2016 Annual Report
Dear valued shareholders,
In an operating landscape fraught with severe macroeconomic headwinds, Frontken Corporation Berhad (“Frontken” or “the Group”) achieved an earnings before interest, tax, depreciation and amortisation (“EBITDA”) of RM51.7 million and profit after tax (“PAT”) of RM27.3 million for the year ended 31 December 2016 (“FYE2016”). This performance not only marks a significant jump in profit yearon-year but also reflects the Group’s highest EBITDA and PAT to date.
Clearly, Frontken’s strategic focus on delivering quality engineering solutions to diverse industries, while at the same, expanding our presence in selected high-growth countries within the Asia Pacific region, has and will
continue to bear fruits for our Group. Simultaneously, we have also been carefully cultivating and nurturing our human capital to ensure that our talent have the right skill-set and mindset to take our Group to greater heights of success.
On this positive note and on behalf of the Board of Directors of Frontken, I am pleased to present to you the Annual Report and Audited Financial Statements of the Group and its subsidiary companies for FYE2016.
As part of this Annual Report, the following Management Discussion and Analysis (“MD&A”) provides our shareholders with details of the Group’s performance and business operations.
We trust that you will find our MD&A both informative and insightful.
MANAGEMENT DISCUSSION AND ANALYSIS
A Multinational Integrated Engineering Solutions Group
Frontken is a leading provider of surface treatments, chemical and mechanical engineering solutions in the region. Leveraging on more than 20 years of industry experience, Frontken has successfully expanded
its presence throughout Asia Pacific, specifically in Malaysia, Taiwan,
Indonesia, Singapore, Thailand and the Philippines.
The Group’s operations across these countries offer technical expertise and solutions to a diverse range of industries including semiconductor, oil and gas, power generation, petrochemical and marine.
Frontken’s competitive advantage is derived from its commitment towards delivery excellence as well as innovative research and development (“R&D”). Embracing state-of-theart technologies and processes, the Group’s highly skilled and motivated professionals of some 1,100 strong are fully capable of providing our broad spectrum of clients with quality one-stop solutions.
The global economy faced significant
headwinds in 2016. Economic growth of advanced economies was in spurtsand-starts while China’s economy grew at a slower pace. Further aggravating the situation were factors such as the continued slump in commodity and oil price, the Brexit referendum and the result of the Presidential Elections in the United States.
Against this backdrop, economies within the Asia Pacific region were impacted to varying degrees. Malaysia’s economy remained resilient, with GDP growth at 4.2%, according to Bank Negara Malaysia. Taiwan, however, was more severely impacted with 2016 GDP growth estimated at only 1.5%, as stated by the Directorate General of Budget, Accounting and Statistics. Singapore also faired the same with a GDP growth of only 1.8% in 2016, as highlighted by its Ministry of Trade and Industry.
From an industry perspective, the persistent slump in oil and gas price naturally affected the oil and gas industry throughout the world. Investments in exploration, production and maintenance activities decreased
significantly and as a consequence, oil and gas related companies throughout the value chain suffered declining performance. Frontken’s oil and gas customers were not spared and this had led to a tough financial year for
our operations that are focused in this sector.
The semiconductor industry, however, is growing from strength to strength. SEMI, a global industry association, estimates spending of US$19 billion on semiconductor equipment and materials in the Southeast Asia region for 2015 and 2016. This uptrend, resulting from the growth in telecommunications and Internetof-Things (“IoT”) technologies, has enabled our Group’s semiconductor operations to turn in strong results.
Review of Financial Performance
For FYE2016, Frontken reported a revenue of RM261.8 million as compared to RM280.6 million in the
last financial year. The year-on-year decrease in revenue was the result of an exceptional revenue derived from the completion of a project (“ATB Project”) that was recorded in FYE2015. If the revenue from the ATB Project was to be excluded, revenue for FYE2016 would have been 4.5% higher year-on-year.
The Group profit before tax (“PBT”) during the year under review jumped by a significant 108.4% to RM33.3 million from RM16.0 million recorded a year ago. As a result, profit after tax grew to
RM27.3 million from RM9.5 million last year. The markedly improved profit was due to stronger contribution from our semiconductor solutions business in Taiwan and Malaysia. The Group also recorded better performance in the Philippines and Indonesia attributable to our expanding business portfolio in these two countries.
From a segmental standpoint, Frontken’s Taiwan operations continues to be the main profit generator as
it contributed 72% to the Group’s overall operating profit in FYE2016. This was followed by Malaysia (22%) and the Philippines (10%). Frontken’s operations in Indonesia and Singapore recorded operating losses for the year under review. Earnings per share attributable to equity holders of the company stood at 1.91 sen for FYE2016, up significantly from 0.39 sen a year ago. Net assets per share increased slightly to RM0.25 as at 31 December 2016 from RM0.23 as at the corresponding period last year.
In 2016, Frontken allocated a capital expenditure of RM9.7 million for FYE2017 in an effort to improve its overall operations.
Review of Business Operations
Frontken Malaysia turned in a strong performance during the year under
review with an operating profit of
RM7.2 million on the back of a revenue of RM68.5 million, as compared to an operating loss of RM3.5 million on a revenue of RM106.8 million recorded
in the previous financial year.
The improved performance was the result of stronger contribution from Frontken Malaysia’s semiconductor division, which has operations in Kulim, Kuching and Melaka.
In Kulim, Frontken has maintained its dominant position as the largest parts cleaning service provider among the Group’s Malaysian subsidiaries. In addition to seeing increased sales from its semiconductor customers, Frontken’s Kulim operations also saw a rebound in business activity from the solar or photovoltaic (“PV”) industry throughout 2016.
In the oil and gas sector, the low price regime affected its related operations across the board. Frontken TTES Malaysia, the Group’s engineering services provider that also holds a license to supply and provide services to Petroliam Nasional Bhd (“Petronas”), experienced acute competition and lower margins in 2016. The company intends to aggressively manage cost and venture into power generation and general industry services to generate revenue and sustain its current operations.
In Johor, Frontken’s oil and gas business was able to secure a new customer that is a global leader in the detailed engineering, fabrication
and construction of offshore floating production storage offloading vessels.
In East Malaysia, Frontken fared better with increased revenue from new customers as well as from non-oil and gas related services.
Frontken’s Taiwan operations, which are primarily focused on the semiconductor industry, remain the
largest profit contributor to the Group.
For FYE2016, Frontken Taiwan turned
in a higher operating profit of RM23.9
million compared to RM20.6 million a year ago. Revenue was also higher at RM128.3 million compared to RM109.1 million last year.
The improved performance was due to the continued strong demand
of thin-film-transistor liquid-crystal
display (“TFT-LCD”), which are used in televisions, computer monitors, mobile phones and projectors. During the year, Frontken Taiwan was able to retain its market share in some products while securing greater market share in others. At the same time, our Taiwan operations continued to look at ways to improve its production processes to
maximise efficiencies and strengthen
For FYE2016, Frontken Philippines
achieved an operating profit of
RM3.2 million from a revenue of RM18.4 million. This was a marginal improvement compared with an
operating profit of RM3.1 million from
a revenue of RM15.8 million recorded a year ago.
In the solar panels sector, Frontken Philippines saw tangible growth throughout its precision cleaning business platforms. In addition, the commencement of operations of its customer’s new solar panel fabrication plant (SunPower Fab 4) at the beginning of 2016 also contributed
significantly towards revenue growth.
Apart from the photovoltaic industry, Frontken Philippines also saw growth in its energy business. This was due to an increase in on-site works for power plants’ scheduled outages and the execution of plant
efficiency improvement programmes.
The Group’s oil and gas and utilities operations in the Philippines, however, were affected by deferred projects during the year.
Frontken Indonesia’s operating loss
narrowed significantly to RM0.1 million
compared to RM0.8 million a year ago. The overall operations continued to be impacted by the oil and gas downturn.
Nevertheless, Frontken in Indonesia is only one out of four companies
that possess an API certification. This
would enable the company to carry
out repairs and rectification works
or tender for projects from large oil companies for blowout preventer repairs when the market recovers.
Frontken’s Singapore operations recorded an operating loss of RM1.1 million for FYE2016. This was higher compared to an operating loss of RM0.8 million for FYE2015.
While the Group’s semiconductor related business in Singapore remained stable, with strong support from its customers, Frontken Singapore’s marine and offshore as well as power generation businesses were severely impacted by the challenging operating conditions.
In order to strengthen its financial
and operational position, Frontken in Singapore will continue to focus on improving cost effectiveness, undertake bigger projects, penetrate new markets and expand its capabilities and know-how.
The global economy is expected to fare better in 2017 compared to 2016. The International Monetary Fund expects the global economy to grow by 3.4% in 2017, which is slightly better than 3.1% in 2016. Nevertheless, uncertainties such as the future trade policy of the United States as well as the economic performances of Europe and China, continue to cause concerns.
The oil and gas industry is also expected to make a gradual recovery in 2017 as price strengthens and oversupply eases. The semiconductor sector is also predicted to sustain its uptrend, buoyed by demand from the telecommunications, automotive and IoT industries.
In view of this operating landscape, Frontken aims to sustain its strong performance in Malaysia, Taiwan and the Philippines, especially in relation to its semiconductor operations. In addition to maintaining its current client portfolio, the Group intends to win more clients by leveraging on its delivery track record and expertise.
state. In Indonesia, we remain confident
of a turnaround in the foreseeable
future in view of the API certification
obtained in December 2016.
From a ‘Big Picture’ perspective, the
Asia Pacific region, especially ASEAN
countries, are expected to maintain robust growth. The Group’s foothold in key economies within ASEAN as well as in Taiwan puts us in a unique position to tap into a dynamic and vibrant marketplace. As the ASEAN Economic Community (“AEC”) gains momentum, we also foresee the rapid growth of ASEAN to ASEAN business activities and this will augur well for the Group in the long term.
All in all, the Board of Directors of Frontken, its Senior Management Team as well as our multinational team of employees are committed towards working cohesively to ensure that the Group continues to deliver enhanced
shareholders’ value in a sustainable manner. As we march forward into 2017, Frontken remains cautiously optimistic that its performance for its
2017 financial year will be satisfactory.
As a Group, we would like to take this opportunity to thank our Board of Directors for their invaluable counsel and dedication in exercising their
fiduciary duties. We would also like
to thank our senior management team and all employees for staying committed to our Group and delivering a record breaking performance in FYE2016. Kudos and congratulations!
We would also like to thank our customers, suppliers, business associates, as well as policymakers, regulators, and relevant government authorities for their assistance and cooperation.
Last but not least, a big ‘Terima Kasih’ to our loyal shareholders for your
continued trust and confidence in
Frontken Corporation Berhad.
NG WAI PIN
Chairman / Managing Director
2015 Annual Report
despite the headwinds for FyE2015 Frontken
managed to deliver a profitable year with a revenue
of RM280.6 million and earnings before interest, tax and amortization of RM35.6 million. Acknowledging
that our financial profits for FYE2015 was lower
compared to FyE2014; it is to be noted that this was mainly due to an unfortunate cost overrun in our ATB Project at Tanjung Bin that was completed
in July 2015. ATB Project was Frontken’s first
Engineering, Procurement, Construction and Commissioning (“EPCC”) contract of this size. We encountered some challenges during the execution of the project and stretched ourselves in ensuring on delivering the completed tankage facilities to our client and at the same time ensuring that our
high standard of quality was not compromised. We
believe that undertaking this project has provided us with an opportunity to further expand and advance on our technical expertise and resources in EPCC projects should we decide to pursue this area of our business.
With a wavering global economy and unsettling commodity price trends, like many others in the market, Frontken was not immune to such market conditions. The dramatic decline in oil prices from an oversupplied market has affected the entire chain of the oil and gas industry. It is believed that the unfavourable market effects of 2015 will continue to ripple through to 2016.
In response to such adverse market conditions, the management of Frontken took the necessary steps in restructuring and streamlining its resources to ensure that it is maximizing operation capacities
and profits. For example in Singapore, having experienced a
slower performance for two years running, resources were heavily streamlined and business strategies revised. during 2015 Frontken Singapore pursued various discussions with foreign companies in establishing a business base in Singapore tapping on its strategic regional location and expertise it is able to offer its potential partners. This has in turn developed a wider client base and international brand recognition for the Group. We hope to turn some of these possibilities into realities in the very near future.
Although it is true that for the foreseeable future we will likely continue to see lower commodity price trends particularly in the oil and gas industry, we are cautiously optimistic that we will be able to maintain our market share in our maintenance and repair business sectors albeit at a lower margin in line with our customers’ expectation. To
make up for the lower margin, we need to increase our efficiency
and explore cost savings measures.
BUILDING A SOLID FOUNDATION
Over the recent years Frontken has been strategising and building a solid platform to maintain a stable momentum for both its
operational and financial growth. I believe that establishing a good fiscal discipline and strong financial position is imperative to maintain
long term and sustainable growth. Since 2012, Frontken have been steadily building a solid cash position for the Group with a zero net
gearing ratio and a cash and cash equivalent of RM105.1 million as at 31 December 2015. Armed with a strong financial position gives
us leverage to capitalise on project and investment opportunities. With this in mind, we will continue to look out for mergers and
acquisitions to boost our bottom line.
In building a solid foundation that is sustainable, we not only have to amass our resources but investments as well to ensure long-term competitiveness and growth. This is an on-going task for Frontken.
Strategic mergers and acquisitions have been an important investment factor contributing to the profitable expansion of the Group. In 2008, we acquired a stake in Ares Green Technology
Corporation (“AGTC”) in Taiwan, in which we currently hold
approximately 68% equity interest. AGTC is a leading company in the
semiconductor industry providing environmental friendly advance precision cleaning and surface treatment solutions. AGTC has
become one of our core profit contributors making up approximately 39% of total revenue for FYE2015. During the financial year under
review, the management had decided to withdraw its plans in listing AGTC on the Taiwan Stock Exchange. After full evaluations and taking all factors into consideration, the management concluded that it was more practical to delist it from the preparatory board and continue as a public limited company. Furthermore, the company is performing robustly despite market sentiments and we are cautiously optimistic that AGTC will be able to maintain its trending performance moving forward.
to cover a broad spectrum of services. We have the
flexibility and capability to mobilize our resources on site with selected technical expertise required
from our respective centres. These combined elements sets us apart from other industry players and enables us to maintain a competitive edge as a leader in our industry.
2016 is expected to be another rocky year for the oil and gas industry leaving many players in the market slowing down their project pipeline, restructuring their business direction and even cutting down their capital expenditures. As mentioned earlier, we believe that this will result in an increase in demand for local services and repairs in which we are anticipating and preparing for the year ahead. Acknowledging that the Group’s overall margin will likely be thinner resulting from possible cost-down from our customers, we need to be vigilant in our cost management and continually explore ways to
improve on our efficiency. With the excellent support
TTES Frontken Integrated Services Sdn Bhd (“TFIS”) was a profitable acquisition for Frontken in 2014. The vendors of TFIS provided a cumulative profit guarantee of RM8.0 million for two (2) financial years combined. TFIS cumulative profit for two (2) financial years combined of RM8.6 million has exceeded the guaranteed profit given to the Group at the time of the acquisition. TFIS is a synergetic
addition to the Group bringing in businesses in which the Group’s technical expertise and capabilities could be leveraged on. This in turn also increased the scope of works that TFIS could undertake and thus able to serve our customers better.
MOVING FORWARD AS A GROUP
Frontken has established business presence and operating centres in Malaysia, Singapore, Taiwan, Philippines, Indonesia and Thailand. As a Group, each of our centres possesses their own set of skills
and unique technology, which sets us up with an extensive platform
from my colleagues and our robust business strategy
for the year ahead, I am confident that Frontken will
be able to maintain a positive performance for the
financial year ending 2016.
I would like to thank our stakeholders for their endless support and trust in the Company. To my Board of directors, your dedication and leadership provided throughout the years is much appreciated. To our most valued employees and colleagues, I would like to express my sincere gratitude and thanks for your commitment, hard work and dedication to Frontken.
Finally, I would like to thank our clients, associates, business partners, consultants and bankers for their continued support, loyalty, advice and trust in us.
MANAGEMENT DISCUSSION AND ANALYSIS
Frontken, equipped with twenty years of industry
experience in providing its clients with innovative engineering and technology is the leading provider of surface metamorphosis, chemical and mechanical engineering solutions. The Group’s
business facilities across the Asia Pacific region
offers excellent technical expertise and solutions to key industry players in the oil and gas, power generation, petrochemical, semiconductor, marine industries and many more.
Frontken’s competitive edge emanates from its
commitment to quality and its investment in research
and development to provide solutions in delivering
maximum results. Well equipped with state-of-the
art technology and a team of committed skilled professionals, Frontken has both the capabilities and infrastructure to provide its broad spectrum of clients with a one-stop solution.
