This printed article is located at http://okp.listedcompany.com/review.html

Operations Review

BUSINESS REVIEW

(i) Construction

Completed Construction Projects

During the year under review, there was one completed public sector construction project, which was secured in June 2017 and completed in February 2019

The construction segment continued to be one of the major contributors to our Group's total revenue, contributing 61.4 per cent or $50.0 million in FY2019.

List of Completed Construction Projects

Ongoing Construction Projects

During the year, we secured three construction projects from various public sector agencies. These three projects were:

• Commuter and road infrastructure works in Pasir Ris and Loyang
• Proposed construction of new infrastructure at Tukang Estate
• Construction of roads, drains and sewers at One-North Crescent and Media Link, and road demolition and reinstatement works at Portsdown Road.

In 2019, we continued the execution of several ongoing construction projects, which had been secured since February 2015.

List of Ongoing Construction Projects

(ii) Maintenance

Completed Maintenance Projects

No maintenance project was completed during the year under review.

In addition to providing a stable and recurrent income stream for the Group, our maintenance segment is an important part of the services that we provide to our clients. This segment contributed $25.7 million, which constituted 31.5 per cent of our Group's total revenue in FY2019.

Ongoing Maintenance Projects

We secured one new maintenance contract in FY2019. The new maintenance project involved improvement to roadside drains and watermain replacement works under Estate Upgrading Programme batch 9 - contract 1 (Clover and Thomson Faber Island Gardens Estates).

In 2019, we continued the execution of several ongoing maintenance projects, which had been secured since January 2018.

List of Ongoing Maintenance Projects

In addition to the above projects, one road maintenance contract for Expressway (TR310A) and another road maintenance contract for North East Sector (TR310B) were awarded to a joint venture partnership, Eng Lam – United E&P JV, in April 2019.

(iii) Rental Income

Rental income contributed $5.7 million or 7.1 per cent of our Group's total revenue for FY2019, up from 4.5 per cent in the previous year.

The increase in rental income, derived from investment properties, was mainly attributed to rental income generated from the property at 6-8 Bennett Street, East Perth, Western Australia based on the occupancy rate of 100.0 per cent as at the end of FY2019 compared to the occupancy rate of 68.0 per cent a year ago.

Financial Review

Income Statement

Balance Sheet

Revenue

Our Group reported a 10.0% or $9.0 million decrease in revenue to $81.4 million for FY2019 as compared to $90.4 million for FY2018. The decrease was due mainly to a 36.4% decrease in revenue from the maintenance segment to $25.7 million, partially offset by (i) an 8.5% increase in revenue from the construction segment to $50.0 million and (ii) a 42.4% increase in rental income.

The increase in revenue from the construction segment was due mainly to the higher percentage of revenue recognised from a number of existing and newly awarded construction projects as they progressed to a more active phase in FY2019.

The decrease in revenue from the maintenance segment was due mainly to a lower percentage of revenue recognised from a few newly-awarded maintenance projects in FY2019.

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 61.4% (FY2018: 50.9%), 31.5% (FY2018: 44.6%) and 7.1% (FY2018: 4.5%) of our Group's revenue respectively for FY2019.

Cost of Sales

Our cost of sales decreased by 2.7% or $1.9 million from $72.5 million for FY2018 to $70.6 million for FY2019. 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; and
   
   
2. the decrease in preliminary costs and overheads such as worksite expenses and depreciation, and professional fees related to the engagement of consultants to design the construction methods of our ongoing projects,
   
   
which were partially offset by:


3. an increase in the cost of construction materials due to higher utilisation of materials as some of the projects progressed to a more active phase in FY2019;
   
   
4. an increase 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
   
   
5. an increase in labour costs,
   
   

during FY2019.

Gross Profit And Gross Profit Margin

Our gross profit for FY2019 decreased by 39.5% or $7.1 million from $17.9 million for FY2018 to $10.8 million for FY2019.

The lower gross profit margin in FY2019 was due mainly to lower profit margins for new and some current construction projects as a result of a more competitive pricing environment and rising manpower cost.

