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Financial Statements And Related Announcement - Half Yearly Results

Financials Archive

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Income Statement

Balance Sheet

Review of Performance

Our Business

OKP Holdings Limited is a home-grown infrastructure and civil engineering company in the region. It specialises in the construction of urban and arterial roads, expressways, vehicular bridges, flyovers, airport infrastructure and oil and gas-related infrastructure for petrochemical plants and oil storage terminals as well as the maintenance of roads and roads-related facilities and building construction-related works. We tender for both public and private civil engineering and infrastructure construction projects. We have expanded our core business to include property development and investment.

We have three business segments: Construction, Maintenance and Rental income from investment properties.

Review of income statements for the Half Year ended 30 June 2020

Revenue

Our Group reported a 16.5% or $6.3 million decrease in revenue to $32.2 million for 1H2020 as compared to $38.5 million for 1H2019. The decrease was due mainly to an 8.3% decrease in revenue from the construction segment to $22.4 million, and a 39.6% decrease in revenue from the maintenance segment to $6.9 million, partially offset by a 6.9% increase in rental income.

The decrease in revenue from both the construction and maintenance segment was due mainly to the lower percentage of revenue recognised from a number of existing and newly awarded construction projects during 1H2020.

The increase in rental income generated from investment properties was due mainly to rental income generated from the property at 6-8 Bennett Street, East Perth, Western Australia which has been fully occupied since the second quarter ended 30 June 2019.

Both the construction and maintenance segments are the major contributors to our Group's revenue. On a segmental basis, construction, maintenance and rental income accounted for 69.5% (1H2019: 63.3%), 21.4% (1H2019: 29.6%) and 9.1% (1H2019: 7.1%) of our Group's revenue respectively for 1H2020.

Cost of sales

Our cost of sales decreased by 12.8% or $4.1 million from $32.5 million for 1H2019 to $28.4 million for 1H2020. The decrease in cost of sales was due mainly to:

  1. the decrease in sub-contracting costs which were mainly costs incurred for specialised works such as bored piling, asphalt works, mechanical and electrical works, soil-testing, landscaping and metalworks which are usually sub-contracted to external parties;

  2. the decrease in the cost of construction materials due to lower utilisation of materials;

  3. the decrease in overheads such as upkeep of machineries and hiring costs related to the rental of additional heavy equipment and machineries to support existing projects; and

  4. the decrease in labour costs as a result of foreign worker levy waiver,

  5. during 1H2020.

Gross profit and gross profit margin

Our gross profit for 1H2020 decreased by 36.5% or $2.2 million from $6.0 million for 1H2019 to $3.8 million for 1H2020.

While the rental income segment demonstrated an increase in contribution to gross profit of $0.1 million from $1.8 million for 1H2019 to $1.9 million for 1H2020, there is a decrease of $2.3 million in that of the construction and maintenance segments, from $4.1 million in 1H2019 to $1.8 million in 1H2020.

The lower gross profit margin for the construction and maintenance segments was due mainly to the temporary cessation of construction activities in compliance with the government's COVID-19 measures. However, the Group continued to perform housekeeping, safety and environmental maintenance works at its project sites. Overall, the negative impact from the COVID-19 situation on the construction and maintenance segments was cushioned by the finalisation of a few existing projects during 1H2020.

Other gains, net

Other gains increased by $3.6 million or 285.7% from $1.2 million for 1H2019 to $4.8 million for 1H2020. The increase was due mainly to:

  1. the receipt of payouts and rebates from the government of $2.7 million which aimed to provide wage support to employers, as part of the support measures for built environment firms affected by COVID-19;

  2. the one-off reversal of impairment allowance made of $1.2 million following the completion of the disposal of a former associated company, CS Amber Development Pte Ltd; and

  3. an increase in the gain on foreign exchange of $0.4 million from a loss on foreign exchange of $0.1 million in 1H2019 largely due to the appreciation of Australian dollar against the Singapore dollar,

  4. which were partially offset by:

  5. a non-recurring technical management consultancy fee of $0.5 million in relation to a piling project in Jakarta, Indonesia which was earned in 1H2019; and

  6. a decrease in interest income from bank deposits of $0.1 million,

  7. during 1H2020.

Administrative expenses

Administrative expenses increased by $1.7 million or 42.0% from $4.1 million for 1H2019 to $5.8 million for 1H2020. The increase was largely due to (1) an increase in legal fees incurred for an ongoing trial and (2) an increase in staff costs of $0.3 million due to salary adjustments in third quarter ended 30 September 2019.

