See Hup Seng

SHS Holdings Ltd

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Full Year Results Ended 31 December 2017

Financials Archive

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Profit & Loss

Profit & Loss

Statement of Comprehensive Income

Statement of Comprehensive Income/(Expense)

Balance Sheet

Balance Sheet

Review of Performance

Overview

For the fourth quarter ended 31 December 2017 ("4Q17"), the Group recorded a 30% decrease in revenue from continuing operations to S$12.1 million and a net loss attributable to equity holders from continuing operations of S$14 million which included a one-off exceptional impairment charge of goodwill of S$9.6 million. This compares with a net profit attributable to equity holders from continuing operations of S$2.4 million a year ago.

For the 12 months ended 31 December 2017 ("FY17"), the Group achieved revenue from continuing operations of S$37.7 million, a decrease of 33% from FY16. Net loss attributable to equity holders from continuing operations in FY17 was S$18.4 million which included a one-off exceptional impairment charge of goodwill of S$9.6 million against a net profit of S$4.5 million a year ago.

Profit from discontinued operations after tax in 4Q16 and FY16 relates to the post completion payment adjustment received from the acquirer Brenntag for the disposal of the Refine Petroleum Business segment.

As at 31 December 2017, the Group's total equity attributable to shareholders stood at S$203.3 million compared to S$217.5 million as at 31 December 2016. The Group has cash and cash equivalent balance of S$49.1 million. It is in a net cash position with low debt-to-total equity ratio of 9.8%.

Revenue from Continuing Operations


Revenue From Continuing Operations

The Group's revenue declined 30% to S$12.1 million in 4Q16, compared with S$17.3 million in the previous corresponding period. For FY17, revenue was 33% lower at S$37.7 million. This was mainly due to lower revenue contribution from the CP, E&C and Solar Energy segments.

Corrosion Prevention ("CP") segment

The Marine, Offshore Oil and Gas sectors which the CP business is dependent upon continue in the doldrums for 2017 as oil prices remained low in the 40s and 50s range and only cross the psychological barrier of US$60 in January 2018. Orders were very much curtailed throughout 2017 as the industry continued to experience orders cancellation or deliveries deferred.

On the back of the depressed marine and offshore sectors, revenue for CP segment dived 63% to S$1.2 million in 4Q17 from the already low base of S$3.4 million in 4Q16. For FY17, revenue plunged 43% to S$10.0 million, from S$17.6 million in FY16. At FY17 activity levels, the CP operations in particular its factory operations was operating well below breakeven utilization.

Engineering & Construction ("E&C") segment

Revenue for the EC segment decreased 11% year-on-year to S$9.8 million in 4Q17 from S$11 million in 4Q16 and decreased 25% year-on-year in FY17 from S$34.2 million to S$25.7 million. This is driven largely by the slowdown of the Singapore construction sector which resulted in fewer orders coupled with delays in the start of projects on hand. For the newly acquired modular construction business, the revenue recognized in FY17 was insignificant as the projects currently on hand are of a design and build contract nature, hence revenue is only recognized when the project is commissioned and fully handed over to the owners. These projects are currently still progressing in line with expected margins but as explained, the contribution are not recognized in the income statement until the completion of the contracts largely in 2018.

Solar Energy segment

The Solar Energy segment for 4Q17 registered revenue of S$0.6 million a decrease of 76% against 4Q16 of S$2.6 million. This is due to 4Q16 included significant contribution from the Singapore Airport Terminal Services ("SATS") 3.6MW project and to a lesser extend delay in two projects in 4Q17 to 2018. Similarly for FY17, sales fell 68% from S$3.3 million in FY16 to S$1 million for the reasons explained above.

Gross Profit and Gross Margin

Gross Profit From Continuing Operations

Gross Profit From Continuing Operations

For 4Q17, the Group's gross profit plunged year-on-year to a loss of S$0.2 million, compared with a profit of S$6 million in 4Q16. The decrease was mainly due to the significant drop in revenue of the CP, E&C and Solar Energy segments as discussed above and costs over-runs incurred in a few structural steel projects under the E&C segment. As a result, the Group's gross margin fell substantially from 34.8% in 4Q16 to -1.9% in 4Q17.

Similarly for the same reasons above, for FY17, the Group's gross profit decreased by 73% to S$4.2 million from S$15.6 million. Gross margin decreases from 27.7% to 11.2%.

CP segment

Gross loss for CP segment in 4Q17 dived to $0.3 million from a gross profit of S$0.9 million in 4Q16. This is driven on the back of the continuing slump in revenue as explained above which was further exacerbated by pricing pressures especially for the factory operations which are operating well below breakeven utilization. For FY17, gross profit decreased 72% to S$1.4 million from S$4.9 million. The underutilization of the factory capacity and equipment and pricing pressures resulted in gross margin decreasing to 16.6% from 28.2% a year ago.

