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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.
Income Statement Review (Current financial year ended 31 December 2020 vs previous financial year ended 31 December 2019)
Our Group reported a 14.5% or $11.7 million decrease in revenue to $69.6 million for FY2020 as compared to $81.3 million for FY2019. The decrease was due mainly to a 7.8% decrease in revenue from the construction segment to $46.1 million, and a 32.9% decrease in revenue from the maintenance segment to $17.2 million, partially offset by a 9.9% increase in rental income.
The decrease in revenue from both the construction and maintenance segments was due mainly to the lower percentage of revenue recognised from a number of existing and newly awarded construction projects during FY2020.
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 Groupís revenue. On a segmental basis, construction, maintenance and rental income accounted for 66.2% (FY2019: 61.4%), 24.7% (FY2019: 31.5%) and 9.1% (FY2019: 7.1%) of our Groupís revenue respectively for FY2020.
Cost of sales
Our cost of sales decreased by 11.8% or $8.3 million from $70.5 million for FY2019 to $62.2 million for FY2020. The decrease in cost of sales was due mainly to:
Gross profit and gross profit margin
Our gross profit for FY2020 decreased by 32.0% or $3.4 million from $10.8 million for FY2019 to $7.4 million for FY2020.
While the rental income segment demonstrated an increase in contribution to gross profit of $0.4 million from $3.9 million for FY2019 to $4.3 million for FY2020, there is a decrease of $3.9 million in that of the construction and maintenance segments, from $6.9 million in FY2019 to $3.0 million in FY2020.
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 governmentís COVID-19 measures.
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 FY2020.
Other gains, net
Other gains increased by $8.2 million or 320.8% from $2.5 million for FY2019 to $10.7 million for FY2020. The increase was due mainly to:
which were partially offset by:
Administrative expenses increased by $2.1 million or 20.9% from $10.0 million for FY2019 to $12.1 million for FY2020. The increase was largely due to legal fees incurred for an ongoing trial and provision for potential fines of a subsidiary corporation and two employees.
Finance expenses decreased by $0.1 million or 9.7% from $1.3 million for FY2019 to $1.2 million for FY2020. The decrease was due mainly to the decrease in interest expenses of $0.2 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, offset by an increase of $0.1 million in lease liabilities arising from the purchase of plant and machineries during FY2020.
Share of results of associated companies and joint ventures
The share of results of associated companies and joint ventures increased by $0.6 million or 64.7% from a loss of $1.0 million for FY2019 to a loss of $0.4 million for FY2020. The increase was due mainly to:
which were partially offset by:
Profit before income tax
Profit before income tax increased by $3.4 million or 326.3% from $1.0 million for FY2019 to $4.4 million for FY2020. The increase was due mainly to (1) the increase in other gains (net) of $8.2 million, (2) the decrease in share of loss of associated companies and joint ventures of $0.6 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 $3.4 million and (2) the increase in administrative expenses of $2.1 million, as explained above.
Income tax expense
Income tax expense increased by $0.1 million or 33.1% from $0.4 million in FY2019 to $0.5 million in FY2020 due mainly to higher profit before income tax, as explained above.
The effective tax rates for FY2020 and FY2019 were 10.8% and 34.5% respectively.
The effective tax rate for FY2020 was lower than the statutory tax rate of 17.0% due mainly to (1) statutory stepped income tax exemption, (2) a tax rebate of 25% on the corporate tax payable, capped at $15,000, (3) an overprovision of prior year income tax amounting to $0.1 million and (4) certain income being not subject to tax.
The effective tax rate for FY2019 was higher than the statutory tax rate of 17.0%, due mainly to (1) to the profit before income tax of $1.0 million which took into account the share of loss of associated companies and joint ventures of $1.0 million, which was not tax deductible, (2) the relatively higher corporate tax rate of our Australian subsidiary corporation, and (3) certain non-deductible items added back for tax purposes.
Non-controlling interests of $0.7 million was due to the share of profit of our subsidiary corporation, Raffles Prestige Capital Pte Ltd, in FY2020.
Overall, for FY2020, net profit increased by $3.3 million or 480.8%, from $0.7 million for FY2019 to $4.0 million for FY2020, following the increase in profit before income tax of $3.4 million, which was partially offset by the increase in income tax expense of $0.1 million, as explained above.
Our net profit margin increased from 0.8% for FY2019 to 5.7% for FY2020.