Finance expenses

Finance expenses decreased by $0.1 million or 11.8% from $0.7 million for 1H2019 to $0.6 million for 1H2020. The decrease was due mainly to the decrease in interest expenses of $0.1 million incurred on a bank term loan for the purchase of an investment property at 6-8 Bennett Street, East Perth, Western Australia due to early repayment of principal.

Share of results of associated companies and joint ventures

The share of results of associated companies and joint ventures increased by $0.7 million or 118.2% from a loss of $0.6 million for 1H2019 to a profit of $0.1 million for 1H2020. The increase was due mainly to:

  1. the share of profit of joint ventures mainly from the Group's 50%-owned joint venture partnership, Chye Joo - Or Kim Peow JV; and

  2. the share of loss of associated companies was due mainly to losses incurred by the Group's 25%-held associated company, USB Holdings Pte Ltd,

  3. during 1H2020.

Profit before income tax

Profit before income tax increased by $0.4 million or 22.9% from $1.9 million for 1H2019 to $2.3 million for 1H2020. The increase was due mainly to (1) the increase in other gains (net) of $3.6 million, (2) the increase in share of profit of associated companies and joint ventures of $0.7 million, and (3) the decrease in finance expenses of $0.1 million. The increase was partially offset by (1) the decrease in gross profit of $2.2 million and (2) the increase in administrative expenses of $1.7 million, as explained above.

Income tax expense

Income tax expense remained at $0.3 million in 1H2020 and 1H2019 respectively.

The effective tax rates for 1H2020 and 1H2019 were 13.5% respectively.

The effective tax rate for 1H2020 was lower than the statutory tax rate of 17.0% due mainly to (1) statutory stepped income tax exemption and (2) a tax rebate of 25% on the corporate tax payable, capped at $15,000 and (3) certain income being not subject to tax.

The effective tax rate for 1H2019 was lower than the statutory tax rate of 17.0% due mainly to (1) statutory stepped income tax exemption and (2) an overprovision of deferred tax amounting to $0.1 million.

Non-controlling interests

Non-controlling interests of $0.4 million was due to the share of profit of our subsidiary corporation, Raffles Prestige Capital Pte Ltd, in 1H2020.

Net profit

Overall, for 1H2020, net profit increased by $0.4 million or 22.8%, from $1.6 million for 1H2019 to $2.0 million for 1H2020, following the increase in profit before income tax of $0.4 million, as explained above.

Our net profit margin increased from 4.2% for 1H2019 to 6.2% for 1H2020.

Commentary

Economic outlook

The Ministry of Trade and Industry (“MTI”) announced that the Singapore's economy contracted by 13.2% on a year-on-year basis in the second quarter of 2020, mainly due to the Circuit Breaker measures introduced to slow the spread of COVID-19. On a quarter-on-quarter seasonally-adjusted annualised basis, the economy shrank by 13.1% in the second quarter. Taking into account the significant deterioration in the external economic environment, the deterioration in the external demand outlook for Singapore as well as the expected economic impact of the Circuit Breaker measures, the MTI has further downgraded its gross domestic product growth forecast for the Singapore economy to -7.0% to -5.0% in August 2020, from - 7.0% to -4.0% in May 2020.

Impact of COVID-19

As a result of the COVID-19 pandemic, economies across the world have been pushed into a lockdown to contain the virus and save lives. At the same time, the lockdowns have triggered what is likely to be the worst recession in decades. The broad and significant disruption to economic activity has affected different sectors to varying degrees.

Notably, in Singapore, the construction sector is one of the worst impacted sectors. Supply chains across the world have been disrupted due to measures implemented by the authorities to fight the virus. This has resulted in a shortage of construction materials, which will in turn cause a delay in the completion of construction projects. In addition, foreign worker dormitories in Singapore were significantly affected by COVID-19, leading to a shortage of manpower. The Singapore government has also implemented tighter restrictions, which further impacts the availability of manpower.

As a result, the Group's construction progress and the Group's financial results are expected to be affected. While Singapore has entered Phase 2 of re-opening and construction work has started to resume progressively, manpower constraints and shortage of raw materials remain. This has resulted in many construction sites being unable to resume work despite the progressive re-opening.

In response to the crisis, the Singapore government has introduced various support measures to alleviate the impact of COVID-19. Where applicable, the Group has tapped on the support schemes to ease the impact from COVID-19.