For the financial year ended 31 December 2015
(“FyE2015”), Frontken reported a revenue of RM280.6 million as compared to RM309.8 million
in the last financial year ended 31 December 2014 (“FYE2014”). The Group’s profit before tax (“PBT”) of RM16.0 million and profit after tax (“PAT”) of RM9.5 million reflected a lower performance as compared
to RM28.1 million and RM23.2 million respectively
for FYE2014. Frontken’s FYE2015 profit was
adversely affected mainly by the higher expenses incurred from our ATB project that was handed over in July 2015. This was further exacerbated by the writing off and impairment of assets combined with the loss on disposal of our Hong Kong and China subsidiaries, Frontken MIC Co. Limited and Frontken-MIC (Wuxi) Co. Ltd.
For the financial year under review, the Group had a
realised foreign currency gain amounting to RM2.9 million.
For FyE2015, Taiwan remains to be our key
profit contributor to the Group with a revenue
of RM108.7 million, representing an increase of 18.7% as compared to FyE2014. Ares Green Technology Corporation (“AGTC”) is the leading advanced technology company in Taiwan that pioneered the advanced precision cleaning and
surface metamorphosis technology. Headquartered
in Tainan with engineering facilities in Hsinchu, Taichung and Tainan, AGTC is supported with over 355 employees leading the semiconductor service business in Taiwan.
AGTC’s advanced research and development experience and capabilities has enabled the company to deliver evolving processes,
engineering solutions and product quality. AGTC commands a
sizable market share in the industry, which has supported its strong and stable growth over the years. Moving forward, the management
is cautiously confident that it will continue to enjoy constant growth
for the company in view of the increasing dependency and usage of the Internet-of-Things and the ever-evolving mobile market.
Frontken Philippines, which provides total integrated engineering solutions to the power, oil and gas, manufacturing, utilities, food, automotive and mining industries delivered a revenue growth of
47.0% with RM15.1 million. Supported with a total of 2900 square
meters of operating facilities, Frontken Philippines serves major industry players in the Philippines. despite a challenging economy during FyE2015, Frontken Philippines increased its number of completed projects from 69 in FyE2014 to 89 for FyE2015, which
was reflected in its profit growth to RM3.1 million from RM1.6
million. during the year, the company had rapidly expanded its workforce to 57 professional technicians from 13 in 2014 to cater for the increasing demand from its existing clients and potential new projects that are anticipated for in 2016.
Frontken Singapore continued to be impacted by the decline in the oil and gas sector that affected the global market. The continual increase in labour costs and government’s initiatives to reduce dependency on foreign workers running in parallel to increasing levies does not help our business. On the back of the very tough and dire year, Frontken Singapore delivered a revenue of RM48.0 million, falling short of last year’s revenue of RM58.6 million.
To counter the market storm and tough business environment, the company has restructured and realigned its business strategies during
the financial year under review. Frontken Singapore streamlined
its resources, merged and strengthened its technical platform by partnering with TFIS in tendering and securing projects. Working together as a Group has placed us higher on the industry scale and enabled us to offer a broader spectrum as a one-stop solution. As a result of our combined capabilities, Frontken Singapore secured
a repair project from Hitachi. This was a significant achievement for to Hitachi OEM’s only. In 2015, Frontken successfully expanded into Thailand when we secured a tie-up with Mitsubishi Compressor as their representing agent.
Moving into 2016, Frontken Singapore is hopeful for a better year as we move forward with our new operating strategies. We plan to gain further business opportunities in Malaysia and Brunei in the area of
rotating equipment services and to secure more projects from our
key clients and industry players. However, we remain cautious of the uncertain market condition and will continue to adjust and anticipate changes.
Disposable of Subsidiary
During the financial year under review, Frontken disposed of its Hong
Kong and China subsidiaries namely Frontken MIC Co. Limited and Frontken-MIC (Wuxi) Co. Ltd. The management’s decision to strip of its China counterpart is strictly to slim down the Group’s loss making operations.
Change in Major Shareholder
dr Jorg Helmut Hohnloser, who was previously a major shareholder of the Group, had on 23 June 2015 disposed his entire interest of 290,991,473 ordinary shares of RM0.10 each (Shares) or 27.8% to CP Asia Holding GmbH.
On 9 March 2015, the completion of the 42,026,970 warrants conversion enlarged our share capital to RM105,343,513.
Various research reports has it that 2016 will continue to be an extremely challenging year for the Malaysian economy, as downside risks on the external front continues to increase and even the global growth forecasts have been revised downwards by the World Bank.
However, with that said we are cautiously optimistic for the year ahead now that Frontken is strategically positioned to capture more opportunities with our merged capabilities and infrastructure as a Group. As mentioned earlier, the extreme cost cutting that oil majors had to undertake will open up more project opportunities for Frontken, as measures to prolong
and maintain their equipment / assets will be sought
for instead of new capital expenditure. Tapping into the anticipated increasing demand of services and repairs – Frontken will be able to leverage on its industry expertise and garner continuous growth moving forward.
Staying mindful of the challenging landscape ahead, Frontken will continue to instill proactive management and business strategies to ensure business sustainability and value.
2014 Annual Report
On behalf of the Board of Directors of Frontken Corporation Berhad, I present to you the Annual Report and the Audited Financial Statements for the financial year ended 31 December 2014.
YEAR 2014 IN PERSPECTIVE
In my last statement, I stated that our Group would remain cautious on the economic outlook for year 2014 as the domestic and overseas markets continue to be challenging but encouraging. With each passing quarters, I am pleased to report that through perseverance and hard work, year 2014 has seen a significant improvement of our performance as compared to year 2013.
Generally, year 2014 was a good year for us. In it, there were mixed performances for our Group’s businesses with some businesses soaring while others were slightly down. We will continue with our strategy to build a stable platform. We have responded to the lessons we learned from the market when our customers rescaled their businesses and are now in a better position in aligning our businesses in the respective markets.
Our revenue improved significantly to RM309.8 million (2013: RM190.6 million) which was largely contributed by the improved business performance of our Group’s subsidiaries in Taiwan and Malaysia. The semi-conductor business in Taiwan was robust and we were fortunate to be able to capitalise on the same. For Malaysia, the ATB Project in Tanjung Bin and contributions from the oil and gas and semi-conductor divisions assisted in the better performance as well. Consequently, our Profit Before Tax also improved to RM28.1 million (2013 : RM5.9 million) as a result of the higher revenue and good control of operating costs. The profit from the sale of a loss making associate company also contributed to the better bottom line.
The Malaysian market improved to RM147.9 million (2013 : RM33.7 million). The operating Malaysian entities are Frontken Malaysia Sdn Bhd, Frontken (Johor) Sdn Bhd, Frontken (East Malaysia) Sdn Bhd and TTES Frontken Integrated Services Sdn Bhd (formerly known as TTES Team & Specialist Sdn Bhd) (“TTES”).
The shareholders’ funds increased by RM20.5 million from RM186.3 million in year 2013 to RM206.8 million in year 2014 mainly due to the improvement in the reserves. The Group’s net asset per share increased from 21 sen (2013) to 24 sen (2014).
On the regional front, Taiwan continued to improve its revenue from RM65.7 million (2013) to RM92.3 million (2014), an improvement of 40% mainly due to the positive growth of the semi-conductor business. However, we encountered a continued drop in business in our operations in Singapore. The revenue from Singapore reduced to RM67.0 million from RM79.7 million partly due to lesser orders received from customers who have either delayed in the outages of their plants or reduced their maintenance activities. Our Philippines’ operations also saw a dip in its revenue from RM13.9 million to RM11.5 million due to stiff competition in the maintenance contracts but its bottom line was better than that achieved in 2013 due to continual prudent cost management. It was comforting to note that Indonesia’s performance has continued to improve to RM2.1 million (2013 : RM1.7 million).The Indonesian company has obtained the necessary licence from SKK Migas, Indonesia which will enable it to participate in repair and services works for the oil and gas industry.
During the year, our Group generated RM40.7 million cash flows from our operations and out of which we utilised RM8.5 million to acquire property, plant and equipment and RM7.4 million for investment in a subsidiary. The cash and cash equivalent amassed for the year was RM52.6 million.
Our Group’s revenue for the 12 months ended 31 December 2014 increased by approximately RM119.2 million (62.6%) mainly due to the improved contribution from our operations in Malaysia and Taiwan.
ANALYSING OUR BUSINESS
The significant improvement in our revenues from our operations in Malaysia and Taiwan had on an overall basis elevated our total revenue to increase about 62.6% as compared with year 2013. The semi-conductor market in Taiwan has been edging upwards from quarter to quarter and this has led to the increase in the demand of our services. On the home front, the growth was attributed to the progressive revenue from the project in Tanjung Bin as well as the higher revenue from both our oil and gas and semi-conductor division.
The markets in Singapore and Philippines continued to challenge us. We will continue to focus our strengths to overcome the challenges by enhancing our services, increasing our efficiencies and reducing costs. Just like the previous years, our business had been affected by the slowdown and deferment of projects by our customers due to scale back of new or proposed expansion. We will consolidate our business and prioritise our efforts to focus on revenue and bottom-line.
We entered year 2015 with the same priority to continue to focus our attention on the quality of our services and efficiencies so as to maintain our competitiveness. As always, we strive to deliver long-term value to our stakeholders. Over the years, we had taken serious steps to continue to look for business opportunities that bode well and synergise with our current activities.
Our acquisition of TTES has enabled us to tap onto our presence and infrastructure in the region with the view of growing its existing business. This synergistic relationship is expected to contribute positively to our earnings. TTES has a license with Petronas for it to supply and provide services to Petronas. It is principally engaged in the business of turbo machinery technical engineering services and rotating equipment engineering, maintenance and technical support services for various types of industrial gas turbines and the driven equipment such as general maintenance on gas turbines, pumps, compressors, high speed industrial gearboxes and turbo generators, field performance analysis of gas turbines and compressors, vibration diagnostics/ analysis, surveillance, system integration and installation and gas compressor overhauls.
KEEPING COST LOW AND GETTING LIqUIDITY FLOWING
Our past practices of keeping cost low will continue to be our main priority as we maintain our practice to keep tabs on our financials by conserving our resources and focusing on growth in the challenging business environment. Our management team possesses great professionalism and commitment to achieving this goal. With each passing year, we will innovate and fine tune our business strategies and model so that we may remain competitive.
We will abide by our strategy of operational efficiencies, organic growth and incremental in customers base to expand our business and keep the liquidity in.
OUTLOOK FOR 2015
Let me now share with you the outlook for 2015. Our Group’s improved performance of the domestic and regional markets is anticipated to spill over from year 2014 to year 2015. The improvement in business and operating performance augur well with us and this represents an encouraging sign that our Group is on the right track of recovery from the slowdown and deferment of projects by our customers back in year 2013.
In 2014, our efforts in focusing on the quality of our services and efficiencies so as to maintain our competitiveness for enhancing business performance has been rewarding and this was reflected in the significant improvement in our profits as compared to year 2013.
The domestic market is expected to grow at a better pace as management continues to introduce new initiatives. With the completion of our Group’s acquisition of 45% stake in TTES, it has also started to show the desired synergised effects to our Group and contributed positively to our Group’s result since its acquisition. Our Group is confident that TTES will continue to improve its overall performance in 2015. I would like to also mention that the partnership has yielded positive outcome to our performance and would continue to reinforce our resources to this partnership. Our overall focus continues to remain in our core activities to ensure sustainable growth.
The regional markets are expected to grow with the encouraging outlook in Taiwan’s semi-conductor sector, our Group is also confident that our Taiwan subsidiary will continue to deliver positive result to our Group. Taiwan continues to be our prime engine of growth for the region. We will also continue to strategise and strengthen our presence in Singapore, Philippines and Indonesia by improving efficiency in all areas of operations.
Our Group envisages that the overall business conditions in year 2015 will still be challenging amidst global uncertain economic conditions and slower growth in the regional economies. Our Group’s ATB project in Tanjung Bin is expected to be completed and delivered to our customer this year. Nevertheless, our Group believes that with the right marketing approach, our Group’s business prospect in year 2015 remains positive and encouraging barring unforeseen circumstances. With the strong support of our Board and management, coupled with the right approaches, I believed our business prospect will remain positive and encouraging. Our Group takes cognisance that to remain competitive, we will continue with our series of improvement measures by improving our cost base, enhanced our cross selling for greater operational synergies and implementing best practice margin management and sourcing strategy to deliver better value propositions to our customers. We will continue to adopt these measures in 2015.
Our key priorities for the year 2014 will continue to be adopted for the growth of our business in 2015. Likewise, we will continue with our costing management to protect our earnings, exercise prudence in liquidity management, disciplined execution of strategy whilst continuing to focus on the fundamentals of our Group’s business.
We will seek to maximise our profitability, to manage our revenue and costs with good care.
According to published reports, this year will be a challenging year for the Malaysian economy. The economy growth is projected to be moderate which is dependent on the magnitude of fluctuations in crude oil prices and also movements of the Ringgit exchange rate against currencies of our major trading partners. Other factors will be the shocks from the commodity terms of trade, Ringgit depreciation and anticipated higher interest rates environment which are expected to affect Malaysia’s domestic macroeconomic fundamentals in the short term. It is hoped that these are merely short term and shall dissipate in the medium and long-term as part of the economic cycle.
Based on the uncertain challenges faced by our Group in year 2015, your Board would not be recommending any final dividend for the year ended 2014 as we still need to conserve our cash for future expansion and investing activities.
As always, I would like to thank all my colleagues for their tremendous hard work which has been the driving force behind our better performance despite the challenging business environment.
I also wish to thank our shareholders for their continued patience, trust and loyalty. In addition, our thanks to our valued customers, bankers, suppliers and business associates for their continuing support and confidence.
Lastly, my heartfelt thanks go to my fellow Board members for their commitment and guidance to me and the Group.
NG WAI PIN
MANAGEMENT dISCUSSION ANd ANALySIS
Our Group is the industry leader in surface treatment solutions and possesses unique combination of surface and mechanical engineering capabilities for servicing and machining mission critical equipment and its components.
We have our presence today in Malaysia, Singapore, Thailand, Philippines, Taiwan, China, Myanmar and Indonesia; with a combined workforce of 958 employees, 17 service facilities in 7 countries and are certified with, amongst others, ISO 9001:2008, ISO 14001:2004, OHSAS 18001:2007 and BS OHSAS 18001:2007.
We are backed by solid infrastructures, capabilities, technologies and know-how having served a very wide spectrum of industries ranging from oil and gas, refineries, marine and offshore, power generation to semiconductors/harddisk manufacturing support services, renewable energy and many more.
Our core expertise is in the application of specialised surface engineering solutions and improvements of coatings quality for specific industrial applications through materials research and modification of micro structural surface properties. Thermal spray coating technologies – the flagship technology of Frontken’s surface engineering capabilities, enable deposition of virtually any material onto surfaces for increased performance, protection, lifetime extension and other highly specialised functions.
Our Group has an established reputation and foundation for quality, prompt delivery and reliable service in this industry and also has proven track records in providing mission critical surface engineering projects that are rapidly architected, engineered and delivered with speed and reliability, as well as demonstrated engineering capabilities, financial resources and human capital in completing projects of any size given by the customers.
Looking at year 2014, the performance of our businesses had been significantly better in certain countries while some had decreased. We continue to address the challenges facing each business in each country. We are constatntly assessing our business models and will improve or innovate the way we conduct our business in the world today. Our growth strategy remained the same i.e. to continue to enhance our service level, to create opportunities for growth, increase efficiencies with the view to keeping cost low and to focus on increasing our customers’ base by adding value to the works we performed.
Our business in Malaysia for year 2014 saw a significant increase in our revenue due to our project in Tanjung Bin. This is a good sign that the business is picking up momentum and will bode well for us into year 2015. Our investment in TTES has also benefited our books. We will continue to maximise on our strengths in our business with faster delivery of services and focusing on the key areas for our projects that will grow our business. We will also build our business in the focused areas and enhance our services to achieve customers’ satisfaction. We will diligently review our cost management and proactively make the necessary adjustments to match demand.
We are pleased with the performance in Taiwan. The business has been increasing gradually in line with the robust semi-conductor market. We remain optimistic of the semiconductor industry which will continue be a growth area in year 2015. We are aware that the competition is stiff and the market may make an adverse turn which may impact our business.
For year 2014, we saw a further decline in our Singapore engineering business where the revenue from this region reduced to RM67 million from RM80 million mainly due to the deferment of outages by our power generation customers. Our business is greatly dependent on our customers securing their orders. In year 2014, there have been recurring smaller jobs to ease the business but with the absence of more significant orders our revenue was adversely affected. We continue to strategise on other revenue earning activities while waiting for the turnaround of our customers.
As stated in my report last year, the year 2014 will likely look the same as year 2013 for our business in Singapore. We remained optimistic that once the economy picks up again these customers would be expanding and this will augur well for us. We will fill up the financial gaps with smaller and additional maintenance works to keep us going in year 2015.
In the Philippines, due to the stiff competition that saw a decline in our service to the power generation industry, the revenue from the Philippines’ business decreased from RM13.9 million to RM11.5 million, a 17% decrease.
Our Indonesia business unit has obtained the necessary license from SKK Migas to enable us to be involved in repair and service works for the Indonesia oil and gas industry which saw an increase in our revenue from RM1.7 million (2013) to RM2.1 million (2014).
