ATS is an investment holding company and provides management services to its subsidiary companies. The subsidiary companies are principally involved in the fabrication of industrial and engineering parts, as well as the design and manufacture of industrial automation systems and machinery, collectively reported under Fabrication and Automation segment. The Group owns and operates three (3) manufacturing plants which are strategically located within the area of Bayan Lepas Industrial Park, Penang, serving customers from various sub-sectors including hard disk drive manufacturing, semiconductor, medical and other manufacturing industries. Our operations are primarily in Malaysia and our export sales currently make up of approximately 26% (2016: 38%) of our Group’s revenue.
Since year 2015, the Group tapped into renewable energy sources through successful bid for the renewable energy quota allocations from SEDA Malaysia and accorded licences to construct Solar PV Plant under the FiT Programme at the Group’s manufacturing plants in Penang. We have completed our maiden Solar PV Plant with capacity of 425kW in December 2015 and now successfully completed another Solar PV Plant with capacity of 300kW in December 2016. The Group has also optimised the production facility layout for better production process and let out the vacant area to earn recurring rental income. Both businesses for solar renewable energy and property letting are now reported under Renewable Energy and Property segment.
Our Group strives to be a leading strategic partner for precision engineering solutions and integrated designer & manufacturer of industrial automation systems to customers worldwide. It is the Group’s objective to build mutually beneficial business relationship with all its shareholders and stakeholders. In meeting various expectations of our shareholders and stakeholders, we are guided by the following principles:
– To maintain sustainable growth in revenue and profits and to maximise value for shareholders;
– To adopt a continuous improvement approach towards products’ quality and reliability in order to exceed our customer expectations;
– To produce highly skilled and committed workforce to achieve manufacturing excellence and to realize their potential by trusting, empowering and rewarding them;
– To promote responsibility and respect when dealing with business partners.
The Group believes effective growth is a key aspect for business expansion and sustainable returns to shareholders, hence the Group is constantly innovating and developing new revenue streams by expanding type and range of products & solutions to customers.
Our financial year end has changed to 31 March, which accounts for the cumulative 13-month performance results (1 March 2016 to 31 March 2017 – FPE 2017) being reported under this Annual Report. The comparative figures presented are for the cumulative 12-month performance results (1 March 2015 to 29 February 2016 – FYE 2016). We will adopt the usual cycle of 12 months for FYE 2018 (1 April 2017 – 31 March 2018) onwards.
Over the cumulative 13-month period, the Group’s revenue for FPE 2017 reported at RM18.24 million, representing a slight increase of 4.9% as compared to RM17.42 million for cumulative 12-month period in FYE 2016. FPE 2017 revenue was mainly driven by higher fabrication orders from semiconductor industry coupled with recovery of fabrication orders from hard disk drives (“HDD”) manufacturing industry. HDD manufacturing industry remain as the major contributor for the Group and it accounts for 38.5% of our FPE 2017 revenue (FYE 2016: 39.0%). Despite continual drops in shipment volume globally, HDDs used in nearline storage have witnessed sales growth, reflecting increasing demand for network attached storage from individual and home users as well as small and medium size businesses. Orders from our Singapore-based partner, FEM, has however decreased from RM3.80 million in FYE 2016 to RM2.19 million in FPE 2017 as FEM continues to face a challenging economic environment in Singapore. The Group’s automation business experienced slight drop in revenue to RM0.48 million from RM0.58 million in FYE 2016 on the absence of project orders from communication and oil & gas industry. In FPE 2017, the Group’s renewable energy business started to contribute approximately RM0.51 million from the sale of solar energy to Tenaga Nasional Berhad (”TNB”) under the FiT Programme.
Cost and Expenses
Total costs and expenses before finance cost was RM29.90 million in FPE 2017, an increase of RM8.1 million as compared to RM21.8 million incurred in FYE 2016 on account of higher cost of sales notably arising from start-up manufacturing costs incurred for production line of fabricating textile industry parts as well as higher depreciation of machineries and Solar PV Plant, coupled with recognition of RM3.6 million fair value expense on the grant of equitysettled share options to the Group’s employees.