As at the date of this announcement, the Group has complied with the Safe Management Measures required by the Ministry of Manpower and Building and Construction Authority (“BCA”) and obtained the relevant approvals to resume work. All of the Group's project sites have resumed activities, with approximately 90% of the Group's workers permitted to work.

Going forward, the full extent of the impact is largely dependent on the trajectory of the pandemic and its recovery, bearing in mind the uncertainty surrounding the likelihood of a second wave. Nevertheless, the Group remains focused on the resumption of business activity and will turn all efforts towards ensuring the availability of manpower and resources. To tide through this crisis, the Group will also focus on preserving cash by reducing operating expenses where applicable and deferring all non-essential expenditures.

For the property segment, the construction progress of the Group's property developments is affected, including construction of the showflat for Phoenix Heights and additional costs estimated by contractors for the main tenders due to shortage of materials caused by the disruption of global supply chains as a result of the COVID-19 outbreak. Meanwhile, the availability of manpower remains an ongoing concern amidst the COVID-19 situation which has affected the foreign worker dormitories.

Industry outlook

The construction sector contracted by 54.7% year-on-year, a significant decrease from the 1.1% decline in the previous quarter. The performance of the sector was weighed down by the stoppage of most construction activities during the Circuit Breaker period, as well as manpower disruptions arising from additional measures to curb the spread of COVID-19, including movement restrictions at foreign worker dormitories. On a quarter-on-quarter seasonallyadjusted annualised basis, the sector contracted by 95.6%, from the 12.2% contraction in the preceding quarter.

Prior to the Circuit Breaker measures, the BCA projected the total construction demand for 2020 to range between $28.0 billion to $33.0 billion, with public sector demand expected to reach $17.5 billion to $20.5 billion, making up about 60% of the projected demand. Since the Circuit Breaker period began on 7 April 2020, most construction work has been suspended. After the Circuit Breaker period ended on 1 June 2020, the BCA allowed construction works to resume in a controlled manner in phases, with priority given to projects that cannot be left idle for too long due to safety concerns, and critical and time-sensitive projects, such as MRT and Deep Tunnel Sewerage System (“DTSS”) tunnelling projects.

The above developments have resulted in a challenging operating environment for the construction sector mainly due to the absence of revenue during the Circuit Breaker period. In addition, construction projects are expected to be delayed further beyond the Circuit Breaker period due to a disruption in the supply of construction materials.

According to real estate statistics from the Urban Redevelopment Authority, prices of private residential properties increased by 0.3% in 2Q2020, compared with the 1.0% decrease in the previous quarter. The number of private new homes sold in Singapore in 2Q2020 fell 20.3% to 1,713 units from 2,149 units in the previous quarter. Overall, total sales volume fell by 37.6% in 2Q2020 to 2,664 units, marking the third consecutive quarterly decline since third quarter 2019 when 5,763 units were sold.

Company outlook and order book update

Looking ahead, the Group expects the cost of construction and other operating costs to continue on an uptrend amidst the challenging operating environment, coupled with impact of COVID-19 during the year.

The Group remains cautiously optimistic as it continues to be supported by a healthy pipeline of construction projects. With the objective of increasing productivity, the Group will continue to focus on technology adoption, innovative measures, training of workers and higher usage of equipment and tools to reduce the overall reliance on manpower.

As at 30 June 2020, the Group's order book stood at $288.4 million, with projects extending till 2023.

On the property development front, the Group's joint venture residential project, The Essence, was launched in March 2019 and has achieved encouraging sales of approximately 70%. Despite the Circuit Breaker measures, the Group has continued to actively market this development through virtual channels.

The Group's 74-unit residential project in Bukit Panjang, Phoenix Residences, is also well on track to launch in 2020, having earlier received the necessary regulatory approvals from the Singapore Land Authority for development and the grant of a top-up to 99-year lease. We expect to launch the project in the second half of 2020.

The Group's investment property at 6-8 Bennett Street in Perth, Australia continues to provide a source of recurring rental income.

Moving forward, the Group will continue to strengthen its capabilities in its core civil engineering business in order to maintain our status as a leading civil engineering contractor across various industries. The Group remains fully committed to the smooth execution and delivery of its existing projects.

In line with the Group's long-term strategy to diversify its earnings and build a recurring income stream, the Group will continue to explore business opportunities, both locally and abroad, to widen its foothold in property development and investment, through strategic tie-ups with experienced partners.