Investor Relations - Corporate Review

 GENERAL

During the financial year ended 30 June 2017
(‘FY17’), the Group continued to face weak demand
for its steel products primarily caused by the low oil
prices. Oil prices which had hovered below US$60
per barrel since early 2016 had resulted in drastic
reduction in demand for new oil exploration and
related assets for many local & overseas shipyards.
The sudden and rapid disappearance of these
orders had caused more shipyards, particularly local
shipyards, to face immediate financial and liquidity
crisis.
As a result, many of these businesses landed in dire
financial straits and defaulted on loan and interest
payments. They were forced to undergo painful
financial re-structuring in order for them to continue
and face the stark prospect of not being able to
recover.
The US Federal Reserve made 2 further rate hikes
since raising interest rate in December 2015. These
rate hikes were made in response to the growing US
economy and inflation rates and caused the US dollar
to strengthen in the process. In general, the global
economy growth was stable with oil prices fluctuating
within a tight range.
After the surprise UK vote to exit the Eurozone, the
world witnessed the election of political novices
in Mr. Donald Trump to the US Presidency and
Mr. Emmanuel Macron as the French President.
With the new US administration still unable to find
solid footing and faced with some initial setbacks in
delivering campaign promises, US dollar had lost
some of its strength gained earlier but US economy
and its stock market had remained relatively resilient.
Other global economies like China, Japan and
Eurozone had continued with steady growth. The
Euro dollar had been gaining strength progressively
despite ongoing negotiations with UK on their exit
from Eurozone. The positive sentiment emanating from
the up and coming Germany elections would likely to
strengthen the Euro dollar further.
08 HUPSTEEL LIMITED
ANNUAL REPORT 2017
OPERATION REVIEW
Large scale military actions in Middle East countries
were reported to be effective in regaining territories
lost to the terrorists. Geopolitical tensions in Asia
had also escalated with North Korea constantly
conducting missile tests and military actions taken
against terrorists recently in the Philippines.

During the financial year ended 30 June 2017 (‘FY17’), the Group continued to face weak demand for its steel products primarily caused by the low oil prices. Oil prices which had hovered below US$60 per barrel since early 2016 had resulted in drastic reduction in demand for new oil exploration and related assets for many local & overseas shipyards. The sudden and rapid disappearance of these orders had caused more shipyards, particularly local shipyards, to face immediate financial and liquidity crisis.

As a result, many of these businesses landed in dire financial straits and defaulted on loan and interest payments. They were forced to undergo painful financial re-structuring in order for them to continue and face the stark prospect of not being able to recover.

The US Federal Reserve made 2 further rate hikes since raising interest rate in December 2015. These rate hikes were made in response to the growing US economy and inflation rates and caused the US dollar to strengthen in the process. In general, the global economy growth was stable with oil prices fluctuating within a tight range.

After the surprise UK vote to exit the Eurozone, the world witnessed the election of political novices in Mr. Donald Trump to the US Presidency and Mr. Emmanuel Macron as the French President. With the new US administration still unable to find solid footing and faced with some initial setbacks in delivering campaign promises, US dollar had lost some of its strength gained earlier but US economy and its stock market had remained relatively resilient.

Other global economies like China, Japan and Eurozone had continued with steady growth. The Euro dollar had been gaining strength progressively despite ongoing negotiations with UK on their exit from Eurozone. The positive sentiment emanating from the up and coming Germany elections would likely to strengthen the Euro dollar further.

Large scale military actions in Middle East countries were reported to be effective in regaining territories lost to the terrorists. Geopolitical tensions in Asia had also escalated with North Korea constantly conducting missile tests and military actions taken against terrorists recently in the Philippines.

PIPES, FITTINGS & STRUCTURAL STEEL

Against the backdrop of low oil prices, demand for pipes, fittings and structural steel products had remained in the doldrums in FY17. Many shipyards which the Group served had hardly announced any orders for new rigs and vessels in FY17. These marine offshore related businesses were so hard pressed for orders that many suffered severe liquidity crunches which led a number of them seeking to restructure their loans and borrowings. Some of them had defaulted in their interest payments and had to seek legal protection against disgruntled creditors and investors.

As a result, demand arising from this sector had diminished further compared with the previous year. The weaker demand was one of the reasons for the lower revenue reported for the last 3 quarters when compared with their respective corresponding quarters. The reduced transaction volume with these customers had however helped to reduce the exposure to credit risks associated with them.

In order to fill the demand void left by these offshore marine customers, the Group had to compete intensely for orders supplying to the repair & maintenance needs of the oil & gas and marine sectors and requirement in the construction, engineering and others. Fierce competition meant that the Group had to moderate prices to secure orders and thereby contributing to the lower revenue reported.