Other income of RM2.29 million was 2.8% higher as compared to FYE 2016 mainly attributable to the higher rental income and income distribution from placements with money market instruments.
The Group’s finance cost increased to RM0.93 million in FPE 2017 from RM0.45 million in FYE 2016 due to higher interest on hire-purchase financing and business flexi loan in line with the investment in new machineries and replacement of used machineries to support the expansion in fabrication business, as well as part funding the Solar PV Plant prior to the completion of the Group’s renounceable rights issue towards the end of October 2016.
The lower effective tax rate against the statutory tax rate for FPE 2017 was mainly due to losses suffered by subsidiaries and availability of group tax relief to the Company.
(Loss)/Profit Attributable to Equity Holders of the Company
In view of the weak performance in the Group’s fabrication business, the Group recorded loss attributable to equity holders of the Company of RM10.11 million as compared to loss attributable to equity holders of the Company of RM2.54 million in FYE 2016. As a result, loss per share further increased from 0.61 sen to loss per share of 1.67 sen.
As at 31 March 2017, the Group’s cash and cash equivalents stood at RM7.51 million (net of placement pledged to banks of RM1.29 million), increased significantly by RM4.04 million from RM3.47 million a year ago mainly due to net effects of the following:-
(a) Net cash used in operating activities of RM6.94 million mainly attributable to fabrication business;
(b) Net cash used in investing activities of RM11.74 million, mainly for construction of Solar PV Plant and new machineries purchase to setup the production line of machinery parts for textile industry;
(c) Net cash generated from financing activities of RM22.7 million, mainly from proceeds of renounceable rights issue and draw down of term loan.
The financial position of the Group has been affected with the net loss of RM10.32 million made during the period in view of weak performance in the Group’s fabrication business. This was however further improved by the subscription of 433 million new shares at RM0.06 per share pursuant to the Group’s renounceable rights issue.
Our total assets have increased by RM24.4 million or 41% from RM59.58 million on 29 February 2016 to RM84.0 million on 31 March 2017. Our total liabilities have increased by RM5.74 million or 33.9% from RM16.85 million on 29 February 2016 to RM22.59 million on 31 March 2017. The Group’s ability to meet its short term financial and debt obligations has been further improved. As at 31 March 2017, the current ratio was higher at 3.7 times (29 February 2016: 3.5 times) and similarly, the quick ratio was also higher at 3.7 times (29 February 2016: 2.5 times).
As at the end of the financial period, the net debt to equity ratio has decreased to 13% (29 February 2016: 17%).
1. Business Risks
The Group is subject to risks inherent in the industries in which the Group operates. These include shortages of raw materials, constraints in labour supply, increase in labour costs, changes in law and tax legislation affecting the industry, increase in costs of new machinery, changes in business and credit conditions, equipment failure and factory accidents.
The Group seeks to mitigate these risks through prudent management policies, maintaining good business relationships with customers and suppliers, diligent cost controls, expansion of customer base and business by increasing the range of products and services offered as well as the range of markets or industries served, stringent quality controls, close production and capacity supervision as well as careful planning, effective human resources management and regular equipment maintenance and renewal.
2. Dependency on Selected Industries and Key Customers
The Group designs and manufactures precision components and fabricates precision tools, moulds, dies, jigs and fixtures for use in precision engineering applications primarily for the hard-disk drive, medical and semiconductor industries. For the FPE 2017, the hard-disk drive, semiconductor and medical industries contributed 38.5%, 22.7% and 12.6% of the Group’s total revenue respectively. In respect of hard-disk drive industry, the Group is fairly dependant on a single customer.
Recognising that the Group may be susceptible to concentration risk in terms of its dependency on certain key industries and key customer, the management of the Group is continuously seeking to increase its customer base by expanding the scope of solutions as well as the range of products that it can offer. Amongst others, the signing of the Basic Purchase Agreement (”BPA”) allows the Group to leverage on FEM’s good relationship with its multi-national customers to bring in more fabrication job orders from different industries to the Group. This strategic partnership with FEM is expected to bring in new business opportunities for the Group and open its doors to customers from other previously untapped sectors such as textile industry.
