Extracted from Annual Report 2015
On behalf of the Board of Directors, it is with great pleasure that we present to you the Annual Report for Dayang Enterprise Holdings Berhad for the financial year ended 31 December 2015.
Despite the unrelenting decline of the crude oil price from a high of USD110 per barrel in 2014 to the current price of around USD33 per barrel, Dayang has continued to forge ahead in 2015, generating RM779mil of revenue and a respectable net profit after tax of RM170mil. Achieving this positive result during such a challenging year would not have been possible without the tireless effort of our dedicated employees and experienced management staff. The team will be asked to put in more effort in 2016 as we seek to become more cost efficient while delivering on our remaining RM3.8bil order book which should keep us busy beyond 2018. Backed by a healthy balance sheet in 2015, we decided to expand our long term marine vessel capabilities through the acquisition of our associate company, Perdana Petroleum Berhad. If present market conditions persist, Dayang's short term approach is to prioritise sustainability via prudent cash flow management while upholding our strong operational track record. Concurrently, the Group will also seek to lower costs and cautiously grasp at any suitable opportunities which could add to our long term execution capabilities.
The significant plunge in the oil price has no doubt sent a negative ripple effect throughout the entire industry. Not long after the downward trend started, Exploration & Production companies worldwide began slashing their budgets, leading to new projects being shelved and the renegotiation of existing contracts with suppliers and service providers. Though we are fortunate that our core business revolves around the Brownfield upstream O&G industry rather than the more heavily hit Greenfields sector, we have not been completely shielded from feeling the adverse effects of these cuts. Our primary client, Petronas, has recently indicated that they intend to reduce as much as RM50bil from their CAPEX and OPEX budgets of RM350bil over the next four years. Unfortunately, this means that there will be a deferment in the award of new projects, a slowdown in work orders and possibly lower rates on any new contracts that we do win. All of the above will translate into lower revenues and tighter margins if we choose not to adapt and evolve.
In May 2015, upon amassing more than a 33% stake in offshore supply vessel (OSV) operator, Perdana Petroleum Berhad, we automatically triggered a Mandatory General Offer (MGO) for Dayang to purchase the remainder of Perdana's shares from the open market. The takeover consumed RM120mil of our existing funds and required us to take on additional bank borrowings of RM680mil. As of November 2015, Dayang owned a 98.01% controlling stake in Perdana.
Along with acquiring Perdana's young fleet of 17 vessels, we also absorbed their net loss of RM101mil into our books for 2015. This loss can be attributed to several internal and external factors but rest assured, we have immediately set out to rectify these issues in order to align our new subsidiary with the overall group direction.
First of all, a rightsizing of the Perdana organisation was carried out which resulted in a reduction of onshore office based staff from 130 personnel to a more optimum number of 50. We are also currently in the midst of refinancing some unhedged USD loans which caused Perdana to suffer forex losses last year. Up to USD150mil worth of this loan will be converted into RM650mil of Islamic bonds via a Sukuk Murabahah programme. This loan restructuring process should be completed within the first half of 2016 and will bring about the dual benefits of reducing our exposure to the strengthening US dollar while making the loan Shariah compliant. Another major contributor to Perdana's losses last year was the necessary RM36.5mil down payment write-off for an Accommodation Work barge (AWB) which was scheduled for delivery in February 2016. The writeoff was a necessary measure as it would have been unwise for us to accept delivery of this vessel and incurring the added operational costs without any visibility of a firm charter.
Going forward, we intend to pull Perdana out of the red by lowering its breakeven vessel utilisation rate. This should be possible considering DESB Marine has been able to operate at a lower breakeven rate. At the same time, we aim to improve Perdana's average vessel utilisation rate by the end of 2016. Our options include redeploying Perdana vessels to Dayang contracts and intensifying our efforts in marketing both Perdana as well as DESB Marine fleets to the regional market.
Although things may look challenging for the OSV market in the near term, the acquisition of Perdana is a strategic long term play which will boost our competitiveness when bidding for the next round of HUCC (Hook-up, Construction & Commissioning) tenders. In the meantime, we will continue establishing new synergies with our most recent subsidiary as we look towards our long term objective of becoming the market leader in HUCC and topsides maintenance (TSM) services within the region. In the near future, it is possible that we may divest our holdings in Perdana while still maintaining control of the company in order to pare down our borrowings.
Regrettably, the financial year ended Dec 2015 (FY15) marks the first year in our history where profits failed to see a year-on-year increase. Revenue decreased from RM877mil in FY14 to RM779mil in FY15 owing to a slower intake of work orders and lower vessel utilization. Similarly, profit after tax was down from FY14's record high of RM181mil to RM170mil in FY15. It should be noted that we made a fair value gain of RM108mil from the acquisition of Perdana but this was offset by Perdana's FY15 net loss of RM118mil. The Group's combined order book (including Perdana's) of more than RM3.8bil should sustain our earnings until 2018 though it will be fairly difficult to predict short term revenue figures or subsequent profits during such turbulent times.
