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Second Quarter Results Financial Statement And Related Announcement

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Income Statement

Statement of Comprehensive Income


Nm: Not meaningful

Balance Sheet

Review Of Group Performance

Revenue

Group revenue of $63.5 million for the 3 months ended 31 December 2017 ("2Q FY2018") was $20.1 million (24.1%) lower compared to the corresponding period in FY2017 ("2Q FY2017"). For the 6 months ended 31 December 2017 ("1H FY2018"), the Group revenue was $44.6 million lower compared to the corresponding period ended 31 December 2016 ("1H FY2017").

Details for revenue generated from each segment are as follows:

Shipbuilding

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 decreased by $29.3 million (83.8%) in 2Q FY2018 and $56.9 million (70.4%) in 1H FY2018 as compared to last corresponding periods mainly due to lower progressive recognition from the new shipbuilding projects secured. Of the 9 units of Tugs recognised in 2Q FY2018, 1 unit was completed in 2Q FY2018 and the remaining 8 units comprised new projects (secured during 1H FY2018) with low POC attained from their initial stages of construction.

Shiprepair and conversion

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 can now be lumpy.

The breakdown of revenue generated from the shiprepair and conversion segment are as follows:

Shiprepair and conversion revenue increased by $11.6 million (89.0%) to $24.5 million in 2Q FY2018 and $22.9 million (84.5%) to $50.1m in 1H FY2018 mainly due to market conditions where fewer new ships are being built and more older ships are being repaired. Consequently, there were more high value (>$1.0 million) shiprepair jobs completed in the periods under review.

The other marine related services of $1.8 million recorded in 2Q FY2017 included sale of some steel plates amounted to $1.6 million.

Shipchartering

The breakdown of revenue generated from the shipchartering segment are as follows:

Shipchartering revenue increased by $4.7 million (21.6%) in 2Q FY2018 mainly due to

  1. Higher contribution from OSV with the

    1. Deployment of three AHTS in India during the quarter under review; and
    2. Charter of several OSVs for ad-hoc towage jobs;

  2. Higher contribution from Tug Boats and Barges

    1. with the commencement and mobilization of our charter fleet to support our customers in several infrastructure projects in Bangladesh, Indonesia and Singapore; and
    2. Pick up of activities from the 5-year local infrastructure project secured in 4Q FY2016 which was chartered under contract of affreightment; partially offset by

  3. Lower charter income from Landing Crafts due to off-hire of one unit of Landing craft in August 2017.

Shipchartering revenue increased by $2.7 million (6.1%) in 1H FY2018 mainly due to higher charter income derived in 2Q FY2018. Trade sales decreased in 1H FY2018 due to lower bunker sales and absence of ad hoc services rendered in one of the large marine infrastructure projects in South Asia which commenced in 4Q FY2016.

Engineering

The breakdown by revenue generated from the engineering segment are as follows:

Engineering revenue was lower in 2Q FY2018 mainly due to lower orders received.

Gross profit and gross profit margin

The breakdown of gross profit and gross profit margin for each respective segment are as follows:

Shipbuilding

The gross loss of $1.2 million with negative GPM of 21.1% in 2Q FY2018 was mainly due to

  1. The much lower value of shipbuilding work available resulting in more overheads having to be allocated to three Barges which were scheduled for delivery in 3Q FY2018; coupled with

  2. lower single digit margins secured on the construction of existing Tugs which were at their initial stage of construction.

Excluding the loss incurred on the 3 Barges, the GP and GPM for 2Q FY2018 and 1H FY2018 would have been $0.2 million (GPM: 3.3%) and $1.3 million (GPM: 6.6%) respectively.

Shiprepair and conversion

Despite increase in revenue, gross profit decreased by $0.7 million (GPM: 9.2%) in 2Q FY2018 and $0.4 million (GPM: 11.5%) in 1H FY2018 mainly attributable to single digit margin derived from several high value shiprepair jobs recognised in the financial periods under review. This was in part due to competitive market conditions and the need for higher manpower overheads being allocated to the shiprepair segment.

Shipchartering

The breakdown of gross profit and gross profit margin from shipchartering segment are as follows:

In line with the increase in revenue, a lower gross loss was recorded in 2Q FY2018 as compared to the corresponding quarter.

