $22.2 million (6.1%) lower compared to the corresponding period ended 30 June 2016 (“FY2016”).
Details for revenue generated from each segment are as follows:
Recognition of shipbuilding revenue is calculated based on project value multiplied by the percentage of completion (“POC”).
The breakdown of shipbuilding revenue generated and the number of units recognised under POC are as follows:
Shipbuilding revenue in 4Q FY2017 decreased by $29.1 million (58.4%) compared to the corresponding quarter mainly due to:
The Group has delivered a total of 8 Tugs and 2 Barges in FY2017 (of which one Tug and one Barge were completed in 4Q FY2017).
Shiprepair and conversion projects are meant to be short term in nature, resulting in revenue recognised only upon completion. With several of our shiprepair jobs being partial conversions, which take far longer than historic jobs to complete (i.e. may not complete within a quarter), revenue from shiprepair and conversions are now likely to be lumpy.
The breakdown of revenue generated from the shiprepair and conversion segment are as follows:
Shiprepair and conversion revenue increased by $13.9 million (81.3%) in 4Q FY2017 and $11.0 million (17.8%) in FY2017 when compared to corresponding periods mainly due to there being more high value (>$1.0 million) shiprepair jobs undertaken in 4Q FY2017.
The breakdown of revenue generated from the shipchartering segment are as follows:
The total charter revenue decreased by $2.1 million (9.1%) to $21.2 million in 4Q FY2017 mainly due to:
Trade sales reduced by 17.0% in 4Q FY2017 mainly due to lower bunker fuel sales partially offset by higher agency income from Indonesia operation.
The total charter revenue increased by $7.4 million (9.3%) in FY2017 when compared to corresponding year mainly due to contribution from operation of Tug Boat and Barges with the commencement of large marine infrastructure projects in Singapore and South Asia in 4Q FY2016 (the “New Charter Contracts”); partially offset by decreased contribution from OSV.
The significant increase in trade sales in FY2017 was due to sale of bunker fuel ancillary to certain ongoing charters and ad hoc services rendered in conjunction with the New Charter Contracts.
Similar to shipbuilding, revenue from New Buildings is calculated based on project value multiply by POC.
The breakdown by revenue generated from the engineering segment are as follows:
Engineering revenue were lower in 4Q FY2017 mainly due to absence of revenue recognition from New Buildings and lower orders concluded for spare parts and cutting/ coupling systems.
The Group gross profit decreased by $8.4 million (75.8%) to $2.7 million in 4Q FY2017 and by $16.8 million (33.4%) to $33.6 million in FY2017 compared to the respective corresponding periods.
The breakdown of gross profit and gross profit margin for each respective segment are as follows:
The gross loss incurred in 4Q FY2017 was mainly attributed to loss recognised on the rescission of 3 OSV vessels (the “Rescission) as follows:
Excluding the Rescission, the Group’s gross profit for shipbuilding would have been:
The Rescission was mutually agreed by the customers. The loss recognised mainly pertained to:
Despite the increase in revenue, gross profit reduced by $2.6 million (38.2%) with a gross profit margin of 13.5% recorded in 4Q FY2017. The lower margin was due to competitive pricing in a weak market, this include single digit margin derived from several major projects (Revenue > $1 million) recognised in 4Q FY2017.
The breakdown of gross profit and gross profit margin from shipchartering segment are as follows:
The gross profit and gross profit margin was lower in 4Q FY2017 as compared with corresponding quarter, this was mainly due to:
Despite increase in revenue in FY2017 when compared to corresponding year, gross profit decreased by $2.3 million (82.1%) and gross profit margin decreased from 3.3% to 0.5% mainly due to:
The breakdown of gross profit and gross profit margin from engineering segment are as follows:
The high margin recorded in 4Q FY2017 was one-off. The gross profit margin of 26.3% from Components in FY2017 is comparable to the 24.4% recorded in FY2016.
Details for other operating income are as follows:
The higher rental income in 4Q FY2017 derived mainly from the leasing of precast workshop, production and storage areas.
Administrative expenses increased by $1.1 million (16.3%) to $7.8 million in 4Q FY2017 when compared to corresponding quarter mainly due to higher legal and professional fees incurred for debt restructuring exercise.