3. Dependency on Experienced Management and Key Personnel
The Group’s continued success depends to a significant extent, on the abilities and continuing efforts of the key management and key technical personnel. The loss of any key management, and/or key technical personnel could adversely affect the Group’s continued ability to manage the operations effectively and competitively. The Group’s future success will also depend upon the ability to attract and retain skilled personnel.
As such, the Group has made continuous efforts to develop a dynamic management team and groom younger management personnel to ensure continuity of the quality and dynamism in the management team. Efforts have been made by the Group to promote opportunities and develop program in all key functions of the Group’s operations. The Group also continuously reviews the remuneration packages to ensure competitiveness and takes appropriate measures and implement programs to attract new personnel as well as to retain existing staff.
4. Inconsistent Production of Solar Energy
The amount of solar energy that can be extracted by the Solar PV Plant is dependent on the availability of sunlight, which in turn is dependent on various factors such as the unpredictable weather conditions throughout the year. Prolonged cloudy or rainy days may lead to fewer hours of sunlight being received. There is no assurance that the changes in the amount of sunlight received due to erratic weather conditions will not materially affect the production of electricity by the Solar PV Plant or that the Solar PV Plant will be able to generate a consistent amount of electricity all year round.
5. Production Delay
The Group’s fabrication operations are highly dependent on the performance of its machineries. Hence, any production interruptions caused by unexpected machine failure, downtime, interrupted transportation of raw materials or power outages will cause production delays and affect delivery schedules.
To mitigate this risk, the Group implements production planning procedures which are able to forecast the production for the next three (3) months. Through this method, the Group is able to allocate the necessary resources to meet the customers’ production schedules in a timely manner with sufficient provision for any potential delays.
To mitigate machine downtime, the Group carries out regular inspection and maintenance on its machineries and equipment to ensure that they are operating efficiently and effectively. The Group also works closely with the machine suppliers to provide immediate repair in the event of any machine downtime.
5. Project Risk
The Group’s automation business relies on the projects secured, which are subjected to the following risk factors:
(i) Fixed cost price contracts, whereby the price is determined at the point of bidding based on estimates. The Group may underestimate project costs in tendering or bidding for a project. In such event, the Group may incur cost overruns that will reduce profits or result in losses;
(ii) Customers may delay or cancel projects. Delays may arise from unanticipated difficulties in developing appropriate solutions. Project delays may affect profit margins due to the additional time spent negotiating and resolving issues; and
(iii) Failure to implement projects that fully satisfy the requirements and expectations of customers may lead to project delays that will affect profit margins and result in additional costs arising from additional time spent negotiating and resolving issues.
The Group does not have any long-term contracts with customers for its automation business. Once a contract has been performed, there is no assurance that these customers will continue to use the Group’s solutions and services or will continue to maintain their relationships with the Group. In this regard, the Group endeavours to provide good customer service and after sales services to its customers.
7. Quality Assurance
The Group’s financial performance could be adversely affected if the Group is unable to maintain overall technical competence and quality of the solutions and products, meet the delivery schedules and reliability as required by the customers and maintain competitive cost structures in terms of products.
As an ISO certified company, the Group has stringent quality control policies and procedures to ensure all the products manufactured are of the highest quality. The Group conducts in-house quality control throughout the manufacturing process as well as tests and inspections on the final products to ensure high quality before delivering to customers.
The Group has completed the refurbishment work of one (1) of its manufacturing plant in Penang in Quarter 3 of 2016. The refurbishment works mainly focus on strengthening the foundation & roof top of the buildings and re-arranging the production facility. Following the completion of refurbishment works, the Group is now experiencing lesser cases of products rejection. In fact, it adds the capability to improve quality, accuracy and precision of the products manufactured. These are the key factors for manufacturing medical devices and it bode well for the Group to position itself as one of the key manufacturer of medical parts in this region. Currently, there are 36 units of various machineries located inside the said plant generating income for the Group.
