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Financials

Third 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 September 2017

Nine Months ended 30 September 2017

Revenue

Total revenue for the Group decreased by 96.2% from RM221.8 million in 3Q2016 to RM8.4 million in 3Q2017. This decrease was mainly due to: (i) the Malikai Tension Leg Platform Installation turnkey project which recorded revenue of RM205.9 million for 3Q2016 to which there was no comparable turnkey project undertaken by the Group for 3Q2017; and (ii) a 80.7% decline in revenue contribution from Integrated Engineering Services ("IES") from RM7.6 million in 3Q2016 to RM1.5 million in 3Q2017. 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 9M2017, total revenue for the Group decreased by 92.6% to RM27.4 million from RM370.2 million in 9M2016. As mentioned above, the Malikai turnkey project contributed revenue of RM326.9 million in 9M2016 for which there was no comparable turnkey project revenue in 9M2017. For reasons given above IES recorded a 77.0% decline in revenue to RM3.7 million in 9M2017 from RM16.2 million in 9M2016. In addition, Mobile Natural Gas Sector ("MNGS") revenue declined by 12.2% to RM23.3 million in 9M2017 from RM26.6 million in 9M2016 due mainly to expiry of several gas sales agreements during FY2017. The Renewable Energy Sector ("RES") recorded revenue of RM0.37 million for 9M2017 compared to RM0.54 million for 9M2016 when the MK-1 Biomass Plant was first commissioned. Revenue in 9M2017 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 harvest seasons in 9M2017, making it uneconomical to produce briquettes.

Gross Profit

The Group's gross profit for 3Q2017 declined by 89.5% to RM0.7 million from RM6.8 million in 3Q2016. MNGS experienced a marginal gross profit of RM0.1 million in 3Q2017 compared to a gross profit of RM1.1 million in 3Q2016, mainly due to the non-renewal of a compressed natural gas ("CNG")supply contract with a major CNG customer, coupled with increased market competition and depressed energy prices which forced the Group to lower its CNG prices for its existing clientele. OES experienced an 88.7% reduction in gross profit to RM0.6 million in 3Q2017 from RM5.7 million in 3Q2017, due to reduced OES business activities including the absence of a similar Malikai turnkey project during FY2017.

RES recorded a gross loss of RM3,000 for 3Q2017 due to high rice husk cost and the capping of briquette sales price due to competition from alternate fuels.

The Group's gross profit for 9M2017 decreased by 86.9% to RM1.9 million from RM14.7 million in 9M2016. MNGS had a gross loss of RM0.7 million for 9M2017 compared to a gross profit of RM2.7 million in 9M2016, due mainly to the closure of a major toll bridge for structural repairs which has forced the Group's CNG delivery vehicles 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. Other factors contributing to the gross loss for 9M2017 included the non-renewal of a CNG supply contract and reduced CNG pricing as explained earlier. OES gross profit for 9M2017 reduced by 77.5% to RM2.7 million from RM12.1million in 9M2016 due to reduced OES business activities and the absence of a similar Malikai turnkey project during FY2017. RES recorded a higher gross loss of RM89,000 for 9M2017 compared to a gross loss of RM65,000 for 9M2016, for the same aforementioned reason of high rice husk cost and capped briquette sales price.

The Group's gross profit margin for 3Q2017 improved to 8.5% compared to 3.1% in 3Q2016 despite gross losses from RES and deteriorating margins from MNGS. OES gross profit margin had increased to 43.9% in 3Q2017 from 2.7% in 3Q2016 due to: (i) a higher proportion of contribution from the Group's proprietary marine growth control products; and (ii) the absence of a similar Malikai turnkey project which typically generates low gross profit margin. Similarly for 9M2017, despite gross losses for RES and MNGS, the higher gross profit margin of 72.6% compared to 3.5% in 9M2016 is due to the aforementioned marine growth control products and the absence of a similar Malikai turnkey project.

Other Operating Income

The Group's other operating income for 3Q2017 increased by RM1.2 million to RM1.3 million from RM0.1 million for 3Q2016, mainly due to (i) a reversal of vendor payables and accruals of RM0.8 million due to a renegotiation of contract terms; (ii) write-back of RM0.2 million in sales commission that was previously over-provided; and (iii) a RM0.1 million gain on disposal of property plant and equipment.

The Group's other operating income for 9M2017 increased by RM1.6 million to RM2.2 million from RM0.6 million for 9M2016. Other operating income for 9M2016 was contributed by rental income, interest income, services fees and a RM0.1 million gain on disposal of property plant and equipment. In addition to the foregoing for 9M2016, other operating income for 9M2017 was also contributed by (i) a reversal of vendor payables and accruals of RM1.2 million due to a renegotiation of contract terms and close-out of projects with over-accruals; (ii) a write back of allowance for doubtful receivables of RM0.2 million due to the settlement of a long outstanding invoice; (iii) write-back of RM0.2 million in sales commission that was previously over-provided.

