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extracted from Annual Report 2017

Dear Valued Shareholders,

On behalf of the Board of Directors of Sealink International Berhad ("the Group"), I am pleased to present to you our Annual Report for the financial year ended 31 December 2017. It has been a challenging but optimistic year for the marine industry, which inevitably impacted our financial performance for the year but gives rise to confidence for the future.

On an encouraging note, the initiatives and strategies undertaken have benefited in reshaping and strengthening the Group, as well as put us in good stead in withstanding challenges. While the oil price and external environment factors are beyond our control, we are focusing on developing our strengths in order to meet challenges better.

MARKET OVERVIEW

The Malaysia oil and gas industry has a healthier outlook in 2018 with Brent crude oil price breaching the key psychological mark of USD60 per barrel (bbl). This is supported by robust oil consumption demand, which coupled with OPEC's adherence to production cuts and extension of the production cuts until end 2018 has led to steady global inventory drawdowns. This is a promising signal as far as market rebalancing is concerned and will continue to support a positive oil price movement hereon, as long as the supply side is capped by market participants.

Global capex budgets are expected to remain resilient in 2018 and accelerate in 2019 albeit from a low base as oil price averages to the USD65/bbl mark. Already, we are seeing signs of recovery along the value chain in 2018 for global offshore activities. Oil and gas service providers with regional or global footprint are well poised to capitalise on this trend.

The Organization of the Petroleum Exporting Countries ("OPEC") and non-OPEC oil producers agreed on 30 November 2017 in Vienna to extend the current agreement of cutting oil output. The decision was taken amid unprecedented unanimity between Saudi Arabia and Russia, two of the world's largest oil producers. The deal also places production caps for the first time on Nigeria and Libya, which were exempt from the cuts and this has resulted in an unexpected supply glut in the early part of 2017. Thus, fewer supply side surprises are expected from the OPEC and non-OPEC bloc in 2018. (Source: DBS Group Research report 2018)

World oil demand would grow faster than expected in 2018 because of a healthy world economy, adding a tailwind to the producer group's effort to remove a supply glut by cutting output. The global market is expected to return to balance only towards the end of 2018, no earlier than previously thought, as higher prices encourage the United States and other non-member producers to pump more. World oil demand is expected to rise by 1.59 million barrels per day (bpd) this year, an increase of 60,000 bpd from the previous forecast. (Source: OPEC)

Demand for Offshore Support Vessels (OSV's) is driven by production support, rig support and to some extent, offshore and subsea construction support. Continuous production support is by far the most important driver for OSV's, while rig support is the main driver for the Anchor Handling Tug Supply segment.

With oil price recovering, we believe that the demand for oil services will come back first for the shallow water segments, as these typically have a lower breakeven cost. This will be beneficial for the Group which has these vessel types.

OVERVIEW OF THE GROUP'S BUSINESS AND OPERATIONS

The Group is principally involved in the business of chartering of marine vessels, shipbuilding and ship repair. The Group builds, owns and operates a diverse fleet of marine support vessels, which serve the global exploration and marine industry.

Our shipyard is located in Kuala Baram, Miri, Sarawak and the workshop in Krokop, Miri, Sarawak. Our shipyard achieved the first milestone in 1999 when it delivered the first new build, a landing craft known as "Sealink Victoria". To-date, our shipyard has constructed in total sixty eight (68) vessels (including fabrication of 2 work barges) with total value amounting to about RM1.4 billion. Armed with technical knowhow and management capabilities, our Group is able to offer a sophisticated array of vessels designed to meet our customers' needs. The Group's shipbuilding division will also continue its emphasis on ship repair. Apart from construction of OSVs, the Group is diversifying into the construction of harbor tugs and other non-oil and gas vessels.

Our ship operations are based in Miri, Sarawak with branch offices located in Labuan, Kemaman and Singapore. The shipping division has a fleet of thirty four (34) vessels providing a broad range of services to the marine sector with the highest standards of safety and technology available in the industry.