The Group incurred an one-off transaction costs amounted to $4.3 million in FY2017, these costs comprised consent fees, solicitation agent and legal and professional fees incurred in relation to i) the Consent Solicitation Exercise undertaken on extension of tenor of the Company’s existing Notes in Jan 2017; ii) the committed $99.9 million 5- year club term loan facility (the “CTL facility”) obtained from the three local banks in February 2017 and iii) perfection of legal mortgages for drawdown of working capital loan under the CTL facility.
Other operating expenses comprised the following:
The allowance for impairment of doubtful receivables (net) made in 4Q FY2017 of $18.4 million largely pertained to specific provision on certain receivables, impaired after due assessment, who either was being wound up or where final settlement sum is being negotiated or the probability of recovering is remote. Nonetheless, the Group will continue its effort to recover the amount, especially for those receivables which the Group has possession of the vessels repaired in hand.
The impairment loss recorded in 4Q FY2017 pertained to:
(a) Inventories (Finished Goods)
impairment of three Platform Supply Vessels (“PSV”) which the Group holds as inventories (finished goods) for sale. An impairment loss of $9.1 million was made based on valuation guidance from independent valuers;
(b) Inventories (Work-in-progress)
write-off of two vessels (one Anchor Handling Tug and Supply vessel “AHTS” and one Multi-purpose Maintenance Workboat) which were built under former Built-to-Stocks program. An impairment loss of $4.7 million for the full amount was made as the Group wish to discontinue building of these vessels in view of the protracted downturn of the global marine industry; and
(c) Property, Plant and Equipment
impairment of its chartering fleet of vessels based on valuation guidance from independent valuers.
The net foreign exchange gain recorded in 4Q FY2017 arose mainly due to the depreciation of USD against SGD on USD denominated liabilities; whereas the net foreign exchange losses in FY2017 were mainly attributed from appreciation of USD and IDR against SGD on USD and IDR denominated liabilities.
Exchange rates for the respective reporting periods were as follows:
Finance costs increased by $0.5 million (9.6%) to $5.3 million in 4Q FY2017 and by $0.2 million (1.1%) to $19.3 million in FY2017 when compared to corresponding periods mainly due to i) increased interest rate payable under the fixed rate bonds which commenced in 4Q FY2017 and ii) progressive drawdown of loans under the CTL facility.
The Group’s share of results of jointly-controlled entity and associates comprised:
The share of loss from Sindo-Econ group of $1.1 million in 4Q FY2017, on the precast operations in Batam, was attributed by low margin due to competitive market condition.
The share of loss from PT Hafar of $1.0 million in 4Q FY2017 was due to absence of charter income from its fleet of vessels since 3Q FY2016.
The share of profit from PT CNI of $0.2 million in 4Q FY2017 mainly pertained to progressive recognition of the Group’s proportionate interest of unrealised profits previously eliminated on sale of vessels to PT CNI. The Group has restricted its share of losses to its cost of investment.
The Group recorded a loss before tax of $67.6 million in FY2017 as compared to a profit before tax of $0.5 million in FY2016. However, much of the loss arose from oneoff events:
The Group’s current period tax credit/ (expense) comprised the following:
The Group’s current income tax expense was $1.2 million lower in FY2017 as compared to corresponding year mainly due to loss incurred from shipyard operations.
Non-controlling interests’ share of loss of $0.3 million for 4Q FY2017 and $1.6 million for FY2017 mainly pertained to the portion of results of its non-wholly owned subsidiaries in Indonesia and China.
The Group recorded a lower net cash inflow of $4.9 million from operating activities in 4Q FY2017 (4Q FY2016: $64.1 million) mainly due to higher payments made to suppliers and purchase of inventories; partially offset by higher receipts from shipbuilding progressive billings.
The lower net cash outflow of $0.3 million from investing activities in 4Q FY2017 (4Q FY2016: $23.9 million) was mainly attributed to lower acquisition of property, plant and equipment.
The net cash outflow from financing activities of $16.1 million in 4Q FY2017 (4Q FY2016: $43.7 million) was lower as the Group made a second draw down of $20.7 million on the CTL facility and obtained a Bridging Loan of $5 million in 4Q FY2017 for working capital usage
In FY2017, the Group recorded a net cash inflow of $77.3 million from operating activities (FY2016: $5.9 million). The higher cash inflow was mainly due to higher receipts from shipbuilding progressive billings, partially offset by higher payments made to suppliers.
The lower net cash outflow of $20.8 million from investing activities in FY2017 (FY2016: $82.3 million) was mainly due to lower acquisition of property, plant and equipment.