As part of the strategic review on our operations, the Group has in previous years entered into strategic collaboration with FEM to form a joint venture company, namely FATV where the Group hold 75% stake in FATV. In March 2016, FATV signed a BPA with FEM, which in turn secured contract from Rieter, a Switzerland-based company listed on the SIX Swiss Exchange. The contract is to manufacture, supply and deliver high-value precision machine components and parts to be used by Rieter for the manufacturing of their machineries such as ring spinning machines and carding machines. FATV is currently utilising the Group’s expanded plant (completed in February 2015) for setting up production line for Rieter’s textile machinery parts.
Since May 2016, the Group has successfully installed and commissioned new specialised tooling machineries catered to manufacture machine components of different design and complexity in accordance to Rieter’s desired specifications. The Group is now entering preliminary production stage and going through the product and process audits by Rieter team, after which the Group expects to start operation commercially by this year.
Under the BPA, FEM and FATV agreed that the machine components to be purchased by FEM from FATV shall not be lesser than SGD2.9 million (approximately RM8.9 million) of value per annum for the first two (2) years. The value of expected purchases in the subsequent years after the initial two (2) years period would depend on, amongst others, purchase orders to be placed by FEM’s customer and potential technological changes, and hence cannot be determined at this juncture. The machine components will be supplied directly by FATV to FEM’s major customer at designated locations worldwide.
In line with the Group’s commitment to safety and quality of the manufactured products, the Group through its fabrication unit has recently attained the ISO 13485 certification in May 2017. ISO 13485 gives international recognition to the Group’s ability to provide medical devices and related services that consistently meet customer and regulatory requirements. Our fabrication unit is now a certified contract manufacture of endoscope and endoscopy accessories metal parts and this has enabled us to better position ourselves to participate in bigger project and gain competitive advantage over the other competitors. Getting ISO 13485 certification has proven a wise strategy and the Group is now working with few potential customers to produce their components. The Group is banking on securing more orders of precision components from medical equipment customers this year, with revenue to start coming in FYE 2018.
Taking a step further towards building a greener portfolio, the Group completed the construction of its second (2nd) Solar PV Plant with capacity of 300kW in December 2016. Earlier in May 2016, the Group has inked a Renewable Energy Power Purchase Agreement with TNB for the sale and delivery of renewable energy for a concession period of 21 years. The Group expects an estimated renewable energy generation of 414MWh worth RM0.33 million per year from this Solar PV Plant.
The current focus of the Group is to create and enhance shareholders’ value in the long run. We aim to re-invest the earnings to fund the business growth. As such, the Group does not adopt any dividend policy in the short term but will consider to distribute excess profits once we have stable earnings, after taking into consideration the working capital requirements and planned capital expenditure in the future.
The Malaysian manufacturing sector is expected to record sustained expansion. Growth will be driven largely by the export-oriented industries, particularly in the electronics segment, reflecting a recovery in the global demand for semiconductors. In this respect, the Group continues to adopt a prudent approach towards its manufacturing operations, with focus on operational efficiency to drive down cost and sustain its growth momentum. The Group will continue to focus on its core business, i.e. fabrication of industrial & engineering parts and to grow its automation business. Following the completion of the private placement in May 2017, the Group expects to set up new production facility for fabrication of sheet metals. The fabrication of sheet metal will complement the Group’s existing fabrication capabilities, thereby allowing the Group to provide multiple solutions and present itself as a one-stop fabrication centre for its customers. This will allow the Group to add another source of income while leveraging on its existing fabrication capabilities and technical know-how. The additional source of income is also intended to reduce the Group’s dependency on customer from the HDD segment, which has suffered from reduced demand globally due to the advent of various data storage alternatives to conventional HDDs. Having said this, the Group expects orders from its HDD customer will pick up in the coming year as our customer has centralised four (4) production lines from other region to Penang.
This year will see the Group’s commitment to grow its business through its strategic plan in partnering with FEM, in particular the contract with Rieter on fabrication of textile machinery parts. A lot of effort have been putting in to ensure stringent criteria set by Rieter are met before the mass production process starts. The Group is also positive in getting more orders from medical industries capitalising on our certification as contract manufacturer of endoscope and endoscopy accessories metal parts. Barring any unforeseen situation, the Group is cautiously confident that its business will deliver sustainable growth and better performance in the coming year.