I am pleased to present to you the Annual Report, incorporating the Financial Statements of the Group and the Company, for the financial year ended 31 December 2018.
The Malaysian economy recorded a steady pace of growth in Gross Domestic Product ("GDP") from 4%-5% in 2018 despite the challenging international economic environment. The careful credit expansion in the US had a significant effect worldwide, resulting in the maintenance of timber prices as well as other commodities which affected Malaysia positively.
The Government's increased expenditure for infrastructure development coupled with cash distribution relief to the people, helped boost domestic demand which had the effect of halting and subsequently reversing the negative effect which the weak global conditions had on the domestic economy earlier in the year under review.
During the financial period under review, the Group posted a Revenue of RM35.6 million compared to RM31.2 million in the corresponding period of 2017. This marked improvement can be attributed to a higher rate of log production and stable demand for logs from the local market.
In May 2018, we had to face a new challenge when the Sabah State Government announced an export ban of round logs. The Company had to re-strategise its business model to focus on sale of logs to the local market. Additionally, the Company is working with local mills to export sawn timber in order to remain viable and profitable. We are happy to announce that we have obtained an export license of sawn timber from Sabah Forestry Department on 12 September 2018.
The Group showed an impressive Profit from Operations of RM7.9 million (2017: 4.5million) after taking into account the fair value gain on Biological Assets amounting to RM2.7 million (2017: RM1.2million).
The Company had engaged Messrs. Smith Gore Sabah to conduct a fair valuation on Biological Assets in advance to the MFRS 141. The Net Present Value ("NPV") derived from the valuation report dated 31 December 2018 are summarised as per table below:
|Particulars||NPV as at 31 December 2018 |
|Biological Assets (planted trees)||21,279|
|Intangible Assets (Unharvested natural standing trees)||96,936|
The fair value gain in Biological Assets is reflected in the financial report and the fair valuation of Intangible Assets is used for impairment testing purposes. The fair value gain on Biological Assets has the effect of increasing the Net Assets per Share of the Company by 10.15 sen.
Due to the nature of our business, which is heavily dependent on timber prices, coupled with a challenging environment during the period under review, Management has put in place a programme to maintain the development of our Forest Management Units ("FMU") to enable additional revenue to be generated.
In timber segment, the Company has been granted a Sustainable Forest Management Licence for 100 years commencing 1997 over an area of 71,293 hectares in Lingkabau Forest Reserve in Sabah. The Company with the permission of State Government of Sabah, is able to plant, rehabilitate and harvest forest in the sustainable forest management concession area, which is marked for Natural Forest Management ("NFM"), Conservation and Industrial Tree Plantation ("ITP").
Subsequently, the Company has on 12 April 2018 entered into a Sustainable Forest Management Licence Agreement ("Supplemental") under the 100 years Principle Agreement; Sustainable Forest Management Licence Agreement dated 10 September 1997 with the Chief Minister of the State of Sabah for conversion of 15,438.30 hectares into Protection Forest Reserve ("Class One") and excise 10,195.28 hectares for socio-economic purpose. Pursuant to the amendments' exercise, the changes of the licensed area are indicated as follows:
|Land use||Before (Hectare)||After (Hectare)|
|Industrial Tree Plantation||15,429.91||30,399.14|
|Natural Forest Management||46,522.67||15,260.28|
|Licensed Area/New Licensed Area||71,293.00||45,659.42|
|(i) Rezoned Area||-||15,438.30|
|(ii) Excised Area||-||10,195.28|
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.
To-date, the industrial tree plantation area is planted with various tree species including mahogany and rubber with the Group's concerted effort on enrichment planting, silvicultural treatment, upkeep and maintenance of the sustainable forest management concession area.
Apart from this, various steps have also been taken by Management and the Board of Directors to transform the Company into a lean and dynamic organisation. With other measures which will be initiated in the coming months, we are confident that the Company will be poised to take advantage of any upturn in the timber market.
Achievement and Accomplishment
The Sabah Chief Conservator of Forests had again awarded the Company with a Certificate of Compliance on Timber Legality Assurance System ("TLAS") (Principle 1-4) for the Licensed Area Sustainable Forest Management Licence Agreement 06/97 - Forest Management Unit 3 on the 1 May 2018.
The Company has been evaluated through the TLAS System criteria against the European Union Forest Enforcement Governance and Trade ("FLEGT") for the management of its forest area. The Assessment Report has resulted in full compliance against all critical criteria. As such, Sabah Forestry Department recognises that the Company has adequately demonstrated legal compliance to the TLAS criteria for forest management in Sabah. As the Company has passed the due diligence requirements for legal compliance to the local Sabah Standard established as part of the FLEGT project. Therefore, materials harvested by the Company are classified as Verified Legal Compliant ("VLC") within the GFS Wood Tracking Program.
In recognition of the continuous effort by Management and the Board of Directors, the Company was again awarded the Compliance Certificate by the Sabah Forestry Department on the 20 July 2018, for its achievement of the overall performance in accordance to Annual Work Plan ("AWP") 2017.
The Board recommends the declaration of Final Single-Tier dividend of two (2) cents per ordinary shares payment for this year, subject to Shareholders' approval in the Annual General Meeting ("AGM") to be held on 21 May 2019.
Outlook and Prospect
Amid the more challenging external environment, Malaysia's economy is projected to experience a steady pace of growth in GDP of 4% - 5% in 2019. Domestic demand is expected to remain resilient and will continue to be the anchor for growth.
The Group will be able to pursue better operational performance at lower costs through its continued prudent cost control measures and improvement in efficiency. It is the commitment of the Group to improve its earnings growth for the sustainability of the Group.
The Board of Directors is cautiously optimistic that the Group will continue to improve its performance for the financial year ending 31 December 2019.
I would like to express my heartfelt thanks to Management and staff for their continuous commitment and invaluable contribution to the Group, as well as my Board colleagues for their dedication, invaluable advice and undivided support over the past year.
My sincere appreciation also goes to our shareholders, customers, bankers, business associates, partners, suppliers and the media for their unwavering support and confidence in our Group.
Last but not least, I would also like to take this opportunity to express the gratitude of the Group to the Sabah Forestry Department, various government agencies and regulatory authorities for their continued trust and confidence in us.
Dato' Seri Abdul Azim bin Mohd Zabidi
Independent Non-Executive Director