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Review of Statement of Comprehensive Income
Breakdown of Revenue, Gross Profit and Gross Profit Margin by business sectors
Three Months ended 31 December 2016
Twelve Months ended 31 December 2016
The Group's revenue for 4Q2016 decreased by RM24.6 million or 99.8% to RM60k from RM24.6 million for 4Q2015. This was mainly due to the reversal of over-accrued revenue recorded for Malikai Tension Leg Platform Installation turnkey project which was completed in 3Q2016. The Mobile Natural Gas Sector ("MNGS") experienced a decline in revenue of RM2.8 million or 24.6% from RM11.4 million in 4Q2015 to RM8.6 million in 4Q2016 due to the expiry of several Gas Sales Agreements as one customer switched to pipeline supplied natural gas and another customer relocated its manufacturing operations to a different location. Integrated Engineering Solutions ("IES"), in line with a downturn in the upstream oil and gas industry, experienced a decline in revenue of RM5.3 million or 81.6% from RM6.5 million in 4Q2015 to RM1.2 million in 4Q2016. The Renewable Energy Sector ("RES") recorded revenue of RM0.8 million in 4Q2016 as IEV's first biomass manufacturing plant ("MK-1"), located in Vietnam, started operations in 2Q2016.
For 12M2016, total revenue for the Group increased by 231.5% to RM370.3 million from RM111.7 million in 12M2015. This substantial increase was due to the completion of the Malikai turnkey project and was offset by reduced revenue contribution from MNGS and IES, for the reasons described above. RES recorded revenue of RM1.4 million for 12M2016.
The Group's gross profit for 4Q2016 decreased by 10.8% to RM4.7 million from RM5.2 million in 4Q2015. MNGS returned to a gross profit position of RM0.1 million for 4Q2016 after a gross loss of RM2.1 million for 4Q2015 that resulted from a road access dispute to its EJ1 CNG mother station in East Java, Indonesia, which resulted in the need to purchase CNG at a higher cost from alternative suppliers and the incurrence of higher transportation expenses for the CNG. OES experienced a decline in its gross profit position to RM4.6 million for 4Q2016 from RM7.3 million for 4Q2015, which is attributed to a slowdown in the upstream oil and gas industry and the reversal of over-accrued revenue and cost of sales from the Malikai turnkey project.
The Group's gross profit for 12M2016 decreased by 7.5% to RM19.4 million from RM21.0 million in 12M2015. The decline in gross profit is attributable to (i) a reduction of IES business activities from the upstream oil and gas industry, which contributes the highest gross profit margin to the Group; and (ii) low profit margins from the Malikai turnkey project; which were partially offset by a turnaround in MNGS gross profit of RM2.8 million for 12M2016 from a gross loss of RM1.4 million for 12M2015. The biomass plant in Vietnam recorded a gross loss RM0.1 million for 12M2016 as it continues to focus on improving its operating protocols.
The Group's gross profit margin for 12M2016 declined to 5.2% from 18.8% in 12M2015. This decline is primarily due to the low margin of turnkey revenue for the Malikai turnkey project (as the project installation risk was undertaken by IEV project partner, Heerema Marine Contractors). The low gross profit margin from the Malikai turnkey project largely offset the gross profit margin of 89.1% for IES and 8.1% for MNGS from 12M2016.
Other Operating Income
Other operating income amounted to RM0.5 million for 4Q2016 as compared to RM1.1 million for 4Q2015. During 4Q2016 there was an insurance settlement for a written-off prime mover for compressed natural gas transportation, which was involved in a road accident. In comparison, 4Q2015 recorded a reversal in allowance for doubtful receivables and reversal of long outstanding payables.
For 12M2016 other operating income amounted to RM1.1 million compared to RM6.2 million for 12M2015. Other operating income for 12M2016, in addition to an insurance settlement, was mainly from rental income and gain on disposal of property, plant & equipment. In comparison, other operating income for 12M2015 was mainly from the global settlement reached with Allison Marine Contractors II LLC in full and final settlement of all claims in relation to the D21 turnkey project.
