Investor Relations - Corporate Review

GENERAL

During the financial year ended 30 June 2017
(‘FY17’), the Group continued to face weak demand
for its steel products primarily caused by the low oil
prices. Oil prices which had hovered below US$60
per barrel since early 2016 had resulted in drastic
reduction in demand for new oil exploration and
related assets for many local & overseas shipyards.
The sudden and rapid disappearance of these
orders had caused more shipyards, particularly local
shipyards, to face immediate financial and liquidity
crisis.
As a result, many of these businesses landed in dire
financial straits and defaulted on loan and interest
payments. They were forced to undergo painful
financial re-structuring in order for them to continue
and face the stark prospect of not being able to
recover.
The US Federal Reserve made 2 further rate hikes
since raising interest rate in December 2015. These
rate hikes were made in response to the growing US
economy and inflation rates and caused the US dollar
to strengthen in the process. In general, the global
economy growth was stable with oil prices fluctuating
within a tight range.
After the surprise UK vote to exit the Eurozone, the
world witnessed the election of political novices
in Mr. Donald Trump to the US Presidency and
Mr. Emmanuel Macron as the French President.
With the new US administration still unable to find
solid footing and faced with some initial setbacks in
delivering campaign promises, US dollar had lost
some of its strength gained earlier but US economy
and its stock market had remained relatively resilient.
Other global economies like China, Japan and
Eurozone had continued with steady growth. The
Euro dollar had been gaining strength progressively
despite ongoing negotiations with UK on their exit
from Eurozone. The positive sentiment emanating from
the up and coming Germany elections would likely to
strengthen the Euro dollar further.
08 HUPSTEEL LIMITED
ANNUAL REPORT 2017
OPERATION REVIEW
Large scale military actions in Middle East countries
were reported to be effective in regaining territories
lost to the terrorists. Geopolitical tensions in Asia
had also escalated with North Korea constantly
conducting missile tests and military actions taken
against terrorists recently in the Philippines.

The financial year ended 30 June 2018 (‘FY18’) started off with the continued poor market demand for its steel products and looming trade wars between the two largest economies in the world.  

Measures to impose tariffs were announced and counter proposed between various parties including the Eurozone & China with the United States. The path to protectionism would not likely to end any sooner. World trade would definitely suffer in the process although remains contain thus far. However, smaller economies like Singapore would not be insulated from these measures and would suffer its effects soon unless the trade war ends quickly.

As US interest rates were hiked during the year and would continue to rise in the coming quarters, local economies could feel the weight of rising costs and the effects of the strengthened US dollars. All of these would be detrimental to global trade though only beneficial to and working in favour of US growth.  

These trade disputes and protectionism measures had heightened political tensions not only between traditional competitors but even with long term strategic alliances. Repercussions from such actions might hurt global trade severely if they were not resolved amicably between the parties. With our small economy, largely dependent on free trade, would certainly be among the first to be affected.

While trade tensions casting a gloomy outlook on the world economy, oil prices had been steadily recovering amidst continuing disharmony among members of the Gulf States. The improving oil prices allowed players in the oil & gas sector to begin or revive projects which in turn stimulated demand for steel products in the 2nd half of the Group’s financial year ended 30 June 2018. There was a relatively strong pick-up in demand after the Chinese New Year holidays and looked to be able to sustain itself beyond the end of this financial year.

The optimism in the oil & gas sector following the recovery in oil prices had yet to spill over to another important sector that the Group served, namely marine and shipbuilding sector. Small pockets of increased activities in the domestic market could be felt but no sizeable demand had been detected yet. This sector would probably need more time and broader market confidence to recover.

The steadily improving oil prices and rises in raw material costs for steel production had caused prices of steel products to increase over the last few quarters. These rises were also fuelled by improving demand from US market which indirectly might have led to the US authorities to imposing duties on these products recently. This development might in turn affect how steel products would be distributed and their prices in the next few quarters.  

The Group was exposed to these developing global trends with operations remained in a depressed state in the first half of the financial year but surged forward in the second half, registering better turnover.  

There were also major political developments that might indirectly affect the Group and its operations. The much anticipated meeting between President Trump and North Korea leader, Mr Kim had contributed to a more peaceful environment for the region and world. Difficulties in the negotiations for United Kingdom to leave the Eurozone posted unknown consequences for many. However, the government change in Malaysia would expect to impact the local market more directly as some major infra-structure projects had become stalled. 

PIPES, FITTINGS & STRUCTURAL STEEL

Demand for pipes and fittings had been improving in the 2nd half of the financial year in tandem with rising oil prices. There were more oil & gas projects and related activities to supply to as oil prices recovered. This increase in activities was more evidently contributed by regional markets which in turn boosted local demand.

