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Second Quarter Results Financial Statement And Related Announcement 2017

Financials Archive

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Statements of Comprehensive Income

Statements of Financial Position

Overview

Review of Statement of Comprehensive Income

Breakdown by business segments

Three Months ended 30 June 2017

Six Months ended 30 June 2017

Revenue

Total revenue for the Group decreased by 94.3% from RM135.7 million in 2Q2016 to RM7.8 million in 2Q2017. This decrease was mainly due to (i) the Malikai Tension Leg Platform Installation turnkey project which recorded revenue of RM120.1 million for 2Q2016 to which there was no comparable turnkey project undertaken by the Group for 2Q2017 and (ii) a 93.6% decline in revenue contribution from Integrated Engineering Services ("IES") from RM7.6 million in 2Q2016 to RM0.5 million in 2Q2017. The reduction in IES revenue was in line with a downturn in the upstream oil and gas industry and a decrease in world energy prices.

For HY2017, total revenue for the Group decreased by 87.2% to RM19.0 million from RM148.4 million in HY2016. As mentioned above, the Malikai turnkey project contributed revenue of RM120.9 million in HY2016 for which there was no comparable turnkey project revenue in HY2017. For reasons given above IES recorded a 73.6% decline in revenue to RM2.3 million in HY2017 from RM8.6 million in HY2016. In addition, Mobile Natural Gas Sector ("MNGS") revenue declined by 11.3% to RM16.4 million in HY2017 from RM18.5 million in HY2016 due mainly to expiry of several Gas Sales Agreement during FY2016, including one customer that switched to pipeline natural gas and another customer relocating its manufacturing operations to a different location. The Renewable Energy Sector ("RES") recorded revenue of RM0.37 million for HY2017 which was marginally higher than RM0.35 million for HY2016 when the MK-1 Biomass Plant was first commissioned and revenue in HY2017 was generated mainly from the sale of briquettes which were brought forward from FY2016. The price of rice husk, the material required to produce briquettes, has remained high during the two harvest seasons in HY2017, making it uneconomical to produce briquettes.

Gross Profit

The Group's gross profit for 2Q2017 declined by 93.9% to RM0.4 million from RM6.4 million in 2Q2016 whilst the Group's gross profit for HY2017 decreased by 84.6% to RM1.2 million from RM7.9 million in HY2016. Both RES and MNGS reported gross losses during 2Q2017 and HY2017. MNGS experienced a gross loss of RM0.3 million in 2Q2017 compared to a gross profit of RM0.8 million in 2Q2016, whilst for HY2017 MNGS had a gross loss of RM0.8 million compared to a gross profit of RM1.6 million in HY2016. The reason for the gross loss was because of the continued closure of a major toll bridge for structural repairs which the Group uses for the delivery of its compressed natural gas ("CNG"). The closure has cause the Group's delivery vehicles having to make a long detour, resulting in higher operating costs. In order to maintain contracted services levels, the Group had to hire additional prime movers and outsource of other services to ensure timely delivery of its CNG. RES gross losses of RM68,000 for 2Q2017 and RM86,000 for HY2017 were due to prevailing high rice husk prices and the capping of briquette sales price due to competition from alternate fuels. For OES, the substantial decline in gross profit for 2Q2017 and HY2017 was also due to reduced OES business activities, in particular, the absence of a similar Malikai turnkey project as mentioned above. HY2017 gross profit from OES reduced by 67.4% to RM2.1 million from RM6.3 million in HY2016 whilst the gross profit for 2Q2017 decreased by 86.8% to RM740,000 from RM5.6 million in 2Q2016.

The Group's gross profit margin for 2Q2017 remained stable at 4.9% compared to 4.7% in 2Q2016 despite gross losses from MNGS and RES. OES gross profit margin had increased to 150% in 2Q2017 from 4.4% in 2Q2016 due to (i) a higher proportion of contribution from the Group's proprietary marine growth control products and (ii) the reversal of over-accrued cost of sales for past IES projects. Similarly for HY2017, the higher gross profit margin of 6.4% compared to 5.3% in HY2016 is due to the aforementioned marine growth control products.

Other Operating Income

The Group has other operating income of RM0.7 million for 2Q2017 and RM0.9 million for HY2017 compared to RM0.3 million for 2Q2016 and RM0.5 million for HY2016. In addition to rental income, interest income and administrative fees recorded for the periods under review, the increase in other operating income in 2Q2017 and HY2017 was mainly contributed by a write back of allowance for doubtful receivables of RM0.2 million which was no longer required and a reversal of vendor accruals of RM0.5 million offset by a one-off RM0.1 million gain on disposal of property plant and equipment recorded in 2Q2016 and HY2016.

Exchange Loss/Gain

The Group recorded an exchange gain of RM0.3 million in 2Q2017 compared to an immaterial exchange gain of RM9,000 in 2Q2016. For HY2017, the Group recorded an exchange gain of RM1.1 million compared to an exchange gain of RM0.3 million in HY2016. The exchange gain for both 2Q2017 and HY2017 was mainly due from trade and other payables denominated in US Dollar which depreciated against the Malaysian Ringgit.