Exchange Loss/Gain

The Group recorded an exchange loss of RM0.2 million in 3Q2017 compared to an exchange gain of RM79,000 in 3Q2016. For 9M2017, the Group recorded an exchange gain of RM0.9 million compared to an exchange gain of RM0.4 million in 9M2016. The exchange loss for 3Q2017 was mainly due to the depreciation of Indonesia Rupiah against Malaysian Ringgit. Meanwhile the exchange gain for 9M2017 was mainly due from trade and other payables denominated in US Dollar which depreciated against the Malaysian Ringgit and that has largely offset the exchange loss the depreciating Indonesia Rupiah.

Administrative Expenses

Administrative expenses in 3Q2017 reduced by 16.1% to RM4.3 million from RM5.1 million in 3Q2016, whilst administrative expenses in 9M2017 reduced by 14.8% to RM13.6 million from RM15.9 million in 9M2016. 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-occurrence of cost of business feasibility studies which resulted in lower consultancy fees in 9M2017.

Selling and Distribution Costs

Selling and distribution costs represent commissions payable to agents for OES sales made for the Group. There was a reversal of sales and distribution cost for 3Q2017 due to an over-accrual of sales and distribution costs resulting in a positive figure of RM29,000. In comparison, 3Q2016 had sales and distribution cost of RM0.8 million reflecting the higher business activity during FY2016. Selling and distribution costs for 9M2017 was RM0.2 million compared to RM1.3 million for 9M2016. This decrease was in line with reduced business activities of the Group.

Other Operating Expenses

Other operating expenses for 3Q2017 were marginal at RM29,000 compared to RM0.7 million for 3Q2016, for which the comparative period had an allowance for doubtful receivable of RM0.7 million from an OES customer. For 3Q2017, the provision for doubtful receivables was a marginal RM2,000. Similarly, other operating expenses for 9M2017 was marginal at RM69,000 compared to RM0.7 million for 9M2016. Allowance for doubtful receivables for 9M2017 was RM2,000 compared to RM0.7 million for 9M2016.

Share of Results of Associates

Share of results of associates was a gain of RM0.3 million for 3Q2017 as compared to a loss of RM0.3 million for 3Q2016. The gain was due to increased business activities of a OES associate during the period in review. However for 9M2017, share of results of associates was a loss of RM0.5 million for 9M2017 compared to RM0.6 million for 9M2016. 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 9M2017 and was in its gestation period during which it incurred initial losses.

Finance Costs

Finance costs for 3Q2017 declined to RM150,000 from RM238,000 in 3Q2016 mainly due to the full settlement of advances from a third party. For the same reason, finance costs in 9M2017 declined to RM0.5 million from RM0.7 million in 9M2016.

Loss Before Tax

For reasons set out above, the Group recorded a loss before tax of RM2.3 million for 3Q2017 compared to a loss before tax of RM0.2 million for 3Q2016. For 9M2017 the Group recorded a loss before tax of RM9.8 million, which was a 172.6% increase from 9M2016's loss before tax of RM3.6 million.

Review of Statement of Financial Position

Non-Current Assets

Net carrying value of property, plant and equipment decreased by RM3.4 million to RM29.8 million as at 30 September 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 RM3.8 million as at 30 September 2017, from RM4.4 million as at 31 December 2016, due to amortisation charges and currency translation differences for US Dollar denominated intangible assets which depreciated against the Malaysian Ringgit.

Oil and gas properties decreased by RM1.7 million to RM46.0 million as at 30 September 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 minimal work over of the twin wells at the KSO Project.

The non-current portion of other receivables and prepayments decreased by RM1.0 million to RM7.8 million as at 30 September 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 RM0.3 million as at 30 September 2017 reflecting the share of results of associates with losses of RM0.5 million for 9M2017. In addition, the balance net investment of RM142,000 in Gas Malaysia IEV Sdn. Bhd. has been reclassified as Asset Held for Sale, as the Group has agreed to dispose of its 25% equity stake in the company to Gas Malaysia Bhd.

Current Assets

Trade receivables decreased by RM39.1 million to RM18.6 million as at 30 September 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 RM2.6 million to RM5.4 million as at 30 September 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 decreased by RM0.3 million to RM4.6 million as at 30 September 2017 from RM4.9 million as at 31 December 2016, due mainly to the depletion of rice husk briquettes and CNG stock.

Capital and Reserves

Share capital of the Company had increased by RM0.6 million to RM98.3 million as at 30 September 2017 from RM97.7 million as at 31 December 2017 due to the issuance 1,912,632 Company shares at SGD0.1074 per share as consideration for the acquisition of minority shares in an indirect subsidiary.

Currency translation reserve reduced to RM3.2 million as at 30 September 2017 from RM9.1 million as at 31 December 2016, due mainly to the appreciation of the Malaysian Ringgit against the US Dollar during the period in review.

