Corporate Perspective


Management Discussion and Analysis


The following Management Discussion and Analysis ("MD&A") of the operating performance and financial condition of Timberwell Berhad ("the Company") should be read in conjunction with the Financial Statements for the year ended 31 December 2018 and notes related thereto.

The MD&A is a mandate to advance the measurement and reporting of organisational performance. This MD&A, in combination with the financial statements, provides the opportunity for the Company to communicate the effectiveness of the stewardship of resources and to further progress towards the stated strategic objective.

This MD&A is presented in accordance with Malaysia Financial Reporting Standards ("MFRS") and to correspond to the amendments Main Market Listing Requirement ("MMLR") of Bursa Malaysia Securities Berhad in relation to the Disclosure and Corporate Governance requirements unless otherwise noted.


Overview

The Company has been granted a Sustainable Forest Management Licence Agreement (“SFMLA 06/97”) for 100 years commencing 10 September 1997 over an area of 71,293 hectares in Lingkabau Forest Reserve in Sabah. The State Government of Sabah granted permission to the Company to plant, rehabilitate and harvest forest in the principles of sustainable forest management and environmental conservation for economic, environmental purposes in the licenced concession area.

Subsequently, the Company has on 12 April 2018 entered into a Sustainable Forest Management Licence Agreement (“Supplemental”) under SFMLA06/97 for conversion of 15,438.30 hectares into Protection Forest Reserve (“Class One”) and excise 10,195.28 hectares for socio-economic purpose.

The entire concession area is zoned into Natural Forest Management (“NFM”), Industrial Tree Plantation (“ITP”), and Community Forest as indicated in the following table:

Land useHectares (Ha)
Industrial Tree Plantation30,125.38
Natural Forest Management15,260.28
Community Forest273.76
Total Area 45,659.42

The amendments may enhance the Company’s long term prospect as the ITP areas are increased from 15,156.15 hectares (after excluding the community forest zone of 273.76 hectares) to 30,125.38 hectares which will enable the Company to enhance its production capacity and area for planting.


Financial Review

Against the backdrop of export ban on timber which announced by the Sabah State Government in May 2018, the Group has implemented few changes in business strategy and strict controls on capital management, including the following:

The Group is mindful that the economic uncertainties and difficult market conditions are expected to prevail into the new financial year in our major operating markets. The Group will continue with aggressive cost containment measures and rollout more innovative approaches in its operations to drive greater cost efficiency and productivity.

The Group generated a revenue of RM35.6million in year 2018 which has increased RM4.4 million compared to the year 2017 (RM31.2million). The revenue increased marginally by 14.1%. The rise in revenue is mainly due to better production and stable local market demand.

The profit after tax figure of RM6.4 million was arrived at after taking into account the fair value gain derived from Biological Assets (“BA”) amounting to RM2.7 million (2017: RM1.2 million).

The Company has appointed Messrs. Smith Gore Sabah to conduct a fair valuation on BA on 27 March 2017 in accordance to MFRS 141. In arriving at the valuation, the valuer has assessed the fair value of the following areas in the FMU 3 by using the Discounted Cash Flow method as the basis of the valuation.

The summary of the valuation report dated 31 December 2018 are shown in the table below:


Net Present Value (“NPV”)
1 January 2017
RM’000
31 December 2017
RM’000
31 December 2018
RM’000
Biological Assets15,80217,69821,279
Intangible Assets76,43995,72596,936
Total 92,241113,423118,215

The Fair Value Gain derived from BA are illustrated as per table below:




Particulars

NBV as at
31 December 2018
RM’000
NPV
as Valuation Report
31 December 2018
RM’000


Fair Value Gain
RM’000
Biological Assets12,23821,2799,041
Intangible Assets8,85396,93688,083
Total 21,091118,21597,124

The variance shown in the table above indicated the NPV of the BA and IA increase by RM9 million and RM88 million respectively. The Fair Value Gain derived from Biological Assets of RM9 million net of deferred tax is reflected in the Audited Financial Statements for the financial year ended 31 December 2018 and the fair valuation of IA is used for impairment testing purposes.