As expected, Dayang's share price has continued to slump in line with the falling oil price due to poor market sentiment. About a year ago, Dayang's share price was trading at above RM2.80 when the Brent crude oil price was above USD80 per barrel. On 21 January 2016, Dayang's share price traded at a low of RM0.99 when the Brent crude oil price dived below USD30 per barrel. The share price has since rebounded to the RM1.40 mark as at 3 March 2016, which goes to show that Dayang's share price is very much tied to the ups and downs of the global crude oil price.
A dividend payment of 3.5sen per share was declared and paid in April 2015. Unfortunately, the board has decided not to pay another dividend for the second half of 2015 in order to preserve our funds. The Group's net gearing ratio for the year ended at 1.5 times which we envisage will be pared down progressively through better management of the Group's vessel portfolio and various synergistic strategies that have been put into action as well as through the divestment of our stake in Perdana. We would also like to take this opportunity to proudly declare that in 2015, Dayang was listed by Forbes Asia as one of the "200 Best Companies under a Billion (USD)". A total of eleven Malaysian companies were named and Dayang was one of only two O&G companies that made it into the list.
East Malaysian operations were cut back in FY15 especially with regards to our Shell HUC contract. HUC and TSM activities for Petronas Carigali were also reduced in East Malaysia but this has been compensated by increased maintenance activity in West Malaysia as well as our recent venture into the realm of EPCC contracts which stands for Engineering, Procurement, Construction and Commissioning. On that note, our RM280mil maiden EPCC project (Bardegg-2 and Baronia EOR) is currently in full swing and should continue to be an addition to our revenue stream for FY16. Ongoing contracts with the rest of our other clients, namely Nippon Oil and Murphy Oil, have remained relatively unaffected during this down-cycle.
Unsurprisingly, the OSV sector is struggling to stay afloat due to a reduction in offshore activities which has led to lowered demand for vessels. Circumstances were further aggravated by an accompanied drop in vessel charter rates towards Q3 and Q4 last year. Operational resilience and a thorough understanding of marginal and breakeven costs will be the emphasis going forward especially for our capital intensive marine charter subsidiaries.
We are delighted to announce that major contracts won in FY15 include a two-year Facilities Improvement Project (FIP) for Petronas Carigali worth RM250mil and a one year extension on our TSM contract with the same client. At this point in time, we are tendering for an additional RM350mil worth of contracts.
Though cost optimisation will be the company's major focus in the immediate future, we will not do so at the expense of tarnishing our solid HSE track record. The Group's excellent HSE performance in 2015 has been recognised by our clients through the following awards:
At this juncture, we would like to reassure our shareholders that Dayang is still in the thick of the action where Malaysian HUC and offshore maintenance activities are concerned. Furthermore, the current market trend sees Exploration & Production (E&P) companies being more inclined towards smaller maintenance and Brownfield jobs rather than new Greenfield projects. Regardless of the direction in which the oil price takes, we are banking on the fact that our country's ageing production facilities will continue to operate and as such will continue to require routine maintenance and Brownfield modifications. Thus, there will still be work for us to bid on even in the short to medium term albeit not with the same volume and margins enjoyed in the past.
Typically, it is easy for companies to do well under favourable economic conditions. It is only when times get tough that we are able to separate the wheat from the chaff, or if you prefers, the oil from the water. In 2016, Dayang intends to not only survive but to forge ahead of the competition by:
The blueprint outlined above should ensure that Dayang is strongly positioned to capitalize on the upswing cycle when the market inevitably recovers. Though we are experiencing rough seas at present, Dayang will stay the course and sail into 2016 with a committed "focus towards excellence".
On behalf of the Board of Directors, we would like to acknowledge the contributions of Datuk Hasmi bin Hasnan, who resigned from his position as Chairman of the Board in December last year. Datuk Hasmi has been with us since the company was listed back in 2008 and his leadership will be missed.
A big thank you goes out to all stakeholders who were a part of our journey in 2015. To our clients, business partners, vendors, suppliers, and financiers, thank you for your ongoing support and cooperation. We look forward to continuing the journey in 2016 and achieving even more together.
We would also like to express our heartfelt appreciation to our capable management team and dedicated employees for their accomplishments in what had been a truly testing year for Dayang and the industry as a whole.
Last but not least, thanks to you, our valued shareholders, for your loyalty in these difficult times. Trust that your faith in the company will be rewarded because our best days still lie ahead of us.
Ali Bin Adai
Independent Non-Executive Chairman
Tengku Dato' Yusof Bin Tengku Ahmad Shahruddin