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Executive Chairman’s Statement

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Executive Chairman’s Statement

Dear Shareholders,

On behalf of the Board of Directors of Mega First Corporation Berhad, I hereby present to you our annual report and audited financial statements for the financial year ended 31 December 2017.

Overview of Group Financial Performance and Prospects

For the financial year ended 2017, the Group recorded a 40.3% increase in profit before tax from continuing operations of RM192.9 million (2016: RM137.6 million). This 40.3% increase was mainly due to construction profit from the Don Sahong Hydropower Project amounting to RM172.6 million (2016: RM96.1 million) and higher earnings from the Resources Division amounting to RM19.3 million (2016: RM15.0 million). The Property Division’s profit contribution remained flat at RM12.5 million.

Financial year 2017 was a year of change and transition for the Group, especially in its Power Division.

During the year, the Board of Directors made the decision not to extend the Group’s sino-foreign cooperative joint venture agreement in relation to its coal fired power plant in China upon its expiry in October 2017. This decision was not taken lightly given the profits that this power plant has contributed historically to the Group. However, tightening environmental protection policies being implemented by the Chinese government have put the earnings from this power plant under serious pressure and profits have been declining rapidly since year 2015. An extension of this joint venture would require large capital injection to upgrade or modify the existing plant and machinery and the Board of Directors is of the view that this huge capital outlay could not be recouped given the short extension term of 5 years.

The Power Purchase Agreement (“PPA”) in Sabah between Serudong Power Sdn. Bhd. (“SPSB”) and Sabah Electricity Sdn. Bhd. (“SESB”) expired on 2 December 2017 and the power plant has stopped energy supply since that date. The proposed new commercial terms of the PPA extension, which have been approved by the Energy Commission and YB Minister of Energy, Green Technology and Water are now being discussed with SESB before the PPA extension can be executed.

The changes in the Power Division are not all bleak and we are enthusiastically looking forward to the completion of the Don Sahong Hydropower Project as it progresses on track to commence commercial operations at the end of year 2019. During the year, the Group entered into loan facilities amounting to USD150 million to finance the construction of this project to completion. Prior to the drawdown of the loan facilities, the project was funded by internally generated funds as well as the cash call (Rights Issue completed in 2016) and Warrants conversion.

Despite the loss of cash flow from the China and Sabah power plant and in anticipation of higher interest expenses due to utilisation of the loan facilities in 2018, the Board of Directors are confident that the Group will be able to weather this transitional period with a prudent and disciplined management approach. Decisive measures have been taken to conserve cash, delay non-essential capital expenditures, increase operational efficiencies and reduce dividend payout ratio. In the meantime, earnings for the financial year 2018 will be driven by the continuous recognition of construction profit from the Don Sahong Hydropower Project as well as projected earnings improvements from existing businesses.

Operations Review and Prospects

Power Division

China Power Plant Discontinued Operations

Upon the expiry of the joint venture agreement on 22 October 2017, the China power plant had contributed a profit before tax of RM19.6 million (2016: RM62.1 million) representing a 68.4% decrease compared to the prior year. This was mainly due to the shorter operation period, lower sales volume due to the continued decrease in demand for industrial steam, increased environmental compliance costs as well as losses on deconsolidation of this joint venture.

Sabah Power Plant

Earnings contribution from this power plant decreased 41.3% to RM3.7 million (2016: RM6.3 million) due to a shorter operation period, overheads incurred in the month of December without any corresponding revenue earned as well as a one-off partial arbitration award of RM1.0 million that was received in financial year 2016.

At the time of writing, we are still in discussions with SESB on the PPA extension.

Don Sahong Hydropower Project

The Don Sahong Hydropower Project was the largest contributor to the Group’s earnings this year and we expect that it will continue to be the largest contributor in the coming years. Prior to commercial operations, its earnings contribution is in the form of construction profit and thereafter, earnings will be in the form of revenue from sales of energy.

