General Description of the Group’s Business
The Group is principally involved in manufacturing and trading of office furniture as well as property development. The Manufacturing Division started in 1976 and has grown over the 40 years to be one of the leading office furniture manufacturers in Malaysia, providing workspace solutions to customers nationwide and internationally. The Manufacturing Division owns and operates three manufacturing plants in Rawang, Selangor.
The Group diversified into property development business in recent year to broaden its revenue base and has launched its maiden property development project, Damai Vista condominium, in the current year.
The Group’s revenue for the year ended 31 December 2016 (“FY2016”) was RM84.3 million, a decrease of RM8.2 million or 9% as compared to RM92.5 million reported in the previous year. The lower revenue was mainly due to stiff competition from seating and steel products, especially in the domestic market coupled with lower project volume for system furniture products in the export market. However, the decrease in revenue from the aforementioned markets was partially mitigated by higher revenue generated from OEM/ODM products.
Cost and Expenses
Total cost and expenses before finance cost for FY2016 amounted to RM79.8 million, a decrease of RM7.6 million as compared to RM87.4 million reported in the previous year. The decrease was mainly attributable to the following items:
- Cost of sales decreased by RM7.9 million to RM55.8 million as compared to RM63.7 million reported in the previous year, the lower cost was in tandem with the lower revenue while average gross profit margin improved from 31.1% to 33.7%.
- Administrative expenses increased by RM0.7 million to RM12.9 million as compared to RM12.2 million reported in the previous year. The increase was mainly due to the increase of RM1.4 million in net allowance for doubtful debts and bad debts written off, partially mitigated by lower other administrative expenses of RM0.7 million derived from cost saving initiatives implemented. Allowance for doubtful debts of RM2.0 million were made in FY2016 on debts overdue for more than 12 months. More stringent credit control measures have been implemented in 2017 to mitigate similar risk and the Management is following up closely with the relevant customers for recovery.
- Selling and distribution expenses decreased by RM0.4 million to RM11.2 million as compared to RM11.6 million reported in the previous year, mainly due to decrease in variable expenses directly related to revenue.
Other income for FY2016 was RM1.4 million, an increase of RM0.7 million as compared to RM0.7 million reported in the previous year mainly attributable to higher foreign exchange gains of RM0.6 million resulting from strengthening of foreign currencies against the local currency.
Interest expense and other finance costs for FY2016 was RM1.7 million and RM0.2 million respectively, both maintained at the same level as reported in the previous year.
The Group’s tax expense for FY2016 was RM0.03 million as compared to RM1.3 million reported in the previous year. The lower taxation was mainly attributable to recognition of RM1.0 million deferred tax assets in the current year.
Profit Attributable to Equity Holders of the Company
The profit attributable to equity holders of the company for FY2016 was RM3.4 million, an increase of RM1.3 million as compared to RM2.1 million reported in the previous year, mainly due to higher profit after tax.
Liquidity and Capital Resources
Cash and cash equivalent of the Group increased by RM4.4 million, from negative RM4.6 million as at 31 December 2015 to negative RM0.2 million as at 31 December 2016. The increase was mainly attributable to the followings:
- Net cash used in operating activities of RM13.1 million mainly for financing the property development cost incurred during the year.
- Net cash used in investing activities of RM0.6 million mainly for purchase of plant and equipment by the Manufacturing Division.
- Net cash generated from financing activities of RM17.8 million mainly from drawdown of bank loans for financing the property development cost.
The gearing ratio of the Group as at 31 December 2016 was 53% as compared to 35% as at 31 December 2015, the increase was due to higher borrowings during the current year for financing the property development cost. The gearing ratio is calculated as net debt divided by total equity. Net debt, which is calculated as total borrowings less deposits, short term funds, cash and bank balances.
Total assets of the Group as at 31 December 2016 was RM157.3 million as compared to RM126.5 million as at end of last year. The increase of RM30.8 million was mainly attributable to the movement of the following assets:
- Property development cost increased by RM36.2 million in line with construction works of Damai Vista Project progressed. During FY2016, finance cost of RM1.0 million (2015: RM0.4 million) was capitalised as property development cost by the Group.
