Financial Statements And Related Announcement - Full Yearly Results
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Profit & Loss
Consolidated Statement of Comprehensive Income
Review of Group Performance
Overview for FY2016
On 1 October 2015, the Group completed the acquisition of the entire equity stake of Ranken Infrastructure Limited ("Ranken"), an Engineering, Procurement and Construction ("EPC") business specialising in design, construction and project consultation in China's rail transit sector ("Infrastructure Business"). The proposed disposal of 81% of the Mining Services Business was announced on 30 December 2016.
As such the Profit and Loss Account and Statement of Cash Flows for the Group in FY2016 included the full-year financial performance of the Infrastructure Business whereas the comparatives for FY2015 only included three months ("4Q2015") of contributions.
The results of the Mining Services are presented as discontinued operations, and the financial statements of the Mining Services Business are presented in the Balance Sheet as assets and liabilities classified as held for sale ("Held for Sale").
As a result, the financial performance for our continuing operations improved with net profit from $3.7 million to $11.4 million in FY2016.
Review of Financial Performance (FY2016 vs FY2015)
Note: Significant changes in revenue, cost of sales and operating expenses during the financial year under review were mainly attributed to the consolidation of Ranken's full year financial performance in FY2016 as compared to 3 months (4Q2015) in FY2015.
Revenue rose by $162.2 million to $223.9 million in FY2016, boosted by the consolidation of Ranken's full year results in FY2016, on the back of revenue recognition for several projects based on their stage of completion. (Note: Ranken also procured materials on behalf of some project owners as part of its supply chain and these materials, as procured on cost-to-cost basis, were not included).
Given the higher revenue, the Group's gross profit rose by $20.2 million to $27.2 million. The overall gross profit margin in FY2016 was 12.2% compared to 11.5% in FY2015.
Other income fell by $3.0 million to $4.9 million in FY2016 due mainly to:
- the absence of interest income relating to the redemption of the bond upon completion of disposal of the Steel Business amounting to $1.2 million;
- lower fair value gain of $1.1 million (FY2015: $2.1 million) related to the acquisition of Mancala as a result of a fall in fair value of contingent purchase consideration payable on acquisition of Mancala. The deferred purchase consideration of Mancala had previously been recorded and estimated based on an accounting valuation recommended by an external independent professional valuer, taking into account certain net profit targets which Mancala could achieve. As Mancala's actual Net Profit was below this accounting estimate, the Group's liabilities to pay deferred consideration "on-the-book" fell by $1.1 million given the "lower-than-expected" Net Profit of Mancala; and
- lower net foreign exchange gain amounting to $2.9 million.
Despite increase in (1) rental income; (2) interest income from retention monies; and (3) consultancy fees.
Selling and distribution costs rose by $0.5 million to $0.9 million due mainly to consolidation of Ranken's full year results in FY2016. These relate mainly to Ranken's travelling expenses.
Administrative expenses rose by $4.8 million to $12.3 million due mainly to the inclusion of additional three financial quarters' results of $5.6 million in administrative expenses incurred by Ranken in FY2016, further offset by lower corporate function expenses.
Other expenses remained relatively unchanged at $1.7 million despite consolidation of Ranken's full year results in FY2016, due mainly to absence of impairment of goodwill of $1.2 million relating to Mancala, offset by loss on disposal/write-off of plant and equipment of $0.3 million upon completion of certain Ranken's projects in FY2016.
Finance costs rose by $1.8 million in FY2016 to $2.5 million due mainly to consolidation of Ranken's full year results in FY2016. Interest expense incurred by Ranken is primarily for its working capital borrowings.
Income tax expense rose by $2.0 million due mainly to consolidation of Ranken's full year results in FY2016. Income tax expense is attributable to provision for income tax on taxable profits for Ranken's operations.
Given the above,
- net profit of our Continuing Operations rose from $3.7 million to $11.4 million in FY2016.
- operating profits before Working Capital or "Cash Profit" of Continuing Operations rose from $7.2 million to $28.4 million in FY2016.
