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extracted from Annual Report 2018

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 2018. The Group believes that we have a strong foundation for recovery following the initiatives and strategies we have undertaken which have reshaped and strengthened the Group, coupled with improving economic conditions and gradual recovery in the marine industry.

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

Oil prices have recovered 35% to average US$74 per barrel (bbl) year to date in 2018 from the low of US$28 bbl in early 2016. Analysts have lowered their average Brent forecast to US$70-75/bbl in 2019 in view of a potentially wider supply/ demand gap on the back of lesser than expected impact from sanctions on Iran in the near term, weaker global GDP growth expectations and emerging market weakness. The overall conventional shipping market is expected to remain on a recovery path, albeit gradual. (DBS research report 2019) This is supported by robust oil consumption demand, which, coupled with Organization of the Petroleum Exporting Countries' (OPEC) adherence to production cuts and extension of the production cuts till today 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.

A forecast rebound in global crude oil prices will be positive for Malaysia's upstream sector over the coming years, stoking renewed appetite in exploration and development works that are increasingly moving out to the offshore, deepwater and technologically challenging areas. (Fitch Solutions, Inc.)

Domestic oil and gas activities across the services value chain is expected to rise based on the activity outlook report released by Petronas for the 2019-2021 period compared with its outlook report for 2018-2020. It is more positive on its expectations for the drilling segment, going by the expected number of jack-up rigs of between 16 and 19, required for the three-year period, which is almost double the projection of between 6 and 10 published by Petronas last year. Another highlight is the much better outlook for marine vessels, on the back of an expected pickup in drilling activities in the period. Petronas increased the expected number of vessels required by the Malaysian upstream sector by an average of about 20 vessels across the board for the three-year period comprising anchor handling tug supply (AHTS), platform and straight-supply vessels (PSVs & SSVs). Analysts are positive that Petronas' drilling and offshore support vessels (OSV) activities offshore Malaysia reflect a rise in asset utilisation across the board. OSV players will stand to gain the most from the improving domestic landscape. Increased utilisation for AHTS, PSVs & SSVs are not unexpected, for it runs in tangent with Petronas recent roll-out of its integrated logistics control tower (ILCT) project). The respective offshore fabrication, linepipes offshore installation and hook-up & commissioning (HUC) / maintenance, construction & modification (MCM) segments will also see increase of workflows.

The maritime industry, which sailed at low speed for last few years in order to survive and brave tough times, is expected to pick up steam as 2019 looks promising, while plans to revive the industry are waiting to be executed. The local oil and gas sector will get more push from the government this year amid rising exploration and production activities. According to RAM Ratings, the country would record firmer economic growth this year, above those of other emerging markets.

Global capex budgets are expected to accelerate in 2019, albeit from a low base. Already, we are seeing signs of recovery along the value chain for global offshore activities. Oil and gas service providers with regional or global footprint are well poised to capitalise on this trend. 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). 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 has diversified 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 three (33) 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; and
  • Effective cash flow management.
  • Notwithstanding the challenges faced, the Group has obtained various contracts and received tenders directly from national and international oil majors in Malaysia, through our joint venture Company, for better market reach and with the view of enhancing shareholder value. We anticipate more contracts to be awarded in the coming months.

    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

    Supported by outcomes from strategic initiatives implemented in previous years, the Group managed to improve on its financial performance amidst challenging market conditions. The Group's financial position has improved despite a contraction in earnings. Despite revenue for financial year ("FY") 2018 declining by RM5 million or 7%, loss net of tax has improved by more than 58% or RM29 million. This is mainly due to sale of a newly constructed harbor tug during the last quarter and in line with the ongoing initiatives in rationalizing and optimizing costs and exposures. Term loan interests have also reduced substantially, by about 15%, from RM6.8 million to RM5.8 million as some loans have been cleared.

    Liquidity and resources

    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 from RM188 million in 2017 to RM143 million in 2018, a drop of about 24%. 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'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 49% in 2017 to 39% in 2018.

    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 FY2018.

    CORPORATE SOCIAL RESPONSIBILITY

    The Group is continuously committed to fulfilling our role as a responsible corporate social citizen. The main foci 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 Report.

    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 on the back of stable oil prices, prompting greater levels of activity. The Group will continue to manage costs and increase efficiency in this turbulent economic climate to improve our competitiveness and resilience. Riding on our strong foundation, we are confident that the Group will achieve good results going forward.

    Based on industry analyst reports, the oil market reacted positively to the Organisation of the Petroleum Exporting Countries' (OPEC) recent decision to extend oil output cuts till June 2019 and US sanctions against exporters Iran and Venezuela. Meanwhile, analyst believes that oil prices will see some stabilisation for 2019, supported by demand and supply fundamentals.

    Petronas' Activity Outlook for 2019-2021 portrays growth in brownfield activities particularly in rigs category and its supporting services, marine vessels. Base activities in maintenance are projected to increase for both onshore and offshore in tandem with this outlook.

    Research also indicates that the upward revision in most upstream sub-segments' activities could be due to the delayed work orders last year being pushed to 2019 which may potentially lead to better contract flows and further provide order-book replenishment opportunities for the support sectors.

    The Group believes that the steady oil price recovery in recent months have led to the increase of activities in the offshore segment. Such optimism is expected to boost the number of projects approved which will also represent opportunities for the Group. The oil and gas sector is expected to continue on a recovery path with upstream companies gradually stepping up production and boosting other firms involved in the industry.

    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.

    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 is well positioned to tide over the current business challenges, of which the worst seem to be over.

    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. The local oil and gas sector will get more push from the government this year amid rising exploration and production activities.

    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 is 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 continued support 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 dedication, tireless efforts and commitment 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. It is my sincere hope that Sealink will continue to grow from strength to strength in the coming years and beyond.

    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 cum Managing Director