The Group recorded exchange losses of RM0.9 million for both 4Q2016 and 4Q2015. The exchange losses for both 4Q2016 and 4Q2015 periods were mainly attributable to the depreciation of the Malaysian Ringgit against the Indonesian Rupiah and US Dollar.
For 12M2016, the Group recorded an exchange loss of RM0.5 million as compared to an exchange gain of RM11.4 million for 12M2015. The exchange gain for 12M2015 was mainly due to the significant strengthening of the US dollar against the Malaysian Ringgit and that a significant portion of the Company's advances to its subsidiaries was denominated in US dollars.
Administrative expenses for 4Q2016 increased by RM0.5 million or 9.4% to RM5.9 million from RM5.4 million for 4Q2015. The increase in administrative expenses is mainly attributed to consulting cost for the negotiation of revised terms to a Gas Offtake Agreement for the Mobile Natural Gas Sector. Administrative expenses for 12M2016 have marginally decreased to RM21.8 million from RM21.9 million for 12M2015. The benefits of the cost reduction measures undertaken by the Group had been offset by (i) the commencement of commercial operations of the Biomass plant in Vietnam; (ii) consulting cost for a MNGS Gas Offtake Agreement; and (iii) business feasibility studies conducted for new markets under MNGS. Depreciation expenses in 4Q2016 increased marginally to RM1.3 million from RM1.2 million in 4Q2015. For 12M2016, depreciation expenses increased by RM0.5 million or 11.9% to RM4.9 million from RM4.4 million for 12M2015. This was mainly due to commencement of commercial operations of the Biomass plant in Vietnam. Amortisation of intangible assets for 4Q2016 has marginally increased to RM0.17 million from RM0.16 million for 4Q2015, whilst for 12M2016 increased by 14.0% to RM0.65 million from RM0.57 million in 12M2015. This increase in amortisation is mainly due to the acquisition of licensing rights to Oxifree corrosion control technology and that intangible assets are mainly denominated in US Dollars, which has strengthened against the Malaysia Ringgit.
Selling and Distribution Costs
Selling and distribution costs relate to commissions payable to agents for sales secured on behalf of the Group. Selling and distribution costs for 4Q2016 decreased to RM0.6 million from RM0.9 million in 4Q2015, whilst for 12M2016 decreased to RM2.0 million from RM2.9 million in 12M2015. This decrease was mainly attributable to lower commission-based sale of products and services in the upstream oil and gas industry.
Other Operating Expenses
Other operating expenses for 4Q2016 increased to RM25.6 million from RM0.9 million for 4Q2015, whilst for 12M2016 increased to RM26.4 million from RM0.7 million for 12M2015. This was mainly due to (i) impairment to Pabuaran KSO development properties and intangible assets of RM20.7 million arising from prevailing and forecasted oil prices; (ii) allowance for doubtful debts of RM2.6 million in 12M2016 arising mainly from OES operating receivables; (iii) write-off of property, plant and equipment of RM2.3 million due to the closure of MNGS EJ1 CNG mother station and cancellation of mobile natural gas projects in Indonesia; and (iv) oil field expenses of RM0.5 million for Pabuaran KSO incurred during well testing operations.
Share of Results of Associates
Share of results of associates was a loss of RM1.2 million for 4Q2016 and a loss of RM1.8 million for 12M2016. In comparison, share of results of associates was a loss of RM0.3 million for 4Q2015 and a loss of RM40k for 12M2015. The increase in the loss position was mainly due to (i) higher losses recorded by the OES associate for 4Q2016 and 12M2016 in line with a downturn in the upstream oil and gas business; and (ii) a delayed commissioning and certification phase for the CNG mother station in the East Cost of Peninsular Malaysia, undertaken by Gas Malaysia IEV Sdn Bhd.
