Management Discussion & AnalysisExtracted from Annual Report 2017
Salcon Berhad (“the Company”) is an investment holding company with principal activities in Engineering & Construction, Property Development, Technology Services and Others. The Company’s core business under the Engineering & Construction division is in the investment, design, construction, commissioning, operation & maintenance of water and wastewater treatment plants, Non-Revenue Water (NRW) Management & Controls and ancillary facilities. The Company has built a strong foothold in Malaysia, Thailand, Vietnam and Sri Lanka as a leading water and wastewater engineering company with more than 900 successfully completed water and wastewater projects since 1974
Besides its traditional water and wastewater business, as part of its portfolio optimization strategy, the Company has expanded into Property Development, Technology Services, Transportation and China Tourism e-commerce in the recent years.
In order to generate greater shareholder value and improve business performance, the Company and its Companies (“the Group”) grows its business via a 3-pronged strategy of strong project execution, optimising its business portfolio and establishing an appropriate risk profile. These key strategies in creating values are further elaborated in the Chairman’s Statement of the annual report.
Additionally, the Group is ever mindful of its role as a responsible corporate citizen and is cognizant of the fact that the sustainability initiatives derived from its businesses can bring about positive impacts to the communities and the environment in which it operates. As such, the Group constantly strives towards greater transparency and sustainability through good corporate culture and governance
Aerial view of Langat 2 Water Treatment Plant
For the year under review, the Group posted a 109% increase in revenues amounting to RM206.5 million in FYE 2017 compared to RM98.9 million in FYE 2016. This was mainly due to revenue contribution from the property division of RM100.7 million which was recognised when the rés280 SOHO property project in Selayang was completed in November 2017
However, the Group posted a higher loss before tax of RM34.8 million for the year as compared with a loss of RM11.7 million a year ago. These losses are primarily due to:-
Unrealised forex losses
The Group’s financial performance was affected by the appreciation of the Ringgit Malaysia against the US Dollar for the past year, which resulted in the Group recording a substantial unrealised loss of RM8.8 million from foreign currency translation.
Provision for one-off Legal Claim relating to sewerage contract in Sabah
The Group’s subsidiary, Salcon Engineering Berhad (SEB) was unsuccessful in a lawsuit against Terra Environment Management Sdn. Bhd. (formerly known as UG Management Services Sdn. Bhd.) resulting in the provision of a penalty sum of RM2.4 million. However, SEB has filed an appeal to the Court of Appeal and an application for stay of execution pending appeal in respect of the Judgement
Impairment Loss on Goodwill
Although the Group’s new venture in China e-commerce tourism started with excellent growth projections, the operating company namely Beijing Xinlian Yitong Technology Co Ltd ("BXYT"), was not able to capitalise on its tie-up with Alitrip and as a result, incurred high operating costs and low revenue contribution during its operation. In consideration of the potential impact on its future results and unsustainable competitive advantage, the Group recognised an impairment loss on goodwill of RM6.74 million. For the year under review, BXYT had made total loss after MI of RM0.6 million
Notwithstanding the above, the Group’s financial position remains healthy with total cash and cash equivalents of RM133.8 million whilst the Group’s gearing ratio remains low at 0.15 as at 31 December 2017 with borrowings totalling RM66.6 million
Engineering & Construction Division
Financial Highlights
The Engineering & Construction Division, which is driven by the Group’s subsidiaries, Salcon Engineering Berhad ("SEB") and Envitech Sdn Bhd ("Envitech"), recorded revenues of RM83.8 million during the year under review, a 0.8% increase from RM83.1 million in FYE 2016. This represents 41% of the total consolidated revenues for FYE 2017.
Despite the share of profit of RM13.6 mil from the Group’s 2 major projects namely Langat 2 Water Treatment Plant Project (Langat 2 WTP) and Langat Centralized Sewage Treatment Plant (Langat CSTP), the division recorded a loss of RM4.0 million in FYE 2017 compared to a profit of RM6.5 million in the previous year. This is mainly due to additional costs incurred for overseas projects and the provision of one-off legal claim as mentioned above
As at 31st March 2018, the Group’s total order book stood at RM1.3 billion comprising water and wastewater projects, both locally and overseas, with RM552.7 million balance of works to be carried out.
Operational Highlights
During FY 2017, the division successfully completed the upgrading of the Sg. Lebam Water Treatment Plant and Distribution System in Johor in September 2017 which involves the conversion of two existing tanks to the dissolved air flotation system to assist our client in reducing operational costs and increasing efficiencies.