We pride ourselves for being the industry leader in surface metamorphosis solutions and that has been our pillar of strength to continue to keep pace with the industry requirements. Our strength also lies in our continuous and conscious needs to maintain a high level of service. We continue to strategise and plan by working with our customers for the preparation of any major shutdown works. We believe that these efforts will translate to a reasonable increase in our turnover.
Our key industrial products are gas turbine overhauls, turbo machinery repairs, oil field equipment coatings and components manufacturing in the refineries and petro chemical complexes. By concentrating our strengths in capabilities and capacities, we can drive ourselves through higher end thermal spray processes, regional presence and support.
We have the capabilities rooted in our resources and together with our skilled operators, we maintain our operational wellbeing by providing the best to our customers while also keeping our standards at work to deliver by keeping wastages at bay. We will continue to consciously maintain our costs low with each delivery to drive profits up. We will continue to strengthen our relationship with our customers to understand their needs with our sales engineers meeting our customers regularly.
Our business operates in a competitive and challenging environment where the economy cycle would affect our financial performance. Our customers impact the way we do our business. In instances when our customers merge with another customers, the risk of reduction or termination of business will be apparent as with all mergers and acquisitions, the acquirer-dominant effects would flow down to the supplier of services – us. If we are on the acquirer’s side, we would anticipate the increase of our business opportunities in view of the growth in the size of our customers. However, if we are on the side of the target company, this could set our business back as in all mergers and acquisitions, through time, there would be standardisation of operations with the acquirer having the upper hand to choose its own suppliers. The need to increase our business to reach a wider customers base regionally may lessen these effects.
In certain area of our business, we are also highly dependent on our single customer. This presents us with great risk because the customer could go under, change their pricing structure or find another partner to do business with, leaving us on the losing end. Most customers keep to their policy of having comparatives quotes which would affect our pricing in securing jobs. The need to diversify would be the key agenda in our yearly plan in addition to continue to upgrade our services to differentiate ourselves.
The rising costs undermine our bottom line unless the same is matched by higher margin jobs. The cost of manpower, fluctuation of currency exchange and material, all equipment and machinery repair and maintenance cost, transport and travel cost in combination would impact the way we do our business. Risks associated with rising labour costs are valid to a certain extent. In our Company, keeping costs low remain our primary objective. The staff retention and hiring of foreign labour continue to plague our industry as the demand for manpower is high and staff is enticed by the better remuneration packages and benefits offered by competitors or commercial companies while the government policy on foreign workers would impact our resources. This has increased labour cost significantly. Replacement and recruitment for expansion in growth areas are real challenges. The strategies to overcome these are to improve productivities and to relook at our service offerings. We may have to merge or remove areas where we are weak, have low margins and have low growth potential. These risks are further managed by getting the information at the soonest possible time from the end-user and paying particular attention to the scope of work provided by the customer prior to any mobilisation. The division ensures that the scopes of work are predetermined and approved by the clients, and if any deviations are identified at any point in the project, these are quoted separately to capture the additional costs and billed back to the clients. Investment in modern and efficient technology could ease the efficiency of our deliverables and reduce manpower.
Our Group anticipates that our business units involved in the oil and gas Industry will contribute a significant share to the Group revenue in year 2015, taking into consideration the positive contribution from the progressive revenue of USD34.5 million from our ATB project. The investment in TTES allows us to reap the benefit of the new partnership which will enable us to tap further into the existing client base of TTES in the oil and gas industry as it has a license with Petronas for it to supply and provide services to Petronas.
The prospects for year 2015 will see the revenue stream from the oil and gas industry, power generation sector and the manpower provision of certified technicians to areas around South East Asia for other projects where support will be provided by the various business units under our Group. We continue to seek new opportunities with potential appointment and expanding our work relationship with established customers. We are also working on long term service agreements with our customers that are manufacturers of oil field equipment. We are prepared for the anticipated major plants shutdown of our existing clients which will see some revenue flowing from that area.
Nevertheless, we are still cautious of year 2015 as the uncertainties of the domestic and overseas markets could continue to run through the rest of the year. We remain positive of our business and would continue to look for opportunities to grow.
2013 Annual Report
YEAR 2013 IN PERSPECTIVE
I have mentioned in my last statement that for year 2013, we would approach it carefully knowing what to expect in an uncertain economy. We continued our strategy to build a stable platform by accelerating and intensifying the execution of our strategy.
In year 2013, we continued to respond diligently to the challenging domestic and foreign markets conditions, by
addressing our resources and rescaling some loss making activities while we continue to improve on the profitable
businesses. This has helped us to align our businesses in the respective markets and continued to develop and strengthen our positions for growth opportunities.
The turbulence in the markets both domestic and foreign have continued to affect our business in year 2013. However, we managed to stay on track and improved our revenue to RM190.6 million (2012 : 181.0 million). The increase in our revenue was mainly driven by our subsidiary in Taiwan in line with the robust semiconductor business there.
Consequently, our Profit Before Tax also improved by RM2.7 million to RM5.9 million (2012 : RM3.2 million) partly
due to lower operating expenses as a result of management’s efforts in cost control combined with improving results from our relatively new business units located in Kuching and Melaka.
The Malaysian market continued to be challenging as can be seen from the marginal improvement in revenue to RM33.6 million (2012 : RM33.5 million) due to lower sales in the semiconductor industry which experienced a slowdown. The operating Malaysian entities are Frontken Malaysia Sdn Bhd, Frontken (Johor) Sdn Bhd and Frontken (East Malaysia) Sdn Bhd.
The shareholders’ funds increased by RM1.4 million from RM184.9 million in year 2012 to RM186.3 million in year 2013 mainly due to the improvement in the reserves. The Group’s net asset per share remained the same at 21 sen.
On the regional front, we encountered a marginal drop in business in our operations in Singapore. The revenue from Singapore reduced to RM74.1 million from RM83.0 million partly due to the disposal of Metall-Treat Industries Pte Ltd (“MTI”), a wholly owned subsidiary, on 6 December 2012, coupled with deferment of outages by its power generation customers and a one off trading sales in the preceding corresponding period. If we were to exclude the revenue from MTI and the one off trading sales in 2012 then the revenue in 2013 would have improved by RM4 million. However, the revenue from Taiwan increased from RM50.0 million to RM65.3 million, an improvement of 30% from year 2012 mainly due to the positive growth of the semiconductor business. Our Philippines’ operations also saw an improvement to its revenue from RM10.8 million to RM13.3 million following the growth in its cleaning business for the solar industry. It was comforting to note that there was continued improvement, albeit marginally, from our operation in Indonesia of RM1.7 million (2012 : RM1.5 million). We anticipate further growth from this unit now that it has obtained the necessary licence from SKK Migas, Indonesia enabling us to participate in repair and services works for the oil and gas industry.
During the year, our Group generated RM36.7 million cash flows from our operations and out of which we utilised
RM5.3 million to acquire property, plant and equipment and RM3.7 million for additional investment in a subsidiary. The cash and cash equivalent amassed for the year was RM37.1 million.
Our Group’s revenue for the 12 months ended 31 December 2013 increased by approximately RM9.6 million (5.3%) mainly due to the improved contribution from our operations in the Philippines and Taiwan.
ANALYSING OUR BUSINESS
The markets continued to challenge us for year 2013 just like the past years. In spite of difficult market and the
uncertainties of recovery in the region, we were able to improve on our revenue marginally. We will continue to strategise and focus on our strengths to overcome the challenges by enhancing our services, increasing our
efficiencies and reducing costs.
Our business had been affected by the slowdown and deferment of projects by our customers due to scale back of new or proposed expansion in light of the uncertainties of the economy. As such, we will continue to consolidate our business and prioritise our efforts to focus on revenue and bottom-line.
In the year 2014, our priority will be to continue to focus our attention on the quality of our services and efficiencies
so as to maintain our competitiveness. As always, we strive to deliver long-term value to our stakeholders. Over the years, we had taken serious steps to continue looking for business opportunities that bode well and synergise with our current activities. The recent acquisition of a strategic 45% stake in TTES Team & Specialist Sdn. Bhd. (“TTES”) is the result of that.
TTES has a license with Petronas for it to supply and provide services to Petronas. It is principally engaged in the business of turbo machinery technical engineering services and rotating equipment engineering, maintenance and technical support services for various types of industrial gas turbines and the driven equipment such as general
maintenance on gas turbines, pumps, compressors, high speed industrial gearboxes and turbo generators, field
performance analysis of gas turbines and compressors, vibration diagnostics/analysis, surveillance, system integration and installation and gas compressor overhauls.
With the encouraging outlook for the oil and gas industry in Malaysia following the implementation of the Economic Transformation Programme (“ETP”), which aims to make Malaysia the number one Asian Hub for oil
field services, the above acquisition provides an attractive opportunity
for us to mark our involvement in the promising oil and gas industry in Malaysia. This acquisition will enable us to tap further into the existing client base of TTES in the oil and gas industry.
By being part of our Group, TTES will also be able to tap onto our presence and infrastructure in the region with the view of growing its existing business. This synergistic relationship is expected to contribute positively to our future earnings.
KEEPING COST LOW AND GETTING LIqUIDITY FLOWING
We continue to keep tabs on our financials by conserving our resources
and focusing on growth in the challenging business environment. Our management team possesses great professionalism and commitment to
keeping cost low. We will continue to innovate and fine tune our business
strategies and model so that we may remain competitive.
We will abide by our strategy of operational efficiencies, organic growth
and incremental in customers base to expand our business and keep the liquidity in.
OUTLOOK FOR 2014
Our Group remain cautious on the economic outlook as the domestic and overseas markets continue to be challenging. With the continual support and guidance of the Board and management, matched with a good business strategy, we
would be in a better position to seize the growth opportunities for the overall benefits of everyone.
The Group anticipates that the overall business conditions in 2014 will continue to be challenging but encouraging amidst subdued global economic conditions and slower growth in the regional economies. This has also resulted in an increase in pressure from customers for price reduction. Nevertheless, the Group believes with the right marketing approach, our business prospect will remain positive and encouraging barring unforeseen circumstances. In order to remain competitive, we embarked on a series of improvement measures including improving our cost base, enhanced our cross selling for greater operational synergies and implementing best practice margin management and sourcing strategy to deliver better value propositions to our customers. We will continue to adopt these measures in 2014.
Key priorities for the year would be to grow our business and at the same time improve on our costing to protect our earnings, exercise prudence in liquidity management, disciplined execution of strategy whilst continuing to focus on the fundamentals of our business.
We will continue to speed up our execution plan in facing potential adversities in the years ahead. We certainly hope that this situation would only be temporary until the economy improves in the near future. We remain positive of our core activities while keeping a watchful eye on our new business units. We strive to achieve value added projects that will drive our businesses to new heights.
Based on the continuous challenges faced by our Group, your Board
would not be recommending any final dividend for the year ended
2013 as we still need to conserve our cash for future expansion and investing activities.
I would like to thank all my colleagues for their tremendous hard work which has been the driving force behind our performance despite the challenging business environment.
I also wish to thank our shareholders for their continued patience, trust and loyalty during this difficult phase. In
addition, our thanks to our valued customers, bankers, suppliers and business associates for their continuing support
Lastly, my heartfelt thanks go to my fellow Board members for their commitment and guidance to me and the Group.
NG WAI PIN
MANAGEMENT DISCUSSION AND ANALYSIS
Our Group is the industry leader in surface metamorphosis and surface treatment solutions and possesses unique combination of surface and mechanical engineering capabilities for servicing and machining mission critical equipment and its components.
We have our presence today in Malaysia, Singapore, Thailand, Philippines, Taiwan, China, Myanmar and Indonesia;
with a combined workforce of 804 employees, 17 service facilities in 7 countries and are certified with, amongst
others, ISO 9001:2008, ISO 14001:2004, OHSAS 18001:2007 and BS OHSAS 18001:2007.
We are backed by solid infrastructures, capabilities, technologies and know-how having served a very wide spectrum
of industries ranging from oil and gas, refineries, marine and offshore, power generation to semiconductors/hard-disk
manufacturing support services, renewable energy and many more.
Our core expertise is in the application of specialised surface engineering solutions and improvements of coatings
quality for specific industrial applications through materials research and modification of micro structural surface properties. Thermal spray coating technologies – the flagship technology of Frontken’s surface engineering capabilities,
enable deposition of virtually any material onto surfaces for increased performance, protection, lifetime extension and other highly specialized functions.
Our Group has an established reputation and foundation for quality, prompt delivery and reliable service in this industry and also has proven track records in providing mission critical surface metamorphosis engineering projects that are rapidly architected, engineered and delivered with speed and reliability, as well as demonstrated the engineering
capabilities, financial resources and human capital in completing projects of any size given by the customers.
From the performance of our businesses in year 2013, the challenges facing each business in each country has prompted each business unit to strategise to improve based on the conditions of each market. We will have to relook at our business models and improve or innovate the way we conduct our business in the world today. Our growth strategy has always been the same i.e. to continue to enhance our service level, to create opportunities for growth,
increase efficiencies with the view to keeping cost low and to focus on increasing our customers’ base by adding
value to the works we performed.
For year 2013, we saw a decline in our Singapore business where the revenue from this region reduced to RM74 million from RM83 million mainly due to the disposal of a wholly owned subsidiary in December 2013, coupled with deferment of outages by our power generation customers and a one off trading sales in the preceding corresponding period. Our customers were not able to secure fully the intended projects due to the cutting down of jobs of their own customers. This has impacted our business which hinges on the demands of our customers. Throughout 2013, there have been recurring smaller jobs to ease the business. On this note, we have re-strategised ourselves by focusing our attention on our batch production activities while waiting for the turnaround of our customers.
The year 2014 will likely look the same for our business in Singapore. Nonetheless, we remained optimistic that once the economy picks up again these customers would be expanding and this will augur well for us. The slowdown
will not discourage us but will drive us to fill up the financial gaps with smaller and additional maintenance works to
keep us going in year 2014.
Likewise in Malaysia, the business in year 2013 continued to be challenging as we saw marginal improvement in our revenue from RM33.5 million to RM33.6 million due to the lower sales in the Malaysia semiconductor industry. As a positive sign to our Malaysia business, both of our relatively new business units in Kuching and Melaka have delivered better results in year 2013. We will continue to maximise on our strengths in our business with faster delivery of services and focusing on the key areas for our projects that will grow our business. As such, in year 2014, our priority would be to continue to build our business in the focused areas and enhance our services to achieve customers’ satisfaction. At the same time, we will maintain discipline in cost management and proactively make the necessary adjustments to match demand.
In Taiwan, we were pleased with the performance of the business which improved significantly and had assisted in
the overall performance of our Group due to the positive growth of the semiconductor business in Taiwan. As we inched forward in Taiwan, we continue to be optimistic of the semiconductor industry which will be a growth area in year 2014. However, we are wary of the fragile recovery in the global economy that may impact our business. We are prepared to face the challenges of year 2014 by continuously evaluating ourselves and changing our business models to be on ready mode when the opportunities come along.
In the Philippines, due to the improvement in our cleaning business for the solar industry, the revenue from the Philippines’ business increased from RM10.8 million to RM13.3 million, a 23% increase.
Our Indonesia business unit has obtained the necessary license from SKK Migas to enable us to be involved in repair and service works for the Indonesia oil and gas industry.
We pride ourselves for being the industry leader in surface metamorphosis solutions and that has been our pillar of strength to continue to keep pace with the industry requirements. Our strength also lies in our continuous and conscious needs to maintain a high level of service. In downtime, we strategise and plan by working with our customers for the preparation of any major shutdown works. We hope that these efforts will translate to a reasonable increase of turnover.
Our key industrial products are gas turbine overhauls, turbo machinery repairs, oil field equipment coatings and components manufacturing in the refineries and petrochemical complexes. By concentrating our strengths in
capabilities and capacities, we can drive ourselves through higher end thermal spray processes, regional presence and support.
We have the capabilities rooted in our resources and together with our skilled operators, we maintain our operational wellbeing by providing the best to our customers while also keeping our standards at work to deliver well by keeping
wastages at bay. We strive to maintain our costs low with each delivery to drive profits up. Our capabilities are also
determined by tight coordination of the key personnel and proper planning of the personnel involved to manage
costs that may impact the financial performance. We continue to strengthen our relationship with our customers to
understand their needs with our sales engineers meeting our customers.
Our business operates in a competitive and challenging environment where the economy cycle would affect our
financial performance. Our customers impact the way we do our business. In instances when our customers
merge with another customers, the risk of reduction or termination of business will be apparent as with all mergers
and acquisitions, the acquirer-dominant effects would flow down to the supplier of services – us. If we are on the
acquirer’s side, we would anticipate the increase of our business opportunities in view of the growth in the size of our customers. However, if we are on the side of the target company, this could set our business back as in all mergers and acquisitions, through time, there would be standardisation of operations with the acquirer having the upper hand to choose its own suppliers. The need to increase our business to reach a wider customers base regionally may lessen these effects.