Finance cost for 4Q2016 was marginally higher at RM0.19 million compared to RM0.15 million for 4Q2015. The lower finance cost for 4Q2015 was due to a RM50 thousand late payment interest charged by a trade vendor during 9M2015 and was ultimately waived by the said trade vendor in 4Q2015. Finance costs for 12M2016 decreased to RM0.9 million from RM1.1 million for 12M2015, which was in line with a gradual reduction of the Group's interest servicing commitment
Profit/ Loss Before Taxation
The Group reported a loss before taxation of RM29.3 million for 4Q2016, compared to a loss before taxation of RM2.1 million for 4Q2015. This was mainly due to other operating expenses of RM25.6 million and share of associated companies' results of a loss of RM1.2 million for 4Q2016 as described above.
For 12M2016, the Group reported a loss before taxation of RM32.9 million compared to a profit before taxation of RM12.1 million for 12M2015. The loss position was mainly due to: (i) RM20.7 million asset impairment to Pabuaran KSO development properties; (ii) allowance for doubtful debts of RM2.6 million; (iii) asset write-off of RM2.3 million in relation to a MNGS mother station closure and cancellation of mobile natural gas projects; (iv) share of loss from associated companies' results of RM1.8 million; and (v) reduced gross profits from OES.
Review of Statement of Financial Position
Trade receivables remained largely the same at RM57.7 million as at 31 December 2016 and 31 December 2015.
Other receivables and prepayments decreased by RM1.1 million to RM7.9 million as at 31 December 2016 from RM9.0 million as at 31 December 2015. This was mainly due to a reduction in project related advances and prepaid operating expenses as various projects have reached billing milestones by 31 December 2016.
Inventories increased by RM0.4 million from RM4.5 million as at 31 December 2015 to RM4.9 million as at 31 December 2016. The increase was mainly due to an increase in stocks for the assembly of marine growth control products and the accumulation of rice husk briquette inventory during the operational ramp of the biomass plant in Vietnam.
Net book value of property, plant and equipment decreased by RM3.9 million to RM33.2 million as at 31 December 2016 from RM37.1 million as at 31 December 2015. The decrease mainly due to (i) depreciation charge of RM4.9 million for 12M2016; and (ii) write-off of RM2.3 million for the closure of EJ1 mother station in East Java and cancellation of MNGS development projects. The aforementioned were partially offset by (i) capital expenditure for the biomass plant in Vietnam; and (ii) additional works on EJ2 CNG mother station in East Java.
Net book value of intangible assets decreased to RM4.4 million as at 31 December 2016 from RM6.3 million as at 31 December 2015, due to:- (i) impairment on Pabuaran KSO related intangible assets of RM1.4 million; and (ii) amortisation and currency translation differences for US Dollar denominated intangible assets.
Oil and gas properties decreased by RM9.2 million to RM47.7 million as at 31 December 2016, from RM56.9 million as at 31 December 2015. This was due to an impairment provision of RM19.4 million taking into consideration the prevailing and forecast oil prices; which was partially offset by continuing workover capital expenditure of RM10.1 million undertaken during 12M2016 on the twin wells at the KSO project.
Associates decreased by RM1.8 million to RM1.0 million as at 31 December 2016 from RM2.8 million as at 31 December 2015. This decrease reflect (i) an operational loss experienced by an OES associate in line with a slowdown in the upstream oil and gas industry and (ii) a prolonged commissioning and certification phase for the CNG mother station in the East Cost of Peninsular Malaysia, undertaken by Gas Malaysia IEV Sdn Bhd.
Capital and Reserves
Currency translation reserves increased to RM9.1 million as at 31 December 2016 from RM5.9 million as at 31 December 2015 mainly due to the strengthening US Dollar against the Malaysian Ringgit during 12M2016.
Retained profits (excluding non-controlling interests) of RM20.5 million as at 31 December 2015 has turned into accumulated losses of RM12.9 million as at 31 December 2016, due to the Group's RM33.7 million loss for 12M2016.
Bank borrowings (current and non-current portions) increased by RM2.2 million to RM9.5 million as at 31 December 2016 from RM7.3 million as at 31 December 2015 due to a recent overdraft drawdown and partially offset by scheduled repayment of loan facilities. Advances from a third party reduced to RM2.5 million as at 31 December 2016 from RM5.0 million as at 31 December 2015 due to a partial repayment of the advances.