Based on advance estimates from the Ministry of Trade and Industry, the Singapore economy contracted by 3.8% on a year-on-year basis in 4Q2020, an improvement from the 5.6% contraction recorded in 3Q2020. On a quarter-on-quarter seasonally adjusted basis, the economy grew by about 2.1%, following the 9.5% expansion in 3Q2020. For the whole of 2020, the Singapore economy contracted by 5.8%.
Impact of COVID-19
The COVID-19 pandemic has caused a severe disruption to global economic activity and the impact on economies across the world has been broad and significant, affecting different sectors to varying degrees. Even with a vaccine being distributed, the effects of the pandemic are expected to linger on for years.
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 in turn caused a delay in the completion of construction projects. In addition, foreign worker dormitories in Singapore were earlier 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.
While Singapore has entered Phase 3 of re-opening in December 2020 and construction work has started to resume progressively, manpower constraints and shortage of raw materials remain.
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 onto support schemes to ease the impact from COVID-19.
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 has complied with the Safe Management Measures required by the Ministry of Manpower and Building and Construction Authority (ďBCAĒ) and has resumed activities at all of the Groupís project sites. To tide through this crisis, the Group will continue to focus on preserving cash by reduce operating expenses where applicable and deferring all non-essential expenditures.
The construction sector shrank by 28.5% on a year-on-year basis in 4Q2020, improving from the 46.2% contraction in the preceding quarter. The improved performance of the sector came on the back of the resumption of more construction activities in 4Q2020 compared to the previous quarter. On a quarter-to-quarter seasonally adjusted basis, the construction sector grew by 34.4%, extending the 39.0% growth in 3Q2020.
According to BCA, total construction demand in 2021 is projected to recover to between S$23 billion and S$28 billion, with the public sector contributing about 65% of the total demand.
The public sector is expected to drive the construction demand in 2021, to between S$15 billion and S$18 billion with an anticipated stronger demand for public housing and infrastructure projects. Some of the upcoming major public sector projects scheduled to be awarded this year include various contracts under the Jurong Region MRT Line, the Cross Island MRT Line Phase 1 and the Deep Tunnel Sewerage System (DTSS) Phase 2.
When the Circuit Breaker period began on 7 April 2020, most construction work was 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 DTSS tunnelling projects.
In September 2020, the Singapore government has also committed S$20 million to support firms in the Built Environment sector adopt digital solutions to help firms keep their worksites and workers safe. The new S$20 million Advanced Digital Solutions (ADS) scheme, supported by the BCA and Infocomm Media Development Authority (IMDA), will help firms defray up to 80% of the costs of digital equipment such as thermal scanners, facial recognition systems, AI cameras and Bluetooth enabled wearables and their integration with site management solutions to assist in COVID-Safe worksite management.
Although the construction sector will continue to experience a challenging operating environment, the above developments, coupled with Singapore moving into Phase 3 of reopening on 28 December 2020, shed a positive light on the recovery of the overall economy and resumption of construction activities.
With regards to the private residential property segment, real estate statistics released by the Urban Redevelopment Authority (ďURAĒ) showed a 2.1% increase in the private residential property index in 4Q2020, compared with the 0.8% increase in 3Q2020. In 4Q2020, developers launched 3,147 uncompleted private residential units for sale, compared with 3,791 units in 3Q2020. For the whole of 2020, developers launched 10,833 uncompleted private residential properties for sale, compared with 11,345 units in 2019.
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 31 December 2020, the Groupís order book stood at $254.0 million, with projects extending till 2023.
On the property development front, the Groupís joint venture residential project, The Essence, was launched in March 2019 and has achieved good sales of approximately over 90%.
The Groupís 74-unit residential project in Bukit Panjang, Phoenix Residences, was launched in December 2020 to warm response. With the Phase 3 re-opening in Singapore, the Group has stepped up marketing efforts to engage homebuyers through both physical and virtual channels.
The Groupís investment property at 6-8 Bennett Street in Perth, Australia continues to provide a source of recurring rental income. As at 31 December 2020, the property had full occupancy.
In line with the expansion of its portfolio of investment properties, the Group announced the completion of the acquisition of 35 Kreta Ayer Road in January 2021. The property has a freehold tenure and comprises a three-storey with attic shophouse. It occupies a lot area of approximately 1,568 square feet and has a total floor area of approximately 4,240 square feet and the acquisition will contribute towards the Groupís performance in FY2021.
Moving forward, the Group will continue to strengthen its capabilities in its core civil engineering business in order to maintain its 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 Groupís long-term strategy to diversify its earnings and build a recurring income stream, it 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.