Other Gain/(Losses),Net

Other gains increased by $3.1 million or 550.1% from a net loss of $0.6 million for FY2018 to a net gain of $2.5 million for FY2019. The increase was due mainly to (1) a technical management consultancy fee of $0.5 million in relation to a piling project in Jakarta, Indonesia, (2) an increase in net fair value gain of $2.5 million resulting from a fair value loss of $1.9 million in FY2018 to a fair value gain of $0.6 million in FY2019, arising from the revaluation of some of the investment properties and (3) an increase of $0.1 million in miscellaneous income arising from the sale of construction materials during FY2019.

Finance Expenses

Finance expenses increased by $0.1 million or 13.7% from $1.1 million for FY2018 to $1.2 million for FY2019. The increase was due mainly to:

1. an increase in lease liabilities of $34,000 arising from right-of-use assets;
   
   
2. an increase in notional interest on loan of $79,000 resulting from fair value adjustment of loan from a non-controlling interests; and
   
   
3. an increase in interest expenses of $42,000 incurred on a bank term loan for the purchase of an investment property at 6-8 Bennett Street, East Perth, Western Australia.
   
   

Administrative expenses

Administrative expenses increased by $0.5 million or 5.1% from $9.5 million for FY2018 to $10.0 million for FY2019. The increase was largely due to an increase in legal fees incurred for an ongoing trial, partially offset by a decrease in directors' remuneration as a result of the loss before income tax (excluding non-controlling interests) of the Group for FY2019.

Share of Results of Associated Companies And Joint Ventures

The share of loss of associated companies was due mainly to losses incurred by the Group's 22.5% held associated company, Chong Kuo Development Pte Ltd, and the Group's 25% held associated company, USB Holdings Pte Ltd, during FY2019.

Profit Before Income Tax

Profit before income tax decreased by $5.5 million or 84.2% from $6.5 million for FY2018 to $1.0 million for FY2019. The decrease was due mainly to (1) the decrease in gross profit of $7.1 million, (2) the increase in administrative expenses of $0.5 million, (3) the increase in finance expenses of $0.1 million and (4) the increase in share of loss of associated companies and joint ventures of $0.9 million. The decrease was partially offset by the increase in other gains (net) of $3.1 million, as explained above.

Income Tax Expense

Income tax expense decreased by $0.6 million or 61.2% from $0.9 million in FY2018 to $0.3 million in FY2019 due mainly to lower profit before income tax, as explained above.

The effective tax rates for FY2019 and FY2018 were 34.5% and 14.1% respectively.

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.

The effective tax rate for FY2018 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 20% on the corporate tax payable.

Non-Controlling Interests

Non-controlling interests of $1.0 million was due to the share of profit of our subsidiary corporation, Raffles Prestige Capital Pte Ltd, in FY2019.

Net Profit

Overall, for FY2019, net profit decreased by $4.9 million or 87.9%, from $5.6 million for FY2018 to $0.7 million for FY2019, following the decrease in profit before income tax of $5.5 million which was partially offset by the decrease in income tax expense of $0.6 million, as explained above.

Our net profit margin decreased from 6.2% for FY2018 to 0.8% for FY2019.

Balance Sheet

Current Assets

Current assets increased by $0.8 million, from $96.4 million as at 31 December 2018 to $97.2 million as at 31 December 2019. The increase was due mainly to:

1. an increase in trade and other receivables of $3.6 million. This was due mainly to (1) an increase in trade receivables of $1.1 million, (2) an increase in non-trade receivables of $1.2 million arising from advances to a joint venture for working capital purpose of $0.5 million and insurance claim receivable of $0.7 million, (3) an increase in deposits of $0.9 million arising mainly from deposits paid for the purchase of property, plant and equipment, and (4) an increase in prepayments of $0.4 million; and
   
   
2. a reclassification of investment in an associated company, CS Amber Development Pte. Ltd. (CS Amber) and non-current loan to CS Amber, collectively amounting to $9.8 million to assets classified as held for sale,
   
   
which was partially off set by:


3. a decrease in cash and cash equivalents of $9.7 million. This was due mainly to the cash used in operating activities of $0.2 million, cash used in investing activities of $3.3 million, and cash used in financing activities of $6.2 million; and
   
   
4. a decrease in contract assets of $2.9 million, due mainly to a decrease in construction contract due from customers arising from lower unbilled amounts expected to be collected from customers following the lower revenue recognised,
   
   

during FY2019.