Trade payables increased by RM11.0 million to RM64.3 million as at 31 December 2016 from RM53.3 million as at 31 December 2015, mainly due to installation works for the Malikai turnkey project.
Other payables increased by RM3.4 million to RM12.7 million as at 31 December 2016 from RM9.3 million as at 31 December 2015, mainly due to increase in accruals and amounts owing to sub-contractors in relation to well workover activities at the Pabuaran KSO in Jawa, Indonesia
The Group has a positive working capital of RM12.3 million as at 31 December 2016 as compared to RM28.5 million as at 31 December 2015.
Review of Statement of Cash Flows
For 4Q2016 the Group generated cash from operating activities of RM5.4 million. This was mainly generated from: (i) decrease in amount due from associate of RM147.5 million; (ii) decrease in operating receivables of RM85.7 million; which were offset by (iii) decrease in operating payables of RM226.8 million; and (iv) operating loss before working capital changes of RM1.5 million. Net cash used in investing activities of RM0.7 million during 4Q2016 was due to the acquisition of property, plant and equipment. Net cash used in financial activities of RM0.4 million during 4Q2016 was for the repayment of bank borrowings and finance leases and for the pledging of fixed deposits.
For 12M2016 the Group generated cash from operating activities of RM14.5 million. This was mainly generated from: (i) operating profit before working capital changes of RM1.4 million; (ii) decrease in operating receivables of RM29.4 million; (iii) Increase in operating payables of RM14.3 million; and were offset by (iv) an increase in amount due from an associate of RM30.2 million. Changes in items (ii), (iii) and (iv) were due mainly to the Malikai turnkey project which had completed the installation phase of the project. Net cash used in investing activities of RM10.5 million during 12M2016 was due to: (i) an increase in oil and gas properties of RM8.4 million and (ii) the purchase of property, plant and equipment of RM2.3 million. Net cash used in financing activities of RM0.7 million during 12M2016 was mainly for the repayment of RM2.5 million for an advance from a third party and repayment of bank facilities and finance leases, which were partially offset by a RM2.5 million drawdown of a bank overdraft.
The agreement between OPEC and certain non-OPEC members to reduce oil production has brought some respite to the oil price decline. As of January 2017, OPEC has achieved 90% of its collective target cut of 1.2 million barrels a day while eleven non-OPEC nations - led by Russia and Mexico - achieved 48% of its pledge to cut production by an additional 558,000 barrels a day. As a result, the oil price has recovered slightly and has been trading close to USD 55 per barrel since December 20161.
Despite the slight recovery in the oil price, it is still approximately 50% below the levels seen in mid-2014. This prolonged depression of pricing has led to major impairment of assets by a large number of oil and gas companies as well as suppliers and vendors. Cost reduction is still a major corporate KPI for most oil and gas companies and, as a consequence, the pipeline of new field developments is largely dry. It will likely take several years before any significant growth in offshore construction activities can be expected.
The Group is 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 costs down for its clients.
Beyond the oil and gas industry and as part of the Group's diversification plans, the Group is in the final stage of completing its feasibility study on the production of advanced materials from rice husk. As more than 90% of global rice production comes from Asia2 , this agricultural waste represents an abundant and valuable renewable resource to produce high value-added materials, if the right technologies are employed. Further announcements shall be made as and when appropriate.
Offshore Engineering Sector ("OES")
The Group is making good progress in the implementation of its business strategy to offer disruptive technologies to create value for its clients by lowering production and operating costs.
The strike rate for the MGP-i globalization is more than 50% and a host of pilot projects are underway globally. However, it is necessary to go through a gestation period of market development and, in some cases, proof of concept before commercial awards are materialized. The Group has successfully tested its typhoon-proof product design in February 2017 and the new generation of product, the MGP-i, is now ready to be launched in all sea conditions throughout the world. A series of patents for new product design is expected to be issued, following those already granted from the USA The MGP-i solution represents one of the lowest cost structural integrity management solutions available in the world to date, and its applications will add life and strength to new and existing offshore facilities, whilst reducing inspection and marine growth management costs.