Revenue for discontinued operations (namely the Group's Mining Service Business) fell by $28.5 million to $26.1 million amid uncertain market sentiment in the mining industry and volatility of commodity prices.
Given the lower revenue, total gross profit fell by $5.5 million to $6.6 million.
Other income fell by $0.5 million to $0.3 million due mainly to lower interest income and lower exchange gain.
Administrative expenses fell by $0.6 million to $7.1 million, due mainly to cost cutting measures that were undertaken during the year.
Other expenses rose by $0.8 million to $1.1 million, due mainly to recognition of loss on disposal of plant and equipment of $0.4 million and impairment loss on receivables of $0.3 million.
Finance cost fell by $0.7 million to $0.6 million as Mancala continued to pay down its working capital borrowings and finance lease obligations.
Given the above,
- Discontinued Operations made a net loss of $1.8 million in FY2016 compared to net profit of $2.8 million in FY2015.
- Nonetheless, the net cash from operating activities of the Discontinued Operations remains positive at $5.0 million, albeit a fall from FY2015's $7.0 million.
Given the full year contribution of Ranken's results (Continuing Operations), offset by the loss incurred by Mancala (Discontinued Operations), Profit attributable to Owners of the Company ("Net Profit") for FY2016 rose to $9.6 million from $6.5 million for FY2015.
Review of Financial Position (31 December 2016 vs 31 December 2015)
Note: Significant changes in financial position during the financial year under review were mainly attributed to classification of Mancala's financial position to assets and liabilities held for sale as at 31 December 2016.
Total non-current assets fell by $26.0 million mainly due to classification of the disposal group's non-current assets of $20.6 million as Held for Sale. As at 31 December 2016 and 2015, non-current assets excluding disposal group were $52.6 million and $52.7 million, respectively. Additions of plant and equipment and site facilities by Ranken for its recently-secured new projects, were offset by depreciation resulting in relatively unchanged balance of non-current assets.
Total current assets increased by $59.0 million partly due to classification of the disposal group's non-current assets of $20.6 million as Held for Sale and partly due to increased current assets of Ranken. As at 31 December 2016 and 2015, current assets excluding disposal group were $273.2 million and $229.6 million respectively. Significant changes excluding the current assets of disposal group during the year under review were:
- Contract work in progress related to Ranken's projects under construction rose by $28.2 million to $83.0 million due to works completed over stages but not yet certified (and thus not invoiced and not recognised as revenue) during the year;
- Trade receivables related to Ranken's projects rose by $18.4 million to $136.1 million. Trade debtors' turnaround time increased to 222 days as at 31 December 2016 from 193 days as at 30 September 2016. 98% of trade receivables are not past due;
- Other receivables, deposits and prepayment, which comprised mainly Ranken's materials procured on behalf of project owners and security deposits placed with the project owners (refundable on project completion), decreased by $1.3 million to $21.9 million in FY2016; and
- Cash and cash equivalents, after accounting for operating cash inflow of $42.4 million for the current year, fell by $4.9 million to $30.2 million as at 31 December 2016; due mainly to (i) cash investments in plant and equipment and site facilities of $11.6 million mainly for Ranken's recently-secured new projects, and (ii) net repayment of bank loans, bond, finance lease liabilities, interest expense and loans from previous shareholders of Ranken's subsidiary amounting to $30.6 million. More specifically, the cash position for corporate function and Ranken were $0.6 million, and $29.6 million, respectively as at 31 December 2016. Total cash of $2.2 million was pledged as fixed deposits for Ranken's secured bank borrowings.
Total non-current liabilities fell by $7.8 million, due partly to classification of the disposal group's non-current liabilities of $1.5 million as Held for Sale and partly due to lower non-current liabilities of Ranken. As at 31 December 2016 and 2015, non-current liabilities excluding disposal group were $8.6 million and $12.3 million respectively. The decrease was due mainly to (i) repayments of working capital borrowings and finance lease obligations and (ii) partial repayment of amounts due to previous shareholders of Ranken's subsidiary, which were extended to Ranken prior to acquisition by the Group.