In certain area of our business, we are also highly dependent on our single customer. This presents us with great
risk because the customer could go under, change their pricing structure or find another partner to do business with,
leaving us on the losing end. Most customers keep to their policy of having comparatives quotes which would affect our pricing in securing jobs. The need to diversify would be the key agenda in our yearly plan in addition to continue to upgrade our services to differentiate ourselves.
Management Discussion And Analysis (cont’d)
The rising costs undermine our bottom line unless the same is matched by higher margin jobs. The cost of manpower,
fluctuation of currency exchange and material, all equipment and machinery repair and maintenance cost, transport
and travel cost in combination would impact the way we do our business. Risks associated with rising labour costs are valid to a certain extent. In our Company, keeping costs low remain our primary objective. The staff retention and hiring of foreign labour continue to plague our industry as the demand for manpower is high and staff is enticed by the
better remuneration packages and benefits offered by competitors or commercial companies while the government policy on foreign workers would impact our resources. This has increase labour cost significantly. Replacement and
recruitment for expansion in growth areas are real challenges. The strategies to overcome these are to improve productivities and to relook at our service offerings. We may have to merge or remove areas where we are weak, have low margins and have low growth potential. These risks are further managed by getting the information at the soonest possible time from the end-user and paying particular attention to the scope of work provided by the customer prior to any mobilization. The division ensures that the scopes of work are predetermined and approved
by the clients, and if any deviations are identified at any point in the project, these are quoted separately to capture the additional costs and billed back to the clients. Investment in modern and efficient technology could ease the efficiency of our deliverables and reduce manpower.
The Group anticipates that our business units involved in the oil and gas industry would contribute a significant
share to the Group revenue in year 2014, taking into consideration the positive contribution from the USD34.5 million ATB project awarded to us in 2013 coupled with the potential incremental contribution to the Group from our recent acquisition of 45% stake in TTES Team & Specialist Sdn. Bhd. (“TTES”). With this acquisition, we will be able to tap further into the existing client base of TTES in the oil and gas industry as it has a license with Petronas for it to supply and provide services to Petronas.
In addition to the revenue stream from the oil and gas industry, there is an expected increase from the power
generation sector as well compared to 2013. Other prospects in 2014 would include manpower provision of certified
technicians to areas around South East Asia for other projects where support will be provided by the various business units under the Group. There are new opportunities with potential appointment and expanding our work relationship with established customers. We are also working on long term service agreements with our customers that are
manufacturers of oil field equipment. We anticipate an increase in the major plants shutdown from our existing clients,
and thus expect to see reasonable revenues generated from the major turnaround works.
Nevertheless, we are still cautious of year 2014 as the uncertainties of the domestic and overseas markets could continue to run through the rest of the year. We remained positive of our business and would continue to look for opportunities to grow.
2012 Annual Report
Year 2012 in perspective
In my last statement, I mentioned that our focus for year 2012 and beyond would be on improving execution and preserving our .nancial strength. We understand that we would not be able to secure long-term success if we do not meet our .nancial targets and deliver acceptable levels of return to our stakeholders.
Global uncertainties continued to plague the markets. The Malaysian front surprisingly remained resilient. The growth was driven by strong domestic demand, with impressive albeit slightly slower year-on-year growth in private consumption and private and public investment outlays. The net exports had meanwhile contracted further due to the deterioration in external demand for manufactured goods and commodities.
For us, 2012 had been a challenging year for the Group. Group sales in 2012 were down 9% to RM181 million (2011: RM198 million) mainly due to lower revenue from its operations in Singapore, Malaysia and Taiwan but pro.t before tax was up 8% at RM3.2 million from RM2.9 million in 2011. This was due to a gain of RM5.5 million on disposal of Metall-Treat Industries Pte Ltd (MTI), our wholly owned subsidiary. The disposal of MTI was in line with the Group’s ongoing strategy to rationalise its investments to allow the Group to consolidate and deploy its resources more ef.ciently, improve operational ef.ciencies and reduce operating costs. In addition, the proceeds from the disposal also strengthened the Group’s liquidity and cash position allowing it .nancial .exibility to pursue its growth plans.
In line with market softening, the revenue from Malaysia was down 28.5% and the other markets cumulatively also reduced by 2.2%. However, reported basic earnings per share were up 34.2% to 0.38 sen.
The shareholders’ funds increased by 3% to RM184.9 million as compared to RM179.3 million in the previous year mainly due to the increase in reserves. The Group’s net asset per share remained the same at 21 sen.
On the regional front, Singapore continued to remain as our main market notwithstanding the fact that the revenue was marginally lower at RM87 million. Our Singapore’s operations accounted for approximately 45.8% of our overall business, slightly higher from last year’s 44.3%. Taiwan market accounted for 27.6% of our business which was also affected with a slight decline of revenue by 3.4% to RM50.0 million as compared to RM51.8 million in 2011. Although the major contributors recorded a down trend, it was comforting to note that the rest of our operations in countries like the Philippines, China and Indonesia recorded an improvement in revenue. The Philippines, China and Indonesia ended the year with revenue of RM10.8 million, RM2.3 million and RM1.5 million respectively.
During the year, the Group generated RM16 million cash .ows from operations and it has utilised RM11.8 million to acquire property, plant and equipment. The cash and cash equivalents amassed for the year was RM41.5 million. The shareholders’ equity increased to RM185 million. The healthy shareholders’ equity was partly attributed to the proceeds from the disposal of MTI of RM22.1 million.
The Group’s revenue for the current quarter and twelve (12) months ended 31 December 2012 (“FY2012”) decreased by approximately RM5.1 million (9.9%) and RM17.1 million (8.6%) respectively mainly due to lower revenue from its operations in Singapore, Malaysia and Taiwan.
The higher revenue from Singapore for the preceding corresponding period was due to more service works from its power generation division from customers’ planned outages which did not happen this year. The lower revenue from Malaysia and Taiwan were mainly due to slow down in the customers’ production capacity coupled with competitive pricing in the respective local markets, leading to lower unit selling price.
Against the same period last year, the pro.t before tax (“PBT”) for FY2012 increased from RM3.0 million to RM3.2 million. Excluding the gain on disposal of investments in MTI, a wholly owned subsidiary, of RM5.5 million, the Group’s PBT would have decreased by 174.6%. This was mainly caused by lower margin from certain trading activities coupled with losses from a few of its new business units namely the ones in Melaka, Kuching and Indonesia that only commenced operations in the fourth quarter of 2011 and in the .rst quarter of 2012 and also the relocation of our plant in Johor.
The PBT for the current quarter as compared to the corresponding quarter in 2011 increased to RM3.8 million from a loss before tax of RM3.3 million in the corresponding quarter in 2011. Excluding the gain on disposal on investments in MTI of RM5.5 million, the loss before tax for the current quarter would have been RM1.7 million.
Analysing our business
The markets have been challenging over the years. The uncertain global economy coupled with the sluggish demands have impacted our revenues greatly. We will continue to look for opportunities to grow our business and explore new markets. Our growth strategy would be to enhance our service level, to create opportunities for growth, increase ef.ciencies with the view to keeping cost low and to focus on increasing our customers base.
In 2012, we saw a decline in our business especially from our major subsidiaries where the market conditions in each country has impacted the way we do our business. We will continue to review our business model to .nd opportunities to increase our revenues.
We will be consolidating our position and prioritising our efforts to focus on increasing revenue and bottom line from our main contributing countries. In looking back at 2012, we .nd ourselves trying to rise above the challenges of yet another dif.cult year of business uncertainties and slow consumer spending.
Against such backdrop, our focus in 2013 would be to deliver quality services and increase ef.ciencies which would in turn keep our growth and pro. ts a.oat. Times were hard in 2012. Rest assured that our efforts have not been affected by the slowdown. We will continue to keep track of our new business units in Melaka, Kuching and Indonesia.
We strive to deliver long-term value to our shareholders. For that, we have taken serious steps to keep looking out for business opportunities that bode well with our current activities. We accept changes in the way we do business in order to stay ahead of competition and to have a good grip of our long term sustainable growth without losing sight of our vision and mission.
Our ultimate objective is to enhance shareholders’ value. We expect the uncertainties of 2012 to continue in 2013. We will continue to leverage on our regional spread and networking to steer our business forward.
In February 2013, it was most unfortunate that we had to announce the .nancial irregularities of one of our wholly owned subsidiaries and the appointment of Crowe Horwath to carry out a special investigative audit. Following the report, the Company had taken further measures to safeguard its assets and interest. The total potential impact will be about RM8.87 million, which have been provided for in the accounts for the past six .nancial years beginning from 2006. As the accounting irregularities happened in the past and full provision
had been made for the .nancial year ended 31 December 2012, there will not be any .nancial or operational impact on the Company. In the event that the same is recovered, the earnings would be adjusted accordingly by the amount received during that year.
We remain committed to overcome the obstacles by focusing on our key revenues and controlling costs.
Keeping cost low and getting liquidity flowing
The results of 2012 continued to remind us of the need to continue to conserve our resources and to focus on growth even during these trying times. We were fortunate to have a management team that was able to face the turbulence with great professionalism and commitment. We will continue to innovate and .ne tune our business strategies and model so that we may remain competitive.
We would abide by our strategy of operational ef.ciencies, organic growth and incremental in customers base to expand our business and keep the liquidity in.
Outlook for 2013
We are still cautious on the economic outlook as the domestic and overseas markets continue to be uncertain. However, under the guidance of the Board, and with a good strategy, I believe we are well positioned to capitalise on growth opportunities in the coming year to the bene.t of our stakeholders.
For the year 2013, we will continue with our strategy to build on Frontken’s stable platform by accelerating and intensifying the execution of our strategy. The market outlook remained to be challenging for this year and beyond. We are taking action to mitigate the macro headwinds to deliver cost reductions and Group synergies. We will continue to work on the growth of our current businesses and renew our focus on operational performance.
We will up the pace of our execution further in the year ahead. We hope that this should deliver short-term earnings growth with signi.cant acceleration once economic conditions improve.
In my last statement, I have said that growth would be partly dependent upon market conditions and it is fair to say that the economic environment and the industry remain challenging. We will continue to seek to maximise our pro.tability, to manage the decline in lower revenue and to manage costs with care.
We approach 2013 carefully knowing what to expect in a turbulent economy. We remain positive of our core activities while keeping tabs on our new business units. We will continue to seek diligently opportunities that can add value to our businesses.
As we weather the storm that would come our way, the Board would not be recommending any .nal dividend for the year ended 2012 as we need to conserve our cash for future expansion and investing activities.
I would like to thank all my colleagues for their tremendous hard work which has been the driving force behind our performance despite
the challenging business environment.
I also wish to thank our shareholders for their continued patience, trust and loyalty during this dif.cult phase. In addition, our thanks to our
valued customers, bankers, suppliers and business associates for their continuing support and con.dence.
Lastly, my heartfelt thanks go to my fellow board members for their commitment and guidance to the Group.
NG WAI PIN
2011 Annual Report
NG WAI PIN Chairman / Managing Director
2011 was, without a doubt, a watershed year for Frontken. The positive trend that marked the .rst quarter of 2011 was reversed in the quarters that followed and we ended the year on a decidedly low note. It goes without saying that we are disappointed with the signi. cant drop in pro.tability, but we are determined to improve to make our business stronger. To that end, our focus for 2012 and beyond will be on improving execution and preserving our . nancial strength.
THE YEAR THAT WAS Global uncertainties and natural disasters prevailed for most of 2011, weighing down the growth momentum of the global economy. While the prognosis is that the global economy will not fall into another recession in 2012, .ve years after the 2008 .nancial crisis, growth during the year will nonetheless be sluggish. Against this backdrop, the Malaysia economy recorded moderated growth of 5.1% in 2011 (2010: 7.2%) driven by expansion in domestic activities and .rm regional demand. In a more challenging external environment, the economy is expected to grow at between 4% and 5% in 2012, with domestic demand continuing to be the anchor for growth. On the foreign front, the Singapore economy grew by 4.9% in 2011 (2010: 14.8%), with slowdown in growth seen across all major sectors. Full year 2012 economic growth has been estimated to be between 1.0% and 3.0% as a result of subdued global economic conditions, which could potentially be derailed by any debt default in the Eurozone or a sharp rise in oil prices. In Taiwan, where exports have traditionally been the major growth engine making up almost 70% of the gross domestic product (“GDP”), real GDP grew by 4.0% in 2011. However, economic growth is forecast to slow down to approximately 3.4% in 2012 due to decline in private investment after a signi.cant drop in export orders amidst continuing global economic uncertainties.
OUR RESULTS AT A GLANCE 2011 was a stark and unwelcome contrast to 2010. After a robust ending to 2010 and a buoyant double-digit growth in the .rst quarter of 2011, revenue on a like-for-like basis plummeted below the 2010 level for the remaining three quarters of the year, exacerbated by spiralling costs. To say that we are disappointed with our . nancial performance would be an understatement, yet the pro.t, albeit meagre, would not have been achieved had we not taken countermeasures to reduce our cost base and tackle increasing margin pressure. As the year progressed, we saw a levelling off in the decline in revenue and gained some ground towards the end of 2011. Reported group revenue for .scal 2011 was 35.0% higher year-on-year, at RM198.1 million. Stripping out the revenue contribution from Taiwan’s Ares Green Technology Corporation (“AGTC”), which became our subsidiary following our acquisition of an additional 8.5% stake in the company in December 2010, group revenue in 2011 of RM146.7 million was broadly unchanged compared with the previous year. The softening in revenue was most keenly felt in the oil and gas sector, with a 31.5% decline to RM27.0 million from RM39.3 million in 2010. The oil and gas sector contributed 13.6% to the group’s revenue in 2011. The downtrend was echoed in the power generation sector, which saw revenue reduced by 32.0% to RM22.8 million from RM33.5 million the year before, and accounting for only 11.5% of the overall revenue in 2011. The signi.cantly lower demand in the power generation sector was partly due to deferment by customers of long-term investment decision as a reaction to uncertain expectations for the future. All is not lost, however, as the revenue contraction in these sectors was compensated by more than two-fold surge in revenue in the semiconductor sector. Semiconductor revenue for .scal 2011 bucked the trend, topping RM99.9 million and contributing 50.4% to total group revenue. Even after excluding the revenue from the acquired Taiwan subsidiary of RM51.8 million, semiconductor revenue on a like-for-like basis still registered a noteworthy organic growth of 16.7%, surpassing the prior year revenue by RM6.9 million. The resiliency of the industry is a direct re.ection of the pervasiveness of semiconductor innovations and their applications in almost every aspect of the modern society. From a regional perspective, Singapore remained as the Group’s main market notwithstanding that the revenue was broadly unchanged at RM66.3 million, representing 33.5% of the now larger revenue base. Meanwhile, revenue from our Malaysia-based customers slipped back in a second consecutive year by 10.9% to RM61.4 million. Over in the Philippines, although the economy suffered more than its ASEAN neighbours in 2011, our revenue from the local customers maintained its course for growth, rising by 59.1% to RM9.3 million driven mainly by higher revenue from rehabilitation work on power plants in the country. With a surge in investment in the power generation and distribution industries, the country now has one of the most liberalised power sectors in Southeast Asia and looks set to undergo a period of modernisation and expansion. Equally heartening was our performance in Taiwan, which emerged as the Group’s third largest market, trailing Singapore and Malaysia, with revenue of RM51.4 million in 2011. This key market now accounts for 26.0% of total group revenue, bene.ting largely from growing economic relationship with China and the progressive easing of cross-Strait investment restrictions. While our top line growth in .scal 2011 gave us a reason to smile, the same cannot be said for our earnings before interest, tax, depreciation and amortisation (“EBITDA”). We closed the year with an EBITDA of RM24.8 million, or 18.2% lower than that in 2010. As a percentage of sales, EBITDA declined to 12.5% from 20.7% the previous year, impacted primarily by massive upsurge in labour and sub-contracting cost, as well as overheads and salaries, in anticipation of revenue growth that did not materialise. On a comparable basis, these costs escalated by RM11.7 million and RM4.0 million respectively and their negative effects were only partially offset by lower materials cost. During the year, the Group also recorded charges of RM2.1 million as a result of allowance for impairment loss on receivables. Re.ecting the deterioration in EBITDA, the Group posted a net pro.t of RM2.5 million for .scal 2011 – a far cry from the RM12.0 million achieved in 2010.
During the year, the Group generated RM24.6 million cash .ows from operations, invested RM23.2 million in capital expenditure on property, plant and equipment, paid an interim dividend of RM1.0 million and pared down borrowings by RM26.8 million. We .nished the year with cash and cash equivalents of RM24.7 million and increased our shareholders’ equity marginally to RM179.3 million from RM176.2 million the year before. Net gearing at year’s end of 0.3 times continues to remain within the range that we consider to be appropriate.
