Unaudited First Quarter Financial Statement for the Period ended 31 March 2008
Profit and Loss
Balance Sheet
Review
Revenue
Group revenue rose 35% to S$54.6 million for the three months ended 31 March 2008 (Ò1Q08Ó) on the back of an increase in sales volume and higher average selling prices compared to the corresponding period in FY2007.
Global steel prices have continued on a sustained upward trend during 1Q08 due primarily to the rising cost of steel production and firm steel consumption by industrial end-users. As a result, the Group benefited from the higher average selling prices of its steel products in 1Q08 compared to 1Q07, as well as gained from continuing orders from its customers in the Asia Pacific region.
Revenue Breakdown by Industry
With the shipbuilding and marine-related sectors as its primary focus, the Group saw sales to customers in these sectors increase by 36% to S$34.6 million in 1Q08. This customer segment continued to dominate the GroupÕs revenue with a contribution of 63%.
The Group also continued to capitalise on the increased opportunities in SingaporeÕs construction sector and raised the revenue contribution from this customer segment to 12% in 1Q08, as compared to 4% in the same period a year ago.
Sales to other stockists and traders also increased during 1Q08 to account for 14% of Group revenue. The remaining 11% of Group revenue came from customers in the engineering/fabrication, manufacturing, precision metal stamping and other sectors.
Revenue Breakdown by Geographical Market
By geographical market, sales to Indonesia rose to account for 54% of Group revenue in 1Q08, spurred primarily by the higher level of shipbuilding and marine-related activities there. Sales to the Singapore market declined marginally to form 34% of 1Q08 Group revenue, compared to 48% previously. This is in line with the shift in offshore and marine-related activities from shipyards in Singapore to Indonesia. However, this was partially offset by buoyant sales to the construction industry in Singapore.
Sales to Malaysia remained stable at 6% of Group revenue in 1Q08. The Group continued with its efforts to make inroads into other potential markets in Asia Pacific region, which contributed to the remaining 6% of revenue in 1Q08.
Gross Profit Margin
Cost of sales (measured on a weighted average cost basis) rose 40% year-on-year in 1Q08, which outpaced the GroupÕs revenue growth of 35%. This was due primarily to higher replacement cost of inventory as the Group has continued to replenish its stock level amid rising global steel prices, as well as the increasingly competitive conditions in the steel distribution industry.
In addition, the sales mix with respect to products and customers was different in 1Q08, compared to 1Q07. In 1Q08, the Group sold greater quantities of shipbuilding plates, which are fast-moving items. The Group also recorded a higher revenue contribution from customers in the construction and stockists/traders segment during the quarter under review.
As a result, the GroupÕs gross profit margin was lower at 16.1% in 1Q08, compared to 1Q07, which is within the range of 15% to 20% that the Group has achieved over the past three financial years.
Distribution Costs and Administrative Expenses
Distribution costs and administrative expenses rose at a slower pace than Group revenue in 1Q08. Distribution costs, which include freight charges related to export orders, rose 23% to S$0.4 million in 1Q08, while administrative expenses were higher at S$2.5 million, an increase of 17% from 1Q07.
Net Profit and Net Profit Margin
Net profit rose 17% to S$5.2 million in 1Q08 as the Group benefited from a lower effective tax rate due to its entry in the Global Trader Program for a period of three years from FY2008 onwards. As a result, the Group registered a respectable net profit margin of 9.5% for the financial quarter under review.
Balance Sheet and Cash Flow Statement
In 1Q08, the GroupÕs net cash flows from operating activities amounted to S$3.0 million. As part of the ordinary course of business, the Group utilised a larger amount of trust receipts to finance purchases of inventories during the quarter. The Group ended the first financial quarter of FY2008 with a healthy cash balance of S$16.8 million.
Trade and other receivables rose marginally from S$37.9 million at the end of FY2007 to S$39.7 million at the end of 1Q08. 54% of the trade receivables was outstanding for less than 60 days while 35% was outstanding between 60 to 120 days. Debtor turnover (days) shortened to around 66 days for 1Q08, compared to 76 days for FY2007.
Inventories stood at S$82.8 million (measured on a weighted average cost basis) as at end of 31 March 2008, an increase of S$16.0 million from the end of FY2007. The Group continued to build inventories in anticipation of firm market demand and to sustain its market position as a Regional Steel Distribution Centre.
Commentary
World crude steel production output rose 5.6% year-on-year to 340.7 million metric tones (mmt) in 1Q2008. This was driven mainly by crude steel production in China, which increased 8.6% year-on-year to 124.9 mmt and accounted for 37% of global output (Source: ÒInternational Iron and Steel Institute, Media Release published on 21 April 2008).
While the economies in the USA and EU are anticipated to weaken, demand from emerging markets is expected to support the global demand for steel, with deliveries from steel producers to the Asian market projected to rise 8.6% in 2008 (Source: ÒInternational Iron and Steel Institute, Media Release published on 14 April 2008).
Due to sharp hikes in the prices of raw materials, such as iron ore, coking coal and scrap, since the beginning of 2008, the cost of steel production continues to rise and is expected to lead to further increases in selling prices by the steel mills.
Going forward, the Group expects to continue benefiting from healthy demand for steel products from its customers in the shipbuilding and marine related sectors in the region. Although global ship orders are expected to decline in 2008, many of the shipyards in the region still have large order books to fulfil.
While the GroupÕs primary focus will remain on the shipbuilding and marine-related sectors in the region, it also sees opportunities in the increasing level of activity in SingaporeÕs construction sector resulting from the implementation of numerous public sector infrastructure projects. According to the Building and Construction Authority, SingaporeÕs construction sector is forecast to grow by as much as 10% in 2008.
Besides its core markets of Singapore, Indonesia and Malaysia, the Group intends to continue working to strengthen its coverage of other territories in the Asia Pacific region that promise potential opportunities for growth. To reinforce its position as a Regional Steel Distribution Center, the Group will ensure it provides a total solution to its customers by maintaining a comprehensive range of steel products.
The Group is continuing to explore various alternatives to position itself for further growth, including the expansion of its storage capacity and suitable acquisitions, joint-ventures or alliances that will enhance its existing business.
With the slowing global economy and increasing competition in the steel distribution industry, the Group will ensure it maintains a sound financial position as this is a practice that has enabled it to successfully weather periods of difficult business conditions over the last 34 years.
Barring a more pronounced downturn in the regionÕs economy and any other unforeseen circumstances, the Group is cautiously optimistic of its prospects in FY2008.