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Group revenue of $65.2 million for the 3 months ended 31 March 2018 ("3Q FY2018") was $19.0 million (22.5%) lower compared to the corresponding period in FY2017 ("3Q FY2017"). For the 9 months ended 31 March 2018 ("9M FY2018"), the Group revenue was $63.5 million lower compared to the corresponding period ended 31 March 2017 ("9M FY2017").
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 decreased by $28.0 million (67.1%) in 3Q FY2018 and $85.0 million (69.2%) in 9M FY2018 as compared to last corresponding periods mainly due to continued weak market conditions. This is reflected by the progressive recognition of existing shipbuilding projects which are of lower contractual value due to smaller and less sophisticated vessels secured.
Of the 13 units of Barges and others recognised in 3Q FY2018, 9 units were completed in the current quarter.
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 $2.7 million (21.6%) to $15.3 million in 3Q FY2018 and $25.7 million (64.6%) to $65.3 million in 9M FY2018. When fewer new ships are being built, the industry often sees more older ships being repaired. There were more smaller shiprepair jobs (<$1.0 million) completed in 3Q FY2018. For the 9M FY2018, the increase was mainly attributed to there being more number of high value (>$1.0 million) shiprepair jobs completed during the period.
The breakdown of revenue generated from the shipchartering segment are as follows:
Shipchartering revenue increased by $5.0 million (23.8%) in 3Q FY2018 mainly due to higher revenue from Tug Boats and Barges with the mobilization of our charter fleet to support our customers in several infrastructure projects in Bangladesh, Malaysia and Singapore. The grab dredgers (classified as "Barges") achieved higher utilisation rate in the current quarter under review (3Q FY2018: 90%; 3Q FY2017: 41%).
Shipchartering revenue increased by $7.8 million (11.8%) in 9M FY2018 mainly due to higher charter income derived from past 2 quarters. Trade sales decreased in 3Q FY2018 and 9M FY2018 mainly due to lower bunker sales.
The breakdown by revenue generated from the engineering segment are as follows:
Engineering revenue was higher in 3Q FY2018 mainly due to higher orders of cutting components received in the financial quarter under review.
The breakdown of gross profit and gross profit margin for each respective segment are as follows:
Lower gross profit and gross profit margin were recorded in 3Q FY2018 mainly due to
Despite increase in revenue, gross profit decreased by $0.4 million (GPM: 12.9%) in 3Q FY2018 and $0.8 million (GPM: 11.8%) in 9M FY2018 mainly due to competitive market conditions and the need for higher manpower overheads being allocated to the shiprepair segment.
The breakdown of gross profit and gross profit margin from shipchartering segment are as follows:
In line with the increase in revenue of Tug Boats and Barges, a higher gross profit and gross profit margin were recorded in 3Q FY2018 mainly due to higher earnings from increased utilization of grab dredgers and urgent deployment and mobilization of vessels to support infrastructure projects in the region.
Despite a higher contribution from Tug Boats and Barges, the Group recorded a gross loss of $0.2m in 9M FY2018 mainly due to negative contribution from the OSV. The negative contribution from OSV was attributable to reduced charter rate, temporary off hire of an OSV in the current quarter and one-off compensation incurred for late delivery of two AHTS to charterer in India.
The lower trade sales profit in 9M FY2018 was mainly due to absence of ad hoc services which were rendered in last corresponding period for one of the large marine infrastructure projects in South Asia which commenced in 4Q FY2016.
The breakdown of gross profit and gross profit margin from engineering segment are as follows:
In line with the higher revenue in 3Q FY2018, gross profit increased to $0.6 million. Gross profit margin reduced to 21.0% in 9M FY2018 mainly due to higher passed on costs from suppliers.
Details for other operating income are as follows:
Unrealised foreign exchange gain of $0.6 million in 3Q FY2018 was mainly due to depreciation of IDR against SGD on IDR denominated liabilities.
The insurance claim recorded in 3Q FY2018 pertained mainly to damage of cranes by a typhoon that hit our China yard.
Rental income decreased by $0.4 million in 3Q FY2018 and $1.2 million in 9M FY2018 as compared to corresponding periods mainly due to reduced rental rate on leasing of precast workshop, production and storage areas.