Faced with diminished demand and tough competition in the market, the Group responded by making small regular purchases to avoid being saddled with the burden of holding large quantity of slow moving inventory and making sure that commonly required sizes were readily available to meet customers’ needs. It also actively seek collaboration opportunities with some of its customers to work together on their projects.

During the financial year, the Group also had to face rising supply prices from mills as there was pick-up in demand in the US & European markets together with the slowly improving prices of coals and iron ore. Some mills which had removed part of its capacity in response to the earlier slowdown in global demand were now taking a longer lead time to make deliveries as their reduced capacity were being fully utilised. These developments could be early signal of a gradual recovery in the steel trade in the global markets. However, the Singapore market would still be affected by the dismal situation lingering in the offshore marine sector.

There were 2 further rate hikes after the US Federal Reserve announced the first hike in interest rate in December 2015. The combined effect of the buoyant US stock market following the election of Mr Donald Trump as the US President & the rate hikes strengthened the US dollar in the process. The stronger US dollar translated into higher inventory costs for the Group.

With rising steel prices and stronger US dollar, gross profit margins eroded in the last quarter of FY17 to 25.2% from 27.1% reported for the 3rd quarter of FY17. Year-on-Year, gross profit margin for FY17 was 26.1% compared to a weak margin of 3.8% for FY16 due to the hefty impairment for stock obsolescence of $10.6M taken up for that financial year.

GENERAL HARDWARE & PROPERTIES

The general hardware segment included the supply of racking, industrial adhesives and industrial tools to mainly the construction sector. This business segment contributed $6.7M (FY16:$7.3M) to the Group’s turnover in FY17 and had remained profitable. Business was slightly affected by a sudden dip in demand from the construction sector during the last quarter of FY17. With the local construction sector, including public housing projects, not showing any significant spike and being faced with stiff competition from other suppliers, this segment would continue to introduce new products and expand its customers base to its offering to maintain its business volume. The Group managed to sell one of its shop house at 359 Jalan Besar in late June 2017 via auction and was sold above its market valuation. As the transfer of the property only occurred in August 2017, the resulting gain from the disposal would be recognised in the results for the quarter ended 30 September 2017. The Group would continue to study options for its remaining investment properties held. Appropriate announcements would be made for any action taken on them. Most of its investment properties were tenanted out for rental income. Due to cooling measures introduced earlier and oversupply of office and industrial spaces in the local market, rental rates were still facing downward pressure for the most of FY17. The Group had been working hard to rent out its new industrial building at 6 Kim Chuan Drive during the financial year. There were a few interested parties and would be looking forward to securing a tenant for it soon.

FINANCIAL REVIEW

For FY17, revenue was $49.1M, declining about 12% from $55.8M for FY16 in the midst of low market demand and sustained low oil prices throughout the financial year. With businesses in the offshore marine sector facing dire financial difficulties and unable to secure new orders, demand for most of the Group’s steel products had fallen. When oil prices begun its steep fall in FY16, resulting in the drastic reduction in orders for new rigs and related assets and forced the offshore marine business into a rapid decline. As a result, the Group had to make an impairment against its stock holding for an amount of $10.6M (FY17:$30K) which caused its gross profit to fall to $2.1M. The Group responded swiftly to the market conditions by adjusting its purchasing strategy to avoid taking another large stock impairment in FY17. This had allowed the Group to report a gross profit of $12.8M for FY17. Other losses of $0.5M (FY16: 1.3M) was mainly due to unrealised foreign exchange translation loss arising from the translation of foreign currency denominated debts, available-for-sale financial assets and foreign currency denominated payables. Other operating income comprised mainly of rental, interest and dividend income had remained relatively stable at $2.0M (FY16:$2.0M). The majority of these assets were managed by professional managers and they regularly engaged the Group to review its composition.

Staff cost fell 15% to $6.6M from $7.8M after the Group took steps to implement cost saving measures in FY17. Among the steps taken included initiatives to help to reduce salaries, minimum provision for incentives and no replacement for positions left vacant. Other operating expenses fell from $11.4M in FY16, which had included an impairment for trade receivables of $5.1M, to $4.9M and was in line with the lower volume reported. Without the needs to set aside impairments for stock and trade receivables, the Group managed to report a net profit after tax of $720K (FY16: loss of 19.1M).

CORPORATE

The Group is proposing a final tax exempt dividend of 1 cent per share and a special dividend of 1 cent per share for the financial year ended 30 June 2017 subject to shareholders’ approval at the coming AGM. This compares to 1.0 cent per share paid for the financial year ended 30 June 2016.

 

LIM BOH CHUAN

CEO & MD
Chairman, Executive Committee