In terms of progress, construction work on the Don Sahong Hydropower Project is slightly ahead of schedule. The progress of construction work is as follows:

  • Powerhouse concreting works and the electrical and mechanical works have reached 73.5% and 36.5% respectively.
  • Embankment excavation works have achieved 99.6% and concreting works are continuing as per schedule.
  • Channel excavation works have achieved 85% completion.
  • Inlet underwater excavation has resumed in December 2017 after the end of the rainy season in November 2017.
  • Offsite fabrication of the turbine and generator components are in progress and the parts will be progressively transported to the site for assembly and installation in the first quarter of 2019.
  • Transmission line construction has commenced in January 2018.

Overall physical completion of the Project as at the end of 2017 was 46.5% and we expect the cumulative physical completion to be about 80% at the end of 2018. We are continuously monitoring the progress of the project to ensure that any risks are identified early and any issues that arise are addressed quickly to avoid any costs overrun or delays.

Resources Division

The Resources Division has performed commendably registering a 28.4% increase in profit before tax for the financial year 2017. In the prior year, the increase in profit was 32.5%. These double digit percentage increases in profits over the past two years prove that the market for lime products in Malaysia and the Asia Pacific region is large and that our capacity expansion strategy has paid off.

Prior to the capacity expansion project in 2014, we had 4 kilns and by the end of 2017, we had 7 kilns. Currently, the kiln capacity utilisation rate is at 80% and growing and we will be adding another kiln with a rated capacity of 400 MT to bring our total kiln number to 8 and a total plant rated capacity of 1,960 MT per day.

On the sales front, steps are being taken to aggressively push sales to address the market’s demand at competitive pricing while on an operational level, we constantly ensure that the plant is properly managed and maintained to gain maximum operational efficiencies and consistently high quality products.

We remain steadfast in our belief that the Resources Division has enormous potential and will continue to aggressively drive it for the foreseeable future.

Shareholder Value Creation

Shareholder value creation is always the top priority of the Group’s management.

For the financial year 2017, basic earnings per share (“EPS”) increased 5.3% to 36.02 sen (2016: 34.19 sen). Shareholder’s equity grew marginally at 4.1% to RM1.24 billion (2016: RM1.19 billion).

We feel that these small increases in shareholder value is commendable given the changes the Group is undergoing, especially with the non-extension of the China power plant joint venture and the capital outlay required during the construction of the Don Sahong Hydropower Project. The Group’s deposits and bank balances remain fairly strong at RM138.8 million (2016: RM291.3 million) and we believe that by practising prudent financial management, we will be able to ride out this 2 year transitional period before the Don Sahong Hydropower Project commences operations comfortably.

Taking into consideration the Group’s funding requirements for the coming year, the Board of Directors is pleased to recommend a final tax-exempt dividend of 2 sen per ordinary share for approval of the shareholders at the forthcoming Annual General Meeting. Together with the interim dividend of 2 sen per ordinary share that was paid out on 13 October 2017, the total dividend for the financial year 2017 is 4 sen per ordinary share.

Acknowledgement and Appreciation

On behalf of the Board of Directors, I would like to express my sincere thanks to the Group’s management team and employees for their hard work and dedication to the Group. I strongly believe that people are the backbone of any organisation and without them, the Group would not be in the position it is today.

I would also like to give thanks to our bankers, customers, suppliers and business associates who have continued to have full confidence in us and who continue to extend their full support despite the changes the Group is currently undergoing.

To my fellow colleagues on the Board, I have enjoyed working with you in the past year and hope that we can continue in the sharing of our ideas and knowledge in the coming year.

Last but not least, I would like to thank all our shareholders for continuing to believe in us and the future of the Group. I assure you that our Board of Directors and management team are committed to the long term success, growth and sustainability of the Group.

Goh Nan Kioh

Executive Chairman

27 March 2018

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