E&C segment

E&C segment's gross profit also plunged 99% to S$60,000 in 4Q17 from S$4.9 million in 4Q16 on the back of drop in revenue due to delay in timing of the delivery of project; fewer projects from the lackluster construction sector and costs over-runs on a few structural steel projects on hand. As a result, gross margin dipped significantly to 0.6% from 44.2% a year earlier. Similarly for the same reasons above, for FY17, gross profit fell 68% to S$3.2 million against S$9.9 million a year earlier.

Solar Energy segment

The Solar Energy segment continues to report a gross loss as it is still at its development phase coupled with projects earlier secured during the year had been delayed to 2018. The significantly better gross profit in FY16 was due to the contribution from the major SATS project in its maiden year.

Other Income

Other income decreased by 5% to S$ 0.76 million in 4Q17 due to the absence of unrealized exchange gain arising from the appreciating USD and depreciation of the Mongolian currency recorded in 4Q16.

For FY17, other income at S$2.1 million was 27% lower than a year ago due to the absence of the unrealized exchange gain arising from the appreciating USD and depreciation of the Mongolian currency recorded for FY 16 totaling S$0.84 million and lower interest income earned due to lower excess cash placed in fixed deposits and lower interest yield.

Selling, Distribution, Administrative and Other Operating Expenses

Expenses and Finance Costs

Total operating expenses increased 234% in 4Q17 and increased 78% in FY17 largely driven by the impairment charge on goodwill (included in "Other Opex"). S$9.6 million impairment was taken on the S$25 million goodwill arising from the acquisition of the Structural Steel Engineering business in 2014 as the business had been hit by slowing orders and compressed margins. The increase in selling and distribution expenses for FY17 is due primarily to the inclusion of modular construction business acquired in early February 2017 whose projects are mainly in overseas markets. Administrative expenses increased 21% in 4Q17 due to the inclusion of the modular construction business. It increased 1% in FY17 despite the inclusion of the modular construction business due to the Group's continuing cost rationalization efforts during the year in the light of slow business activities of its CP and structural steel business. Other OPEX increased 441% in 4Q17 and increased 215% in FY17 due to the S$9.6 million goodwill impairment charge; bad debts provided for the E&C segment; the inclusion of the modular construction business and; unrealized foreign exchange loss incurred on the depreciating USD against the S$ for the overseas projects and the depreciating M$ against the S$ incurred by the E&C and Solar segments.

Finance Costs

Finance costs in 4Q17 at S$144,000 increased 260% compared with S$40,000 in 4Q16 due to higher borrowings incurred for the development of the new Hetat factory. Similarly for the same reason, finance costs in FY17 was S$246,000, compared with S$135,000 in FY16.

Share of Associates' Results

Share of loss of associated companies came in at S$256,000 in 4Q17 against S$108,000 a year ago largely attributable to the mini-hydro power projects of Aenergy which is still at its development stage. Share of loss of associated companies for FY17 was S$571,000 against a profit of S$257,000 as the final 2 units from the Heron Bay project was disposed at a loss in 1Q17 as reported in earlier quarter coupled with the higher loss from the mini-hydro power projects of Aenergy.

Financial Position and Cash Flow Analysis

Non-current assets increased S$17.5 million from S$111.3 million as at 31 December 2016 to S$128.8 million as at 31 December 2017. This was mainly due to:

  1. Increase in fixed assets of S$32.7 million arising largely from the redevelopment of the Hetat plant at 19 Tuas Avenue 20; the increase in valuation of S$6.2 million from the periodic revaluation of the CP property; the consolidation of fixed assets of newly acquired TLC JSC Vietnam of S$5.1 million; addition of S$10.3 million from Solar segment for the progressively acquisition of land for the Bangladesh solar project less the depreciation of Property, plant and equipment charged to the income statement in the financial year of S$3.5 million;
  2. Increase in Prepaid Land Lease of S$3.8 million in relation to factory land arising from the consolidation of the newly acquired TLC JSC Vietnam.
  3. Decrease of S$5.9 million in Goodwill arising from S$9.6 million impairment charge taken on the goodwill arising from the acquisition of Hetat Group in 2014 less the acquisition of TLC JSC Vietnam in February 2017 of S$3.7 million;
  4. Decrease in Investment in Associate from dividend received for the Heron Bay Executive Condominium project of S$13.5 million less the investment of S$1.1 million in Yokomori Singapore Pte Ltd for a 30% equity interest.