Gross profit and gross profit margin in 2Q FY2018 remains low, mainly due to a higher proportion of charter income was under towage jobs/ lumpsum charters and contracts of affreightment, which yields a lower margin.

Gross profit and gross profit margin were lower in 1H FY2018 as compared to the corresponding period, this was mainly due to

  1. negative contribution from OSV as a result of lower charter rate and compensation for late delivery of two AHTS to charterer in India; and
  2. negative contribution from Grab Dredgers (classified under Barges) as a result of low utilisation of 16% recorded in 1Q FY2018.

The lower trade sales profit in 2Q FY2018 and 1H FY2018 mainly due to absence of ad hoc services rendered in last corresponding periods for one of the large marine infrastructure projects in South Asia which commenced in 4Q FY2016.

Engineering

The breakdown of gross profit and gross profit margin from engineering segment are as follows:

Consequent to the lower revenue in 2Q FY2018, gross profit reduced to $0.5 million. Gross profit margin reduced to 25.9% mainly due to reduced orders of higher margin products such as cutting and coupling systems.

Other operating income

Details for other operating income are as follows:

The higher other operating income in 2Q FY2018 and 1H FY2018 was mainly due to higher gain on disposal of cranes as well as sale of 2 vessels under assets classified as held for sale, partially offset by lower rental income from leasing of precast workshop, production and storage areas.

Administrative expenses

Administrative expenses decreased by $0.4 million (8.0%) to $4.9 million in 2Q FY2018 and by $0.9 million (8.4%) to $10.1 million in 1H FY2018 when compared to corresponding periods mainly due to lower staff costs and rental expenses partially offset by higher legal and professional fees incurred on recovery of debts.

Other operating expenses

Other operating expenses of $1.1 million in 2Q FY2018 comprised foreign exchange loss, of which unrealised loss of $1.4 million was mainly due to the depreciation of USD against SGD on USD denominated assets.

Finance costs

Finance costs increased by $0.9 million (19.9%) to $5.6 million in 2Q FY2018 and by $2.0 million (22.3%) to $11.2 million in 1H FY2018 mainly due to i) interest incurred from progressive drawdown of loans under the committed $99.9 million 5-year club term loan facility (the "CTL Facility") and ii) stepped up interest rate payable under the fixed rate bonds which became effective from 1 April 2017.

Share of results of joint ventures and associates

The Group's share of results of joint ventures and associates comprised:

The loss of $1.3 million recorded by Sindo-Econ group in 1H FY2018 was due to lower margin of precast products attributed to competitive market condition. The Group has restricted its share of losses to its cost of investment since 1Q FY2018.

The share of loss from PT Hafar of $0.7 million in 2Q FY2018 and $1.5 million in 1H FY2018 was due to low utilisation from its vessel fleet (which in turn is due to weak market conditions) and the foreign exchange loss recorded.

The share of profit from PT CNI of $0.1 million in 1H FY2018 mainly pertained to progressive recognition of the Group's proportionate interest of unrealised profits previously eliminated on sale of vessels to PT CNI. The required accounting policy restricts the Group share of losses to its cost of investment.

Loss before tax

The Group recorded a loss before tax of $5.9 million in 2Q FY2018 mainly due to an overall decrease in gross profit coupled with higher foreign exchange loss and finance costs, partially offset by higher other operating income.

The Group recorded a loss before tax of $12.7 million in 1H FY2018 mainly due to an overall decrease in gross profit coupled with higher finance costs and share of losses of joint ventures and associates, partially offset by higher other operating income.

Tax credit/ (expense)

The Group's current tax expenses were $0.4 million and $1.3 million lower in 2Q FY2018 and 1H FY2018 respectively when compared to the corresponding periods, this was mainly due to loss incurred from shipyard operations.

Non-controlling interests

Non-controlling interests' share of loss of $0.3 million for 2Q FY2018 and $0.7 million for 1H FY2018 mainly pertains to the portion of results of its non-wholly owned subsidiaries in Indonesia and China.

Operation cash flows

2Q FY2018

The Group recorded a lower net cash inflow from operating activities of $29.1 million in 2Q FY2018 (2Q FY2017: $41.3 million) mainly due to lower earnings, lower receipts from customers, offset by lower construction costs incurred on projects and higher advances required from customers.