Non-current assets

Non-current assets decreased by $7.2 million, from $90.2 million as at 31 December 2018 to $83.0 million as at 31 December 2019. The decrease was due mainly to:

1. decrease in investments in joint ventures of $1.0 million arising from dividends received of $0.6 million and a capital reduction in a joint venture of $0.4 million;
   
   
2. a decrease in investments in associated companies of $2.3 million arising from (1) the notional fair value on loan and share of loss of the associated companies and (2) a reclassification of investment in CS Amber of $0.9 million to assets classified as held for sale;
   
   
3. a decrease in other receivables of $6.9 million arising from the reclassification of loan to CS Amber to assets classified as held for sale, offset by an increase in other receivables of $2.0 million due mainly to an advance to an associated company, USB Holdings Pte Ltd; and
   
   
4. a decrease in property, plant and equipment of $0.7 million resulting from the disposal and depreciation of property, plant and equipment, which were partially offset by the purchase of new property, plant and equipment,
   
   
which were partially offset by:


5. an increase in right-of-use assets of $3.7 million resulting from the new plant and equipment acquired to support the new and existing projects and the use of state land,
   
   

during FY2019.

Current liabilities

Current liabilities decreased by $5.2 million, from $27.6 million as at 31 December 2018 to $22.4 million as at 31 December 2019. The decrease was due mainly to:

1. a decrease in trade and other payables of $5.4 million arising from (1) lower accrued operating expenses related to project costs and (2) settlement of some major trade and other payables; and
   
   
2. a decrease in current income tax liabilities of $0.5 million due to lower tax provision resulting from lower profits generated,
   
   
which were partially offset by:


3. an increase in lease liabilities of $0.7 million arising from the purchase of plant and machineries and use of state land,
   
   

during FY2019.

Non-Current Liabilities

Non-current liabilities increased by $1.3 million, from $35.4 million as at 31 December 2018 to $36.7 million as at 31 December 2019. The increase was due mainly to (1) an increase in lease liabilities of $2.2 million arising from the purchase of plant and machineries to support the existing projects and (2) a net increase of $0.2 million in non-trade payables arising from a foreign exchange realignment due to depreciation of Australian dollar against the Singapore dollar, which were partially offset by repayment of bank borrowing of $1.1 million during FY2019.

Shareholders' Equity

Shareholders' equity, comprising share capital, other reserves, retained profits and non-controlling interests, decreased by $2.5 million, from $123.6 million as at 31 December 2018 to $121.1 million as at 31 December 2019. The decrease was due mainly to:

1. the dividend payment to shareholders of $3.1 million; and
   
   
2. the loss generated from operations of $0.4 million attributable to equity holders of the Company, offset by noncontrolling interests of $1.0 million arising from the share of profit of Raffles Prestige Capital Pte Ltd,
   
   

during FY2019.

Our Operating And Financial Review

Group's Quarterly Results

All quarters in FY2019 reported lower revenue as compared to their corresponding quarters in FY2018 except for the fourth quarter. The lower revenue was due mainly to the lower percentage of revenue recognised from a few newlyawarded maintenance projects. The decrease in revenue from the maintenance segment was partially offset by an increase in the construction segment and rental income generated from investment properties due mainly to a higher percentage of recenue recognised from a number of existing construction projects and newly awarded projects which progressed to a more active phase in FY2019, and rental income from the property at 6-8 Bennett Street, East Perth, Western Australia. The higher revenue in the fourth quarter of FY2019 as compared to the corresponding quarter in FY2018 is due mainly to the higher percentage of revenue recognised from a number of existing and newly awarded construction projects as they progressed to a more active phase in 4Q2019 as well as a higher percentage of revenue recognised from a number of existing maintenance projects as they progressed to a more active phase during 4Q2019.

Lower EBITDA were recorded in the first quarter and the last two quarters in FY2019 as compared to their corresponding quarters in FY2018.