The net assets per share of the Company as at 31 December 2018 after taking into account the fair valuation were illustrated below:-



Particulars
Audited result as at
31 December 2018
before fair valuation

Effect of the fair
valuation

After the fair
valuation
Equity Attributable to the owners of the Company (RM“000”)39,9639,04149,004
No. of shares (‘000)89,05189,05189,051
Net Assets per share (sen)44.8810.1555.03

Operational Review

The focal operations of the Company are timber harvesting and area rehabilitation mainly involving Silviculture Treatment and Mosaic Timber Planting. The approved 2018 Annual Work Plan (“2018 AWP”) stipulates the targets for all the activities in the entire year and the achievements are assessed in the year ending 31 December 2018.

Figure 1 : Areas in hectare for 2018 AWP target and the year ending 2018 achievements

The Company managed to harvest about 60% of the targeted area for harvesting in 2018. This is due to additional verification for areas adjacent to settlement and tedious field operation in natural forest harvesting area. The Company will take further action to identify high conservation value for the community to ensure the operation in 2019 will be more efficient.

The market for timber remains challenging in 2018. The change of the state government policy on round logs export has compelled the Company to advocate the focus on domestic timber market. Despite the challenges the Company managed to produce higher timber volume in 2018.

Apart from the main tasks, other supporting activities carried out by the Company in 2018 are Area Surveillance, Community Development and Outreach and Environmental Inspection for Environmental Compliances. All the tasks are carried out in full compliance to the approved 2018 AWP.

Figure 2: Comparison of logs production volume for year ending 2017 and 2018


Achievement & Acomplishment

At the ending of 2018, the Company attained the following achievement:


Outlook & Prospect

The Management has improved the harvesting output in 2018. However, further improvement is required in Reduce Impact Logging (“RIL”) to ensure efficient planning and field operation.

The Management with the consent of the Executive Committee will continue to target larger area for harvesting and have incorporated the increase in the 2019 AWP. In tandem with the increase of area, the additional contractor for harvesting and rehabilitation will also be maintained to expedite the harvesting and rehabilitation activity.

The Management is vigilant to the volatile timber market and will continue to improve productivity and efficiency in its operation. Within the principles of Sustainable Forest Management, the Management strives to carry out its tasks in a prudent and discreet manner while adapting to any improvement and strategy to address the evolving market, environment and social development.


Workforce

The Company is committed in creating a dynamic workplace that is able to attract, retain and develop talents as an inherent component of maintaining sustainability.

The Group itself have a diverse, multi-cultural workforce consisting of competent industry professionals. Both genders are well represented at all levels of the Group, comprising Technical and Non-Technical staffs and also the Management.

As at 31 December 2018, the workforce are equipped with 60 employees.



Succession Planning

The Management has created a precedent for the Company’s Succession Planning to improve organisational succession and talent development programs through the Six (6) Key Elements guidelines.

The Company continued exploring the employee development plans and streamline the strategy into an "executive level" leadership development succession plan that will allow every employee to prepare and develop their future leadership roles in line with the Company’s growth.

The Company's Succession Planning has been review and assessed accordingly in the Nomination and Remuneration Meeting on 8 February 2018.


Continuing Education Program

The Employer Sponsorship Programme allows a corporate to work along with outstanding employees in grooming them for senior management positions within the Company. For employers, it is a chance to finance education for talented employees while encouraging them to stay and grow with the Company.

The Service Contract has been approved by the Directors in the Nomination and Remuneration Meeting held on 25 April 2017.

Benefit to employers:

In year 2018, the Company has sponsored two (2) employees to further their studies to advance or diversify their job-related skills (i.e. Professional Certification for Chartered Company Secretary and Bachelor of Accounting). The Company value what the employees bring back to the organisations and are willing to sponsor them as they know that the strategies and insights, which their employees learn will be put to best use at the work place.


Employee Development & Training

The Company believes that the people need to be developed, challenged and nurtured to be motivated in delivering the Company’s business goals. During the year, our workforce has attended various training and engagements pertaining to compliance awareness, product knowledge, technical skills, finance, health and safety, and environment security. With the training comprises both internal and external courses, where the records are maintained in the Head office.

We continue to place emphasis on maintaining a safe working environment. The Management continues to inculcate the Health and Safety mindset and culture within the organization, particularly for onsite employees. A weekly reporting of our Rangers from the worksite via a tracking system called “Smart Tracker” records all activities done in the forest and its vicinity. Alongside regular management site visit to verify their weekly report are done in a proper and safe manner.

Our Camp management is continually engaging its operation workforce for a "gotong-royong" culture at least twice a month. This also involved activity to prevent the breeding of AEDES Mosquito in the employee living quarters. The blood testing was also conducted for malaria disease and the samples tested have given negative result.