Current major projects on hand include the following:-
In FYE 2017, the division remains active in securing new projects in Malaysia and overseas with a total of RM89.2 million worth of new water and wastewater contracts secured
In Malaysia, the division successfully secured nearly RM43.7 million worth of contracts from Pengurusan Air Selangor Sdn Bhd in relation to the state of Selangor's pipe replacement programme ie Package 8 (RM17.2 million), Package 6 (RM13.2 million) and Package 11A (RM13.3 million).
On the wastewater side, Envitech had a good start to 2018 when it bagged contracts totalling RM26.0 million from Jurutera Perunding Tegap Sdn Bhd for works related to the construction and upgrading of sewage infrastructure in Banting, Selangor and from China State Construction Engineering (M) Sdn Bhd for sewage infrastructure works for 2 blocks of 53 and 55-storey serviced apartment at Mukim Batu, Kuala Lumpur
The division is also active in overseas where the Group’s 25%- owned joint venture secured a water supply upgrading works contract worth 426.2 billion Vietnam Dong or RM77.1 million from Haiphong Water Joint Stock Company, the water authority of Haiphong City, Vietnam. The project commenced in early January 2018 and is expected to be completed in 24 months
Concession Investments Division
Vietnam Concession
The Binh An water concession located in Ho Chi Minh City, Vietnam has been contributing a consistent recurring income to the Group since it commenced operations in 1999. For FYE 2017, this division contributed a share of profit of RM4.8 million to the Group.
Property Development Division
Financial Highlights
The Property Development Division posted its maiden revenue of RM100.7 million with the successful completion of the rés280 development project in Selayang in November 2017. The rés280 development project itself has recorded profit after tax of RM5.3 million
However, the profitability of the division was affected by the lease rental payment of Belfield Crest in Kuala Lumpur, unrealised foreign exchange loss from monies held in AUD relating to our property development in Australia and the finance costs incurred in relation to the Eco Midtown in Johor, which resulted in a loss after tax of RM5.8 million in the division
Operational Highlights
The Group’s small office home office (“SOHO”) development project rés280 obtained the Certificate of Completion & Compliance (CCC) on 16 November 2017. In terms of sales, a total of 188 units of SOHO and 12 units of commercial lots translating to 68.5% of total sales, has been sold despite the slow-moving property market in Malaysia and also more stringent bank requirements on housing loan approvals. The division is currently intensifying its promotional efforts via an attractive buying scheme to market the remaining unsold units
In April 2017, the Group via its subsidiary Salcon Development (Australia) Pty Ltd had entered a Sales and Purchase Agreement with Fortune Quest Group Ltd, the subsidiary of Eco World International Bhd (EWI) to sell 80% of stake in the company, thus embarking on a collaboration with EWI to develop the freehold commercial land located at Melbourne, Australia into a project named “Yarra One”. The project comprises a 27-storey tower with 268 residential units complemented by a retail and office podium. It was launched in 2017 and the construction works is expected to commence in April 2018. As at today, 36% of units in Yarra One has been sold
In view of the adverse market conditions, the other property development projects on hand including Eco Midtown in Johor and Belfield Crest in Kuala Lumpur are currently on hold and under review.
Looking Forward
The division looks forward to sustained revenue and profit contribution via the rés280 project from the remaining units to be sold for the year ahead. Besides that, with the collaboration with EWI for the Yarra One project which has an estimated Gross Development Value of RM 776.0 million (AUD $253.6 million), the Group expects to recognise its share of profits upon completion of the project in year 2020
View of completed SOHO development project res280 at Selayang, Selangor
Other Divisions
Transportation
The Transportation Division which is spearheaded by the company’s subsidiary, Eco-Coach & Tours (M) Sdn. Bhd. ("EcoCoach"), has maintained a steady and stable performance, recording revenues of RM15.3 million, which constitutes 7% of the Group’s total revenue during the year under review.
During the year, Eco-Coach has added 27 vans and 15 MPVs to its fleet of vehicles to cater for demand for transportation services from its clients which include multinational companies such as Intel, Western Digital Media, Paramit and B Braun Medical. To date, Eco-Coach operates a total of 129 vans, 31 coaches, 20 MPVs, 8 limo services vehicles and employs 168 drivers to provide safe, reliable and comfortable transportation services to its customers in Kulim and Penang.