The net cash outflow from financing activities of $55.7 million in FY2017 (FY2016: net cash inflow of $23.9 million) arose from lower borrowings on trust receipts and interestbearing loans and borrowings, partially offset by proceeds of $25 million from the Rights Issue.
Property, plant and equipment (“PPE”) increased by $8.8 million (1.5%) from $603.1 million as at 30 June 2016 to $611.9 million as at 30 June 2017.
Movement of PPE during the year under review:
The vessels acquired in FY2017 were mainly tugs and barges that were deployed to support our customers in marine infrastructure project in South Asia.
Current assets decreased by $134.0 million (21.4%) from $625.6 million as at 30 June 2016 to $491.6 million as at 30 June 2017 due to the decrease in inventories, construction work-in-progress, trade and other receivables, partially offset by increase in amounts due from related parties and cash and bank balances.
Inventories comprised the following:
The decrease in work-in-progress was due to transfer of i) three AHTS to Property, Plant and Equipment as the Group managed to secure charter contracts for these vessels; ii) two PSV to finished goods upon completion and iii) write-off of two vessels (one AHTS and one Multi-purpose Maintenance Workboat) which were built under former Built-to-Stocks program.
Trade and other receivables comprised the following:
The decrease in trade receivables was mainly due to receipt of milestone billings from shipbuilding projects; increased focus on trade debt collection; netting agreements entered and certain specific allowance for doubtful debts made during the year. Of the total trade receivables, $14.6 million was received subsequent to the year under review.
The increase in amounts due from related parties was mainly due to settlement on behalf of US$4.95 million owing under other receivables pursuant to a mutual agreement entered, payments on behalf and upward revaluation of balances denominated in USD as a result of appreciation of USD against SGD during the year under review.
Current liabilities decreased by $222.5 million (37.3%) from $596.9 million as at 30 June 2016 to $374.4 million as at 30 June 2017. The decrease was mainly due to lower trade payables, progress billings in excess of work in progress, trust receipts and interest-bearing loans and borrowings, partially offset by increase in amounts due to related parties.
Trade and other payables comprised the following:
The decrease in trade payables was mainly due to higher payment and netting agreements entered with trade creditors.
Net construction work-in-progress in excess of progress billings decreased by $18.2 million (17.8%) from $102.1 million as at 30 June 2016 to $83.9 million as at 30 June 2017, mainly attributable to completion of vessels during the year.
The breakdown of the Group's total borrowings are as follows:
The Group’s total borrowings decreased by $42.7 million (7.2%) mainly due to repayment of long term loans and trust receipts of those shipbuilding projects completed during the year under review, partially offset by addition of working capital loans which comprised:
Non-current liabilities increased by $137.4 million (54.0%) to $391.8 million as at 30 June 2017 mainly due to increase in non-current portion of the Group’s total borrowings as a result of i) extension of maturity dates of existing $100 million and $50 million notes originally due in March 2017 and October 2018 respectively for another three years each; ii) re-profile of its existing term loans; and iii) the drawdown of new working capital loans mentioned above.
As our businesses are primarily affected by the market conditions in the shipbuilding, shipping, oil & gas and offshore & marine industries, the main macroeconomic variables we are sensitive to include (but not exclusively) global trade, oil prices and infrastructure spending in Asia.
Global trade, particularly global volume of trade, is very sensitive to China export volumes. Whilst the latest China figures for July 2017, were slightly better than expected, the trend as can be seen in the chart remains negative.
In terms of oil prices and upstream activities, oil majors appear to have adapted to the low-carbon world and the new normal of USD50/barrel market by cutting expenditure (by 44% between 2014 - 2016). While it was reported that oil demand would still grow at a slow pace, oil majors are unlikely to spend on mega projects as they used to, but on one smaller ones with shorter payback period. As such, there is limited room for an outright recovery for downstream business, and we don’t expect meaningful improvement in the operating environment for the offshore & marine sector in the near term.
Infrastructure spending in select Asia region has increased. Especially in the Indian Ocean due to China’s Belt and Road Initiative, India’s continued 6.5% to 7% GDP growth and Myanmar’s revival. Whilst off shore demand for such work is strong, competition is also very keen.