MANAGING COSTS AND IMPROVING LIQUIDITY The results in .scal 2011 have inspired us more than ever to refresh our thinking about the way we do business in a rapidly changing marketplace. For many years, we have invested signi.cantly to expand or build new facilities to increase capacity ahead of anticipated growth, leading to either underutilised capacity in a softer market or lower than expected bene. ts from our capital spending. Likewise in 2011, we continued to invest in new facilities around the region to strengthen our foothold and safeguard our market share. These investments included new semiconductor facilities in Melaka and Kuching in Malaysia, and an engineering plant with coating and blowout preventer repair and calibration service capabilities in Jakarta, Indonesia. In Singapore, we invested in a new building to ful.l prerequisites for an extension of the lease of the site by the local statutory agency. We recognise that with our growth aspiration, we need a reorientation of our approach to achieve our goal. To that end, our new strategic agenda calls for emphasis on functional excellence balanced by a disciplined approach to cash management. Capital spending will henceforth be prioritised and modulated in response to market conditions, and at the same time allowing us to move forward on our accelerated growth ambition, while still delivering appropriate levels of cash in our business. In simple terms, generating more free cash and growing our pro.tability will be our order of the day. We are gathering pace on a series of improvement measures that we had put in place since the end of 2011 to steer the Group back to a position of strengthened pro.tability. As well as cutting our cost base and right-sizing our workforce into a leaner organisation, we are improving cross selling for greater operational synergies, and implementing best practice margin management and sourcing strategy in our supply chain to help us deliver better value propositions to our customers. Alongside these measures, we are driving ‘results and accountability’ agenda across all our business units and where there is little prospect of improvement in investment returns for the foreseeable future, we will realign our business to provide headroom for growth opportunities, pro. tability and leadership in other selected priority markets. Above all, we are reassessing our investments with the aim of focusing on fewer activities, so that we can concentrate our resources on those market segments where we have a competitive edge and can achieve sustainable, above-average . nancial returns. The end goal is to generate stronger growth in earnings while providing the .nancial wherewithal for investment in our future and, more importantly, stable if not growing dividends to our shareholders. That said, where it supports our goal and overall strategy, we will supplement our organic growth with selective value-enhancing acquisitions and partnerships. We see investment opportunities aplenty in all areas of our business, but it is naturally important that our expansion takes place with maintained pro.tability and our investments prioritised to yield justi.ed returns. Any such investment, we assure you, will meet our rigorous .nancial criteria. There is still much remaining to be done and it is by no means a quick .x. However, I can assure you that we are working with grim determination to meet all these challenges and are optimistic about our ability to improve in these areas and navigate the Group back on a growth path. The long-term future of our Group holds as much promise as ever because of the inherent size and strength of the markets we serve, the innovation and ef.ciency of the solutions we bring to our customers, and the dedication and passion of the people we employ. Furthermore, the scope, scale and depth of our core business across diverse markets and geographical spread has served us well in coping with varying economic landscapes and enabling us to act quickly on various opportunities in each market. Whilst our cost reduction and improvement programmes are integral to setting the stage for our long term growth, we recognise that sustainable improvement is predicated upon corporate culture of excellence and integrity. At Frontken, each of us has a responsibility for upholding the Group’s reputation as an ethical, reliable, and honest business. Our employees know that we do not tolerate unethical practices in any facet of our business and they are never to engage in conduct that would undermine the reputation of the Group, their peers or themselves.
OUR PRIORITIES FOR 2012 We entered 2012 acutely aware of the many challenges that lie ahead, but are also con.dent and clear about our priorities. 2012 is a year in which we will work tirelessly to rebuild a stable platform that will drive revenue and earnings growth for many years to come. Although visibility beyond the short term is still limited, we know that market conditions are likely to remain volatile and the uncertain global economic and geopolitical backdrop will continue to raise challenges throughout 2012 and beyond. We look to the future with cautious optimism and expect that we will be able to grow our top line this year across our markets. Our bottom line will bene.t from this growth even as headwinds remain. To summarise our priorities for the year: • We will be disciplined in the execution of our strategy, and focused on the fundamentals of our business and on markets that provide good growth prospects.
• Costs will be tightly managed to protect earnings and investment modulated in response to market conditions.
• We will continue to proactively manage the balance sheet and exercise prudence in liquidity management.
Delivering on our plans will take not only discipline, determination and intense focus, but also .exibility and agility to anticipate and respond to the extraordinary changes around us. We are con.dent we can achieve our goal through our strategy and to assist me in achieving our goal, I have the support of my colleagues around the region who are helping to lead the Group into a future full of possibilities. Together, we are determined to turn the uncertainties in the economic environment into opportunity and use it as an additional drive for change and reinvention as we build the Group that all our people can be proud of. In light of the Group’s immediate focus on cash generation, the Board considers it prudent not to recommend a .nal dividend payment. It is expected that this suspension will be temporary and that a dividend policy will be formulated in due course to re. ect the Group’s .nancial and cash . ow positions and the shape of the business following our implementation of the improvement measures.
APPRECIATION In January 2012, Mr Wong Hua Choon stepped down as the Chairman and Managing Director of Frontken after helming the Group for 16 years. On behalf of the Board, I wish to thank Mr Wong for his valued contributions and wish him well in all that he does in the future. We also offer a very warm welcome to our Non-Executive Director, Mr Jorg Helmut Hohnloser and his alternate, Mr Timo Fabian Seeberger, who joined the Board in February 2012, bringing with them signi.cant relevant experience in areas of the business which will be increasingly important for the Group in the future. We are deeply saddened by the passing of our Non-Executive Director, Dato’ Sri Ibrahim Bin Mahmud, in February 2012 and express our sincere condolences to his family and friends. He will be remembered for his contribution to the Group. I also wish to thank our shareholders for their continued patience through a dif.cult time and all my colleagues for their efforts and contributions. It has been four months now since I assumed the position of Chairman and Managing Director of the Company – a challenge that involves a tremendous amount of responsibility, and one that I’m pleased to accept. It is my honour to lead this team as we prepare to take Frontken into a new era of sustainable growth. Sincerely, NG WAI PIN Chairman / Managing Director
2010 Annual Report
A Word from the Chairman
Fiscal 2010 was an outstanding year for Frontken. With the world economy recovering from the .nancial crisis, all our business divisions made commendable contributions to our sales and pro.ts. The basis for the success over this past year, I am pleased to say, was the consistent application of our focused strategy and af.rmation of our business approach, coupled with the tremendous expertise and enduring strengths of our employees, demonstrating amply our ability to remain resilient in trying times. Looking back, our .nancial vigilance and decisive response to the global downturn enabled us to weather the economic storm, and we emerged from the crisis an even stronger company.
Looking forward, key priorities in the coming years will be to accelerate our growth. Our focus is on leveraging organic growth in rapidly expanding markets, supplemented with selective acquisitions to boost organic growth. Equally important on our agenda is expansion with maintained pro. tability and attractive returns, regardless of whether it is generated organically or through acquisitions.
Our revenue reached a new high in 2010, our earnings rebounded and our .nancial performance is accelerating. In terms of overall strategy, we forti.ed our competitive strengths, renewed our regional strategies to make our balanced service offerings more robust, and established our priorities in an improving global economy.
Backed by a healthy balance sheet, we continued to assess acquisition opportunities to strengthen our diverse offerings and expand our regional network in 2010. Notable highlight was our acquisition, shortly before year’s end, of an additional 8.5% stake in Ares Green Technology Corporation, making it our 50.6% subsidiary and consolidating two organisations with proud histories of leading complementary technologies. I am con.dent that our combined global presence, technologies, services, brands, and expertise will bene.t our customers worldwide.
At the macro level, economic activity in most developing countries has, or is close to having, recovered, and developing countries have regained trend growth rates close to those observed in the pre-crisis period.
Upturn prevailed in the two traditional geographic markets of Frontken, namely Singapore and Malaysia, with particularly strong growth in Singapore. We saw Singapore economy reverse from the contraction of 0.8% in 2009 to record a growth of 14.5% in 2010, driven largely by the rebound in manufacturing sector stemming from a surge in electronics and biomedical manufacturing output. Following the sharp rebound in 2010, the Singapore economy is expected to grow at 4% to 6% in 2011, supported by strong domestic demand and regional growth.
Back in our home country, the economy experienced a strong resumption of growth in 2010 with an expansion of 7.2%, driven mainly by robust domestic demand and strong private sector activity. Capital spending expanded across all sectors, particularly in the manufacturing, mining and services sectors, following improvement in external demand. Malaysia projects to grow at 5% to 6% in 2011 underpinned by strong domestic demand emanating primarily from private sector activity.
WE FARED WELL IN 2010
In 2010, we turned in a solid .nancial performance, with revenue growing 6.8% year-on-year to RM146.7 million and earnings before interest, tax, depreciation and amortisation (EBITDA) rising 10.9% to RM29.7 million. As a percentage of sales, EBITDA also improved to 20.2% from 19.5% in 2009 primarily due to operational improvements and the favourable macroeconomic environment. Reported net pro.t increased 42.6% to RM12.0 million compared with 2009 net pro.t of RM8.4 million, notwithstanding a one-off goodwill impairment charges of RM0.9 million, as well as higher debt provision of RM2.9 million compared to RM0.1 million a year ago. Excluding the goodwill impairment charges, net pro.t attributable to shareholders grew by 53.7% in 2010.
Revenue in our core market segments kept almost level with prior year, except for power generation which leaped 51.0% to RM33.5 million from RM22.2 million in 2009 and contributing 22.9% to sector revenue in 2010, due mainly to higher outages in Singapore, Malaysia and the Philippines. Meanwhile, oil and gas remained a key revenue driver accounting for 26.8% or RM39.3 million of overall revenue, but this represented a 9.9% decline from RM43.6 million in 2009. Semiconductor performed robustly with strong momentum particularly in the second half of 2010, chalking up RM38.9 million in sales for the whole year. Equally pleasing is our general sector, which turned in a stellar performance with revenue growing 34.0% to RM35.0 million, driven mainly by engineering and marine industries.
On a geographic basis, the impact of recovery was most keenly felt by our Singapore operations. Our customers in Singapore led all our major markets with revenue soaring 17.7% to RM66.5 million and accounting for 45.3% of the Group’s overall revenue in 2010. Our Philippines subsidiary also executed well, growing revenue by 71.1% to RM5.9 million, and bene.ting from greater activities particularly in the renewable energy sector. Growth of these markets more than offset much of the softening in revenue from our customers in Malaysia, which fell 7.5% year-on-year to RM69.0 million, due in part to a slower pace of recovery from the downturn in 2009, notably in the semiconductor market. Nevertheless, Malaysia continues to be our biggest market, with revenue from our Malaysia-based customers remaining strong at 47.0% of overall revenue in 2010. We remain bullish of the long term prospects of our Malaysia market, given the various positive developments in the country.
Our improved operating performance, along with prudent management of working capital, generated some RM20.9 million of cash .ow from operations. We raised RM31.8 million equity funds through a rights issue in March 2010 and invested RM23.9 million in capital expenditure on property, plant and equipment. Net gearing at year’s end of 0.3 times remained within the range that we consider to be appropriate. We ended the year with a healthy cash and cash equivalents of RM33.0 million and increased our shareholders’ equity by RM40.9 million to RM176.2 million. Simply put, we have improved our .nancial . exibility.
The results we achieved in 2010 enabled us to pay an interim dividend in September 2010 of 1% per share, our .rst ever cash dividend, to reward shareholders who had remained with the Company through dif. cult times.
Whilst we view the improved results for 2010 as an important step forward and a glimpse of what we believe is achievable in the years ahead, the success we achieved in the past year gives us no reason to rest on our laurels. A wealth of growth opportunities awaits in a .ercely competitive market and against this backdrop, our focus continues to be on growth, with each of our business units positioned to make a contribution to both our top and bottom lines. To achieve this, we will continue to enhance our efforts strengthening our technologies, tapping growth markets and exploiting our core expertise.
INNOVATION REMAINS PARAMOUNT
Succeeding in today’s global economy is no simple feat. Even though we believe that the strength of our business, as well as our ability to deliver our integrated expertise to customers, are creating compelling opportunities in this competitive landscape, we will strive to focus even more on addressing the needs and aspirations of our customers around the globe.
Our un.inching commitment to technology excellence, the very foundation that propelled our Group to where it is today, continues to receive our prioritised attention. In .scal 2010, we invested RM2.4 million (including depreciation) on our research and development (R&D) activities to keep our solutions and services relevant, vibrant and valuable.
We expanded our broad array of service offerings during the year to include SIFCO Applied Surface Concepts’ selective plating, a portable method of selective brush electroplating to precise engineering tolerances and .nishes without using an immersion tank. This technique overcomes the challenges of plating only small areas of large or complex machines, or items having parts that may be damaged by immersion. It also helps reduce complex masking and the risk of plating surrounding surfaces, and improves our agility in on-site repair and coating services.
Another milestone on our R&D front is our newly acquired skills in Electromagnetic Core Imperfection Detection (ELCID) to test the condition of stator core lamination insulation in large turbo and hydro generators by using a low core excitation level to establish a magnetic .eld within the core. This technique brings the bene.ts of ease of use, safety for both machine and personnel and, more importantly, reduced downtime as it can be carried out without having to remove the rotor. ELCID, together with our range of electrical equipment and instrument testing capabilities, further extends our integrated expertise for mechanical and electrical equipment in the geothermal energy sector and puts us in a position of strength to take advantage of the growing service opportunities for power plants in the Philippines.
Our dedication to R&D has allowed us to offer customers an unrivalled mix of service offerings and is what makes us different from our competitors. Our journey of technology development, therefore, will not stop here. We will continue to develop practical and effective solutions, products and services, while building distinctive capabilities for our customers.
EXPANDING REGIONAL LEADERSHIP
In a successful .scal 2010, we set the stage for reinforcing and expanding our leading position in the region. We invested RM2 million to extend our service plant in the Philippines by 1,000 square metres to include a full .edge precision cleaning engineering facility to serve the solar and semiconductor industry, and are now in the midst of quali.cation by our solar products and services customer. We are encouraged by the fact that the semiconductor and electronics industry in the Philippines reached a staggering $2.3 billion in 2010, posting the highest record so far in the history of the industry. Looking ahead, the semiconductor and electronics industry in the Philippines is bullish for 2011, according to Semiconductor and Electronics Industries in the Philippines Inc (SEIPI), and expects to be the driver of growth for Philippines’ export.
Last year, we made great strides unveiling our new green technology division – GreenFront. GreenFront is an extension of our energy ef.ciency imperative, focusing on green energy product line and covering light emitting diode (LED) lightings, solar energy products as well as waste-to-energy solutions. GreenFront clinched its .rst project, shortly after inauguration, to deploy its green technology lighting at Selangor’s Mines 2 shopping mall, making the latter a .rst commercial building in Malaysia which is fully installed with Frontken’s LED. With increasing awareness and growing demand for energy-ef.cient products and solutions, there can surely be no doubt we are excited about the prospects for GreenFront and we remain positive that this division will emerge as an engine of growth for the Group in the years ahead.
A particular highlight deserving special mention is the signi.cant accomplishment by our dedicated team of people in an overhaul project for the energy sector jointly undertaken with our customer in Bangladesh. The project, I am proud to say, was successfully completed within a short span of time with our people remaining undistracted by the extremely challenging working environment -yet another shining example of our capabilities and commitment to deliver our best.
In addition to pursuing organic growth, we also made good progress in targeted acquisitions to lay the foundation that shapes the future direction of our Group. A major milestone in 2010 was the acquisition of an additional 8.5% stake in Ares Green Technology Corporation, which we expect will provide a solid platform for accelerated expansion in Taiwan and China. We view the acquisition as timely to position the Group in seizing the rebound in Taiwan’s
precision cleaning industry emanating from significant hike in the utilisation rate of semiconductor and TFT-LCD fabs as well as pricing stabilisation in a more orderly market. Further, with the improving cross-straits cooperation following the signing of trade pact between Taiwan and China last year, companies in the technology industries such as AGTC stand to bene.t hugely from the growth potential of the Chinese semiconductor industry, for which investments of USD40 billion have been projected to fuel industry growth during the 5-year development period from 2011 to 2015.
We also invested in a 51% subsidiary in turnkey project-based engineering, construction and maintenance works to enable us to serve our customers with a more complete range of engineering solutions. Operating from one of our plants in Singapore, this new subsidiary will be serving mainly the oil and gas, petrochemical and chemical plants at Singapore’s Jurong Island. The anticipated increase in investments in the process industries, coupled with the government’s drive to build an oil and gas and petrochemical hub in the Asia Paci.c region, spells opportunities for players in the engineering, procurement and construction industry.
Increasing our presence in growth markets has long been, and will continue to be, one of our strategic priorities. Our proximity to customers in the region plays an important part for what proved to be a year of resiliency across our businesses. We want to continue pursuing business opportunities in markets with exceptional growth potential. To that end, we announced our foray into Qatar in April 2011 following the resolution by our Board to incorporate a 49% subsidiary to provide surface engineering services to the oil and gas industry in the State of Qatar. While we have been closely watching events unfold in parts of the Middle East and North Africa, and paying careful attention to political risk, we are comforted that Qatar appears relatively stable with economic outlook for the next 5 years appearing broadly favourable and total gross domestic investment expecting to reach QR820 billion under its National Development Strategy 2011-2016. The country presents a good entry point into the Middle East.