While demand for pipes and fittings had improved during the financial year, demand for structural steel products did not enjoy recovery in the similar magnitude. This was mainly due to slower recovery in the shipbuilding sector while performance of the construction sector was lackluster throughout the financial year. As the group of products performed differently in response to an uneven sectoral demand, the Group worked hard to maintain margins to safeguard its operations and moved forward in an ever challenging environment made complex by new trade restrictions and sanctions.

It was mentioned in the operation review segment that the Group also had to operate in an environment of rising steel prices and faced allocation issues from the mills as the US market was consuming larger quantities as it recovered. However, the recently announced US tariffs on imported steel products might divert the products to other markets and affect prices.

GENERAL HARDWARE & PROPERTIES

Business volume from General Hardware in FY18 had remained steady at $6.4M (FY17:$6.7M). It had remained an integrated part of the Group and had been consistently contributing to profits over the years. In the last financial year, it was able to secure new products and would begin to offer them to its customers in the coming year. This would increase its volume and profit contribution to the Group as well. Fierce competition remained the toughest challenge the business had to face in the market in addition to the tense global economic conditions.

The Group was well positioned to lease out its property at 6 Kim Chuan Drive to a local operation of an internationally renowned company during the financial year. The lease period was for 5 years from January 2018 with an option for renewal. The monthly rental had served to supplement the rental income for the Group for FY18.

During the financial year, the Group had also decided to re-develop its property located at 38 Genting Lane (SG171205OTHRWL1K dated 5 Dec 2017). It would erect a 8 storey industrial building at the site by the year 2020 at an estimated costs of $9.3M. The residual costs of the old building were written off in the results for the period ended 31 December 2017. It will review all available options it has with this new property when it is ready while taking into consideration of prevailing market conditions in the property sector then.

In addition, the Group managed to sell its shop unit at 359 Jalan Besar via auction. The profits of about $4.5 million arising from the sale were more than sufficient to cushion the write off of building costs of 38 Genting Lane and enabled the Group to remain profitable in the first half of the financial year despite weak market demand for its steel products.

With property market returning to favour and increasing number of en-bloc sale being completed during the year, before the sudden imposition of cooling measures in July 2018, the Group could look forward to participate in en-bloc activities for some of the properties that it is holding.

FINANCIAL REVIEW

With the last 2 quarters of FY18 reporting better turnover than the first 2 quarters, annual revenue improved 22% to $59.7M from $49.1M when compared with a year ago.

As a result, gross profit for the year also rose to $14.0M from $12.2M with improved volume. However gross profit margin for the year moderated to 23% from 25% due to higher project sales, commanding lower margins than spot sale, during the second half of FY18. The lower margin was also caused by the strengthening of US dollar resulting in higher costs of inventory sold.

Other income of $2.1M (FY17:$2.0M) was mainly comprised of interest and dividend income earned from financial assets held by the Group during the year and rental income earned. The increase was mainly due to new rental income stream from the successful leasing out of 6 Kim Chuan Drive while compensating for the lower interest and dividend income earned during the year.

Other gains of $2.1M made in FY18 (FY17: $466K loss) were mainly contributed by the gain from the disposal of a shop unit ($4.5M) and the writing off of building costs of 38 Genting Lane ($2.2M).

With better profits reported in FY18, the management would like to recognize the effort and sacrifice the staff had made over the last few years when the market was in the doldrums. Hence it had provided more incentives causing staff cost to rise to $7.4M from $6.6M.

Other operating expenses in FY18 were higher at $4.5M compared with $4.3M incurred in FY17. These expenses were higher, in line with higher revenue.

After including an one time net gains from property transactions, the Group reported a net profit after tax of $4.7M for FY18 (FY17:$0.7M). If the effect of these property transactions was discounted, the profits after tax from ordinary activities of the Group would be $2.3M for FY18.

Trade and other receivables rose to $21.0M from $16.4M while inventories balance increased to $32.4M from $28.0M. These increases in balances reflected the higher volume achieved in the 2nd half of FY18 and the higher purchases to meet the improving volume.

The Group remains in a net cash situation rendering it to be in a strong balance sheet position. This will enable it to respond to the challenging market fraught with uncertainties.

CORPORATE

The Group is proposing a final tax exempt dividend of 1 cent per share and a special dividend of 1 cent per share for the financial year ended 30 June 2018 subject to shareholders’ approval at the coming AGM. This is in addition to an interim dividends of 2 cents per share paid on 14th March 2018, making a total of 4 cents per share for FY18. This compared to total of 2 cents per share paid for the financial year ended 30 June 2017. 

 

LIM BOH CHUAN

CEO & MD
Chairman, Executive Committee