Administrative Expenses

Administrative expenses in 2Q2017 reduced by 17.2% to RM4.4 million from RM5.4 million in 2Q2016, whilst administrative expenses in HY2017 reduced by 14.2% to RM9.3 million from RM10.8 million in HY2016. The lower administrative expenses were mainly due to (i) cost reduction initiatives including reduced manpower headcount and reduction of leased properties such as EJ-1 CNG station and OES Batam supply base; (ii) disposal of non-essential fixed assets to reduce depreciation expenses; (iii) reduced amortisation of intangible assets arising from impairment provisioning in FY2016 of KSO's signature bonus; and (iv) non-occurance of cost of business feasibility studies in HY2017.

Selling and Distribution Costs

Selling and distribution costs represent commissions payable to agents for OES sales made for the Group. Selling and distribution costs for 2Q2017 and HY2017 was RM0.2 million compared to RM0.5 million in 2Q2016 and HY2016. This decrease was mainly due to lower commission on agent-based sales, which was in line with reduced business activities of the Group.

Share of Results of Associates

Share of results of associates was a loss of RM0.3 million for 2Q2017 and a loss of RM0.7 million for HY2017. In comparison, share of results of associates was a loss of RM0.1 for 2Q2016 and a loss of RM0.4 million for HY2016. The losses were recorded by (i) an OES associate in line with a slowdown in the upstream oil and gas business and (ii) Gas Malaysia IEV Sdn Bhd which only commenced commercial operations during HY2017 and was in its gestation period during which it incurred initial losses.

Finance Costs

Finance costs for 2Q2017 declined to RM151,000 from RM228,000 in 2Q2016 mainly due to the full settlement of advances from a third party. For the same reason, finance costs in HY2017 declined to RM0.3 million from RM0.5 million in HY2016.

Loss Before Tax

For reasons set out above, the Group recorded a loss before tax of RM3.8 million for 2Q2017 compared to a profit before tax of RM0.4 million for 2Q2016. For HY2017 the Group recorded a loss before tax of RM7.4 million, which is a 116.8% increase from HY2016's loss before tax of RM3.4 million.

Review of Statement of Financial Position

Non-Current Assets

Net carrying value of property, plant and equipment decreased by RM2.0 million to RM31.3 million as at 30 June 2017 from RM33.2 million as at 31 December 2016. This was due to depreciation charges and currency translation differences; and partially offset by capital expenditure for operational equipment for various subsidiaries.

Net book value of intangible assets decreased to RM4.0 million as at 30 June 2017, from RM4.4 million as at 31 December 2016, due to amortisation and currency translation differences for US Dollar denominated intangible assets.

Oil and gas properties decreased by RM1.2 million to RM46.6 million as at 30 June 2017, from RM47.7 million as at 31 December 2016. This was mainly due to currency translation differences on the exploration and production concession at the Pabuaran KSO Block, West Java Indonesia, which is denominated in US Dollars. This currency translation was partially offset by continuing work over of the twin wells at the KSO Project.

The non-current portion of other receivables and prepayments decreased by RM0.8 million to RM8.0 million as at 30 June 2017, from RM8.8 million as at 31 December 2016, due to a reclassification to current portion of other receivables that the Company expects to receive in the near term and amortisation of land use rights.

Associates decreased from RM0.9 million as at 31 December 2016 to as at 30 June 2017 reflecting the share of results of associates with losses of RM0.7 million for HY2017.

Current Assets

Trade receivables decreased by RM39.4 million to RM18.3 million as at 30 June 2017, from RM57.7 million as at 31 December 2016, due mainly to the settlement of OES project invoices and in particular the Malikai turnkey project. The current portion of other receivables and prepayments, which comprised project related advances, third-party recoverable expenses and prepaid operating expenses decreased by RM2.1 million to RM5.8 million as at 30 June 2017, from RM7.9 million as at 31 December 2016, due mainly to settlement of third-party recoverable expenses and depletion of prepaid operating expenses. Inventories marginally decreased by RM0.1 million to RM4.8 million as at 30 June 2017, from RM4.9 million as at 31 December 2016.

Capital and Reserves

Currency translation reserve reduced to RM4.9 million as at 30 June 2017 from RM9.1 million as at 31 December 2016, mainly due to the appreciation of the Malaysian Ringgit against the US Dollar during the period in review.

Accumulated losses for the Group increased by RM7.3 million to RM20.2 million as at 30 June 2017 from RM12.9 million accumulated losses as at 31 December 2016.

Non-Current Liabilities and Current Liabilities

Bank borrowings (current and non-current portions) increased by RM0.3 million to RM9.8 million as at 30 June 2017 from RM9.5 million as at 31 December 2016, mainly due to a drawdown on bank overdraft facility. Finance leases increased to RM0.3 million as at 30 June 2017 from RM0.2 million as at 31 December 2016 due mainly to the financing of a replacement prime mover truck for MNGS.

Trade and other payables decreased by RM46.8 million to RM30.1 million as at 30 June 2017 from RM76.9 million as at 31 December 2016, mainly due to the settlement of OES project invoices particularly for the Malikai turnkey project. Provision for post-employment benefits obligations reduced to RM2.3 million as at 30 June 2017 from RM2.7 million as at 31 December 2016 due to the reduction of manpower headcount that arose from cost reduction initiatives implemented during HY2017.