As an integrated service provider, we have full discretion and control over the design specification, quality, cost and timely delivery of our vessels. It also provides us with the flexibility to either "build and sell" or "build and charter" our vessels. Our experienced maintenance team can respond promptly and attend to emergency repairs and where necessary, vessel(s) can be arranged to be up slipped internally at our slipway in Kuala Baram for vessels within the vicinity. This reduces our dependence on other yards and provides our Group with a distinct competitive advantage over the other players in the market.

Over the years, the Group has established a reputation with a proven track record in both of our core businesses. As a testimony to this, our clientele includes both local and international companies from the United States of America, Australia, China, Latin America, Europe, East Africa, Southeast Asia and the Middle East.

The Group strives to intensify its efforts and commitment to deliver high value products and services with emphasis on safe operations and to maintain the group's position as one of the leading integrated service providers in the offshore marine services segment.

As a key measure to manage the Group's exposure to the business risks, the Group has continued on the following initiatives which have been reinforced and carried forward to the next fiscal year:

  • Sustainable cost rationalization and optimization of human resources where only critical positions are filled when the incumbents leave the Group. Existing personnel are re-deployed within the Group to take on additional responsibilities for better efficiencies without impairing the adequacy of existing internal control system;
  • Closer monitoring of inventory management, where stringent controls have been deployed to account for procurement of goods and of services vis-à-vis existing inventory levels to conserve cash flows and minimize the risk of inventory obsolescence;
  • Effective cash flow management.
  • Notwithstanding the challenges faced, the Group is always on the look-out for strategic alliances with business partners, especially those which niche expertise for better market reach, all with the view of enhancing shareholder value. On this premise, the Group entered into two joint venture agreements in November 2017 to have direct access and involvement with national and international oil majors and participate in their tendering exercises directly.

    With the ongoing initiatives in rationalizing and optimizing costs and exposures, we believe the Group will be well poised and positioned to tide over the prevailing business challenges.

    OVERVIEW OF FINANCIAL PERFORMANCE

    Financial results

    The Group's financial position has improved despite a contraction in earnings. Revenue for financial year ("FY") 2017 declined by RM48 million or by 38%, primarily due to reduced charter hire income. Nevertheless, loss net of tax has improved by more than 10% or RM7 million. This is in line with the ongoing initiatives in rationalizing and optimizing costs and exposures which have significantly reduced our cost of sales and other operating expenses & administrative expenses by RM42 million and RM22 million respectively. Finance costs have also reduced substantially, by more than 20%, from RM12.4 million to RM9.5 million as some loans have been cleared.

    Liquidity and resources

    Despite suffering a loss in FY2017, on a positive note, net cash flows from operating activities amounted to RM27 million. The Group monitors its cash flows actively and ensures all obligations are met as and when they fall due. The Group actively manages its debt maturity profile, operating cash flows and the availability of funding as to ensure that all repayments and funding needs are met.

    Borrowings reduced significantly to RM188 million from RM252 million in 2016, a drop of more than 25%. This speaks well on the viability of the Group's business despite the tough conditions in which it operates. At the same time, with reduced gearing the group will have a stronger balance sheet to take on additional financing to fund expansion when the industry turns around.

    Capital Management

    The Group's objectives when managing capital are to safeguard the Group's ability to continue as a going concern and to maintain an optimal capital structure so as to maximize shareholders value. In order to maintain or achieve an optimal capital structure, the Group may adjust the dividend payment, return capital to shareholders, obtain new financing facilities or dispose of assets to reduce borrowings. Management monitors capital based on the Group's gearing ratio. The Group is also required by certain banks to maintain a gearing ratio of not exceeding a certain percentage varying between 100% and 200%. The Group's Company's strategy is to maintain gearing ratio of not exceeding 100%. The gearing ratio is calculated as total loans and borrowings divided by equity capital. The ratio for the Group has improved from 55% in 2016 to 49% in 2017.

    Dividend

    The declaration and payment of dividend will depend upon the Company's financial performance, cash requirements and is subject to certain limitations imposed under the Company Act 2016. Due to the aforesaid losses incurred, the Board does not recommend any dividend for the FY2017.

