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Extracted
from Annual Report 2011
On Behalf Of The Board Of Directors, I Am Pleased To Present The
Annual Report And Audited Financial Statements Of SILK Holdings
Berhad For The Year Ended 31 July 2011.
FINANCIAL PERFORMANCE
SILK Holdings Berhad ("SHB" or "the Group") recorded a loss
after tax and minority interest of RM 11.24 million for the year
ended 31 July 2011. The result is below the profit after tax and
minority interest of RM 10.03 million recorded by the Group
for the year ended 31 July 2010. On the face of it, this result
may give the impression that there has been a regression in
performance. However, when examined closely, it will be noted
that top-line performance for the year has actually improved, as
illustrated by the 10.6% increase in revenue for the financial year
to RM 247.73 million from RM 223.94 million recorded in the
previous financial year.
The Group's earnings before interest, taxation, depreciation and
amortisation ("EBITDA") of RM 129.39 million for the financial
year ended 31 July 2011 also surpasses the EBITDA of RM
124.33 million recorded in the previous corresponding period.
These clearly highlight that there have been improvements
achieved at the operating level.
In addition, further examination will reveal that the final bottomline
performance was adversely impacted by the adoption of
the new IC Interpretation 12 in compliance with accounting
standards, which applies to all service concessions. This has
resulted in a 45.1% increase in amortisation being recognised
for the Group's highway development expenditure, from RM 7.3
million to RM 10.59 million during the period under review. As a
follow-on, SHB also had to change its accounting policies with
respect to expenditures on heavy repairs to comply with FRS
137. This resulted in a provision for future expenditure having to
be made during the financial year.
For the financial year ended 31 July 2011, the Group also had
to account for a 62.7% increase in depreciation amounting
to RM 33.37 million and a 64.1% increase in finance costs
amounting to RM 27.76 million at its Oil & Gas Support Services
Division, brought about by the entry of new vessels into its fleet.
The depreciation and amortisation charges, although having a
significant impact on the Group's bottom-line, are essentially
non-cash movements. The increase in finance costs meanwhile,
is expected given the Group's fleet renewal programme. The
previous year's performance also reflected the gains arising from
the disposal of 2 vessels which contributed RM 21.9 million to
the EBITDA.
Notwithstanding the dip in Group performance, the Highway
Infrastructure Division continues to make strides with its financial
performance. Revenue for the Division improved to RM 65.04
million compared to RM 50.95 million recorded for period ended
31 July 2010. The Highway Division enjoyed increased EBITDA
of RM 51.53 million in the financial year under review, compared
to RM 38.95 million recorded in the previous financial period, an
increase of 32.3%. The improvement in revenue and EBITDA
has translated into significantly reduced after-tax losses, where
the Division recorded loss for the year of RM 19.08 million, a
reduction from the RM 27.96 million loss for the year recorded
previously.
The Oil & Gas Support Services Division recorded improved
revenue of RM 182.69 million from RM 181.32 million recorded
in the previous corresponding year. This represents a marginal
improvement of 0.76% over the performance recorded
previously. Given the prevailing soft conditions in the market
for the supply of offshore marine support services for much of
the period under review, the top-line performance put in by the
Division is commendable.
The Oil & Gas Support Services Division recorded an EBITDA
of RM 78.24 million in the financial year under review compared
to RM 90.74 million recorded in the previous financial year.
The drop in divisional EBITDA is due to a 92.1% decline in
miscellaneous income, primarily attributed to the absence of
any vessel disposals during the financial year under review. A
massive increase in depreciation and amortisation charges of
RM 13.41 million to RM 35.82 million weighed down divisional
profit after-tax and minority interest to RM 8.89 million for the
financial year ended 31 July 2011, compared with RM 26.57
million in the previous corresponding period. This represents a
66.5% decline in profitability.
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OPERATING CONDITIONS
Highway Infrastructure Division
The Highway Infrastructure Division experienced steady traffic
growth during the financial year under review, continuing the trend
set for the last few years. This increase in traffic has consequently
led to improvements in its operational performance.
The concession operated by Sistem Lingkaran Lebuhraya Kajang
Sdn Bhd recorded total traffic volume of 45.4 million vehicles
for the period January until December 2010, a 17% increase
over the total traffic volume of 38.8 million recorded a year
earlier. Average Daily Traffic Volume ("ADTV") for January until
December 2010 improved to 124,404 vehicles per day, which is
also a 17% improvement over the ADTV of 106,241 vehicles per
day recorded in the previous calendar year.