The Group has a positive working capital of RM2.8 million as at 30 June 2017 as compared to RM11.8 million as at 31 December 2016.

Review of Statement of Cash Flows

For 2Q2017, the Group recorded cash used in operating activities of RM2.5 million. This was mainly due to: (i) operating loss before working capital changes of RM2.1 million; (ii) decrease in operating payables of RM6.9 million; and (iii) increase in other receivables and prepayment of RM0.5 million; which were partially offset by (i) decrease in operating receivables of RM6.7 million; and (ii) decrease in amount due from an associate of RM0.2 million. Net cash used in investing activities of RM0.4 million during 2Q2017 was due to: (i) an increase in oil and gas properties of RM0.3 million and (ii) purchase of property, plant and equipment of RM0.1 million. Net cash generated from financing activities of RM1.4 million during 2Q2017 was mainly due to the release of a pledged fixed deposit of RM1.7 million, which was partially offset by the servicing of bank borrowing and finance leases of the Group.

The Group recorded net cash used in operating activities of RM9.2 million for HY2017. This was mainly due to: (i) operating loss before working capital changes of RM3.7 million; and (ii) decrease in operating payables of RM45.9 million as a result of the completion of the Malikai turnkey project in FY2016; which were partially offset by (i) a decrease in operating receivables of RM7.0 million; and (ii) decrease in amount due from an associate of RM33.4 million.

The Group's negative cash flow from operations of RM9.2 million for HY2017 and RM3.5 million for HY2016 was mainly due to the continued downturn in the oil and gas industry which in turn has reduced OES business activities.

Net cash used in investing activities which amounted to RM1.9 million during HY2017 was mainly due to: (i) the purchase of property, plant and equipment of RM1.0 million; and (ii) an increase in oil and gas properties of RM0.9 million. Net cash used in financing activities of RM0.4 million during HY2017 was mainly for (i) the repayment of advances from a third party of RM2.5 million; and (ii) servicing bank borrowing and finance leases of the Group of RM0.5 million; which were partially offset by (i) release of a pledged fixed deposit of RM1.7 million; and (ii) the drawdown of bank facilities and finance leases of RM0.8 million.

As a result of the above and after taking into account the currency translation deficit, the cash and cash equivalents balance was RM5.5 million as at 30 June 2017, as compared to RM6.5 million as at 30 June 2016.

Commentary

Oil prices remain low and volatile as the downturn of the oil and gas industry is entering its fourth year since its start in mid-2014. Despite the effort of OPEC to trim oil production, there is no sign of any sustainable price recovery from the current level. It is expected that oil prices will remain at around USD 50 per barrel for the foreseeable future.

The Group is executing its plan to divest all non-profitable oil and gas assets and intensify its focus on the globalization of disruptive technologies, where risks and returns are favourable during this challenging period. The Group is in advanced discussions with various parties regarding the divestment plans and would make further announcements as and when they materialise.

The diversification away from oil and gas is expected to progress slowly as the Group saves sufficient funds to focus on its disruptive technologies.

Offshore Engineering Sector ("OES")

The globalisation of the Group's suite of disruptive technologies is gaining momentum and opportunities have been identified in new territories such as Europe, Africa and Australia, in addition to the traditional markets of the Far East and India. The Group has now established distribution network in 14 countries, which is a major step towards the globalization effort. The network is expected to grow further to include a number of European countries in FY2017.

After the USA and China, the Group has received its third patent from the United Kingdom for its new generation of Marine Growth Preventers, the MGP-i. The same patent is also expected from a number of other countries in FY2017. The Group has incorporated a wholly owned subsidiary under the name of IEV Technologies Pte. Ltd, which will hold all patents related to the MGP-i and possibly future IPs developed or acquired by the Group.

The Group has successfully secured a long-term contract for its Oxifree thermoplastic corrosion control solution in Malaysia with Sarawak Shell Berhad and Sabah Shell Company Limited. Additional opportunities are also envisaged in Malaysia in FY2017.

The Group has received a number of enquiries related to decommissioning of ageing assets throughout the region. These decommissioning projects are currently at the stage of Expression of Interest (EOI) and scheduled for execution from 2019 onwards.

Mobile Natural Gas Sector ("MNGS")

The Group is currently in discussion with several parties to divest the MNGS business in both Indonesia and Malaysia. Further updates on the divestment will be announced as and when material information becomes available.

Exploration and Production Sector ("EPS")

The Group continues to explore various options to farm-out the Pabuaran KSO. Further updates on the potential farm-out will be announced as and when material information becomes available.

Renewable Energy Sector ("RES")

Equipment for the silica pilot project is due to arrive at MK-1 plant from Russia in early August 2017 from Russia. Plant construction and commissioning will ensue and production of high purity silica should commence within 4Q2017.

The Group continues to maintain a low production level of briquettes at MK-1 due to the high price of rice husk, which is caused by the poor harvest seasons and low rice production in the Mekong Delta since the start of FY2017.