A unit of Double Decker Coach was launched recently for transportation services to Intel staff in early 2018.
Technology Services
Under the Technology Services Division, Volksbahn Technologies (M) Sdn Bhd ("VBT") recorded revenue of RM5.3 million, an increase of 178% compared to RM1.9 million recorded in the previous year. The higher revenue resulted in lower losses of RM1.2 million during the financial year under review
The improved performance is due to the increase in number of sites utilised at the stations by the various telecommunication operators resulting in increased revenue contribution from the site rental for shared infrastructure as well as bandwidth charges
Currently, the mobile operators which have already signed up with VBT include U Mobile Sdn Bhd, Celcom Berhad and Digi Telecommunication Sdn Bhd. VBT looks to extend its collaboration with other mobile operators such as Maxis, YTL Broadband, Webe and Symphonet Sdn Bhd.
During the year under review, VBT entered into a strategic partnership with YTL Broadband and Symphonet Sdn Bhd to provide their broadband services to retailers through VBT’s fibre optic backbone. VBT is currently working closely with both parties to secure buildings and property development for retail services in order to generate a new income stream
Sectorisation site survey at Gombak LRT station.
The income from this division is expected to improve progressively in the years ahead in tandem with the increase in number of sites at the extended Light Railway Transit (LRT) line. The division expects to commence the laying of fibre optics cable for the LRT line extension in Klang Valley in the first half of 2018
Solar Power Services
The performance of the Group’s subsidiary Salcon Power (HK) Limited was boosted by the income generated from the ongoing of electricity meter reading which resulted in revenue recognition of RM3.4 million and loss after tax of RM3.4 million respectively during the year under review compared to the revenue of RM0.6 million and loss after tax of RM3.8 million in the previous year.
China e-commerce Tourism
Operated by the Group’s subsidiary Beijing Xinlian Yitong Technology Co Ltd ("BYXT"), the China e-commerce tourism business was not able to leverage on its collaboration with Alitrip, a unit of the Alibaba group. In FYE 2017, the company had made loss after tax of RM1.2 million due to high operating expenses and no revenue contribution from the operation
As BXYT could not sustain its competitive advantage and in order to ensure efficient management of the Group’s resources and also the goodwill of shareholders, the Group has made the strategic decision to wind down the operation of this division to minimise further losses.
The challenging economic landscape had compelled us to further review and strengthen the Group’s commitment to growing long-term shareholder value. Despite strong headwinds and the Group’s lacklustre performance over the past year, the Group maintains a cautiously positive outlook for FYE 2018
Notably, in the Engineering & Construction Division, our capabilities and outstanding track record has placed us in a strong position to play a key role in the nation’s water supply needs as well as in overseas markets. With RM1.4 billion allocated under the Malaysian Budget 2018 for NRW reduction and control, the Group looks to capitalise on opportunities to grow and expand in the niche NRW segment where profit margins are higher and are less competitive due to specialised skills and knowledge. We remain focussed on building our competitive strengths in the design and construction of water and wastewater treatment plants and are confident of our tender prospects in the overseas market especially Sri Lanka where we have established a good track record with the successful completion of 4 projects there.
In the Technologies Services Division, the Group’s performance will be underpinned by the strong demand from the various telecommunication companies to provide fast and reliable bandwidth service for their users. As VBT extends its fibre optic backbone in the Klang Valley in line with the LRT extension from the existing 70 km to 108 km, this will enable us to reach out to more telecommunication operators to assist in the fiberization of their networks to improve service coverage and meet customer demands for digital services, content and applications
In technology services, telecommunications companies which are competing to provide faster and reliable bandwidth services will need to fiberise their networks. The competition between telecommunication companies which are driven by data growth and innovative new digital services, content and applications give the group extensive opportunities to fully utilize our fibre optic backbone which is strategically located in the heart of the Klang valley to secure more income-generating ventures.
As for the Property Development Division, whilst uncertainties and risks exist in the current soft Malaysian property market, there will still be demand for well-located and affordable properties and the Group will review its development strategies to ensure an attractive offering which will appeal to buyers in the current market conditions
The Group continuously reviews and evaluates its operation and strategies with the aim of delivering sustainable growth and remaining competitive. To this end, the Group will continue to manage its risks through prudent management policies, close working relationships with its stakeholders, especially the community within which it is operating, government authorities and retention of key management staff.
Salcon HQ : 603 8024 8822