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Financials

First 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 31 March 2017 and 31 March 2016

Revenue

1Q2017. With the completion of the Malikai Tension Leg Platform Installation turnkey project in 3Q2016, there was no comparable turnkey project in 1Q2017 undertaken by the Group which led to a decrease in revenue of RM0.9 million. Integrated Engineering Solutions ("IES"), which include the Group's proprietary marine growth prevention ("MGP") products, recorded an 88.8% revenue increase to RM1.8 million in 1Q2017 from RM0.9 million in 1Q2016. The Mobile Natural Gas Sector ("MNGS") recorded a 14.5% decrease in revenue from RM10.7 million in 1Q2016 to RM9.2 million in 1Q2017. This was due to the expiry of several Gas Sales Agreements 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 RM0.3 million in 1Q2017 compared to RM0.1 million in 1Q2016. Rice husk prices has remained high during the harvest season in 1Q2017, making it uneconomical to produce briquettes during this period.

Gross Profit

The Group's gross profit for 1Q2017 decreased by 46.6% to RM0.8 million from RM1.6 million in 1Q2016, with both MNGS and RES recording gross losses during 1Q2017. MNGS experienced gross loss of RM0.5 million in 1Q2017 compared to a gross profit of RM0.8 million in 1Q2016. The closure of a major toll bridge for structural repairs which the Group uses for the delivery of the compressed natural gas had caused our delivery vehicles having to make a long detour, resulting in higher operating costs. In addition, maintaining service levels to customers necessitated the hiring of additional prime movers and outsource of other services to ensure timely delivery of CNG. RES gross loss of RM18 thousand was due to prevailing high rice husk prices and the capping of briquette sales price due to competition from alternate fuels. Gross profit from the Offshore Engineering Sector ("OES") increased by 80.9% from RM0.7 million in 1Q2016 to RM1.3 million in 1Q2017, due to the sale of products from disruptive technologies.

The Group's gross profit margin for 1Q2017 declined to 7.4% from 12.3% in 1Q2016, mainly due to the gross losses from MNGS and RES. OES reported an improved gross profit margin of 74.8% in 1Q2017 compared to 40.3% for 1Q2016. This was due to: (i) the increase in business activities of IES, which include the Group's proprietary MGP products; and (ii) the absence of turnkey business activity which typically has lower gross profit margins.

Other Operating Income

Other operating income was RM141 thousand in 1Q2017 compared to RM194 thousand in 1Q2016. Other operating income of the Group for 1Q2017 comprised mainly rental and interest income.

Exchange Gain

The Group recorded an exchange gain of RM0.8 million in 1Q2017 as compared to an exchange gain of RM0.3 million in 1Q2016. This exchange gain arose mainly from trade payables denominated in US Dollars which depreciated against the Malaysian Ringgit.

Administrative Expenses

Administrative expenses in 1Q2017 were RM4.8 million which had decreased by 11.3% as compared to RM5.4 million in 1Q2016. The decrease in administrative expenses reflected the cost reduction initiatives that were undertaken by the Group including staff retrenchment, reduction of headcount by natural attrition, disposal of non-essential assets to reduce depreciation expenses, and rental reduction such as the closure of EJ-1 CNG mother station. Amortisation of intangible assets decreased by 16.5% to RM137 thousand in 1Q2017 from RM164 thousand in 1Q2016 mainly due to an impairment provisioning for Pabuaran KSO's signing bonus that was recorded in 4Q2017, resulting in a reduction in periodic amortisation charging.

Other Operating Expenses

No significant other operating expenses was recorded for 1Q2017 compared to RM34 thousand for 1Q2016, which was due to inventory written off in relation to the commissioning phase of the MK-1 biomass plant in Vietnam.

Share of Results of Associates

Share of results of associates for 1Q2017 recorded a loss of RM0.4 million compared to a loss of RM0.2 million for 1Q2016. The loss recorded by the OES associate was in line with a continued slowdown in the upstream oil and gas business in 1Q2017.

Finance Costs

Finance costs for 1Q2017 reduced by 22.4% to RM177 thousand from RM228 thousand for 1Q2016, which was mainly due to the full settlement of advances from a third party.

Loss Before Tax

For reasons set out above, the Group recorded a loss before tax of RM3.6 million for 1Q2017 as compared to a loss before tax of RM3.9 million for 1Q2016.

Review of Statement of Financial Position

Non-Current Assets

Net book value of intangible assets decreased by RM0.2 million to RM4.2 million as at 31 March 2017 from RM4.4 million as at 31 December 2016, which was in line with periodic amortisation charges. Net carrying value of property, plant and equipment decreased by RM0.3 million to RM32.9 million as at 31 March 2017 from RM33.2 million as at 31 December 2016. This was mainly due to depreciation charges of RM1.2 million and partially offset by the acquisition of property plant and equipment of RM0.9 million, mainly a prime mover for MNGS. Oil and gas properties remained largely unchanged at RM47.7 million as at 31 March 2017 and 31 December 2016.

Current Assets

Trade receivables decreased by RM33.9 million to RM23.8 million as at 31 March 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 and prepaid operating expenses decreased to RM7.0 million as at 31 March 2107, from RM7.9 million as at 31 December 2016. This was attributable to projects reaching billing milestones which allowed project prepayments be billed to clients.

Capital and Reserves

Currency translation reserve reduced to RM7.2 million as at 31 March 2017 from RM9.1 million as at 31 December 2016, mainly due to the appreciation of the Malaysian Ringgit against US dollar during the period in review.

Accumulated losses for the Group increased by RM3.6 million to RM16.5 million as at 31 March 2017, from RM12.9 million as at 31 December 2016, due to the loss recorded for 1Q2017.