We are now taking the next step with the focus of synergising our various business units and harnessing our regional platform by capitalising on the expanse of our markets and our diverse capabilities.
In addition to our priority of operating pro.tably and successfully in even the most challenging market environments, we are also acutely aware of our responsibilities that go beyond our engineering business.
As well as meeting our customers’ needs, our business activities are directed towards addressing environmental aspiration. We work alongside our customers to develop effective solutions that will help them address green issues by reducing the life-cycle impact of their equipment and improving processes through recycling, reusing, repairing, refurbishing and re-manufacturing their equipment. We also ensure all our operating units adhere strictly to environmental legislations governing treatment of plant ef.uents and waste water, and maintain strict control to minimise adverse impact on the environment.
The markets we compete in today are subject to constant change and it is therefore vital to retain the best talents and continually improve our people who are largely responsible for ensuring that we remain a market leader in all our business areas. More than ever, we are placing increasing emphasis to create a culture of lifelong learning, driven by training and development to give them the tools they need to set new market trends, master new market challenges confronting our businesses and help us remain successful in global competition over the long term.
We integrate health, safety and environment (HSE) considerations into all aspects of our business operations and processes as far and practicable, and provide constant training and monitoring to ensure the safety and overall well-being of our people. Measurable approach is applied to continually improve our HSE culture and performance.
From a community perspective, we continue to support and promote education and training in the regions where we operate, seeking to improve the prospects of both future leaders of the world and our workforces. Particularly noteworthy was the support we have extended to Singapore’s Institute of Technical Education by providing its students with technical skills and knowledge, as well as exposure in global business trends and developments and different work practices and cultural environments at our service plant in Malaysia.
Nothing is more important in our business today than the confidence and trust our customers and business partners place in us. The competence of our people, their integrity, ethics and behavior are vital to all aspects of our operations. Our aim is to ensure that we run our operations in line with our values, applicable laws and regulations and, most importantly, with integrity. We empower people close to the actions to take ownership and responsibility, and instill a culture that values honesty, integrity and transparency. With this in mind, we launched our whistle-blowing policy this year to strengthen our corporate governance practices and provide employees with accessible avenue to report in good faith suspected fraud, corruption, dishonest practices or other similar matters.
AWARDS AND RECOGNITION
I take great pride in the fact that Frontken has been recognised repeatedly by its customers for service excellence. Last year, we won an On-site Service Suppliers Quality Performance Award from In.neon Technologies (Kulim) Sdn Bhd and this year, we received a certi. cate of appreciation from VDL Enabling Technologies Group (Singapore) Pte Ltd. Equally gratifying was The BrandLaureate Award 2010 – 2011 we received recently for being the best brand in Engineering – Industrial and Surface Metamorphosis Solutions.
Every award and recognition helps reaf.rm that we are on the right course, and with it comes the responsibility to preserve our extraordinary values and uphold the exemplary standards established by our people.
FISCAL 2011 PRIORITIES
Pleased as we are with the results for the .scal year that just ended, what we really want with this foundation is to create sustainable value for the long term. To achieve this, we will stay anchored in what we do best and focus our Group around its core competitive strengths. Emphasis will be placed on leveraging our strong regional network and differentiated service offerings even more intensively as we chart our path to grow our businesses. We will also continue to pursue avenues for developing our business in attractive growth markets.
The unpredictable and volatile macro environment in recent years has shown how important it is to respond quickly, .exibly and decisively to change. Even though the economic situation has stabilised in most markets, the necessity remains to continuously adapt and optimize existing structures so we can stay ahead of the curve.
We have entered 2011 with the same tenacity, commitment and enthusiasm that drove our operations last year, but with more optimism. We have a strong base of resources, a pipeline of growth businesses and a reputation for innovative applications of technology. Despite continuing risks, we are convinced of our ability to master the challenges of increasingly volatile markets and intensifying competition.
The future is looking brighter. We are getting stronger every year, and will continue to do so. Rest assured that the global Frontken team is primed to do even better to increase shareholders’ value, regardless of whatever challenges that global conditions may spring on us.
I would like to thank our people, who showed in the past year that they can rise to the sternest challenge, and our Board of Directors for their invaluable stewardship. I also express my appreciation to our customers, bankers and business partners for their con.dence and trust in Frontken.
And lastly, I want to thank you, my fellow shareholders, for your support and ask that you accompany us on this journey as we look to 2011 and beyond with con. dence.
WONG HUA CHOON
Executive Chairman / Managing Director
2009 Annual Report
A Word from the Chairman
2009 was a year few of us will easily forget. An economic meltdown that spread around the globe and created the most dif.cult business environment made it a very challenging year for companies around
the world, and Frontken was no exception.
Faced with the most severe global economic downturn many of us have ever experienced, our people delivered results that were as impressive as any we have ever achieved.
Economies in the Asia and Paci.c region were particularly hard hit by the collapse of global business investment in the fall of 2008. The crisis curtailed .nancing .ows to private .rms worldwide, and together with depressed growth expectations, investment plans were marked down sharply. However, East Asia’s rebound from the global downturn over the course of 2009 was quicker and more robust than in other parts of the world, underpinned by domestic stimulus programs put in place by a number of economies, most notably by China.
In Malaysia, more than 40% of the country’s exports are electrical and electronics products with high import content and produced in large part by .rms under foreign ownership. This helped reduce the economy-wide signi.cance of the shock. Still, growth for the Malaysian economy turned negative in the .rst three quarters, contracting markedly by 6.2% in the .rst quarter, but regained growth momentum in the fourth quarter to register an overall contraction of 1.7% in 2009. Real Gross Domestic Product is expected to expand by 4.5% to 5.5% in 2010 supported by strengthening domestic demand and an improving external environment.
Across the border, the Singapore economy contracted by 2.0% in 2009 compared to an expansion of 1.4% in 2008. With the exception of construction, business services and information and communications, all major sectors contracted in 2009. The Singapore Ministry of Trade and Industry expects the Singapore economy to grow by 4.5% to 6.5% in 2010, which is an upgrade from the earlier forecast of 3.0% to 5.0% largely re.ecting increased strength in the near term growth momentum.
STRENGTH IN UNCERTAIN TIMES
To say that 2009 was a dif.cult year would be an understatement. It was a unique and extremely tough situation as we started the year confronted with muted demand, but we wrestled with our challenges and rede.ned our priorities swiftly to minimize the impact of the crisis. The trying times of the past year were indeed a test of our resolve, but we discovered more about our capabilities and commitment to persevere than we could have under less daunting environment.
In an extraordinarily dif.cult year for many, we remain steadfastly focused on deploying our resources where they can deliver the greatest results and rigorously assessed every decision against cost. We ended the year 2009 with group revenue of RM137.4 million, 5.2% higher compared with RM130.6 million previously. EBITDA, although improved to RM26.8 million from RM26.5 million in 2008, declined as a percentage of sales by 0.8% to 19.5% primarily due to higher subcontracting cost.
Net pro.t attributable to shareholders for the .nancial year ended 31 December (“FY”) 2009 was RM8.4 million. This is however not directly comparable to the exceptional RM18.9 million recorded in FY2008 when a one-off insurance compensation (net of losses) of RM7.1 million was recognised. Pro. tability was further affected by share of losses of associates of RM1.3 million this year compared to share of pro.ts of RM1.3 million previously, as our associate coped with the battered semiconductor market in Taiwan in 2009.
During the year, the oil and gas industry remained a key revenue driver, albeit at a lower level than in 2008. The sector chalked up RM43.6 million revenue but this represented a decline in overall contribution to Group’s revenue from 37.3% in 2008 to 31.8%. Meanwhile, the power generation sector saw a tremendous growth of 43.0% in sales with a contribution of RM22.2 million or 16.2% to Group’s revenue, compared with RM15.5 million or 11.9% in 2008. The semiconductor industry continued to perform well as we experienced a rebound in demand towards the end of the year to end the year with revenue of RM45.4 million or 33.1% of total revenue, up 6.1% from RM42.8 million recorded previously.
Geographically, Malaysia and Singapore remained our biggest markets in 2009, accounting for 54.3% and 41.1% of Group’s revenue respectively. At RM74.5 million, revenue contribution from the Group’s local customers increased by 21.6% from RM61.3 million in the preceding year. By comparison, the Group’s Singapore-based customers contributed RM56.5 million to total revenue, a drop of 4.9% from RM59.4 million in the previous year.
During 2009, we increased our shareholders’ equity by RM13.7 million and ended the year with RM10.2 million of cash. Net gearing was 0.4 times at the end of 2009, compared with 0.5 times at the end of 2008. Capital expenditure in 2009 amounted to RM16.6 million which included RM11.1 million in respect of purchase of plant and machinery.
Our results in 2009 once again demonstrates the underlying robustness of Frontken’s business model, which, drawing upon the diversity of our markets, a broad array of services and applications, and strategic geographic positioning, has enabled us to thrive in the good times and weather the bad. The people of Frontken have been tested and we have pulled together, but we know that we have much more to accomplish.
The demands imposed by the fragile operating environment over the course of the last 18 months reduced access to . nancial capital and required that we reviewed more fundamentally how we achieve .nancial stability and liquidity cushion for the Group in a manner that best preserve long-term shareholders’ value. To that end, we announced a 2-for-5 rights issue of shares with free warrants in November 2009, which was completed in March 2010 and raised approximately RM32 million. It was pleasing that the share issue was well subscribed with an over-subscription rate in excess of 40%. Its success demonstrated the strong con. dence which you, our shareholders, have in our future and we are profoundly thankful for your support. As a consequence of the capital raising, proforma net gearing as at 31 December 2009 is further reduced to
SUSTAINABILITY THROUGH RESEARCH & DEVELOPMENT (R&D)
Investing in the future of Frontken has and will always remain a priority – a commitment we never once wavered even in the grip of the .nancial turmoil. We are committed to being more than just a high quality surface metamorphosis solutions provider, and to deliver this, we will fully leverage our broad capabilities and offer a compelling value proposition for our customers through innovation and technology.
During the year, we invested RM3.2 million (including depreciation) in developing the next generation technologies that will provide critical leading-edge solutions to our customers. Notable milestone on our journey of technology development included research on the effect of off-normal spray angle on the structure and properties of HVOF coatings. This has enabled us to take on challenging engineering problems which were once limited by thermal spray techniques.
Our R&D team is also undertaking studies on heat transfer and its correlation with zirconia thermal barrier coating for a plasma sprayed gas turbine application. If successful, this R&D initiative is expected to open door to thermal barrier coating applications in the power generation sector, in particular, for gas turbine engine and turbine blade.
Another major R&D initiative is the development of novel coating on the interior surface of semiconductor process kits to reduce impurities and particulate contamination that may sputter off the interior surfaces of the chamber during plasma immersion ion implantation. This invention is cost effective and has advantages over conventional methods with a relatively easy technique for improving implantation uniformity across a water with very low impurities and particulate contamination.
As a technology solutions provider, our technology innovation often goes hand-in-hand with corporate responsibility. We promote green initiatives by offering our customers practical cost-effective technology solutions to recover, recycle and reuse their critical parts and equipments. This year, we continue our green drive by collaborating with Kriya Materials B.V. to develop a series of new advanced next generation nano-products and solutions to address, amongst others, the energy saving needs of major industries such as automotive, green building, precision optics, electronics or displays with groundbreaking nano-coating technologies.
EXPANDING OUR MARKETS
Since our maiden foray into the solar and photovoltaic (“PV”) industry last year, we made good progress with the . nalisation of a cleaning service agreement with one of the world’s largest manufacturer of PV cells. The PV industry is constantly advancing and has clearly entered the accelerating growth phase, with worldwide solar cell production reaching 9.34 gigawatt (“GW”) in 2009, up from 6.85 GW a year earlier. According to an international solar energy market research company, the industry is expected to return to high growth in 2010 and over the next .ve years, and even in the slowest growth scenario, the global market will be 2.5 times its current size by 2014. I am convinced that the solar business platform will provide our Group with opportunities to develop further with our core competency.
As we continue to break new ground identifying new market-relevant technology to broaden our services portfolio, we made major strides in the renewable energy sector this year. For the .rst time, we successfully completed the repair and restoration of a 63-megawatt steam turbine from Makban Geothermal Power Plant at Laguna, Philippines within a short period of time, an achievement which I believe will stand us in good stead for the future. Our execution success marks our entry into the geothermal energy sector and demonstrates, once again, our proven ability to deliver complex solutions. It also gives us con.dence to advance our development efforts in the relatively untapped geothermal energy market.
In December 2009, a Memorandum of Understanding was signed with Osborne Engineering Ltd to jointly service Southeast Asia’s hydrodynamic bearings aftermarket and form an aftermarket support alliance and partnership for the turbo-machinery services, repair and retro.t activities in the United Arab Emirates, as well as selective Gulf Region and African markets. This is also in line with our customer-focused strategy of localised support for our existing original equipment manufacturer (OEM) customers in the energy, oil and gas and related sectors in the Middle East.
Consistent with our long term strategy to expand our market, we established Frontship Pte Ltd as a wholly-owned subsidiary with a paid-up capital of SGD500,000 in December 2009 to serve as a procurement partner for vessels in the marine industry and promote cross-selling opportunities within the Group. The marine sector, a market with which we are not unfamiliar, has been a small but steady revenue contributor to the Group thus far and we are now determined to grow this segment.
In January this year, we completed the acquisition of a 20% stake in Chinyee Engineering & Machinery Pte Ltd (Chinyee) for an adjusted purchase price of SGD1,387,000. Chinyee is an excellent .t with our long term strategy and should place us in a better stead to compete more effectively by offering a higher value service proposition.
More than ever, it is vital in our industry to deliver services when and where customers need them. Our regional footprints and local services spanning 7 countries with 13 facilities are among our strongest competitive advantages and explain why customers around the world put their trust in us. We believe the seeds we have sowed regionally will mature gradually to fuel growth in the foreseeable future. Notwithstanding the broad reach, we will continue to mine opportunities to strengthen our presence in geographies where more coverage sharpens our competitive edge. And our strengthened balance sheet means that we will be in a position to make strategic investments to accelerate our growth when such opportunities arise, but with a cautious approach.
Our corporate social responsibility platform touches upon responsible business practices, environmental stewardship and education stewardship.
Conducting business responsibly has always been a tall order and never more so than now. Our aim is to ensure that we run our operations in line with our values, applicable laws and regulations and with integrity. We believe in empowering people close to the actions to take ownership and responsibility, and instil a culture that values honesty, integrity and transparency alongside innovation and continuous improvement.
We integrate health, safety and environment (HSE) considerations into all aspects of our business operations and processes as far as practicable and provide constant training and monitoring to ensure the safety and overall well-being of our people. Measurable approach is applied to continually improve our HSE culture and performance.
Delivering outstanding performance requires exceptional people. At Frontken, our goal is to develop our employees to have the highest technical and leadership capabilities in the industry. We believe that investing in our people creates a sustainable source of competitive advantage, and will continue to provide our people with formal training and a broad range of experiences to develop them into the next generation of company leaders.
We also encourage employees to support local initiatives of particular importance to them. In October 2009, our subsidiary, Frontken Philippines Inc., supported Manila Water Company Inc in the latter’s relief efforts for Typhoon Ondoy, which wrought havoc on Metro Manila and nearby areas, causing severe .ooding which resulted in the loss of many lives and the displacement of many people. We are incredibly proud of the efforts our employees put into these worthy causes.
While the year had been one of sharp contrasts, there were nevertheless many successes that the Group could celebrate.
In May 2009, Chinyee, was bestowed the 2009 Aerospace Supplier Excellence Award by The Association of Aerospace Industries (Singapore), recognising Chinyee’s commitment to satisfy the OEMs and major aerospace market players. We are encouraged by this accolade but at the same time, are aware that with such recognition comes the expectation that we continue with the high standards which we have achieved.
We are also deeply honoured to receive the 2010 South East Asia Frost & Sullivan Technology Innovation Award in the Semiconductor Services Market, an award for best-in-class and industry leading surface treatment technologies with excellence in R&D activities. It is gratifying to see that our endeavours have been recognised and needless to say, this will go a long way in making sure we continue our efforts towards R&D and help us accomplish greater heights.
OUR PATH FORWARD
Looking back, I take great pride that we have been able to take headwinds in our stride in times of crisis and still deliver commendable performance. This, I have our people to thank whose loyalty, commitment, passion and tireless efforts I am incredibly proud of. Because of them we have been able to successfully navigate through the period of economic uncertainties, and emerge a better and stronger company than we have ever been.
As we embark on .scal year 2010, we are encouraged by the signs that the worst of the downturn is behind us. Current macro-economic trends are pointing towards recovery and the start of a modest growth cycle. I am optimistic that our strengthened balance sheet and a good cash position, increasingly strong brand, considerable expertise and strong presence in a diverse array of market sectors will help us continue to grow our markets. More than ever, we are well-equipped to master the challenges that lie ahead and we will continue to prove our mettle in an environment that is full of profound challenges and opportunities.
