Wah Seong Corporation Berhad Annual Report 2017

FROM THE BOARD OF DIRECTORS AND KEY SENIOR MANAGEMENT WAH SEONG CORPORATION BERHAD ANNUAL REPORT 2017 20 The effort to streamline WASCO’s Engineering Services fabrication business in Batam, Indonesia yielded positive results and resulted in a healthy order backlogs of RM262.9 million to be executed in year 2018. During the year under review, the division successfully delivered Re Gasification Offshore E-House Module for the Bahrain LNG Project for Schneider and this was after the successful delivery of five substations for the Kazakhstan, Tengizchevroil Future Growth (“TCO”) Project for Schneider, France. The TCO projects entails the delivery of 21 substations with staggered deliveries beginning from October 2017 to March 2019. The market however continues to be challenging for the gas compression rental business and during the year, the division impaired 15 units of its rental compressors amounting to RM72.0 million. Discussion on Key Financial and Operational Indicators for the segment For the year under review, the oil and gas segment recorded revenue of RM1,557.1 million and segment profit of RM132.0 million, which were both higher than the previous year’s performance. This was mainly contributed byWASCO’s Pipeline Services Division following the execution of order backlogs secured at the end of 2016. The segment recognised a one-off gain on disposal of land and buildings of RM99.4 million, which was offset by RM72.0 million of impairment charge for rental compressors during the year. The oil and gas segment had an order backlog of RM3.42 billion at the end of 2016, contributed mainly by the NS2 Contract worth RM2.85 billion (making up 83.3% of the segment’s order book). The order backlog also included other projects such as Schneider TCO Gathering and Johan Sverdrup. At the end of 2017, the segment had an order backlog of RM2.51 billion. The oil and gas segment also recorded 18,600,062man-hourswithout Loss Time Injury (“LTI”) in 2017. WASCO recorded other positive indicators signifying the effectiveness of the safety culture instituted by the Group. Discussions of Health, Safety and Environment (“HSE”) is set out separately in the Sustainability Development section of the Annual Report on page 11. Discussion of anticipated or known risks that may have a material effect on, among others, the sustainability of the group’s results or operations, financial condition or liquidity WASCO places strong emphasis on Health, Safety & Environment (“HSE”). Non-compliance to standards or a major HSE incident in the two operations would affect the Group’s business and its reputation. In mitigation of the risk, policies and procedures are established, communicated and implemented at all our operations. Audits and inspection are conducted periodically to ensure compliance. Awareness campaigns and on-going trainings are conducted and management does safety walkabout regularly at the sites. Target Key Performance Indicators (“KPI”) are also set to create greater accountability. The global economic, political and social factors largely remain beyond the WASCO’s control. WASCO’s Pipeline Services and Engineering Services business are independent of each other and have different target market in the oil and gas value chain. This in itself is a conscious strategic decision made by WASCO to mitigate risk of being overly reliant on a specific market. The management team conducts strategy meetings and business strategies reviews during the year to ensure operational sustainability. WASCO continues to hold engagement sessions with customers and partners to identify new markets and opportunities. WASCO today is operational in 17 locations worldwide and the business of the Company could be exposed to the risk of litigation action by customers, vendors and other parties. Such litigation actions may have a material effect on the Company’s result. In mitigation of this risk, the Company has a robust system in place to reviewcontracts and agreements to govern contractual obligations with all parties. Discussion on expectations of future results With global oil price stabilising during the year, the increase demand from factories around the world and OPEC’s move to keep the lid on supply and improved fundamentals have brought a sense of cautious optimism back to the industry. The oil price collapse in June 2014 triggered a wave of cost reduction amongst upstream oil and gas companies. Capital expenditures were slashed between 40%and 50%between 2014 and 2017. As part of this cost rationalisation exercise, major projects which did not meet the profitability criteria were either cancelled or deferred. Demands for efficiency improvements also saw a reduction between 30% and 40% in operational expenditures and as a result, a number of projects could break even at oil prices in the high of USD20 per barrel. As oil price recover to just over USD60 per barrel towards the end of 2017 and remains somewhat stable at this price levels, more upstream projects are likely to commence. This positive development will impact the demands for supply of services to the oil and gas services companies servicing the upstream sector like ourselves. However, it must be noted that the upstream oil and gas companies will be more diligent about containing its expenditure and will want to hold on to some benefits of the cost reduction exercise that they undertook for the past three years. The strong order book at the beginning of 2018 will ensure a good flow of work for execution in 2018 and therefore contribute positively to the Group in 2018. There will be a lag between improving industry landscape and new project for our products and services, but overall the future looks positive for WASCO from year 2019 onwards as the industry continues to stabilise. In the meantime, WASCO will continue to improve on its efficiencies through investments in process and technology innovation and will start focusing on using big data analytics to improve its market and service offerings. MANAGEMENT DISCUSSION AND ANALYSIS