Wah Seong Corporation Berhad Annual Report 2018

MANAGEMENT DISCUSSION AND ANALYSIS RENEWABLE ENERGY (“RE”) Discussion of strategies, operational capabilities to achieve the desired business objectives and results Despite the weak backdrop in the Palm oil industry sector in 2018, through heighten marketing efforts, RE has recorded a stable increase in sales for both its’ agro-engineering and steam solution units. RE’s Teluk Panglima Garang fabrication yard delivered 305 units of process equipment for the Petronas RAPID Project through its EPCC clients namely, Toyo Engineering Japan, Tecnimont Spa Italy, Petrofac Engineering and Flour. At the back of this success, RE was also able to secure a contract directly from Petronas Chemicals to supply LPG Bullet Mounted Tank P29 INA. Other than that, RE also delivered oversized and large sized module for its growing international clients namely UOP Honeywell, large columns for Thyssenkrupp Thailand and a storage facility project for Singapore’s Jurong Island. This raised the yard utilisation rate to 85% in 2018. To further strengthen RE’s manufacturing capacity to cope with the demand, the existing production floor space in the Teluk Panglima Garang fabrication yard is expected to be expanded by an additional capacity of 10,000 m 2 in 2019. On 27 th August 2018, PMT entered into a joint venture agreement with Saito Separator Limited, Japan to jointly develop the decanter locally under the name of PMT-Saito. The RE‘s Agro Engineering unit also continues to perform well with its locally assembled turbines (30% y-o-y increase) and expanded its offering to a 2 in 1 Empty Fruit Bunch Presses in the Indonesian market. RE had a successful year promoting its products and services into new geographical markets. During the year, RE successfully delivered a 50 tph gas-fired boiler for a sugar mill in Bangladesh and a 7MW steam turbine to a palm oil production complex in Nigeria. RE also was successful in penetrating the Mexico market. Discussion on Key Financial and Operational Indicators for the segment For the year under review, the RE segment recorded a higher revenue of RM335.8 million against RM280.3 million achieved in the previous year, a positive indication of business recovery. The RE segment recorded a segment profit before taxation of RM30.7million which was marginally higher compared to its previous year’s performance. As of 31 st December 2018, the RE segment has a combined order book of RM283.3 million which is higher than the order book position as at end 2017. Its orders are made up of smaller projects, of which 20% relates to the downstream oil and gas industry, 60% relates to the palm oil industry and 20% from other industries including power generation industry. 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 A change in global economic, political and social factors largely remains beyond RE’s control. RE’s performance is driven mainly by project awards. Delayed project awards due to delays in customer’s investment decision results to a lower order intake and causes fluctuation to earnings. To mitigate this operational risk, RE has been actively building up its recurring income business stream to cushion the impact of project cycles. RE has broadened its customer base and diversified its products and services range across few industries to not be overly reliant on a particular industry. Discussion on expectations of future results The renewed optimism especially in the downstream oil and gas industry will impact RE positively in 2019. The segment is expected to benefit from more process equipment packages for LNG development projects, gas infrastructure development and storage projects. The changes in Malaysia’s Department of Environment regulations on air pollution will also have a positive impact on the RE segment. An increased demand in the emission control equipment product line in 2018 is expected to continue in 2019 as factories nationwide step up their efforts to comply with the DOE regulation deadline by July 2019. The RE segment is positive that more co-generation system will also be adopted by the industry players in view of the rising tariff. This positive development will increase the demand for the products and services offered by the segment in the immediate future, not only in Malaysia but also in Indonesia. WAH SEONG CORPORATION BERHAD 26