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Group revenue of $79.5 million for the 3 months ended 30 June 2018 ("4Q FY2018") was $1.7 million (2.2%) higher compared to the corresponding period in FY2017 ("4Q FY2017"). For the 12 months ended 30 June 2018 (“FY2018”), the Group revenue was $61.8 million (18.1%) lower compared to the corresponding period ended 30 June 2017 (“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 $3.6 million (17.3%) in 4Q FY2018 and $88.5 million (61.7%) in FY2018 as compared to last corresponding periods mainly due to continued weak market conditions. This is reflected by the progressive revenue recognition of existing shipbuilding projects which are of lower contractual value as the vessels being built are smaller and/or less sophisticated.
The Group has delivered a total of 4 Tugs and 16 Barges in FY2018, of which 1 tug and 3 barges were completed and 2 OSVs were rescinded in the current quarter.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 larger or with 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 decreased by $5.6 million (18.1%) to $25.2 million in 4Q FY2018 mainly attributed to fewer high-value shiprepair jobs (>$1.0 million) completed during the quarter.
Apart from having completed several high value repair jobs in first half of FY2018, the increase in shiprepair and conversion revenue by $20.1 million (28.5%) to $90.5 million in FY2018 was partly due to there being more number of smaller shiprepair jobs completed during the year. When fewer new ships are being built, the industry often sees more older ships being repaired.
The breakdown of revenue generated from the shipchartering segment are as follows:
Shipchartering revenue increased by $5.1 million (24.0%) in 4Q FY2018 and $12.9 million (14.8%) in FY2018 mainly due to higher revenue from Tug Boats and Barges with the mobilization of our charter fleet deploying in several infrastructure projects in Bangladesh, Indonesia, Malaysia and Singapore. The grab dredgers (classified as “Barges”) achieved higher utilisation rate in the current quarter under review (4Q FY2018: 60%; 4Q FY2017: 23%).
Trade sales comprised mainly of bunker sales, agency fee and ad-hoc services rendered. The increase in 4Q FY2018 was mainly due to increase in agency fee and bunker sales.
The breakdown by revenue generated from the engineering segment are as follows:
The decrease in revenue in FY2018 was due to lower sales in spare parts and components and cutting and coupling system.
The breakdown of gross profit and gross profit margin for each respective segment are as follows:
The low profit margin of 1.9% in 4Q FY2018 and 0.3% in FY2018 was mainly due to
Excluding the rescission, the Group’s Shipbuilding gross profit and gross profit margin in FY2018 would have been $1.8 million and 3.3% respectively.
The gross loss incurred in 4Q FY2017 was mainly attributed to loss recognised on the rescission of 3 OSV vessels secured in 2014.
Gross profit decreased by $1.1 million (GPM: 11.9%) in 4Q FY2018 and $1.9 million (GPM: 11.8%) in FY2018 mainly due to competitive market pricing 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:
With the increase in revenue, the Group recorded a higher gross profit and gross profit margin from the operation of Tug Boats and Barges. This was mainly attributed to:
Despite the higher contribution derived from Tug Boats and Barges, the Group recorded a gross loss of $0.2 million in 4Q FY2018 and $0.5 million in FY2018 as a result of negative contribution from OSV. There was reduction in charter rate, off hire of certain OSVs and one-off compensation incurred for late delivery of two AHTS to a charterer in India recorded in 1Q FY2018.
The higher trade sales profit in 4Q FY2018 was in line with the increase in trade sales revenue.
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. Gross profit margin decreased to 20.2% in FY2018 mainly due to higher passed on costs from suppliers.
Details for other operating income are as follows:
The gain on disposal of plant and equipment of $4.6 million in 4Q FY2018 arose mainly from disposal of 1 unit of crane, 5 barges and 2 tug boats.
The net foreign exchange gain recorded in 4Q FY2018 arose mainly due to the appreciation of USD against SGD on SGD denominated liabilities for certain subsidiaries whose accounts are maintained in USD. The net foreign exchange gain in FY2018 was mainly attributed from depreciation of IDR against SGD on IDR denominated liabilities.
Exchange rates for the respective reporting periods were as follows:
Rental income decreased by $0.7 million in 4Q FY2018 and $1.9 million in FY2018 as compared to corresponding periods mainly due to lower rental of cranes from shipyard operation and reduced rental rate on leasing of precast workshop, production and storage areas, dump trucks and excavators for precast operations in Indonesia.
Administrative expenses decreased by $1.6 million (21.1%) to $6.1 million in 4Q FY2018 when compared to corresponding quarter mainly due to absence of legal and professional fees incurred for debt restructuring exercise.