    CORPORATE SOCIAL RESPONSIBILITY

    The Group is continuously committed to fulfilling our role as a responsible corporate social citizen. The main focus of our Group on corporate social initiatives are the Workplace, the Environment and the Community, with the view of maintaining a sustainable value for the Group and its shareholders. Activities undertaken in the discharge of the Group's corporate social responsibilities are set out separately in the Sustainability Statement.

    CORPORATE GOVERNANCE AND INVESTORS' RELATIONS

    The Board believes in embedding a culture in the Group that seeks to balance compliance requirements with the need to deliver long-term strategic value to shareholders and stakeholders through performance, predicated on entrepreneurship, control and ownership, and with due consideration towards ethics and integrity. As such, the Board strives to embrace the substance behind the Principles and Recommendations as promulgated by the Malaysian Code on Corporate Governance 2017 and not merely the form.

    Apart from the disclosures in the Annual Report, the Group has also established a corporate website at www.asiasealink.com that houses, inter-alia, documentation on the Group's corporate governance practices like the Board Charter, Whistle-Blowing Policy, Code of Conduct for Directors and employees of the Group, Corporate Disclosure Policies and Procedures and Sustainability Policy that are useful for investors as well as potential investors to be apprised on how the Board views corporate governance and engagement with investors.

    OUTLOOK AND PROSPECTS

    Although market sentiments are still cautious, there is more optimism over prospects for the oil and gas industry in light of moderate oil price recovery trend. The Group will continue to manage costs and increase efficiency in this turbulent economic climate. Riding on our strong foundation, we are confident that the Group will achieve good results going forward.

    Based on industry analyst reports, oil prices will hover around USD50 to USD60 per barrel in 2018 as crude prices have rallied on the extension of OPEC and non-OPEC members' production cuts, and the market could refocus on the revival of US shale gas production.

    According to Kenanga Research, tendering activities have been on the rise and oil majors are reviewing projects suggesting that they are relatively more upbeat on the upstream sector following the stabilisation of oil prices.

    Petronas' Activity Outlook for 2018-2020 also indicates most upstream sub-segments' activities in 2018 were revised higher compared to the previous report. Research indicates that the upward revision could be due to the delayed work orders last year being pushed to 2018 which may potentially lead to better contract flows and further provide order-book replenishment opportunities for the supporting sectors.

    The Group will continue its emphasis on its core activities of ship building, ship charter and ship repair. The Group's shipbuilding division will be looking towards building vessels which have a niche market as well as enhancing its docking (ship repair) facilities, whilst continuous efforts will be taken towards optimising capacity utilisation of the Group's vessels. The Group is also looking at building new vessels that are more energy efficient and environment friendly, in line with tighter environmental regulations in the maritime industry. With the ongoing initiatives in sustainable cost rationalisation and exposures, we believe the Group will be well positioned to tide over the current business challenges.

    With the Government lending stronger support to the maritime industry with the recent launch of the Malaysia Shipping Master plan, the country is set to become a self-sufficient and internationally competitive nation, that can benefit us along the maritime industry supply chain.

    Barring any unforeseen circumstances or events, the Board is optimistic that demand for offshore marine support vessels will improve with further increased expenditure in offshore oil field development and maintenance work by the oil majors. The outlook seems to be improving in anticipation of a shipping recovery.

    NOTE OF APPRECIATION

    On behalf of the Board of Directors, I wish to convey our sincere thanks and appreciation to all our stakeholders, beginning with our shareholders for their confidence and belief in the prospects of our Group. To our clients, business partners, associates and principals; for their continuous support and belief in our competencies. To our Bankers and the authorities; for their vital role in our strategic planning and execution. To our committed and dedicated Management team; for their hard work, professionalism and tireless efforts in maintaining our position as one of the leading marine offshore support vessel providers and shipbuilders in Malaysia.

    To our dedicated and loyal employees; your efforts have not gone unnoticed. Let us weather this downturn together as one team with our values upheld, and come out of this with more resilience and focus. Let us maintain our commitment to steer towards greater heights in the future together.

    Last but not least, my special thanks to my fellow Directors on the Board for their invaluable support and guidance throughout the financial year.

    Thank you.

    YONG KIAM SAM
    Chief Executive Officer