Moving forward, our strategy remains unchanged and our value proposition intact. We will continue to grow our robust fundamentals and leverage our competitive advantages by replicating our business model in all our business units. We will also maintain the .nancial and operational discipline that had served us well through the economic downturn.
I am delighted to welcome Mr Aaron Sim to the Board as an independent non-executive director. Mr Sim joined us in August 2009 and his breadth of commercial experience and .nancial expertise will serve us well in the coming years. I would also like to express my gratitude and appreciation for the contribution by Mr See Chuan Swee, who stepped down as our Executive Director / Chief Financial Of.cer in June 2009. My sincere gratitude also goes to Mr Kek Chin Wu for his valuable contribution during his short stay with us.
I would also like to thank our customers around the world for putting their continued trust in us and allowing us to play a key role in helping them advance their businesses and achieve their goals.
And most of all I thank you, my fellow shareholders, for the trust you have shown in us. We are always mindful of our responsibility to steward the investment you have made in us and we are honoured to have that responsibility and are committed to continuing to earn your con. dence.
WONG HUA CHOON
Executive Chairman / Managing Director
2008 Annual Report
A Word from the Chairman
We are pleased to register another pro.table year despite the global economic downturn in the .nancial year ended 31 December 2008 (“FY2008”). Our Group achieved RM18.9 million in net pro.t on steady revenue of RM130.6 million.
The year marked our initial foray into the solar and photovoltaic arena prompted by growing worldwide demand for ‘green’ energy sources.
2008 saw a world in unprecedented turmoil with the surge and relapse of crude oil affecting a large and diverse set of countries in the East Asia and the Paci.c region. What began as .nancial dif.culties in the United States tied to subprime mortgage-based securities turned into a global .nancial crisis raising risk perceptions for several economies in East Asia. Adding to the gloom, global Gross Domestic Product (“GDP”) growth is now predicted to slip from 2.5% in 2008 to 0.9% in 2009 with developing country growth expecting to decline to 4.5% in 2009, more than 3% below the average of the past . ve years.
The continuing and profound escalation in the global .nancial crisis that characterized the latter part of 2008 signi.cantly reduced the .ow of credit, eroding consumer and corporate spending and con.dence, and ultimately resulted in signi.cantly reduced economic and industrial activities. Every industry and company was somehow impacted by this unexpected economic storm.
On the local scene, economic growth moderated to 4.6% in 2008, from 6.3% the previous year, as the effects of the global .nancial crisis hit our shores in the .nal quarter of the year, with domestic demand remaining the principal driver. Export and import activities (in terms of volume) decelerated sharply in the fourth quarter of 2008, falling considerably below trend growth following a plunge in exports and weakening domestic demand. Taking into account the expectation of a deepening global downturn as well as the support provided by the policy measures such as the economic stimulus packages, real GDP performance in 2009 is projected to be between -1% to 1%.
2008 in review
Amidst these challenges, the Frontken Group was able to deliver a commendable set of results in the FY2008. The Group achieved 23.9% higher revenue of RM130.6 million, compared with RM105.4 million previously. Operating performance remained resilient with EBITDA at a healthy RM26.5 million, a 15.1% increase compared to FY2007. Underlying net pro. t grew from RM4.0 million in FY2007 to RM18.9 million in FY2008.
Excluding total compensation of RM7.3 million in FY2008 from insurance companies for claims on losses arising from the .re incidents in the previous year, net pro.t attributable to shareholders in FY2008 is RM11.8 million, an increase of 14.2% compared to RM10.3 million in the .nancial year ended 31 December 2007 (“FY2007”), excluding the .nancial effects of the one-off insurance compensation and losses arising from the . re incidents.
For the majority of FY2008, the relevant markets in which Frontken operates were strong. In terms of industries, the oil and gas sector once again chartered the fastest sector growth by contributing RM48.7 million or 37.3% to Group’s revenue in FY2008, compared with RM32.1 million or 30.5% previously. The semiconductor industry continued to perform well and remained a key revenue driver, improving 20.8% from RM35.4 million in FY2007 to RM42.8 million in FY2008. Nonetheless, this represents a slight decline in overall contribution to Group’s revenue from 33.6% to 32.8%.
The activities in the power generation market remained largely stable contributing 11.9% or RM15.5 million to Group’s revenue. However, the sector saw a decline in revenue of 22.9% from RM20.1 million recorded in the previous year, due to lower scheduled maintenance during the year.
The higher revenue recorded was mainly due to higher demand for the Group’s surface metamorphosis services in tandem with increased awareness of the bene.ts of surface metamorphosis technology to wide-ranging industries. The Group’s diverse customer base also helps spread the business risk across key sectors. I attribute our 2008 performance to the strength of our core business fundamentals, our unique and diversi.ed business model, which combines our niches and capabilities across varied market segments, and our untiring efforts in developing longer term relationships with global manufacturers.
Geographically, Malaysia remained the biggest market for the Group during the year under review. Revenue contribution from the Group’s local customers improved by 17.8% to RM61.3 million in FY2008 from RM52.0 million in the preceding year. Nonetheless, this represents a slight decline in overall contribution to Group’s revenue from 49.4% to 47.0%. The Group’s Singapore-based customers contributed 45.5% or RM59.4 million to total revenue in FY2008, compared to 47.4% or RM50.0 million in the previous year.
Towards the end of the year, however, demand somewhat softened in almost all relevant Frontken markets. Generally, customers became more cautious with their investment and spending decisions due to uncertainties in the economic environment. Higher operating expenses led by business expansion tempered pro. t margin in FY2008.
Our balance sheet remained stable and we continued to generate strong and predictable cash .ows. Shareholders’ equity stood at RM121.7 million as at 31 December 2008, compared with RM98.0 million a year ago while share capital increased to RM70.0 million from RM49.5 million as a result of issuance of new placement shares and a 2-for-5 bonus issue implemented during the year.
18 November 2008 will go down as another memorable day in the corporate history of the Frontken Group with the successful transfer of the Company from the MESDAQ Market to the Main Board of Bursa Malaysia Securities Berhad. The transfer of the listing to the Main Board will help to enhance the pro. le of the Group and its attractiveness to institutional and retail investors.
Strengthening technology focus
Technology innovation has been pivotal in positioning us as the preferred solutions provider in our targeted business segments. Through the years, we have kept an unwavering commitment on innovation and a relentless pursuit of excellence through research and development (“R&D”) with speci.c focus on solutions for performance-critical applications that combine products, services and customer application know-how, to help our customers bene. t from improved productivity, longer equipment life and lower maintenance costs.
During the year, the Group invested approximately RM2.3 million (including depreciation) in enhancing our R&D capabilities and strengthening our platform for growth. Among the Group’s notable R&D projects completed during the year included the development of plasma doping process kits used in semiconductor fabrication for the protection of the interior surface of chamber from deterioration and unwanted contaminants. With this process, engineers can increase recycle cleaning process yields, improve process quality and performance and achieve faster time-to-delivery. A patent has been . led for this invention.
The year saw us moving up the value chain with the launch of our very own chemical delivery system for the semiconductor industry. The same technology could be applied to renewable energy and hard disk industries. These milestone wins are signi.cant in positioning the Frontken Group in the marketplace and they further augment our reputation and credibility as a key surface metamorphosis technology player in the region.
Moving forward, the Group will continue to orient its R&D activities around concrete customer problems. Among the R&D priorities for the year includes the development of application capabilities of solvent-free anti-corrosion coating suited for the lining of oil and gas and chemical tankage. This new coating eliminates the risks of lining failure due to solvent retention and cuts health and safety hazards from volatile organic compounds, and is fast becoming the preferred option in today’s oil and gas industry.
Expanding our markets
There are few players in the region that can provide the scope, scale and depth of capabilities required by large global companies looking for consistently high service standards across their entire business and to achieve the economies of outsourcing to a single provider. I take great pride in the reputation we have for the quality of the service we deliver and the loyalty that this inspires in our clients, as evidenced in our high retention rate and the growth in extending our services to existing customers.
Frontken continues to be guided by our three-pronged strategy, which places unwavering focus on expansion into existing and potentially high-growth catchment markets to be closer to our customers, developing .exibility in our service offerings to further align with future market needs and making strategic investment that will allow us to offer the best opportunities for differentiation, growth and pro. tability.
In 2008, we made initial foray into the solar and photovoltaic arena prompted by growing worldwide demand for ‘green’ energy sources. We are excited about the long term prospects of the global renewable energy market and remain positive that this will emerge as a signi.cant revenue generator to the Group in the years ahead. To this end, we are focused in enhancing our capability building in cleaning technologies as renewable energy initiatives worldwide are anticipated to spur the market.
Our venture into China with our joint venture partner to meet the local demand is taking shape slowly but surely. Our 50% subsidiary in Wuxi was incorporated in October 2008 with a registered capital of USD500,000 to develop, market and implement surface metamorphosis engineering business in China with an initial focus on the local semiconductor market. Although industry experts forecast a lower 5.8% revenue for China’s semiconductor industry in 2009 at $72 billion, growth is predicted to return in 2010 with a revenue climb of 9%, followed by an 11% increase in 2011. It is therefore an opportune time to lay the foundation so that we are able to ride the uptrend when business conditions improve.
Closer to home, our service plant in Iskandar Malaysia, Johor, operating under Frontken (Johor) Sdn Bhd and occupying an area of 28,162 square feet, was opened in November 2008 to cater to the oil and gas majors in the vicinity. Our network of plants in this region allows us .exibility, agility and responsiveness in project execution. While each of our plants is specialised to serve its niche target markets, they also complement and support one another in the regional market place.
We also made inroads into the Indonesia market with the incorporation of a 95%-owned subsidiary, PT Frontken Indonesia in November 2008. The progress has been encouraging with increasing enquiries from our customers to help them overcome the pressing needs of lowering their cost structures amidst their declining sales and growth.
Apart from organic growth, we mine opportunities that will help us gain entry into new markets, create new business alliances or bring new capabilities and technologies to propel the Group upwards in the value chain. Our desire to increase our foothold in our present market is, however, balanced with a cautious approach.
To this end, we acquired 30,000 ordinary shares of RM1.00 each representing 30% equity interest in Frontken BumiMaju Sdn Bhd (formerly known as Hecserv Sdn Bhd) in September 2008 for a cash consideration of RM23,500 to enable it to capture a larger market share in the oil and gas market.
In addition, we announced the acquisition of a 20% stake comprising 1,397,400 ordinary shares in Chinyee Engineering and Machinery Pte Ltd in February 2009 for a cash consideration of SGD820,000 to enable the Group to compete more effectively by offering a higher value service proposition and distancing itself from competition. This should place us in a better stead to capitalise on opportunities that may arise from both new and existing customers looking to either further outsource or consolidate suppliers, as they review their own cost base in response to changes in the economic outlook.
Frontken tries in every way possible to act as a responsible company and be accountable to all of its stakeholders. As a technology solutions provider, we work alongside our customers to develop effective solutions and strategies to help them address green issues by recovering, recycling and reusing their critical parts and equipments not only for economic and environmental bene. ts, but also to achieve sustainable business growth.
We take responsibility for our actions and conduct our business with honesty and integrity, and we expect our business partners’ values and business practices to mirror ours. As the Group grows and further regionalises its operations, it becomes increasingly important to be more vigilant about environmental, health and safety issues. We support the growth and development of our people and communities and strive to develop and market our products in an environmentally responsible manner.
Opportunity in adversity
As the breadth and severity of the global .nancial crisis began to take hold towards the latter part of 2008, Frontken reacted swiftly and decisively to ensure that we continue to run a cost-ef.cient business, with suf.cient borrowing capacity under our credit facilities to conduct our planned operations, as well as take advantage of strategic opportunities.
We now have some breathing space and the opportunity to concentrate on our core business, and we are seizing that opportunity. Across the Group, we are conscientiously identifying and realizing improvements in every aspect of our business. We believe the ef. ciencies we build into our operations will help us weather the current market storm and give us a clear competitive advantage when the time comes to resume major growth projects.
The path forward
The Group anticipates the challenging business climate to persist into 2009. While the strength of the Group’s diversi.ed business model does not insulate the Group from the global broad based economic downturn, it should help to soften the impact of an overall slowdown in the broader economy, and position the Group to capture market growth opportunities when the macro economic environment improves.
We will continue to fortify our core base and stay on course with a disciplined execution of our strategies for long term business growth. We will continue to concentrate on investment in the areas of businesses which we believe will deliver long term growth and value. With the unsettling reports concerning the global .nancial crisis, it goes without saying that 2009 will be marked by more volatile quarterly readings than in previous years. Nevertheless, with our clear strategy and a strong sense of determination and drive, I am con.dent we will ride out the storm and ultimately thrive over the long term.
All that the Group achieved in 2008 would not have been possible without the commitment, passion and teamwork of our employees, which will also be key for the continued success of our Group in a more dif.cult environment. I would like to take this opportunity to thank everyone at Frontken for their steadfast dedication and hard work to keep us always ahead of the curve.
I wish to put on record my sincere gratitude to my fellow Directors for their wise counsel and invaluable contributions throughout the year. I also welcome Mr Kek Chin Wu who joined the board in November 2008 as an Independent Non-Executive Director.
May I also express my heartfelt appreciation to our shareholders, customers, bankers and business partners for your con.dence and trust in Frontken. I look forward to your continued support.
WONG HUA CHOON
Executive Chairman / Managing Director
2007 Annual Report
(FY07) saw the Group
Against this backdrop, the Group recorded a laudable 16.7% increase in revenue to RM105.4 million in FY2007, compared with proforma RM90.2 million previously. The higher revenue recorded was mainly due to higher demand for the Groups surface metamorphosis services in tandem with growing awareness, as well as from full-year contributions from the Groups wholly-owned subsidiary, Metall-Treat Industries Pte Ltd. In spite of the commendable growth in revenue, the Groups financial performance in the year under review was adversely affected by two separate incidents of fire in our Singapore and Kulim plants, as well as flood in our Bukit Mertajam plant, which resulted in one off losses amounting to RM11.2 million, arising from the write off of stocks and fi xed assets affected by fire incidents, compensation to customers for damaged inventories and parts, and post-fi re maintenance costs. Fortunately, the Groups operations were not aff ected to a large extent, as we were able to take immediate remedial action to minimize disruption to operations by shifting our service requirements to other plants for support. As at 31 December 2007, the Group had received a total of RM4.9 million from the insurance company as interim payment for the claims and another RM2.9 million in the fi rst quarter of 2008. The Group expects to receive further payment pending the approval of insurance claims submitted in the current fi nancial year. The year under review also saw the Group expanding our operations through organic means and via merger and acquisition activities, as well as the in-tandem increase in our engineering team. These developments resulted in higher incurrence of professional fees and fi nancing costs. Nevertheless, the Board is of the view that these activities and corporate developments do indeed propel the Group forward in claiming greater market share in our target markets and achieving higher growth in the long term.
With this, the Group s profit before tax in FY2007 stood at RM6.9 million, compared to proforma RM14.0 million in FY2006, while group net profi ts amounted to RM4.01 million, versus RM10.5 million in the previous fi nancial year. Correspondingly, earnings per share decreased to 0.8 sen for the financial year under review, from proforma 3.2 sen a year ago. Shareholders equity stood at RM98.0 million as at 31 December 2007, compared with RM79.2 million just a year before; while share capital increased to RM49.5 million from RM47.5 million as a result of the private placement exercise undertaken in July last year. OPERATIONS REVIEW In the domestic scene, contributions from the Group s local customers improved to 49.4% or RM52.0 million of FY2007 group revenue, compared to 36.8% or RM33.2 million in the preceding year. We believe that this improved performance indicates the Groups strengthened position in the local surface metamorphosis technology industry, in line with greater market awareness of the benefits of these technologies as well as the value-added enhancements of Group s end-to end integrated service off erings. On the foreign front, meanwhile, an incident of fire at the Group s plant located in Singapore in FY2007 had adverse short-term impact on our top line. Accordingly, the year under review saw the Group s Singapore based customers contributed 47.4% or RM50.0 million to total revenue, representing a slight decline of 10.7% from RM56.0 million recorded in the previous year.