Administrative expenses decreased by $7.0 million (25.3%) to $20.9 million in FY2018 as compared to corresponding year mainly due to
The inventories written off pertained to write-off of slow moving components parts from engineering segment.
The Group recorded a lower allowance of $2.5 million for impairment of doubtful receivables (net) as compared to $18.4 million made in the corresponding quarter. The impairment largely pertained to specific provision on certain receivables, impaired after due assessment, where final settlement sum is being negotiated or the probability of recovering is remote. Nonetheless, the Group continues to make great effort to recover these amounts, especially with respect to those receivables which the Group has possession of the repaired vessels in hand.
Other impairment loss recorded in 4Q FY2018:
(a) Inventories and recoverables
(b) Property, Plant and Equipment
Impairment of the Group’s chartering fleet of vessels, mainly on OSV, based on valuation guidance from independent valuers.
The goodwill arose from the Group’s acquisition of VOSTA LMG group in December 2012. The Engineering segment continued to incur lower operating profits. The goodwill is impaired based on recoverable amount determined from value in use calculations using cash flow projections from financial budgets prepared by the management covering a five-year period.
Finance costs increased by $0.5 million (9.9%) to $5.8 million in 4Q FY2018 and by $3.4 million (17.5%) to $22.7 million in 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 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 4Q FY2018 and $2.7 million in FY2018 was mainly due to impairment loss of $1.7 million on its vessel fleet, which comprises mainly OSV, impaired based on valuation guidance from independent valuers; partially offset by higher share of profit of $1.1 million in current quarter due to increased utilisation of its vessels.
The share of profit from PT CNI of $0.2 million in 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’s share of losses to its cost of investment.
The Group recorded a lower loss before tax of $51.3 million in 4Q FY2018 as compared to $63.3 million in 4Q FY2017 mainly due to an overall increase in gross profit and other operating income, a lower share of losses from joint ventures and associate coupled with absence of the one-off cost relating to the previous debt restructuring exercise under administrative expenses.
Despite an overall decrease in gross profit and higher finance costs, the Group recorded a lower loss before tax of $68.3 million in FY2018 as compared to $71.3 million in FY2017 mainly due to higher other operating income and lower administrative expenses, impairment losses and share of losses from joint ventures and associates.
The Group recorded higher tax expenses of $1.6 million in 4Q FY2018 and $3.0 million in FY2018 as compared to the corresponding periods. This was mainly due to losses incurred by shipyard operations overseas that cannot be offset profits earned by other subsidiaries within the Group, coupled with higher proportion of non-exempt shipping profits.
Non-controlling interests’ share of loss of $0.3 million in 4Q FY2018 and $1.4 million in FY2018 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 from operating activities of $1.3 million in 4Q FY2018 (4Q FY2017: $10.2 million) mainly due to lower receipts from shipbuilding progressive billings, partially offset by lower payments to suppliers and purchase of inventories.
The net cash inflow from investing activities of $6.7 million in 4Q FY2018 (4Q FY2017: net cash outflow of $0.7 million) was mainly attributed to higher proceeds from disposal of property, plant and equipment.
The lower net cash outflow from financing activities of $11.3 million (4Q FY2017: $21.0 million) was mainly due to lower net repayment of trust receipts and lower cash balances being restricted in project accounts, partially offset by higher net repayment on interest-bearing loans and borrowings.
The Group recorded a higher net cash inflow from operating activities of $87.0 million in FY2018 (FY2017: $85.9 million) mainly due to lower purchase of inventories and payment to suppliers, partially offset by lower earnings and receipts from customers.
The lower net cash outflow from investing activities of $14.0 million in FY2018 (FY2017: $24.5 million) was mainly due to higher proceeds from disposal of property, plant and equipment and assets classified as held for sale, partially offset by higher purchase of assets classified as held for sale.
The higher net cash outflow from financing activities of $82.1 million in FY2018 (FY2017: $60.6 million) was mainly due to higher net repayment of interest-bearing loans and borrowings and absence of proceeds from shares issuance raised in FY2017, partially offset by lower net repayment of trust receipts and lower cash balances being restricted in project accounts.
Property, plant and equipment (“PPE”) decreased by $34.8 million (5.7%) from $611.9 million as at 30 June 2017 to $577.1 million as at 30 June 2018.
Movement of PPE during the year under review:
The vessels acquired in FY2018 were mainly tugs and barges deployed to support our customers in marine infrastructure projects in Singapore, Indonesia and South Asia.
The decrease in intangible assets was mainly due to amortisation of intangible assets and an impairment of goodwill made in 4Q FY2018.