Given the above, the macro environment has mixed implications for our various business segments. The outlook for shipbuilding, ship chartering and ship repair businesses seems more encouraging than that for oil & gas and offshore & marine related business. However, we do not foresee the operating environment for our businesses improving significantly in the next 12 months. Meaning the demand for shipbuilding and shipchartering is likely to remain weak and price-sensitive.
With careful cost control, committed management and increased financial flexibility brought by the financial restructuring in FY2017, the Company will continue to seek cash-flow-positive business opportunities for our various business segments and optimize our financial performance.
In shipbuilding, we will continue to seek orders for non-OSV vessels such as tanker, tugs and barges, improve our operational efficiency and tighten cost control to ensure our competitiveness, and stimulate shiprepair and conversion business by offering maintenance services at the enhanced facilities in Batam.
Singapore’s mega infrastructure program in Tuas is making good progress. Given the master plan for the next few years and the amount of construction work required, our fleet, with a good proportion of barges and tugs, is expected to benefit from the potential increase in demand.
The diversified vessel types in our fleet, especially the non-OSV vessels are expected to lend support to our chartering business in the current low-oil-price environment However, due to market competition, the Group expects continued pressure on charter rates.
On the 5-year large local infrastructure project secured in 4Q FY2016 which was chartered under the contract of affreightment, revenue has decreased since November 2016 due to low volume of excavated materials being transported as a result of reduction in earth works, excavation and tunnelling related projects in Singapore. Upon consultation with main contractors and our customers, we have been led to believe that the volume of excavated materials should gradually pick up from September 2017 until early 2018 to the expected volume.
The transportation of precast concrete products from the precast yard in Batam to Singapore by our landing crafts will continue to provide a steady flow of income to our shipchartering operations.
As at 30 June 2017, the Group's shipchartering operations have an outstanding delivery order of 2 AHTS, 3 tugs and 6 barges worth approximately $50 million. With the exception of 2 barges with a total worth of $5.3 million, the rest of the vessels are being built internally by the Group. 8 of these vessels are for charter already secured.
Our engineering division (VOSTA LMG) engages primarily in the infrastructure and construction industry which is less affected by the weak oil price. The main growth drivers of the global dredging market include: i) more land and coastal areas has to be reclaimed and protected due to population growth and global warming; ii) expansion of ports due to increasing seaborne trade and growing size of container vessels. Besides Europe and USA, the Group is looking at expanding its business in China, the largest dredging market in the world.
With respect to Sindo Econ group, we have been informed by our partners that there is a significant amount of work being tendered for, as a result, they expect Sindo Econ group to perform better in 2018.
With respect to our Indonesia associates, recent political developments in Jakarta and continued subdued economic activities in Indonesia, suggested that the accumulated losses are unlikely to be reversed in the immediate future.
As at 30 June 2017, the Group had an outstanding shipbuilding order book from external customers of approximately $39 million for the building of 10 vessels with progressive deliveries up to 4Q FY2018. Barring any unforeseen circumstances, all of which is expected to be recognised in FY2018. The order book comprises OSV, harbour tugs, barges and tankers. Subsequent to 30 June 2017, the Group secured additional shipbuilding contracts for 2 tugs and 2 barges totaling $21 million of which 50% is expected to be recognised in FY2018.
The Group's shipchartering revenue consists of mainly short-term and ad-hoc contracts. Approximately 33% of shipchartering revenue in FY2017 was attributed to long-term chartering contracts (meaning contracts with a duration of more than one year). As at 30 June 2017, the Group had an outstanding chartering order book of approximately $138 million with respect to long-term contracts.
With the exception of new contracts secured subsequent to 30 June 2017, the Group would run down its existing shipbuilding order book by 30 June 2018. While the Management is actively seeking for new orders, the Board expects the Group’s revenue to be lower for the financial year ending 30 June 2018.
The Company has on 19 December 2016 pursuant to its Rights Issue exercise, allotted and issued 209,755,647 Rights Shares and raised a total gross proceeds of $25.2 million.
On 20 January 2017, the Company received approval from noteholders to extend the maturity dates of its existing $100 million and $50 million notes originally due in March 2017 and October 2018 respectively for another three years each.
To date, the Company has partially drawn down $57.8 million from the CTL facility. The loan will be further drawn down in tranches according to the Group’s working capital needs and availability of security.
In 4Q FY2017, the Group’s principal lenders have effected the re-profiling of its existing term loans (stretching of loans tenure thereby reducing monthly instalment), this has further alleviated the Group’s next 12 months debt maturity profile.