Market penetration from other disruptive technologies such as the Vertical Tension Anode for retrofit of cathodic protection on ageing offshore structures, Oxifree thermoplastic coating for corrosion protection of flanges and valves, and Magnetometry Tomography Method for non-intrusive stress measurements of piggable and non-piggable pipelines is encouraging and updates on these technologies will be announced as and when there are material developments.
The Group is building its network of global agents and distributors in order to access the world market of over 10,000 offshore platforms as well as the large number of downstream and midstream facilities. The size of the distribution network will be updated in future announcements.
Following the success of the Malikai Tension Leg Platform turnkey project, the Group has recently executed an exclusive MOU on 2 February 2017 with Heerema Marine Contractors for the provision of offshore transportation and installation opportunities in Malaysian waters. Further announcements will be made as and when there are material developments.
1 (Bloomberg L.P., 2017)
Mobile Natural Gas Sector ("MNGS")
The Indonesian manufacturing market is relatively weak due to current economic conditions. As such, the demand for compressed natural gas ("CNG") remains low. To counter its effect, the management of PT. IEV Gas ("PTIG") has successfully reduced its gas off-take commitments and implemented a number of cost reduction initiatives ("CRIs") in 2H2016 to overcome the challenges of low CNG sales volumes and margin pressure. The outcome of these initiatives will result in significant cost savings for the Group in 2017.
Meanwhile, in the land dispute case related to EJ-1, the appeal case is currently being heard in the District Court of Bekasi.
The CNG Mother Station for the virtual pipeline on the East Coast of Malaysia has commenced operation in January 2017 after receiving the Certificate of Completion and Compliance ("CCC"). With this approval, Gas Malaysia IEV Sdn Bhd will commence delivering CNG to all its east coast supply chain customers in 2017. The feasibility study for the second mobile natural gas supply chain in west Peninsula Malaysia has concluded that this supply chain project is not feasible since large natural gas consuming customers have access to cheaper priced pipeline natural gas.
On the Tamil Nadu LNG project, the Group and Timah Langat-Emrail Consortium is in the midst of finalising the site location of the LNG terminal, funding options with financial institutions and strategic partners. This process will be completed in 120-180 days.
Exploration and Production Sector ("EPS")
Following the 2-month production trial, the Group is now considering various technical options to optimize the handling of scale and wax issues in order to achieve sustainable crude oil production from CLS1-TW well. This will also involve a change in well completion string. An additional zone in CLS-1TW, which correlates with a hydrocarbon bearing zone from a newly drilled well in the vicinity of Pabuaran Block by Pertamina, has also been identified and is being considered for perforation and testing during the next workover campaign.
A limited 3D seismic project is also under consideration to accurately determine the updip location of the hydrocarbonbearing 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 increase the production volume from this well drilled in 2015 in Cilamaya Selatan.
The Group continues to look for strategic investors to farm-out the KSO block due to the capital-intensive investment nature of exploration and production.
Renewable Energy Sector ("RES")
The Group expects to face challenges associated with the decline in the supply of rice husks in the Mekong Delta in 2017 due to heavy rains in January and February 2017 that adversely affected the winter-spring harvest season. In addition, there has been a reduction in import of rice from Cambodia due to the growing number of rice mills in Cambodia lowering the output of rice mills in the Mekong Delta.
The tightening of supply is expected to affect the price of husks, the raw materials for the manufacturing of briquettes. The sector is under a lot of pressure as energy prices continue to adversely impact the price of all types of energy products, including briquettes from Vietnam, which now have to compete with coal imports from Indonesia.
The Group continues to explore the production of silica and nano-silica from its plant MK-1 in Thot Not, as part of its strategy to develop the Advanced Materials business involving nano-silica and its derivatives. The Group is in the final stages of producing a feasibility study in this regard and further announcements will be made as and when there are material developments.