Administrative expenses decreased by $4.5 million (49.1%) to $4.6 million in 3Q FY2018 and by $5.4 million (26.9%) to $14.7 million in 9M FY2018 as compared to corresponding periods mainly due to absence of one-off transaction costs of $3.7 million arising from debt restructuring exercises and lower staff costs.
There was a write-off of plant and equipment in 3Q FY2018 which pertained mainly to damage of cranes by a typhoon that hit our China yard. The loss was partially compensated by the insurance claim recognised in other operating income.
Finance costs increased by $0.8 million (16.6%) to $5.7 million in 3Q FY2018 and by $2.9 million (20.3%) to $16.9 million in 9M 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.
The Group's share of results of joint ventures and associates comprised:
The loss of $1.3 million recorded by Sindo-Econ group in 9M 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 $0.6 million in 3Q FY2018 and $2.1 million in 9M FY2018 was due to low utilisation from its vessel fleet due to weak market conditions. A lower loss was recorded in current quarter under review as one of its AHTS was on hire from late January 2018.
The share of profit from PT CNI of $0.2 million in 9M 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.
Despite an overall decrease in gross profit, the Group recorded a lower loss before tax of $4.2 million in 3Q FY2018 as compared to $10.5 million in 3Q FY2017 mainly due to higher other operating income, absence of the one-off cost relating to the previous debt restructuring exercise, no foreign exchange loss and a lower share of losses from joint ventures and associates.
The Group recorded a loss before tax of $16.9 million in 9M FY2018 as compared to $7.9 million in 9M FY2017 mainly due to an overall decrease in gross profit coupled with higher finance costs, partially offset by lower administrative expenses and higher operating income.
The Group recorded lower tax expenses of $0.3 million and $1.5 million in 3Q FY2018 and 9M FY2018 respectively as compared to the corresponding periods, this was mainly due to losses incurred from shipyard operations.
Non-controlling interests' share of loss of $0.4 million in 3Q FY2018 and $1.1 million in 9M FY2018 mainly pertains to the portion of results of its non-wholly owned subsidiaries in Indonesia and China.
The Group recorded a net cash inflow from operating activities of $31.2 million in 3Q FY2018 (3Q FY2017: net cash outflow of $13.5 million) mainly due to higher operating earnings, lower payments to suppliers and higher advances received from customers, partially offset by higher construction costs incurred on projects.
The net cash outflow from investing activities of $5.7 million in 3Q FY2018 (3Q FY2017: net cash inflow of $1.9 million) was mainly attributed to higher acquisition of property, plant and equipment, partially offset by higher proceeds from disposal of assets classified as held for sale.
The net cash outflow from financing activities of $28.8 million (3Q FY2017: net cash inflow of $13.4 million) was mainly due to lower net proceeds from interest-bearing loans and borrowings.
The Group recorded a higher net cash inflow from operating activities of $85.7 million in 9M FY2018 (9M FY2017: $72.3 million) mainly due to lower construction costs incurred on projects and payment to suppliers, partially offset by lower earnings and receipts from customers.
Net cash outflow from investing activities of $20.6 million in 9M FY2018 increased marginally by $0.1 million as compared to corresponding period.
The higher net cash outflow from financing activities of $70.8 million in 9M FY2018 (9M FY2017: $39.6 million) was mainly due to higher net repayment of interest-bearing loans and borrowings, absence of proceeds from shares issuance raised in 9M FY2017 and higher cash balances being restricted in project accounts partially offset by lower net repayment of trust receipts.
Property, plant and equipment ("PPE") decreased by $28.2 million (4.6%) from $611.9 million as at 30 June 2017 to $583.7 million as at 31 March 2018.
Movement in PPE during the period under review is as follows:
The vessels acquired in 9M FY2018 were mainly tugs and barges deployed to support our customers in marine infrastructure projects in Singapore, Indonesia and South Asia.
Current assets decreased marginally by $1.3 million (0.3%) from $491.6 million as at 30 June 2017 to $490.3 million as at 31 March 2018. The decrease was mainly from construction work-in-progress; offset by higher cash and bank balances and assets classified as held for sale.
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, $16.9 million was received subsequent to the quarter under review.