Total traffic volume for the financial year under review also
improved by 17% to 49.5 million vehicles from 42.3 million
vehicles recorded in the previous financial year. ADTV for the
financial year ended 31 July 2011 improved to 135,728 vehicles
per day, which is a 17% improvement over the ADTV of 115,987
vehicles per day recorded in the previous financial year.
In the first 7 months of the calendar year 2011, there has been
further marked increase in traffic performance. The ADTV for the
period January to July 2011 stands at 139,955 vehicles per day.
The increase in traffic plying the highway is in part due to SHB's
continuing efforts to raise public awareness of the highway,
particularly that it serves as a time-saving and convenient linkage
to existing highway networks. The Board is extremely pleased
with this trend and is confident that the Division will be able to
show similar improvements in the current financial year.
Oil & Gas Support Services Division
Despite prevailing soft conditions in the market throughout
much of the previous 12-months, the Group's Oil & Gas Support
Services Division continues to remain market competitive.
Utilisation rates continued to be reasonably robust, at above the
industry average of 80%.
During the period, the Division via Jasa Merin Sdn Bhd ("Jasa
Merin") continued to pursue opportunities with vigour, capitalising
on the value proposition offered by Jasa Merin's safety track
record, availability of vessels for deep water operations and young
average fleet age. The approach adopted was appropriate, as
during the financial year under the review, the Division managed
to secure six new long-term charters and had three existing
charters renewed. The majority of these were secured towards
the end of the financial year, and therefore its impact will only be
felt in this current financial year onwards.
Despite the competitive market for the supply of offshore
support vessels ("OSVs") during the financial year 31 July 2011,
the Oil & Gas Support Services Division continued to enjoy
reasonably good performance. Overall profitability was affected
by an increase in finance costs, depreciation and amortisation
charges amounting to RM 63.58 million compared to RM 39.33
million previously. However, this increase in expenses is within
expectations, in line with the Division's fleet expansion and
modernisation program.
Notwithstanding the decline in profitability, the Division continues
to be recognised as a trusted offshore marine support services
provider, winning the Bronze Award from Petronas Carigali Sdn
Bhd's Development Division, for its good health, safety and
environmental ("HSE") performance in the year 2010. Out of the
five recipients, Jasa Merin is the only offshore support vessel
provider to have won the award for 2010. The entire Group is
extremely pleased and proud of this recognition and will continue
to ensure safety remains a priority in how it operates.
CORPORATE DEVELOPMENTS
SILK has during the course of the period under review, carried out
various strategic and tactical initiatives aimed at strengthening
the foundation for future growth.
Continuation of the fleet renewal programme
In line with the Group's strategic objectives and to ensure the
Oil & Gas Support Services Division is able to continue to meet
customer expectations, Jasa Merin continued with its renewal
and replacement programme for its Offshore Support Vessels
("OSVs"). During the financial year under review, Jasa Merin
launched three new vessels and took delivery of four new
vessels into its fleet. Of the four vessels, two are capable of
operating in deeper waters, which will be a positive factor, as
more exploration works move to deeper waters.
All four vessels delivered during the financial year are now fully
operational, bringing the total fleet size to 14 owned vessels.
The new vessels have been deployed to their respective
charter clients and will be contributing towards the company's
performance in the current financial year.
PROSPECTS
Highway Infrastructure Division
The Division continues to have good growth prospects with
increased awareness of the connectivity it provides to the
adjacent network of highways. Given this, efforts are currently
underway to further improve the highway's traffic flow via better
signage at critical intersections and enhancing cooperation with
other highway operators.
At the operating level, efforts are on-going to continue to contain
and manage operational costs, including detailed identification
of critical and non-critical costs and optimising of highway
maintenance works. Moving forward, the Highway Infrastructure
Division is expected to incur accounting losses in the immediate
to medium term, albeit on a declining trend, as the traffic volume
increases and its borrowing cost is further trimmed down.
Irrespective of this, it is expected to remain cashflow positive and
maintain its operational profitability as a result of the restructuring
of the long-term debt, whereby the Sukuk Mudharabah obligation
payments until January 2015 will be limited to the available cash
flow generated from the highway.
Despite the efforts to contain costs, there remains some concern
with respect to regulatory actions that could have a significant
impact on the Division's bottom line. The Division is not averse to
regulatory changes that enhance utility to road-users, promote
safety as well as improve transparency and investor protection.