Current assets decreased by $52.2 million (10.6%) from $491.6 million as at 30 June 2017 to $439.4 million as at 30 June 2018. The decrease was mainly from construction work-in-progress, inventories 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. Work-in-progress increased mainly due to transfer of one AHTS from construction work-in-progress to inventories due to cancellation of project in 4Q FY2018. Finished goods comprised mainly three PSV and dredge component parts.
Trade and other receivables comprised the following:
Of the total trade receivables, $20.1 million was received subsequent to the financial year under review.
The increase in other receivables was partly due to a reclassification of $4.8 million from amount due from related parties to other receivables pursuant to a mutual agreement entered between a subsidiary of the Group, the related party and our business associates, who will settle the balance on behalf of the related party to the subsidiary of the Group.
Assets classified as held for sale (“AHFS”) comprised one landing craft contracted for disposal within a year.
Current liabilities decreased by $95.4 million (22.3%) from $427.8 million as at 30 June 2017 to $332.4 million as at 30 June 2018. The decrease was mainly due to lower trust receipts and current portion of interest-bearing loans and borrowings, partially offset by higher trade and other payables.
Trade and other payables comprised the following:
The increase in other payables was due to interest-free advances of $6.6 million received from a substantial shareholder mainly to finance the purchase of a floating dock and for working capital usage.
The increase in deposits received from customers was mainly due to receipts from customers for the mobilization and supply of vessels deployed in an overseas infrastructure project.
The deferred income mainly relates to advance payments received from customers for which charter services have not been rendered. The deferred income will be amortised and recognised as income when the services are performed.
Net construction work-in-progress in excess of progress billings decreased by $42.4 million (50.6%) from $83.9 million as at 30 June 2017 to $41.5 million as at 30 June 2018, mainly attributed to completion of jobs during the year and transfer of two AHTS due to cancellation of projects, carrying amount of which reclassified to inventories (hold for sale) and property, plant and equipment (for charter).
The breakdown of the Group’s total borrowings are as follows:
The Group’s total borrowings decreased by $47.4 million (8.6%) to $502.1 million as at 30 June 2018 mainly due to repayment of long-term loans, partially offset by partial draw down of $38.3 million on the CTL Facility and additional finance lease liabilities for acquisition of vessels during the year.
*The Group classifies the current portion of the CTL facility in accordance to the monthly repayment schedule of the Facility Agreement, over its 5-year tenor since the waiver for the breach of one of the financial covenants under the CTL facility for the quarter ended 30 June 2018 was obtained before the reporting date.
Non-current liabilities increased by $71.0 million (21.0%) to $409.4 million as at 30 June 2018. The increase was mainly due to absence of reclassification of the non-current portion of CTL Facility as current as at 30 June 2018, partially offset by lower other liabilities as a result of recognition of deferred income.
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.
Although the International Monetary Fund has projected a healthy economic growth of 3.9% globally, in their words “the expansion is becoming less even”, and rising oil prices, higher yields in the US and escalating trade tension are among the key uncertainties in economic growth. The likelihood of escalating and sustained trade actions could derail the recovery and depress medium-term growth prospects1.
On a positive note, various studies show that the trade war could have limited impact on the international trade volume, and the Group does not foresee the tariff list on its own having any direct impact on the Group’s order flow. However, the Group remains mindful of the dangers and will continue to monitor the situation closely.
In terms of oil prices, while geopolitical events and potential increase in US shale oil supply could have dynamic effects on oil prices, EIA forecasted that crude oil prices would remaining relatively stable from August 2018 through the end of 20192. Oil & gas majors are planning higher capital expenditures across the value chain in the next few years3, which could in turn benefit the recovery of the oil service sectors.
Infrastructure spending in select Asia region is also expected to increase further, as China implements the Belt and Road Initiative in the countries along the route. 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 an improving 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 30 June 2018, the Group had an outstanding shipbuilding order book from external customers of approximately $31 million for the building of 10 vessels with progressive deliveries up to 4Q FY2019. Barring any unforeseen circumstances, all of which is expected to be recognised in FY2019. The order book comprises harbour tugs, barges and tanker.
The Group's shipchartering revenue consists of mainly short-term and ad-hoc contracts. Approximately 27% of shipchartering revenue in FY2018 was attributed to long-term chartering contracts (meaning contracts with a duration of more than one year). As at 30 June 2018, the Group had an outstanding chartering order book of approximately $116 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, on 28 June 2018 the Group obtained waiver for the breach of one of the financial covenants (the “Breach”) for the quarter ended 30 June 2018. The Breach relates to the same covenant that we had made in the clarification announcement released via SGXNET on 19 October 2017. 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.