Current assets decreased S$13.5 million from S$137.3 million as at 31 December 2016 to S$123.8 million as at 31 December 2017. This was mainly due to:

  1. Lower cash and cash equivalents of S$21.7 million from fixed assets increase of S$26.5 million arising from the redevelopment of the Hetat factory and acquisition of land for the solar project in Bangladesh partially financed from term loan increased of S$13 million ; acquisition of modular business of TLC JSC in Vietnam of $$5.8 million and investment in joint venture with Yokomori of S$1.1 million ; working capital funding for inventory and works in progress for E&C projects including funding the financial year operating loss and dividend payment of S$1.7 million offset by improved collections from trade receivables; the receipt of S$10 million held previously in escrow from the sale of the RP business and S$14 million from dividend from associate company for the Heron Bay EC project;
  2. Lower trade receivables of S$7.4 million from collections of receivables and lower revenue for FY17;
  3. Higher other receivables of S$6.1 million largely from the receipt of escrow monies of $10 million previously held for the sale of the RP business and repayment of shareholder loans received from an associate company S$2.8 million less progress payments made for the Bangladesh solar project of S$16.6 million and Vietnam solar project S$1.9 million;
  4. Increase in inventories and work in progress of $10.5 million largely from the E&C segment in relation to the works in progress for the projects on hand.

Current liabilities of the Group increased S$16.0 million from S$22.7 million as at 31 December 2016 to S$38.7 million as at 31 December 2017. This was mainly due to:

  1. Increase in other payables of S$1.4 million from the amount held in escrow for the profit warranty arising from the acquisition of the modular business and advance deposits from lease rental;
  2. Increase in term loan from the drawdown of construction loan to finance the redevelopment of Hetat factory and revolving credit line to repay trust receipts due to banks;
  3. Increase of amount due to Non-Controlling Interests of S$4.1 million for its share of the Bangladesh's solar project under development.

Non-current liabilities of the Group increased S$1.6 million as at 31 December 2017 due largely to increase in deferred taxation from the periodic revaluation of the leasehold properties of the Group.

Shareholders' equity decreased to S$203.3 million as at 31 December 2017 from S$217.8 million as at 31 December 2016. The decrease was largely attributed to the loss for the financial year offset partially by the revaluation of the leasehold properties of the Group.

Non-controlling interests of S$2.9 million relates to the minority interests portion of Solar Energy segment and the newly acquired subsidiary of TLC JSC Vietnam.

During FY17, the Group recorded a net cash outflow of S$17.8 million from operating activities after using S$10.6 million for changes in working capital largely driven by working capital used for the modular construction and solar projects currently in progress and the balance largely for funding the FY17 operating loss.

Net cash used in investing activities amounted to S$17.9 million in FY17 mainly due to the construction in progress arising from the redevelopment of Hetat leasehold land; the purchase of land in Bangladesh for the Solar Energy segment and the payment in relation to the acquisition of TLC JSC in Vietnam offset partially by the S$13.7 million dividend receive from its investment and associate company.

Net cash generated from financing activities in FY17 was S$14 million derived from drawdown of bank loans for the redevelopment of Hetat factory and office building and funds received from non-controlling shareholders for their shareholding in part of the Group's business. After taking into account net foreign currency translation adjustments, the Group recorded a net decrease in cash equivalents of S$21.7 million to S$49.1 million for FY17.

Commentary

Notwithstanding the challenging conditions guided for the year, operating conditions in FY17 had been more difficult than expected resulting in the dismal results reported. The business landscape for FY18 is showing signs of improvement and on the back of some of earlier initiatives taken by the Group for the modular construction business and for solar energy segment which are gaining traction, the Group expects 2018 results to improve over the previous year.

On the back of a weakened prospect of the construction sector, the Group's engineering business in Singapore continues to face margin pressure in an increasingly competitive industry which had resulted in FY17 loss and the need to take impairment charge on goodwill. Management continues to take appropriate action to stay efficient and remain nimble in this difficult trading condition. For the Group's efforts to move into modular construction and explore overseas for growth in this segment, this business has successfully entered the New Zealand market with delivery of the first modular hotel in Christchurch to take place in 1H18. Following this, the Group's is cautiously optimistic that more modular contracts will follow with more adopters for the new technology.

For the Group's solar energy segment, the Group will focus on developing the 50MW Bangladesh project and target to commission the project in the 4th quarter of 2018 and at the same time seek to secure new orders for roof-top solar projects and reap value from existing projects on hand. Barring unforeseen circumstances, this segment is expected to be profitable for the Group.

With the gradual recovery of oil prices to sustain at above US$60, management is seeing some recovery in the marine, offshore oil and gas sector and improvement in demand for its corrosion prevention services. The Group expects the contribution from this segment to improve from 2017 but whether it can return to profitability remains uncertain. The Group will continue its cost rationalisation exercise and enhance productivity to maintain an appropriate and efficient cost structure while it focuses on delivering value from its improved orders.