Non-Current Liabilities and Current Liabilities

Bank borrowings (current and non-current portions) increased by RM0.4 million to RM9.9 million as at 31 March 2017, from RM9.5 million as at 31 December 2016, mainly due to a drawdown on a bank overdraft facility. Finance leases increased to RM0.5 million as at 31 March 2017 from RM0.2 million as at 31 March 2017 mainly due to the financing of a replacement Prime Mover truck for MNGS.

Trade and other payables decreased by RM39.2 million to RM37.7million as at 31 March 2017, from RM76.9million as at 31 December 2016, due to the settlement of OES project invoices in 1Q2017 particularly for the Malikai turnkey project.

The Group has a positive working capital of RM6.0 million as at 31 March 2017, compared to RM12.3 million as at 31 December 2016.

Review of Statement of Cash Flows

The Group recorded net cash used in operating activities of RM7.0 million for 1Q2017. This was mainly due to: (i) an operating loss before working capital changes of RM1.6 million; and (ii) a decrease in operating payables of RM39.0 million; which were partially offset by: (i) a decrease in operating and other receivables of RM0.8 million; and (ii) a decrease in amount due from an associate of RM33.2 million;

Net cash used in investing activities which amounted to RM1.5 million was mainly due to: (i) the purchase of property, plant and equipment of RM0.9 million; and (ii) an increase in oil and gas properties of RM0.6 million. Net cash used in financing activities of RM1.8 million was mainly for repayment of advances from a third party of RM2.5 million and partially offset by net drawdown of finance leases of RM0.3 million and bank facilities of RM0.4 million.

As a result, after taking into account a currency translation difference of RM0.1 million, the cash and cash equivalents balance was RM7.9 million as at 31 March 2017, as compared to RM9.6 million as at 31 March 2016.

Commentary

The cut in oil production led by OPEC members, announced in November 2016, has resulted in a moderate recovery in oil prices, which have traded about USD 50 per barrel since December 2016. This has led to the recent surge in profits reported by oil majors following several years of negative earnings. However, oil prices remain volatile due to many geopolitical factors, including the looming question over extension of production cuts by OPEC members and the surge in shale oil production in the USA.

The Group remains cautious in making any major capital investment into the oil and gas industry and continues to focus on its strategy to offer disruptive technologies to challenge conventional engineering practices and drive down costs for its clients.

The divestment of certain oil and gas assets remains a high priority in the new era of low oil price normality and this will help to fund the globalisation effort of the Group's disruptive technologies as well as its diversification plans outside of the oil and gas sector.

Offshore Engineering Sector ("OES")

The Group continues its efforts in the globalisation of its suite of disruptive technologies and a number of new agents/distributors are being appointed throughout Asia Pacific, the Middle East and Africa in this regard. After the USA, the Group has received its second patent from China 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, which represents a valuable and important IP protection for the Group's current globalisation plan.

Besides offering the MGP-i structural integrity management solution to the global market, the Group has been successful in securing a long-term contract for its Oxifree thermoplastic corrosion control solution in Malaysia and making inroads into Indonesia, India and Vietnam.

The Group's strategy to transform its OES from a contractor to a technology provider is producing positive results but will require a gestation period of about a year or more before concrete results can be delivered, as new technologies are introduced to customers in new territories.

Mobile Natural Gas Sector ("MNGS")

The demand for compressed natural gas ("CNG") in Indonesia has increased in 1Q2017, but the closure of the Cisomang Bridge to heavy vehicles due to structural damage since January 2017 has significantly increased CNG transportation and other outsourcing costs. Although the bridge was re-opened on 1 April 2017, heavy vehicles above 45 tons are still required to use an alternative route until September 2017 when the bridge repairs are totally complete.

Meanwhile, in the land dispute case related to EJ-1, the appeal case is still ongoing in the District Court of Bekasi.

The CNG Mother Station for the virtual pipeline on the East Coast of Malaysia was officially opened on 18 April 2017 and commenced delivery of CNG to customers. As customers need to modify their equipment to accept natural gas, the commencement delivery date for each customer is expected to be staggered over the coming months.

On the Tamil Nadu LNG project, to date, the government of Tamil Nadu has not been successful in securing suitable land needed for the receiving terminal. The Group and Timah Langat-Emrail Consortium should reach the conclusion on the project feasibility study in FY2017.

Exploration and Production Sector ("EPS")

The Group is considering various options to finance the continued work program at CLS-1TW to unlock the reserves and resources from Pabuaran KSO, including a possible farm-out of the block.

A limited 3D seismic project is being planned to accurately determine the updip location of the hydrocarbon-bearing interval in Upper Cibulakan formation as well as to evaluate the resource level at the Talang Akang formation. This will be followed by the side tracking and possibly deepening of CLS-1TW to achieve a sustainable production volume.

Renewable Energy Sector ("RES")

The Winter-Spring rice harvest season did not produce the usual amount of husk as in previous years due to heavy rains in January and February 2017 that damaged a significant amount of crops in the Mekong Delta. Meanwhile, the selling price of briquettes is constrained by the low price of competing fuels. This resulted in low production of briquettes during 1Q2017 and low production levels are expected to continue until the Summer-Autumn rice harvest.

After the signing of the Heads of Agreement in March 2017, the Group is finalising the Cooperation Agreement with BSB Investment and Development Co. Ltd to construct and operate the pilot plant for rice husk silica and nanosilica. Meanwhile, research into global demand and prices for high purity amorphous silica is in progress as part of the preparation for the future testing program with prospective customers.

Concurrently, the feasibility study for the production of zeolites in Malaysia in collaboration with NanoMalaysia Berhad is progressing and further announcements will be made when there are material developments.

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