The lower net cash outflow from investing activities of $7.3 million in 2Q FY2018 (2Q FY2017: $8.5 million) mainly attributed to higher proceeds from disposal of property, plant and equipment and assets classified as held for sale, offset by acquisition of assets classified as held for sale.

The higher net cash outflow from financing activities of $29.4 million (2Q FY2018: $28.9 million) was mainly due to higher restricted cash and bank balances, and absence of proceeds from rights issue of shares, partially offset by lower repayment of trust receipts.

1H FY2018

The Group recorded a lower net cash inflow from operating activities of $54.5 million in 1H FY2018 (1H FY2017: $85.8 million) mainly due to lower earnings and lower receipts from customers offset by lower construction costs incurred on projects.

The lower net cash outflow from investing activities of $14.9 million in 1H FY2018 (1H FY2017: $22.4 million) was mainly due to lower acquisition of property, plant and equipment and receipts from related parties, partially offset by acquisition of assets classified as held for sale.

The lower net cash outflow from financing activities of $40.2 million in 1H FY2018 (1H FY2017: $52.9 million) was mainly due to lower repayment of trust receipts offset by absence of proceeds from shares issuance raised in 1H FY2017.

REVIEW OF FINANCIAL POSITION AS AT 31 DECEMBER 2017

Non-current assets

Property, plant and equipment ("PPE") decreased by $16.2 million (2.6%) from $611.9 million as at 30 June 2017 to $595.7 million as at 31 December 2017.

Movement in PPE during the period under review is as follows:

The vessels acquired in 1H FY2018 were mainly tugs and barges deployed to support our customers in marine infrastructure project in Singapore, Indonesia and South Asia.

Current assets

Current assets decreased marginally by $1.4 million (0.3%) from $491.6 million as at 30 June 2017 to $490.2 million as at 31 December 2017. The decrease was mainly from construction work-in-progress; partially offset by higher trade and other receivables, assets classified as held for sale and cash and bank balances.

Inventories comprised the following:

Bulk of the raw materials and consumables are inventories meant for ongoing shipbuilding and shiprepair projects.

Trade and other receivables comprised the following:

Of the total trade receivables, $24.7 million was received subsequent to the quarter under review.

Other receivables comprised mainly downpayment made for purchase of vessels, and advances to subcontractors. Increase in other receivables was mainly due to advance payments made for purchase of vessels.

Assets classified as held for sale ("AHFS") comprised 3 vessels contracted for disposal within a year.

Cash and bank balances increased by $12.3 million to $48.4 million included payments received from customers based on progress billings for shipbuilding projects on hand.

Current liabilities

Current liabilities decreased by $18.1 million (4.2%) from $427.8 million as at 30 June 2017 to $409.7 million as at 31 December 2017. The decrease was mainly due to lower trust receipts and current portion of interest-bearing loans and borrowings, partially offset by higher other payables.

Trade and other payables comprised the following:

Other payables increased by $12.5 million mainly due to higher payables for vessels acquired with jobs secured and advance receipts of $8.5 million from customers for the sale of vessels.

The decrease in amount due to related parties was mainly due to contra arrangements entered with related parties.

Net construction work-in-progress in excess of progress billings decreased by $31.1 million (37.0%) from $83.9 million as at 30 June 2017 to $52.8 million as at 31 December 2017, mainly attributed to completion of jobs during the period.

The breakdown of the Group's total borrowings are as follows:

The Group's total borrowings decreased by $12.2 million (2.2%) to $537.3 million as at 31 December 2017 mainly arose from repayment of long term loans, partially offset by partial draw down of $31.8 million on the CTL Facility and addition of finance lease liabilities for acquisition of vessels.

Non-current liabilities

Non-current liabilities increased by $12.3 million (3.6%) to $350.7 million as at 31 December 2017 mainly due to increase in non-current portion of the Group's total borrowings resulted from re-profiling of its property and vessels loans during the period under review.

Commentary

Market and industry outlook

As our businesses are primarily reliant on 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. Consequently, the industry downturn has adversely affected our financial performance over the past few years. However, the macro economy has started to show some encouraging signs. We are now more hopeful that the business environment that defines our operations is likely to improve.

