General
Hupsteel Limited and its group of subsidiaries (‘the Group’) were inevitably affected as global economies slipped into recession in 2008. Demand for steel products shrunk quickly in the 2nd half of 2008 due to the credit crunch and prices for steel also plummeted during the period. The decline in demand was due to cut back in purchasing by customers as a result of delay or cancellation of projects while high inventory and oversupply created an additional pressure for the downward adjustment of products’ prices.
Construction sector was the only sector that reported growth but it was insufficient to arrest the declining trend and the overwhelming negative sentiment felt in the marketplace. The marine, oil and gas sectors which the Group served were affected by the downturn and had to cut back on their purchases.
In response to the recession, the Singapore Government introduced various economic initiatives in its 2009 budget. These included the construction of large infrastructure projects like the Marina Coastal Highway and new MRT lines, job credit scheme, utility and property tax rebates were also implemented.
Pipes, fittings and structural steel
Demand for pipes and fittings was stable for most of the financial year ended 30 June 2009 (‘FY09’) but begun to show signs of softening from the 4th quarter of FY09 as the world economy continued to worsen during that period. Drop in demand for oil led to delays in many oil related projects causing margins for pipes and fittings to decline during the financial year. The margins for the pipe and fitting products will
likely to remain depress during this economic downturn.
Structural steel products, particularly steel plates catering to the marine sector, were the worse hit by the global slump as its prices corrected sharply beginning from September 2008. Prices for plates declined significantly and rapidly throughout FY09 while demand for them dwindled quickly as customers curtailed their purchases in anticipation of further fall in market prices for plates. Many market players were holding high inventory were caught unprepared by the large and sudden price corrections and faced with credit tightening by banks, drove them to release their inventories hurriedly into the market. This further enforced a downward spiral in the prices of plates. As a consequence, the Group had to make a provision in the diminution in the value of its plate inventory as selling prices dipped below the inventory carrying costs.
In the face of softening demand and falling prices, the Group decided to curtail its purchasing programme and run down its stock holding of all product categories at the same time. This would relieve the Group from arduous financial burden arising from its purchasing activities and only to replenish stock when prices begun to stabilise.
By the end of the financial year, the Group managed to trim its stock holding by half to $67.1M from $137.7M from a year earlier. At this current inventory holding level, the Group is well poised to take advantage of any offerings from mills at the most competitive prices to selectively replenish its stock.
Sandblasting, General Hardwares & Properties
The Group’s sandblasting business also declined during the year in line with the global recession which affected the activities of many shipyards who it services. As capacity utilization declined in tandem with general business environment, the Group is also reducing the resources deployed in this operation.
Turnover from the general hardware business grew approximately by 10% for the year as the new range of racking system introduced in the year earlier was well received by the market. The pricing of this easy to assemble racking system was found to be more acceptable to its target customers.
Occupancy rate for the Group owned industrial buildings, offices and shop-houses remained healthy for the year with only minor adjustments to rental rates. The Group also passed on much of the savings as announced in the 2009 budget to its tenants to help them to cope with the current recession.
However, the total turnover generated by these 3 business operations constitutes less than 5% of the Group’s annual turnover.
Financial Review
With the world slipping into the deepest recession it ever experienced resulting in sharp contraction in steel demand and steep corrections in steel prices, particularly for structural steel products, the Group’s turnover for the financial year ended 30 June 2009 (‘FY09’) declined by 26% to $321.7M from $433.7M reported for the previous financial year (‘FY08’). The Group was still able to report a net profit after tax of $14.1M (FY08: $45.1M) despite the financial debacle crippling the global economy.
Faced with a volatile market situation, the Group was able to act swiftly to reconfigure its inventory
holding and maintain it at a healthy level. However the drastic change in market prices still necessitated the
Group to make some provisions for the diminution in value of its inventory during the year. These circumstances
resulted in gross margin for FY09 declining to 12.9% (FY08: 20.1%).
With the Singapore Government taking the lead to preserve jobs, the Group responded likewise by not
retrenching its staffs but instead implemented salary cuts, reduced working hours and other measures. Staff
cost hence reduced by 29% to $9.9M from $13.9M. Nevertheless, it is maintaining a healthy headcount that
ensure it could continue to execute its operations smoothly and efficiently.
The lower turnover in FY09 correspondingly resulted in the reduction of other operating expenses by 36% to $10.2M from $15.9M incurred in the year earlier. The significant reduction was also made possible by a slew of cost saving measures implemented during the financial year to cut costs across the entire Group.
As the world slipped into recession in 2008, US dollar strengthened against the Singapore dollar from the
2nd half of calendar year 2008 and continued well into the first quarter of 2009. The stronger US dollar
resulted in an exchange loss arising from trust receipts amounting to $2.2M as the Group’s purchases are
largely denominated in US dollar. The Group mitigates the impact of its currency risk by making sales in US
dollar and entering into forward contracts.
In addition to the Group’s effort to downsize its inventory holding during the year, it also scaled down its
purchases. The effect of these two pronged actions was inventory holding fell sharply to $67.1M from $137.7M.
The sale of its stock coupled with the Group’s emphasis in debts collection resulted in a shorter conversion cycle
of stock to cash. As a result, trade and other receivables fell to $62.5M from $109.0M. The faster and higher
cash collection allowed the Group to repay its borrowings, mainly in terms of trust receipts, faster and by the
end of FY09, its holding of cash and cash equivalent of $53.6M (FY08: $27.4M) far exceeded its total current
and non current borrowings of $6.9M (FY08: $68.4M). This healthy balance of cash and cash equivalents would
provide a strong foundation to support the growth of the Group when the economy recovers.
Corporate
No major corporate actions took place during the financial year due to the poor state of economic health
and management attention was focused on steering the Group through the recession. Unlike many other
businesses, the Group did not call for fresh capital injection to strengthen its equity base in the midst of the
severe credit squeeze experienced by many. As such, shareholders interests were not diluted in the process
despite the world economy faced a tumultuous time in the last 12 months.
Lim Kim Thor
Chief Executive Officer |