The increase in other receivables was due to reclassification of $4.6 million from amount due from related party pursuant to a tripartite agreement entered between a subsidiary of the Group, the related party and our business associate for settlement of the balance due from the related party.
Assets classified as held for sale ("AHFS") comprised 4 vessels contracted for disposal within a year.
Cash and bank balances increased by $15.2 million to $51.3 million which included advance payments made by customers and funds deposited in shipbuilding project accounts.
Current liabilities decreased by $12.9 million (3.0%) from $427.8 million as at 30 June 2017 to $414.9 million as at 31 March 2018. The decrease was mainly due to lower current portion of interest-bearing loans and borrowings, partially offset by higher advance receipts from customers for supply of vessels.
Trade and other payables comprised the following:
Other payables comprised mainly payables for purchase of vessels and cranes, deposits received from customers for shiprepairs and shipchartering services. The increase was mainly due to advance receipts from customers for the mobilization and supply of vessels to support an overseas infrastructure project.
Deferred income decreased mainly due to recognition of deferred income.
Net construction work-in-progress in excess of progress billings decreased by $27.4 million (32.7%) from $83.9 million as at 30 June 2017 to $56.5 million as at 31 March 2018, 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 $29.7 million (5.4%) to $519.8 million as at 31 March 2018 mainly arose from repayment of long term loans, partially offset by partial draw down of $38.3 million on the CTL Facility and addition of finance lease liabilities for acquisition of vessels.
Non-current liabilities decreased marginally by $0.1 million to $338.3 million as at 31 March 2018. The decrease in other payables and liabilities as a result of recognition of deferred income was offset by higher deferred tax liabilities.
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.
Global economic growth, according to International Monetary Fund1 , is looking to accelerate in 2018. 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 continue2 . Stronger economic growth and increase in international trade volume are expected to lead to an incremental demand for shipping and related industries.
On a more cautious note, a potential trade war between the US and China has caused uncertainties in global trade and the shipping and shipbuilding market. While it's unlikely for the tariffs to hit trade flows in key sectors, the dynamic effects, especially on the global trade volume, could impact the shipping and shipbuilding industries.
In terms of oil prices, 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), and survey3 suggested higher capital expenditures in the oil industry in 2018, which could in turn benefit the recovery of the oil service sectors. However, geopolitical events and potential increase in US shale oil supply could have dynamic effects on oil prices, which could affect the sustainability of the oil price recovery.
Infrastructure spending in select Asia region is also expected to increase further, as stimulated by China's Belt and Road Initiative. Research4 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.
In general, the factors discussed above suggest a more favorable business environment for the Group. However, given the complexity of the industry structure and the uncertainties in macro economy, the Group could only benefit from these factors gradually.
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.
The diversified vessel types in our fleet, especially the non-OSV vessels are expected to lend support to our chartering business in view of the marine infrastructure projects in Bangladesh, Indonesia, Malaysia and Singapore. However, due to market competition, the Group expects continued pressure on charter rates. The management has been actively working on increasing utilisation of fleet.
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.
As at 31 March 2018, the Group had an outstanding shipbuilding order book from external customers of approximately $49 million for the building of 14 vessels with progressive deliveries up to financial year ending 30 June 2019 ("2H FY2019"). The order book comprises OSV, harbour tugs, barges and tanker.
The Group's shipchartering revenue consists of mainly short-term and ad-hoc contracts. Approximately 28% of shipchartering revenue in 9M FY2018 was attributed to long-term chartering contracts (meaning contracts with a duration of more than one year). As at 31 March 2018, the Group had an outstanding chartering order book of approximately $118 million with respect to long-term contracts.
Investors may wish to note that the financial performance of the companies in the shipping and shipbuilding industries tend to lag industry trends.
With respect to the CTL Facility, the Group continues to classify the non-current portion of $86.8 million as current liabilities as waiver for the breach of one of the financial covenants (the "Breach") in 9M FY2018 has not been obtained as at the quarter end, 31 March 2018. The Breach relates to the same covenant that we had made in the clarification announcement released via SGXNET on 19 October 2017. Waivers have since been obtained for all past Breaches, including the current quarter. The Company continues to service the CTL facility in accordance with the monthly repayment schedule of the Facility Agreement, over the 5-year tenor of the CTL Facility.