Accumulated losses for the Group increased by RM9.5 million to RM22.4 million as at 30 September 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 RM0.2 million to RM9.7 million as at 30 September 2017 from RM9.5 million as at 31 December 2016, mainly due to a drawdown on bank overdraft facility. Finance leases remained stable at RM0.2 million as at 30 September 2017 and 31 December 2016.

Trade and other payables decreased by RM46.2 million to RM30.7 million as at 30 September 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 RM2.1 million as at 30 September 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 9M2017.

The Group has a positive working capital of RM0.9 million as at 30 September 2017 as compared to RM12.3 million as at 31 December 2016.

Review of Statement of Cash Flows

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

The Group recorded net cash used in operating activities of RM10.6 million for 9M2017. This was mainly due to: (i) operating loss before working capital changes of RM6.3 million; and (ii) decrease in operating payables of RM43.5 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 RM6.3 million; and (ii) decrease in amount due from an associate of RM33.6 million.

Net cash used in investing activities which amounted to RM2.3 million during 9M2017 was mainly due to: (i) the net purchase of property, plant and equipment of RM1.2 million; and (ii) an increase in oil and gas properties of RM1.1 million. Net cash used in financing activities of RM0.6 million during 9M2017 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 RM0.6 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 RM4.4 million as at 30 September 2017, as compared to RM13.2 million as at 30 September 2016.

Commentary

Following the recent recovery of oil prices, analysts are cautiously optimistic that OPEC is determined to stick to the oil production cut it agreed with Russia and ten other producing countries last year. Oil prices are forecasted to be between USD 50 and USD 60 per barrel in 20181.

The oil and gas industry is hiring again, after more than 400,000 jobs were lost in the industry in the last 3 years. This reinforces the belief that a lot of oil and gas companies have successfully adjusted to the new norm of oil prices, which is still less than 50% of the high oil prices in 2014.

The Group is actively divesting all non-profitable assets and units, and intensifying its efforts on the development and global commercialisation of disruptive technologies, particularly in the OES sector, where risks and returns are favorable during this challenging period. This strategy reflects the new vision of the Group and its sustainability, given the low oil price environment that has changed the dynamics of the oil and gas industry. Simultaneously, various cost reduction initiatives are being undertaken as the Group moves towards a lean management organisation.

Offshore Engineering Sector ("OES")

The Group is accelerating its technology-focused business and has formed a Technology Development Team (TDT) to undertake R&D activities as well as evaluate new technologies. This is central to the Group's vision to create value through disruptive technologies.

Currently, the suite of disruptive technologies offered by the Group includes: i) the MGP-i, the world's lowest cost structural integrity management solution, ii) Vertical Tension Anode system, a diverless cathodic protection retrofit solution; iii) Magnetometry Tomography Method, a non-contact stress survey of onshore and subsea pipelines; and iv) Oxifree, a thermoplastic anti-corrosion coating solution for flanges and valves.

A pipeline of new disruptive technologies is being developed and the Group will continue to launch technologies in the coming years through its global distribution network. Technologies under study and development are related to corrosion control and specialised inspection solutions, and novel seismic services. Concurrently, the Group is seeking complementary technologies and offering complete engineering solutions to create further value for its customers.

Mobile Natural Gas Sector ("MNGS")

As announced on 3 November 2017, the Group sold its 25% shareholding in GM-IEV Sdn. Bhd. to Gas Malaysia Sdn Bhd. Similarly, the Group has put the CNG supply chain in Indonesia up for sale and a third party is currently performing due diligence for the purchase of PT IEV Gas. Further news on this divestment will be announced as and when material information becomes available.

With regards to the value-added tax (VAT) dispute by PT IEV Gas with the Indonesia tax authority, a tax court hearing was recently presided by a panel of judges on 2nd November 2017 in which the facts of the case and legal arguments were presented. At dispute is whether the various streams of revenue are subject to VAT during the 2013 tax year. The next tax court hearing is scheduled towards the end of November 2017 and further information will be provided when there is any material development.

Exploration and Production Sector ("EPS")

The Group continues to work on the farm out of Pabuaran KSO with interested parties. Additional funds will be required for the planned limited 3D seismic followed by the side tracking and possibly deepening of CLS-1TW to achieve a sustainable production volume.

Renewable Energy Sector ("RES")

The Group has entered into a Heads of Agreement ("HOA") with BSB Investment and Development Co. Ltd. ("BSB"), effective 31 October 2017, to commence the legal process to lease the MK-1 Biomass Plant and its related assets located in Thot Not District, Vietnam for a 2-year lease period and also to grant BSB an option to purchase the MK-1 Biomass Plant at the end of the said lease period.

The HOA is part of the Company's move to refocus on its core engineering business and exit from the rice-husk biomass business in Vietnam.

1 https://knoema.com/yxptpab/crude-oil-price-forecast-2017-2018-and-long-term-to-2030

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