Email This Print ThisChairman's Statement

(Extracted from Annual Report 2017)

Dear Shareholders,

Glenndle Sim

On behalf of the Board of Directors, we present the Annual Report of Mencast (the "Company" or "Group") for the financial year ended 31 December 2017 ("FY2017").

A YEAR OF EXTRAORDINARY CHALLENGE

Mencast had perhaps the most difficult year in our 36 years in business. The offshore and marine sector experienced tremendous pressure due to the simultaneous impact of slumping demand, tight credit conditions and slow customer payments.

The Group reported a net loss of $80.7 million after taking large asset write-downs to reflect our expectation of a slow recovery in the Oil and Gas ("O & G") industry.

Mencast generated $16.6 million cashflow from operations during the year, primarily from stringent working capital management, including the collection of long outstanding trade receivables.

SEGMENT PERFORMANCE

Group revenue for the year declined 14% to $51.7 million. The bulk of the decline was attributable to the Offshore and Engineering segment, where sales fell 34% as low oil prices depressed demand for O&G related services.

Our Marine segment saw a small decline in sales of 7% to $22.3 million. This segment was supported by strong transportation activity around Singapore and the region and relatively robust demand for ship servicing.

Our Energy Services segment performed robustly, with revenue inching up 2% to $15.4 million during the year. In the year ahead, we expect to recycle capital from the Offshore and Engineering segment to grow our business in this segment.

The operating environment for each of our businesses segments is not expected to strengthen significantly in the year ahead. To weather this period, we will continue to improve our operational efficiency as well as tighten cost control and capital management.

BALANCE SHEET RESTRUCTURING

Though crude oil prices rose last year, price volatility has been high and the sporadic price rallies are being viewed with caution by most market participants. OPEC's patchy production discipline and the rapidity at which shale oil producers are able to increase production have added to concerns that oil may be significantly oversupplied in the year ahead.

The budgets of oil majors are unlikely to return to the same levels as prior to the downturn in the foreseeable future. As such, a strong recovery in our Offshore and Engineering segment is unlikely in the short term.

Asset values are being depressed and we have written down carrying values to reflect this. During the year, we have recognised impairment losses on a number of O&G related assets. In particular, we wrote off $35.1 million in goodwill, as well as recorded impairment charges on assets such as plant and equipment, receivables and inventory.

THE ROUTE AHEAD

Even before the downturn, we have been leveraging Mencast's capabilities, platforms and relationships into new business opportunities. As well as adding revenue and growth potential, new revenue streams enhance earnings quality by providing diversification and resiliency through the industry cycles.

Our Energy Services segment is an example of how effective this strategy has been. Established in 2009, Mencast Energy leveraged our O&G knowledge and familiarity to build a successful environmental remediation business, specialising in waste management and green initiatives. Though only a few years old, this division generated 30% of Group revenue last year.

Early last year, to gain access to innovative technologies, Mencast signed a MOU with Houston Technology Centre-Asia ("HTC-Asia") for technology innovation, incubation, accelerator and commercialization assistance to hard science technology companies. HTC-Asia has a collaborative relationship with Houston Technology Center (USA), which FORBES International Business Magazine has called "1 of 10 Technology Incubators Changing the World".

Mencast Innovation Centre Pte. Ltd. ("MIC") was also established last year as a platform to manage these new business and revenue initiatives. To defray operating costs, MIC applied for and received approval for support under the SPRING Singapore's "Startup SG Accelerator" program. MIC will provide mentorship, equipment, working space, and networking opportunities and work closely with the Group's business units to drive opportunities for growth.

With your support, we are confident that we will ride out the challenges and be solidly positioned for future growth.

The target areas are technology driven green solutions that lower environmental impact and could include energy technology, life and agricultural sciences, nanotechnology and/or industrial IT sectors.

The markets for such products may be within Singapore or the region. Our business and expertise is already in an economically fast-growing region. China's Belt-and-Road Initiative is likely to generate substantial further economic growth and opportunity in the region.

APPRECIATION AND THANKS

I express my sincere gratitude to our customers, bankers and business partners for their strong support through these difficult times. We also wish to recognise the determination and outstanding efforts of our entire workforce in overcoming the challenges of the last few years. I also convey my sincere appreciation to the Board for their support and guidance over a difficult period.

The year ahead will remain challenging. With your support, we are confident that we will ride out the challenges and be solidly positioned for future growth.

We look forward to meeting you at the upcoming Annual General Meeting. Thank you all for your unwavering support.

Sim Soon Ngee Glenndle
Executive Chairman and Chief Executive Officer

1 Ratio of new finds to oil extracted. A reserve ratio below one indicates that production cannot be sustained indefinitely at current levels