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 manufactures 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 2011 to broaden its revenue base.
The Group’s revenue for the year ended 31 December 2017 (“FY2017”) was RM63.5 million, a decrease of RM20.8 million or 25% as compared to RM84.3 million reported in the previous year. The lower revenue was due to stiff competition in all products range, namely seating, system furniture and steel storages as well as temporary disruption of India market in 2017, one of the main export destination. However, export to India shown some recovery in the fourth quarter.
Cost and Expenses
Total cost and expenses before finance cost for FY2017 amounted to RM63.7 million, a decrease of RM16.1 million as compared to RM79.8 million reported in the previous year. The decrease was mainly attributable to the following items:
- Cost of sales decreased by RM10.3 million to RM45.5 million as compared to RM55.8 million reported in the previous year, the lower cost was in tandem with lower revenue while average gross profit margin decreased from 33.7% to 28.4% mainly due to certain production overheads were fixed in nature while cost of raw material has risen.
- Administrative expenses decreased by RM3.9 million to RM9.0 million as compared to RM12.9 million reported in the previous year. The decrease was mainly due to the decrease of RM2.0 million in net allowance for doubtful debts and bad debts written off. In addition, other administrative expenses decreased by RM1.9 million benefited 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 FY2017 to mitigate similar risk and the doubtful debts were partially recovered in FY2017. Management is following up with the relevant customers for further recovery
- Selling and distribution expenses decreased by RM2.0 million to RM9.2 million as compared to RM11.2 million reported in the previous year, due to reduced overheads benefited from cost saving initiatives and decrease in variable expenses directly related to revenue.
Other income for FY2017 was RM0.9 million, a decrease of RM0.5 million as compared to RM1.4 million reported in the previous year mainly attributable to lower foreign exchange gain of RM0.4 million resulting from strengthening of the local currency against foreign currencies.
Interest expense for FY2017 was RM1.4 million, a decrease of RM0.3 million as compared to RM1.7 million reported in the previous year due to lower interest for term loan and finance lease resulting from instalment made during the year. Other finance costs for FY2017 was RM0.2 million, which has maintained at the same level as reported in the previous year.
The Group’s tax expense for FY2017 was RM2.68 million as compared to RM0.03 million reported in the previous year. The higher taxation was mainly attributable to de-recognition of RM1.7 million deferred tax assets in the current year as compared to recognition of deferred tax assets of RM1.0 million in previous year.
PROFIT / (LOSS) ATTRIBUTABLE TO EQUITY HOLDERS OF THE COMPANY
The loss attribute to equity holders of the company for FY2017 was RM3.6 million as compared to profit of RM3.4 million reported in the previous year, the loss was due to lower operating profit resulting from lower revenue coupied with higher taxation as explained above.
Liquidity and Capital Resources
Cash and cash equivalent of the Group decreased by RM3.5 million, from negative RM0.2 million as at 31 December 2016 to negative RM3.7 million as at 31 December 2017. The decrease was mainly attributable to the followings:
- Net cash used in operating activities of RM8.5 million mainly for financing the property development cost incurred during the year.
- Net cash used in investing activities of RM0.4 million mainly for purchase of plant and equipment by the Manufacturing Division.
- Net cash generated from financing activities of RM5.1 million mainly from proceeds of private placement, advance proceeds from sale of property development units and bridging loan draw down off set with repayment of bank loans, interest payment and fixed deposit pledged for banking facility.
The gearing ratio of the Group as at 31 December 2017 was 59% as compared to 53% as at 31 December 2016, the increase was mainly due to higher debt financing during the current year for property development cost. The gearing ratio is calculated as net debt divided by total equity. Net debt, which is calculated as total borrowings and advance proceeds from sale of development units less deposits, short term funds, cash and bank balances.
Total assets of the Group as at 31 December 2017 was RM173.0 million as compared to RM157.3 million as at end of last year. The increase of RM15.7 million was mainly attributable to the movement of the following assets:
- Property development cost increased by RM25.4 million in line with construction works of Damai Vista Project progressed. During FY2017, interests of RM2.0 million (2016: RM1.0 million) and an apportionment of profit guarantee cost of RM0.8 million (2016: RMNil) were capitalised under property development cost by the Group.
- Property, plant and equipment decreased by RM3.8 million mainly due to current year depreciation of RM4.3 million
- Trade receivables decreased by RM2.7 million due to lower revenue in current year, while gross debtor turnover days increased to 133 days as compared to 112 days of the previous year
- Cash and bank balance decreased by RM2.4 million due mainly to lower utilisation of bank borrowings as compared to last year.
Total liabilities of the Group as at 31 December 2017 was RM97.2 million as compared to RM82.4 million as at end of last year. The increase of RM14.8 million mainly attributable to the movement of the following liabilities:
- Trade payables increased by RM9.1 million mainly due to the increase in progress billings from property development while no revenue was recognised during the year to offset the progress billings.
- Other payables increased by RM7.8 million mainly due to the increase in payables related to property development activities during the year.
- Bank borrowings decreased by RM1.9 million mainly due to decrease in term loan resulting from monthly repayments made during the year.
The Group's profit before interest and tax ("PBIT") for FY2017 was RM0.6 million as compared to RM5.5 million reported in the previous year.
Manufacturing Division’s PBIT of FY2017 was at RM3.4 million, a decrease of RM4.5 million as compared to RM7.9 million reported in the previous year due mainly to decrease in revenue. In response to the stiff competition amid weaker market demand, the Management has adopted a more aggressive approach on product pricing in order to re-capture sales from all areas in the last quarter of 2017. The Management will continuously adopt the same strategy and measures the performance going into 2018.
Property Division loss before interest and tax was recorded at RM1.2 million, which was same level as reported in the previous year. The constructions works of Damai Vista project progressed as scheduled although revenue from the project is yet to be recognised in line with the revenue recognition policy complied with existing applicable accounting standards.
Export sale will remain as key contributor of the Manufacturing Division while greater effort would also be made in regaining the local market share. India shall remain as one of the key markets and the Management will continue to focus on the business from India. India business environment is expected to overcome the temporary disruption experienced in FY2017 and revived to the previous condition after the GST regulations simplified.
The Management will invest greater time and effort in neighbouring countries to increase sales in the ASEAN region, especially in countries that with rapid development policy and increasing establishment of Business Process Outsourcing centre.
The Original Design Manufacturer or Original Equiment Manufacturer (ODM/OEM) programme has contributed consistent orders for office chairs and revenue from this market is expected to continue in 2018. 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.
A newly developed range of business collaboration furniture was officially launched and introduced in the Malaysia International Furniture Fair 2018. With this new product range, the Manufacturing Division is able to expand beyond the conventional office environment and leading EURO brand into the hospitality set up such as hotel and airport.
Inflation of the raw material cost and higher direct labour expenses resulting from Malaysia foreign labour policy will continue to put pressure on production cost of the Manufacturing Division. The division is therefore driven to continue its efforts to improve productivity and optimise operational efficiencies
In regard to Property Division, construction works of Damai Vista Condominium will continue to progress as scheduled and as such the revenue recognition from the project is expected to contribute positively to the Group's 2018 financials.
Dato' Sri Choong Yuen Keong @ Tong Yuen Keong
Group Managing Director