Throughout the financial year that ended 30 June 2015, we witnessed the US economy growing gradually and its unemployment rates reduced. Although the US inflation rate had remained low, improving economic conditions in the US had given rise to a greater expectation of a possible US interest rate hike in 2015.
On the other hand, China, the world second largest economy, had been reporting slower growth and suffered from production overcapacity. Many steel mills were reported to have overstock of inventory. The Chinese government had even taken the surprise step of devaluing the Chinese yuan to stimulate exports as local consumption shown signs of weakening. The Chinese stock market was also hit by a series of sharp falls after reaching record highs recently. All of these signs are pointing to a weaker Chinese market in the near term.
European markets had not fully recovered from the sovereign debt crisis and only managed to work out a rescue package for the failing Greek economy lately. Other serious geopolitical conflicts in Middle East were also hurting the global economy. Economies nearer home were affected by the strengthening of the US dollar against their own currencies and in some countries, tense political situation created uncertainties for the local markets. Over the last year, regional and local shipyards received much fewer contracts for new vessels. There was poor demand for new vessels as the oil & gas industry had slowed down due to the oil glut and lower manufacturing output had led to reduced shipping traffic. Shipyards kept themselves busy by working on earlier orders secured.
Pipes, fittings and structural steel
Against the backdrop of these macro-economic and global developments, it was a challenging and tough year for the Group. Most of its product categories namely structural steel products, pipes and fittings were affected by the slowdown in activities of its customers. Market demand softened over each successive reporting quarters and competition became more intense. The decline in demand for structural steel products, particularly steel plates, was more pronounced during the year. Our subsidiary, Hoe Seng Huat Pte Ltd (‘Hoe’) which sells structural steel products is most affected by this market downturn.
Many of its shipyard, oil & gas customers bought progressively less over the quarters and some regional shipyards were further affected by the weakening of their local currencies. This led some customers to face difficulties in making payment or running into cashflow problems. As such, the Group had made provisions for doubtful debts of $1.9M against identified customers.
With consecutive quarters of declining sale volume and dim outlook for the shipbuilding and oil & gas sectors, demand for structural steel products is not expected to improve for the near to middle term. The poorer forecasted demand would translate to weaker future streams of cash inflow. Management evaluated that the net present values of these future streams of cashflow could not support the book value of the assets of the business unit. The associated goodwill of $4.6M which arose when the business was acquired in the past was deemed to have been impaired as a result, hence the Group decided to write it off during this financial year.
As the demand for structural steel products, pipes and fittings dwindled, competition became more intensified which drove selling prices downward. The fall in selling prices precipitated an exercise to write down affected stocks to net realizable value. Together with identified obsolete items, the Group made a provision for inventory write-down of $3.3M for the financial year ended 30 June 2015.
General Hardwares & Properties
The Group’s General Hardware business however turned in a slightly better performance than last financial year. It contributed $7.4M in external sales to the total turnover and had remained profitable. Though small in size, the Group would be exploring ways to increase contribution from this business segment in the coming financial year.
Rental from properties served as another income stream to the Group and was fairly constant (see chart). The redevelopment of the site at 6 Kim Chuan Drive into a light industrial building went on smoothly during the financial year and it obtained its Temporary Occupation Permit on 24 August 2015. Marketing by appointed agent would soon begin although the weak property sentiment might affect the take up rate in the short term. Nevertheless, we would be looking forward to contribution to rental income from this property in the new financial year.
The Group’s revenue in FY15 declined about 28% to $83.7M from $116.6M as a result of further weakening of market demand for structural steel products, pipe and fitting products. Gross profits also fell to $11.2M from $18.7M due to stiff competition arising from weak demand environment and an inventory write-down of $3.3M.
Other operating income mainly comprised interest and rental income, remained stable at $1.3M (FY14: $1.2M) despite severe market fluctuations in the recent months. It would continue to monitor the composition of the available-for-sale financial assets to supplement its trading income. Majority of these assets were managed by professionals.
Other losses arose mainly due to the goodwill written off during the year. The amount of $4.6M represented the goodwill arising from the purchase of assets of the structural steel business.
With lower sales and the Group reporting a net loss, it had reduced the provision of staff incentives for the year. This reduced our staff cost to $7.5M from $8.5M. With no major addition of fixed assets and construction still ongoing at 6 Kim Chuan Drive, depreciation for FY15 remained unchanged at $1.7M (FY14:$1.7M).
Although the Group reported lower turnover for FY15, other operating expenses increased to $8.0M from $6.8M mainly due to provision of doubtful debts of $1.9M. The weak market and poor outlook had taken a toll on some customers serving the shipbuilding, oil & gas sectors. As the Group had begun to scale down its inventory purchases since the last financial year and paying as quickly as it could, it had kept financing expenses arising from the utilization of bank facilities down. The finance cost represented expenses incurred of $81K (FY14:$7K) because of exchange losses arising from bank facilities utilized for the purchases.
With the writing off goodwill of $4.6M and provision for doubtful debts of $1.9M and adjusting for tax benefits, the Group reported a net loss of $8.0M for the financial year ended 30 June 2015.
Despite reporting a net loss for the year, the Group’s balance sheet remained healthy with a strong cash holding of $44.3M (FY14:$50.0M) and total current assets of $114.8M (FY14:$142.5M) exceeded its total current liabilities of $6.9M (FY14:$14.2M). The Group would continue to manage its inventory purchase programme to ensure its stock configuration would be suitable to market needs and not overly exposed to price fluctuations.
The strong balance sheet would enable the Group to weather out the poor market outlook while allowing it to seize opportunities that might arise within the steel business or beyond.
The Group is proposing a final tax exempt dividend of 0.1 cent per share for the financial year ended 30 June 2015 subject to shareholders’ approval at the coming AGM.
Lim Kim Thor
Co-Chief Executive Officer