The outlook for economic growth, according to forecasts by various international organizations 1, is looking significantly better in 2018. According to a recent report by World Bank, "the global economy is experiencing a cyclical recovery, reflecting a rebound in investment, manufacturing activity and trade". In Emerging Asia, (Southeast Asia, China and India), the economy is expected to grow by an average 6.3% per year on the assumption that trade momentum holds and domestic reforms continue 2. Stronger economic growth and increase in international trade volume are expected to support the demand for shipping and related industries.

Oil prices have also recovered steadily in 2017, and Brent reached the highest level since Dec 2014. This rise in price, reflects the continuing decline in global oil inventory levels. Given that OPEC has extended its oil supply reduction agreement to the end of 2018, oil prices are expected to remain stable to firm (chart below). However, and as always, certain risks that could influence prices in either direction remain 3.

As oil prices recover and stabilize, more global oil and gas firms expect to increase capital spending in 2018. Wood Mackenzie expects global oil and gas capital expenditure to recover in 2018 to a total of US$400 billion, up from the US$200 billion4 in 2016. While capital expenditure is unlikely to return to the pre-2014 norms, as upstream companies make efforts to survive and make profit in a lower-oil-price environment, higher expenditure and drilling activities will gradually help lift the demand for the offshore and marine industry in the downstream.

Infrastructure spending in select Asia region is also expected to increase further, as stimulated by China's Belt and Road Initiative. Research5 shows that driven by China's growth, "Asia is slated to represent nearly 60% of global infrastructure spending by 2025. Growing urbanization in emerging markets such as Philippines and Indonesia should boost spending for vital infrastructure sectors such as water, power, and transportation". This represents mid-long term opportunities for the Group's non-offshore and marine business. In Singapore, as the Tuas Mega Port project gains momentum, the demand for hiring tugs and barges is expected to remain strong.

1http://www.straitstimes.com/business/economy/stronger-growth-expected-for-global-economy-in-2018
2https://www.oecd.org/dev/SAEO2018_Preliminary_version.pdf;
3https://www.eia.gov/outlooks/steo/report/prices.php
4https://www.reuters.com/article/us-oil-gas-spending/more-oil-and-gas-firms-expect-to-hike-capital-spending-in-2018-surveyidUSKBN1FE003
5https://www.pwc.com/sg/en/capital-projects-infrastructure/assets/cpi-sea-infrastructure-spend-summary-201405.pdf

Business segments

Shipbuilding and Shiprepair

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.

Shipchartering

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. The management has been actively working on increasing utilisation of fleet.

As at 31 December 2017, the Group's shipchartering operations have an outstanding delivery order of 3 tugs and 2 barges worth approximately $8 million. With the exception of 2 barges with a total worth of $5 million, the rest of the vessels are being built internally by the Group. 2 of these vessels are for charter already secured.

Engineering

Our engineering division (VOSTA LMG) engages primarily in the infrastructure and construction industry. 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. The Group is working closely with suppliers and seek to expand production capability in different regional markets to drive down costs.

Order Book

As at 31 December 2017, the Group had an outstanding shipbuilding order book from external customers of approximately $60 million for the building of 17 vessels with progressive deliveries up to financial year ending 30 June 2019 ("2H FY2019"). The order book comprises OSV, harbour tugs, barges and tankers.

The Group's shipchartering revenue consists of mainly short-term and ad-hoc contracts. Approximately 29% of shipchartering revenue in 1H FY2018 was attributed to long-term chartering contracts (meaning contracts with a duration of more than one year). As at 31 December 2017, the Group had an outstanding chartering order book of approximately $125 million with respect to long-term contracts.

Although the macro economic environment does not appear to be deteriorating further, and while the Management is actively seeking for new orders, the Board expects the Group's revenue to be lower and is unlikely to be profitable for the financial year ending 30 June 2018.

Funding Arrangements

With respect to the CTL Facility, the Group continues to classify the non-current portion of $82.2 million as current liabilities as waiver for the breach of one of the financial covenants in 1H FY2018 (the "Breach") has not been obtained at the end of the reporting period. The Breach relates to the same covenant that we had made in the clarification announcement released via SGXNET on 19 October 2017. Waivers has been obtained for the past quarters from the lenders of CTL Facility since the inception of the loan.

The Group has today obtained waiver from the lenders in respect of the Breach for 1H FY2018. The Company continues to service the CTL facility in accordance to the monthly repayment schedule of the Facility Agreement, over the 5-year tenor of the CTL Facility.