In terms of industries, the semiconductor sector still remained the largest contributor to the Groups FY2007 total revenue. While the overall contribution decreased slightly to 33.6% compared to 34.4% previously, the semiconductor industry improved to RM35.4 million from RM31.0 million previously in absolute terms. Alongside the Groups target to mitigate risks inherent in any individual industry, the year under review saw Frontkens oil & gas and petrochemical (“oil and gas”) sector charting fastest sector growth by contributing 30.5% or RM32.1 million to group revenue, compared with 23.4% previously. At the same time, the power generation sector contributed 19.1% to FY2007 group revenue, compared to 14.9% contribution in FY2006. Parallel to these results, the sector grew 49.4% to RM20.1 million from RM13.46 million recorded in the previous year. Amongst other developments in the foreign front in the year under review, FY2007 saw the Group acquiring a 42.1% stake in Taiwan-based Ares Green Technology Corporation in three tranches, comprising a total of 12,633,534 ordinary shares of NT$10 each for an aggregate cash consideration of NT$467.4 million (approximately RM49.7 million). Frontken also made further inroads into new geographical markets by entering into a Joint Venture Agreement with China-based Marketech International Corporation to jointly develop, market and implement surface metamorphosis engineering business in China. The Board believes that these strategies allow the Group to effectively tap into the semiconductor industry in Taiwan and China, as well as strategically lay the groundwork for future market expansion, particularly in the North Asian markets. In addition, the Group through its subsidiary, Frontken Singapore Pte Ltd, signed a cross license agreement with a US-based thermal spray company, Cincinnati Thermal Spray (“CTS”), in the year under review, which allows the Group and CTS to leverage on each other s expertise of advanced technologies. We opine that this collaboration would not only benefit our end-users, but also speaks volumes of our triedand-tested technologies in the industry. RESEARCH AND DEVELOPMENT (“R&D”) True to our stance to continue innovating and developing new technologies, the year under review saw the Group invested approximately RM2.1 million on R&D projects. Among the Group s ongoing projects that are anticipated to be completed in the current year are:• Special surface treatment of aluminium materials used in ultra high vacuum chamber application in semiconductor related manufacturing and solar manufacturing;
• Development of an advanced technique and cost eff ective method to refurbish and recover a critical component for high vacuum processing; and
• New improved coating for corrosive advanced high plasma chamber in semiconductor manufacturing application.
Going forward in line with industry trends, the Group has identified several key research areas to further improve our service offerings. Among the initiatives the Group is currently focusing on include:
• Development of an anti-fouling technology for the marine and subsea oil and gas industry;
• Special surface treatment method and unique thermal spray technique for corrosion protection in deep sea and sub-low temperature environment;
• Development of HACAS coating and Kolmomide coating for critical parts used in the extreme wear conditions via abrasion and erosion/cavitation wear environment for the oil and gas industry oil and gas industry; and
• Development of plasma spray ACME re coating, refurbishment and re-manufacturing of chamber linear to its original specification for the global semiconductor industry.
CORPORATE DEVELOPMENTS AND GROWTH PROSPECTS Moving forward, the Group will undertake a three-pronged growth plan, comprising market expansion, strategic alliances and product development efforts to propel the Groups progress forward.
Undertake a three-pronged growth plan…
strategic alliancesand product development MARKET EXPANSION To begin with, the Group will focus on expanding our presence and representation in existing markets, as well as venturing into new markets and industry segments. One such initiative is the Group’s recent agreement to establish a service plant in Johor’s Iskandar Malaysia (formerly known as the Iskandar Development Region). We believe that the facility would allow the Group to broaden our customer base not only from the existing oil and gas clientele in Iskandar Malaysia, but also present the Group the opportunity to serve the needs of industries in the high-growth catchment area. In addition, on 14 April 2008, Frontken acquired the remaining stake of its subsidiary, Frontken-AMT Engineering Sdn Bhd, to grow our customer base particularly in the oil & gas and petrochemical sectors. In tandem with the increased exploration and production activities in East Malaysia, this acquisition would enable the Group to ride on wave of opportunities, as well as be in strategic position to develop a higher-margin services mix. Further strengthening our position in the East Malaysia market, Frontken Petroleum Sdn Bhd has begun to commence operations in the Kota Kinabalu plant, targeting primarily the oil & gas and petrochemical industries in the region. Moving on to our regional establishment, on 31 January 2008, the Group increased its stake in Frontken Thailand Co Ltd (“Frontken Thailand”) from 39% to 49% via the subscription of 392,000 new ordinary shares of THB10 each at par, by way of capitalization of part of the amount owing by Frontken Thailand amounting to THB3.9 million (approximately RM0.4 million). The Group is also at the initial stages of exploring business opportunities overseas, namely in Abu Dhabi and Vietnam, as well as Batam Island and Jakarta in Indonesia, as part of our efforts to achieve greater recognition in the global surface metamorphosis technology industry. To this end, we have appointed an agent in Abu Dhabi for the Group’s sales and marketing purposes.
STRATEGIC ALLIANCES The Group will also establish strategic alliances with global and regional market leaders in order to boost our service off erings to off er greater value to our customers. One such example is the Group’s establishment of a strategic alliance with French-based Balazs NanoAnalysis, a globally renowned analytical services company, to provide nano-level contamination control services for the advanced microelectronics and process industries in the South East Asian countries and Taiwan. Together, this alliance would help to support the Group’s technological advancement and uplift our standard of service offerings in precision cleaning. Not only that, the Group recently forged a business alliance with Carboline, a US-based coatings specialist, to jointly undertake joint customer servicing and development efforts, which will further enhance our reputation in the surface metamorphosis technology industry in the region. This collaboration in effect allows the Group to leverage on Carboline’s customer base, as well as improve our overall product and service offerings to become more integrated and cost-effective for our customers. In addition, this union will also boost the technical competency of our workforce to a new level. PRODUCT DEVELOPMENT In addition to the aforementioned list of services that the Group intends to undertake in the current fi nancial year, the Group will continue to explore – both in-house and in collaboration with partners – various new methods and procedures with a view to expand our scope of services to cater to the Group’s portfolio of diverse industries and fuel our business growth.
Other developments in our product line include undertaking integrated equipment engineering and strengthening current capabilities in Frontken On-site Specialised Services. To this end, the Group is also involved in new parts engineering for the aerospace industry as we endeavour to transform Frontken into an integrated technological solutions provider to stay ahead of global competition. All said, the Group is confident of charting continuous growth in the coming years, and strengthening our position in the regional surface metamorphosis technology sector. CORPORATE SOCIAL RESPONSIBILITY We are cognizant of the need to be a corporately responsible citizen, and placed great emphasis in undertaking various initiatives to contribute to the wellbeing of the society. CORPORATE GOVERNANCE The Board is committed to the maintenance of the highest standards of Corporate Governance practices within the Group, in compliance with the Best Practices of the Malaysian Code of Corporate Governance. This lays the groundwork in the discharge of our responsibilities to maximize shareholders’ value, while enhancing the business prosperity of the Group. The measures implemented are highlighted in the Corporate Governance Statement in the Annual Report. ACKNOWLEDGEMENT On behalf of the Board of Directors, I would like to acknowledge the management team and all the employees of Frontken for their stewardship and contribution to the Group. It is my desire to see that we continue on this journey together to achieve greater heights. I would also like to take this opportunity to forward my utmost appreciation to the various government and regulatory authorities as well as the financial and investing community for their unwavering support and trust in the Group. Finally, a word of gratitude also goes out to our valued shareholders, customers, and business associates for their continued support rendered to the Group. WONG HUA CHOON Executive Chaiman / Managing Director 23 May 2008
2006 Annual Report
The regional economy faced tremendous pressure in 2006, in light of escalating crude oil prices, .uctuations in major foreign currencies and rising interest rates adversely affecting business sentiment. Country-speci.c threats further compounded the regional outlook, with the effects of the military coup in Thailand, and weak sentiment in the Philippines and Indonesia.
In spite of the dampened outlook, World Bank reports that economies in East Asia and the Paci.c region (which include the People’s Republic of China, Korea, Indonesia, Malaysia, Thailand and Singapore) grew steadily at an aggregate of 9.2% in 2006 – the highest regional growth rate since 2001. Malaysia’s Gross Domestic Product (“GDP”) grew 5.9% in the year under review.
From a sectoral viewpoint, foreign direct investments (“FDI”) in the South East Asian region rose rapidly across key manufacturing and energy-related industries such as semiconductors, oil and gas and petrochemical industries, according to the World Investment Report 2006 by UNCTAD (United Nations Conference on Trade and Development). This growth was on the back of the rapid industrialization of certain economies and increased oil re.ning activities overall.
FY2006 saw the Group achieving RM7.93 million in net pro.t on the back of RM72.48 million revenue.
On a proforma basis, including the pre-acquisition .nancials before 31 March 2006, the Group achieved commendable .nancial performance in FY2006, with proforma group revenues amounting to RM90.24 million, 41.3% higher than RM63.86 million achieved the year before.
EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) improved 36.7% year on year to RM22.67 million from RM16.42 million previously, while group pro.t before tax stood at RM13.95 million, compared to RM10.0 million achieved in the previous year. Group net pro. ts saw a marked increase to RM10.5 million in FY2006 compared to RM7.90 million in the previous year.
From a wider perspective, the group revenue recorded compounded annual growth rates (“CAGR”) of 46.8% from 2003 to 2006, and CAGR of 38.7% for group net pro. t. This indicates that the Group has been continuing its steady growth path over the years; an upward trend of sustained sales and pro.tability.
Shareholders’ equity as at end-FY2006 amounted to RM79.22 million, while cash and cash equivalents stood at RM20.97 million. The Group achieved returns on average shareholders’ equity of 16.5% in the year under review, and total debt over equity ratio was 0.37 times. All said, the Group is adequately equipped . nancially for expansion at the opportune time, and will continue its practice of implementing strategies to create value for our shareholders and other stakeholders.
The semiconductor sector which is the Group’s traditional stronghold contributed 34% in FY2006, compared to 32% previously.
FY 2006 Proforma Revenue: RM90.239 mil
Oil & Gas
The oil and gas sector maintained its 13% contribution to group revenue. In absolute terms, revenue from this burgeoning sector grew 37.6% year-on-year, to RM11.37 million from RM8.26 million in the previous year.
The petrochemical and pharmaceutical sector became a signi.cant contributor to FY2006 group revenue, improving an incredible 51% to RM9.74 million from RM6.46 million previously.
The bulk, or approximately 62%, of FY2006 group revenue was derived from our customer base in Singapore, where we passed stringent quali.cations and obtained approvals to work on various critical surface metamorphosis applications with leading industry players. This breakthrough in the semiconductor sector augurs well for our continued growth in the years to come.
The year under review also saw the Group making signi.cant headway in the wafer fabrication sector in Singapore, where we passed stringent quali. cations and obtained approvals to work on various critical surface metamorphosis applications with leading industry players. This breakthrough in the semiconductor sector augurs well for our continued growth in the years to come.
37% of group revenues were derived from customers from Malaysia which are served from our plants from Singapore, Shah Alam, Penang, Kulim, Kuching, Bintulu and Kota Kinabalu, and a sales of.ce in Terengganu; compared to 36% contribution in the previous year. It is vital to note that in absolute terms, sales from our Malaysian customers improved 46% to RM33.17 million from RM22.74 million previously. This improvement not only demonstrates the Group’s strengthened presence in the Malaysian market, but also indicates the high market demand in line with the country’s sustained growth in the industrialization phase.
In the year under review, the Group also successfully acquired Metall-Treat Industries Pte Ltd (“Metall-Treat”), a Singapore-based .rm specializing in engineering phosphating technologies, electroplating and niche surface treatment services for a purchase for a purchase consideration of SG$3.5 million. The exercise was completed on 16 October 2006.
The acquisition not only allows the Group to enhance its suite of products and services, but also effectively grants Frontken access to Metall-Treat’s pool of established customers in the oil and gas and aerospace industries. Not only that, the Group will then be able to leverage on Metall-Treat’s existing infrastructure and technology.
As has been our practice in the past, Frontken has placed high premium on Research and Development (R&D) activities, as it enables the Group to be in the forefront of cutting-edge technologies. We spent RM1.38 million on R&D projects in FY2006.
Our in-house R&D team is led by Dr Tay Kiang Meng who possesses 18 years of experience. On top of that, the Group has established alliances and strategic partnerships with world-renowned R&D experts including Tocalo Co., Ltd, Japan; Lam Research Corporation, USA; OTS, Germany; and Ares Green Technology Corporation (“AGTC”), Taiwan, in which the Group now holds a 19.00% equity stake.
Having introduced the surface metamorphosis technology solution to the world in 2003, we focused signi. cant efforts on this technologies particularly to the power generation and semiconductor industry, and developed many innovative processes, solution and services required, including:
• Technologies for selectively remove unwanted deposits and other particulate material from critical surfaces of semiconductor High purity quartz and ceramics process kits, thereby increasing the process kit’s service life used in nanoscale semiconductor manufacturing.
• Nanostructured Coatings produced by HVOF Thermal Spray of Super.ne Wc/Co Feedstocks with Improved Coating Properties.
• Innovative method and system using thermal spray coatings on substrates to improve and enhance adhesion of deposits during ultra-high vacuum processing.
Several emerging research areas where Frontken has applicable competencies, and is working on development with materials vendors, equipment suppliers, end-user customers, are:
• Surface treatment technology for unltra-small inner cavities.
• Nano-materials for specialty coating applications.
We have also integrated our business and production processes with Information Technology, to reduce production cycle time and improve customer turnaround-to-delivery time, as well as to provide visibility to keep customers informed at every stage. With this, Frontken will be able to track and control all aspects of the production processes and quality and delivery for customers’ satisfaction.
STATUS OF UTILISATION OF IPO PROCEEDS
The Group’s Initial Public Offer (“IPO”) exercise, completed in July 2006, effectively raised gross proceeds amounting to RM31.439 million. The table below shows the amounts allocated for each purpose, the amounts utilized and balance of the proceeds as at 4 May 2007:
Construction of plant 6,600 6,507 93
Purchase of machinery and equipment 9,757 5,327 4,430
R&D expenditure 6,300 290 6,010
Repayment of bank borrowings 3,000 3,000
Working capital 4,082 4,082
CORPORATE DEVELOPMENTS AND GROWTH PROSPECTS
We at Frontken are moving on the fast plane in expanding our operations and broadening our regional presence to capture greater market share and thus become a formidable player in the surface metamorphosis engineering sector in the regional playing .eld.
To this end, the Group has identi. ed three strategies to propel the Group in continuing on its growth path moving forward: regional expansion through organic means, strategic partnerships or merger and acquisition (“M&A”) activities, new product / process development through R&D, and customer base expansion via proactive marketing activities.
Firstly, under the regional expansion program, the Group will grow organically by penetrating into new geographical markets and establishing a .rmer presence in key countries already ventured into. To this end, the current year to date has seen the Group setting foot in Taiwan through the incorporation of a wholly-owned subsidiary Frontken Technology Corporation, Taiwan on 14 March 2007.
The Group is also stepping up its presence in Malaysia, with the setting up of an additional plant in Kota Kinabalu under 55%-owned Frontken Petroleum Sdn Bhd to market the Group’s services to the surrounding industries, primarily for oil and gas and petrochemical industries in Sabah and Peninsular Malaysia. We are also progressively equipping our Bintulu plant to serve the oil and gas and process industries there. Moreover, the Group also intends to expand the capacity of its Kulim plant, which has achieved 80% capacity utilization, by embarking on the second phase of expansion. The second phase is planned to occupy approximately .ve times more .oor space than the 32,000 sq ft in its current plant.
In further recognition of our industry expertise, the Group has established strategic alliances with global players in the semiconductor wafer fabrication, power generation and petrochemical industries. Indeed, our business relationships have extended beyond partnerships, where Frontken has gained approvals to become service centres for these customers.
What is most exciting about these alliances and partnerships are that they present opportunities for the Group to tap into the potential business from the multi-billion dollar investments in the each of the wafer fabrication plants to be built across the region.
Industry leaders, including In.neon, Qimonda AG, First Solar, Soitec, Chartered Semiconductor and IM Flash Technologies (a joint venture between Intel and Micron Technology) have each announced further investments into the sectors into Malaysia, Singapore, Taiwan, China and India in 2007 and beyond. The global semiconductor sector is anticipated to grow from US$36 billion (2006) to US$39 billion (2007), while the Asia-Paci.c region, excluding Japan, is expected to account for over US$20 billion, or 53% of the global investments. Suf.ce to say, the Frontken group is poised to capitalize on this tremendous growth trend worldwide.
Also, our strong link with Siemens Power Gen Asia Paci.c facilitates our undertaking of more Gas Turbine MRO (“Maintenance, Repair and Overhaul”) projects in Malaysia, Singapore, Thailand, Philippines, Vietnam, Indonesia, Taiwan and Korea in the near future. This also allows us to ride on the fast-growth of Siemen’s market share in new markets in Asia Paci.c. Adding yet another feather to our cap is our petrochemical partner, Elliot Ebara, extending our service partnership beyond Singapore and Malaysia presently to cover Thailand and the Philippines as well. All these positive developments augur well for the Group’s sustained pro.tability moving ahead, and speak volumes of our partners’ con.dence in the Group.
The Group will also explore opportunities to acquire growth through M&A activities. We believe that vertical expansion will not only allow the Group to offer a more comprehensive range of products and services to its customers, but to also reap the bene.ts of improved margins through cost-savings.
To this end, the Group recently entered into agreement to increase its equity stake in AGTC to 32.36% which includes the recently-announced acquisition of an additional 4.0 million shares representing about 13.36% for a cash consideration of NT$148.3 million (approximately RM15.2 million). This strategic acquisition is anticipated to bring about powerful synergies between both companies particularly in the .eld of R&D, and kick starts Frontken’s access into the emerging markets of China and Korea, and even India. The acquisition, once completed, will also make AGTC an associate company of Frontken, and its .nancial results will be equity-accounted into the Group.