Total current liabilities increased by $34.0 million due partly to classification of the disposal group's non-current liabilities of $1.5 million as Held for Sale and partly due to increased current liabilities of Ranken. As at 31 December 2016 and 2015, current liabilities excluding disposal group were $239.3 million and $199.8 million respectively. Significant changes excluding current liabilities of disposal group, during the year under review were:
- Trade payables related to Ranken's projects rose by $47.1 million to $109.6 million, due mainly to higher purchases and longer credit terms (for goods and services from suppliers and contractors);
- Progress billings in excess of construction work in progress rose by $8.8 million, as a result of higher construction activities;
- Other payables and accruals increased by $11.1 million to $74.3 million due mainly to increase in advanced deposits received from clients. Other payables and accruals for Ranken and the Company (corporate) and were $61.2 million and $13.1 million respectively as at 31 December 2016. Other payables and accruals for Ranken comprised deposits received from clients and security deposits from sub-contractors, VAT payables and accruals of operating expenses. Other payables of the Company (corporate) comprised mainly the purchase consideration payable to Mancala's vendors; and
- Current financial liabilities fell by $29.1 million to $33.2 million as Ranken continued to pay down working capital borrowings, finance lease obligations and bond.
Despite higher earnings of $9.6 million during the twelve months under review, total equity attributable to owners of the Company or Shareholders' Equity, only increased by $6.6 million to $97.2 million. This was due mainly to a non-cash or accounting translation loss of $3.1 million in relation to translating financial statements of foreign subsidiaries to S$, as a result of (i) weakening of RMB against S$ and (ii) the weakening of the Vietnamese Dong against A$.
Review of Cash Flows (FY2016)
Operating cash inflow of continuing operation for FY2016 rose by $36.5 million to $42.4 million after taking into account profit before income tax of $14.7 million.
Cash flows used in investing activities of continuing operation for FY2016 amounted to $11.4 million, due mainly to Ranken's investment in equipment and site facilities for recently secured projects.
Cash flows used in financing activities of continuing operation for FY2016 amounted to $30.6 million, due mainly to repayment of bank loans, finance lease liabilities, bond, interest expense and loans from previous shareholders of Ranken's subsidiary amounting to $59.9 million, offset by proceeds from bank loans and bond of $29.3 million.
The discontinued operations recorded net cash from operating activities of $5.0 million, offset by cash used in financing activities of $2.9 million and its balance of $3.6 million cash were classified as Held for Sale as at 31 December 2016.
Given the above, cash and cash equivalents decreased by $2.3 million to $28.0 million (net of fixed deposits pledged of $2.2 million).
FY2016 marks the first financial year in which the Group recognised the full 12-month revenue contributions from Ranken Infrastructure Limited ("Ranken"), its wholly owned China rail engineering subsidiary. Since the completion of the Ranken acquisition on 1 October 2015, the Group has announced a cumulative RMB2.6 billion ($541.3 million) worth of new contracts secured. The Group's order book stood at RMB2.3 billion ($478.9 million) as at 31 December 2016 after delivering part of the works in progress while following up closely on new contracts won over the next few weeks.
With its strong operational capabilities and track record, Ranken is well positioned to ride the wave of public infrastructure spending in the region. The mainland Chinese government is expected to invest a further RMB 4.7 trillion in transport infrastructure over the next three years as it extends its 'One Belt, One Road' initiative. Investments in the rail sector and major land transport infrastructure are expected to remain buoyant in both China and other emerging Asia. Building on such capabilities, Ranken will continue to explore new construction management works in Bangladesh and other parts of South Asia.
As Ranken seeks out new projects, it will progressively scale up its production capacity via an 'asset-light' business model so as to meet the increase in orders and execute growth strategies without significant capital expenditure.
Mining Services Business
On 30 December 2016, Sapphire announced the proposed disposal of an 81% stake in Mancala Holdings ("Mancala"), its Australian mining services subsidiary. The Group will retain the remaining 19% stake in Mancala as part of a 'passive investing strategy', which enables the Group to focus resources on its core infrastructure business.
Barring unforeseen circumstances, the Group expects to be profitable in the financial year ending 31 December 2017 ("FY2017").