The decrease in profit before income tax for the first quarter in FY2019 was due mainly to lower profit margins for new and some current projects as a result of a more competitive pricing environment and rising manpower costs, an increase in share of losses of associated companies, as well as an increase in finance expenses. The decrease was partially offset by a decrease in administrative expenses due mainly to lower directors' remuneration (including profit sharing), and an increase in other gains (net) of $0.5 million arising from strengthening of the Australian dollar against the Singapore dollar. The increase in profit before income tax for the second quarter in FY2019 was due mainly to an increase in gross profit which was largely attributable to the higher contribution from the rental income segment as well as a few construction projects which had commanded better gross profit in the second quarter ended 30 June 2019. The decrease in profit before income tax for the third quarter in FY2019 was largely due to lower profit margins for some current construction projects as a result of a more competitive pricing environment and rising manpower costs and an increase in share of losses of associated companies and joint ventures of $0.4 million. The decrease in profit before income tax for the fourth quarter in FY2019 was due to lower profit margins for new and some current construction projects as a result of a more competitive pricing environment and rising manpower cost, an increase in finance expenses and an increase in share of loss of associated companies. The decrease was partially offset by an increase in other gains (net) arising from the revaluation of some of the investment properties.

Lower profit before income tax led to lower profit attributable to shareholders for the first, third and fourth quarters in FY2019.

Higher profit before income tax led to higher profit attributable to shareholders for the second quarter in FY2019.

Corporate Liquidity And Cash Resources

We maintained a strong and healthy balance sheet and cash flow position which enabled us to explore new infrastructure projects and property investments, either here or overseas.

We reported net cash of $0.2 million used in operating activities in FY2019 as compared to $2.5 million in FY2018. The $2.3 million decrease in net cash used in operating activities was due mainly to

1. a decrease in net cash generated from operating activities before working capital changes of $5.9 million; and


2. an decrease in interest received of $0.4 million,

which were partially offset by:


3. a decrease in net working capital outflow of $7.9 million; and


4. an decrease in income tax paid of $0.7 million during FY2019.

Net cash used in investing activites decreased by $33.7 mllion due mainly to

1. repayment of loans by associated company and joint venture of $8.5 million and $3.8 million respectively in FY2018
   
   
2. an increase in cash used in the purchase of property, plant and equipment of $0.8 million during FY2019; and
   
   
3. a decrease in dividend received from joint ventures of $3.7 million
   
   
which were partially offset by:


4. cash used in FY2018 for (1) the purchase of new investment property of $46.3 million and (2) investment in an associated company of $0.5 million; and
   
   
5. decrease in advances extended to associated companies of $3.7 million.
   
   

Net cash of $6.2 million was used in financing activities in FY2019. This was due mainly to (1) dividend payments to shareholders of $3.1 million, (2) repayment of lease liabilities of $1.3 million, (3) interest payments of $1.0 million, and (4) repayment of borrowings of $0.8 million, during FY2019.

Overall, free cash and cash equivalents stood at $59.5 million as at 31 December 2019, a decrease of $9.7 million, from $69.2 million as at 31 December 2018. This works out to cash of 19.3 cents per share as at 31 December 2019 as compared to 22.4 cents per share as at 31 December 2018 (based on 308,430,594 issued shares as at 31 December 2019 and 31 December 2018).

The lease liabilities of $6.4 million are secured by way of corporate guarantees issued by the Company and charges over the property, plant and equipment under the leases.

The bank borrowings of $23.5 million is secured by first legal mortgage over an investment property of the Group, certain bank deposits, the Group's shares in a subsidiary corporation and corporate guarantee of the Company.

The increase in debt amount from $28.1 million as at FY2018 to $29.9 million as at FY2019 is largely due to acquisitions of property, plant and equipment to support the exising projects.

Value Added Statement

Total value-added created by the Group in FY2019 amounted to $37.6 million (2018: $49.3 million) due to lower profits reported in Y2019.

In FY2019, about $30.9 million or 82.0 per cent of the value-added was paid to employees in the form of salaries and wages. $0.5 million or 1.0 per cent was paid to the government in the form of corporate and property taxes while $4.1 million or 11.0 per cent was paid as dividends to shareholders and interests to financial institutions. Balance of $2.8 million was retained by the Group for its future growth.

In FY2018, about $30.8 million or 62.0 per cent of the value-added was paid to employees in the form of salaries and wages. $1.0 million or 2.0 per cent was paid to the government in the form of corporate and property taxes while $7.1 million or 14.0 per cent was paid as dividends to shareholders and interests to financial institutions. Balance of $8.6 million was retained by the Group for its future growth.

n.m. - not meaningful