Wah Seong Corporation Berhad Annual Report 2019

27 ANNUAL REPORT 2019 Discussion on Key Financial and Operational Indicators for the segment For the year under review, the RE segment recorded its highest revenue to date with RM399.6 million compared with RM335.8 million in the previous year. However, the RE segment recorded a lower segment profit of RM25.5 million against RM30.7 million in the previous year, mainly due to margin compression for the boiler equipment packages and the higher operational cost during the year. As of 31 st December 2019, the RE segment has a combined order book of RM309.3 million, which is higher than the order book position at the end of 2018. Its orders are mainly driven by the process equipment business and are primarily for the overseas market. Discussion of anticipated or known risks that may have a material effect on, among others, the sustainability of the group’s results or operations, financial condition or liquidity RE’s performance is driven mainly by project awards. Delay in project awards results in lower order intake and cause fluctuation to earnings. To mitigate this operational risk, RE has been actively building up its recurring income business stream to cushion the impact of project cycles. RE has broadened its customer base and diversified its products and services range across a few industries in order not to be overly reliant on a particular industry. Risks related to the COVID-19 outbreak are closely monitored at each business operations. The Group also recognises risk related to supply disruption. To date, RE has implemented several risk mitigation strategies that focus on alternative sourcing strategies to minimise the impact of any disruptions. Clients have also been duly notified should there be impacts on contractual terms for on-going secured projects. Discussion on expectations of future results The outbreak of COVID-19 has resulted in the short term, lower demand for CPO from China leading to downward price pressures, with prices dropping to RM2,307 per tonne for the three-month benchmark for palm oil futures for May 2020 delivery, from its highest point at RM3,000 in January 2020. However, RE Group remains bullish that Indonesia’s B30 biodiesel mandate which stipulates its biodiesel will have 30% palm-based biofuel will cushion the softer demand from China and CPO prices. The Group anticipates that there will be strong demand for its products and services coming from the Indonesian market for its agro-business in 2020. Its recent operational expansion in Indonesia would position the Group’s agro business favorably. In 2020, the Group expects to further strengthen and grow its position in Indonesia via a strategy of mergers and acquisition. In the longer term, the demand for biofuels is expected to grow by around 4Mb/d to 6Mb/d by 2040, according to BP’s Energy Outlook 2019 Edition. This supports RE Group’s long term outlook for the agro-business. The short term impact of COVID-19 on the oil and gas industry as well as the Saudi Arabia and Russia trade dispute will also impact the process equipment business for the RE Group. Nonetheless, with a healthy order backlog already secured at the end of 2019, the RE Group is bullish and expects its facilities with high utilisation rate in 2020. MANAGEMENT DISCUSSION AND ANALYSIS