- Property, plant and equipment decreased by RM4.1 million mainly due to current year depreciation of RM4.9 million.
- Trade receivables decreased by RM4.0 million due to increase in allowance for doubt debts of RM1.2 million coupled with lower revenue in current year, while gross debtor turnover days maintained at the similar level as the previous year.
Total liabilities of the Group as at 31 December 2016 was RM82.4 million as compared to RM55.4 million as at end of last year. The increase of RM27.0 million mainly attributable to the movement of the following liabilities:
- Bank loans increased by RM21.4 million mainly due to drawdown of banking facilities during the year to finance the property development cost.
- Trade and other payables increased by RM10.0 million mainly due to the increase in property development activities during the year.
- Bank overdraft decreased by RM2.9 million mainly due to full repayment of overdraft facility by Property Division in accordance with facilities agreement with bank.
The Group’s profit before interest and tax (“PBIT”) maintained at RM5.5 million, the same level as in the previous year.
Manufacturing Division’s PBIT of FY2016 was at RM7.9 million, an increase of RM0.5 million as compared to RM7.4 million reported in the previous year despite a lower revenue was generated. This was mainly attributable to average gross margin improved through enhanced efficiency and effective management of operating costs.
The Management has tracked and monitored the cost of production and foreign currency fluctuations in 2016 and developed a competitive product pricing strategy, taking into consideration of overall market competition.
The Product Committee has been having monthly meetings with two key objectives of improving the quality of existing products and brainstorming for new products. In 2016, the quality of existing products have been enhanced significantly with almost all product issues limited to orders prior to 2016.
In less than the normal gestation period of 24 months for a new product, a newly designed chair has been developed and showcased at the ORGATEC exhibition held in Cologne, Germany in October 2016. The new chair was officially launched in the MIFF 2017 exhibition in March 2017 and commercially available for sale thereafter.
Property Division loss before interest and tax was recorded at RM1.2 million as compared to RM1.1 million reported in the previous year. The increase of RM0.1 million was mainly due to higher selling and distribution expenses incurred during the year for the launching and marketing of Damai Vista Project, while revenue from the project is yet to be recognised in line with the revenue recognition policy complied with existing applicable accounting standards.
Damai Vista Project was officially launched in March 2016, the residential development project features 322 units of freehold condominium strategically located in Alam Damai, Cheras. This maiden property development project of the Group is managed by experienced team with proven track record in the property development industry.
Sales growth for the Manufacturing Division will remain focused on export market as the Management targets to capture the dormant businesses of existing export markets recovering from their economic situations in the past years.
India shall remain as one of the key market and the economic recovery in India since 2015 is expected to continue into 2017. India will introduce GST starting third quarter of 2017, it would have a significant impact on international trade of goods through the change in customs duty computation. The business community is awaiting details of change in customs and foreign trade policy as a consequence to introduction of GST.
Continuous efforts would be made to increase sales in the ASEAN region, especially Singapore, Vietnam and Thailand. Sales to customers in Indonesia and The Philippines are expected to improve in 2017, although sales had declined in FY2016.
The ODM programme launched in 2014 has resulted in consistent orders for office chairs and revenue growth from this market is expected to continue in 2017. With the capabilities to produce furniture components, OEM/ODM business is an added contribution to the Group with minimal capital cost outlay. The Management will continue to develop the OEM/ODM markets with existing customers from Japan.
Outlook of local property sector is challenging in the year ahead given the current economic environment and property related policies. The Management is focused on marketing Damai Vista Project and managing the construction progress to handover the project on time. With the wealth of industry experience and the long term prospect of the property market, the Management is confident that the Group will weather the short term uncertainties in the property sector.
Pressure on the Malaysia Ringgit is expected to continue into 2017 leading to higher cost of raw materials and final products. The Management will continue its efforts in improving production efficiency with focus on safety and health of the staff. Additional processes were implemented in all areas of production to improve productivity. Continuous process improvement will be introduced to minimise material wastage and optimise operational efficiencies.
Measures taken in the FY2016 has generated steady earnings for the Group and the Management will maintain similar approach going forward.
Dato' Sri Choong Yuen Keong @ Tong Yuen Keong
Group Managing Director