However, it is mindful that some regulatory changes can have a
significant impact on the Division's overall financial performance
despite there being no drop in actual operating performance.
One of these regulatory actions, in the form of changes to
accounting rules has already made a significant impact on the
Division's accounting performance for the period under review.
Although the changes in themselves do not have an impact
on the ability of the business to generate cash, it nevertheless
provides an additional consideration when evaluating operational
strategies.
In view of the impact that regulatory changes can have on
bottom-line performance, the Division aims to maintain a close
view of prospective regulatory changes, particularly those that
do not directly improve utility to road-users or investors.
Oil & Gas Support Services Division
The Fukushima incident in Japan earlier this year has raised doubts
about the long-term safety of nuclear energy. As such, the use
of hydro-carbon products as primary source of fuel is expected
to continue. Consequently, demand for these products will likely
spur an increase in exploration and production ("E&P") activities.
Malaysia, being one of the largest oil and gas producers in South
East Asia and one of the largest global exporters of liquefied
natural gas, is also likely to follow this trend. An increase in E&P
activities, particularly offshore, will drive demand up for offshore
marine support services. However, in order to fill this demand,
the oil majors will subject operators to stringent requirements,
particularly with respect to safety track record.
The new charters awarded to the Division, were awarded in part
due to the excellent safety and delivery track record of Jasa
Merin. In addition, the fact that Jasa Merin operates a fairly young
and modern fleet resulting from the on-going fleet renewal and
replacement programme instituted, has also meant it is able to
keep up with changing requirements and the increasingly higher
specifications required by charterers.
The addition of the new vessels to the fleet and the company's
established track record provides Jasa Merin with the ability
to remain competitive and be able to provide compelling value
proposition to current and prospective customers. As such,
barring any unforeseen circumstances, this Division is expected
to continue to contribute positively to the Group in the current
financial year.
That said, the Board is mindful of the dynamic nature of this
industry. One of the shifts being witnessed with respect to
offshore exploration is the move away from shallow waters to
deeper waters and more remote fields. The hardware, technology
and expertise required to be successful in this environment, not
to mention financial resources required, will undoubtedly be
different. These bring a set of unique challenges to the offshore
marine support services operators, which will require them to be
more agile and proactive in their plans going forward.
As such, the Division has started to study and explore
opportunities for collaboration to supplant gaps in the Division, as
well as institutionalise the capacity to alter strategies as business
conditions change. This will enable it to continually adapt to
changes in the business landscape. With these in place, we are
confident that the Division will be better prepared to "ride out"
future challenges.
DIVIDENDS
In order to continue building the foundations for the Group so
as to enable it to achieve long-term and sustainable growth, the
Board of Directors are not able to recommend the declaration
of any dividend for the financial year ended 31 July 2011. With
improved operating and financial performance in the future, and
sustainable growth, the Board will revisit and review this position
for the benefit of its shareholders.
ACKNOWLEDGEMENT
On behalf of the Board of Directors, I wish to extend our sincere
appreciation to the Group's management, staff and employees,
at all levels and across the various functions. The Board is indeed
appreciative of the efforts shown by the Group staff throughout
the financial year. It is my hope that the entire SHB family will
sustain this level of effort to propel the Group further forward.
My sincerest gratitude also goes out to our Board of Directors for
their vision and counsel in guiding SHB forward. The contribution
of the Board to SHB's transformation is also deeply appreciated.
It is hoped that the Board will continue to be committed to the
Group as it charts its way forward.
I would also like to take this opportunity to convey the Board's
appreciation to all our customers for their continued support. The
Group's progress is in no small part a reflection of this support.
It is our sincere hope that our customers continue with us for
the foreseeable future. Likewise, I would also like to thank the
Group's bankers and financiers for their continued trust in SHB
and its plans for the future.
The Group's progress is also partly owed to the various regulatory
bodies and Governmental agencies entrusted to oversee the
industries the Group operates in. Therefore it is appropriate that
I also extend my gratitude to these bodies.
Lastly, on behalf of the Board, I would also like to convey our
gratitude to all our shareholders, who collectively have played a
significant role in enabling the Group to complete its turnaround
from the difficulties faced in previous years. I sincerely thank you
all for the support and hope that you will continue to support the
Board in its objective to take the Group forward.
Thank you.
Dato' Mohammed Azlan Bin Hashim
Executive Chairman
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