MISC Annual Report 2018

PRESIDENT/GROUP CEO’S REVIEW The Liquefied Natural Gas (LNG) shipping market was similarly beset by vessel oversupply, and started the year on a sluggish basis, although it did recover to end the year on a stronger note as demand for vessels picked up. At the same time, LNG trade became more spot trade oriented, with spot trade accounting for 25% of all trade volumes in 2018, compared to 20% 2014. The average length of a time charter contract also declined from around 12 years to around seven years. SUCCESSFUL COMMERCIAL YEAR Over the year, we were able to make progress in several key areas of our strategic MISC 2020 journey and beyond. I rate 2018 as a successful commercial year for MISC, in terms of our efforts to secure our profit growth in the future. However, in light of the difficult market conditions and prevailing challenges that defined 2018, our financial performance for the year was weaker than 2017. Our LNG Business segment expanded our footprint into Europe and the mid-size carrier sector in 2018, with a two-vessel purchase and leaseback deal. We have established our credentials in this space because we believe there is an emerging market for small-size and mid-size vessels. Overall, the segment had a good year and was largely unaffected by the sluggish LNG shipping market as the vast majority of our carriers are on long-term charters, providing a high level of predictability in revenue and allowing a focus on operational excellence. I am particularly proud of the investments in future growth made by our Petroleum & Product Shipping segment over the year, in spite of the dire freight market conditions. By focusing on strategic gains and developing solutions for the evolving industry, the segment won long-term contracts for five newbuild DPSTs destined for Brazilian waters. This showed how MISC can compete against the best in the industry and win, in certain sectors. Our DPST fleet size will rise to 11 vessels by 2020, providing long-term secured income, and positioning MISC as one of the market leaders in the niche DPST market. Our Offshore Business segment concluded a purchase-and-charter agreement with a 16-year term for a floating solution which led to immediate, recurring cash generation. We also won a seven-year charter contract with our Vietnamese joint venture, showing how our past experience, expertise and technical capabilities are serving us well in securing and delivering new contracts. Closing out a few challenging projects, and targeting new markets, such as the Middle East, was the focus of our Marine & Heavy Engineering segment in 2018. Delays in dry docking from ship owners and a dearth of new projects have affected business, but the industry upturn in upstream oil and gas projects and the successful closeout of a few challenging contracts augurs well for 2019. In 2018, our Integrated Marine Services segment demonstrated the central importance of health and safety to MISC by extending its zero Lost Time Injuries to over 880 days. This segment is a recent integration of the service arms of the LNG and petroleum fleets and has harnessed management efficiencies, and improved seafarers’ cross- training over both fleets. In our Port & Terminal Services segment, the Group’s succession planning was put to the test when a new leader was required. I am happy to report that the new team turned in a very good set of numbers for 2018. Our Maritime Education & Training segment focused on higher-level qualifications and building collaboration with other institutions in the maritime industry. More detail on the performance of our four core businesses and three key enablers is to be found in their respective sections on pages 92 to 127 of this Annual Report. FINANCIAL PERFORMANCE For the financial year ended 31 December 2018, MISC Group revenue was RM8,780.3 million, down 12.8% from the previous year, with all segments recording lower revenue, with the exception of the Marine & Heavy Engineering segment, following higher revenue from ongoing projects in 2018. Group Profit Before Tax (PBT) was RM1,344.1 million, a drop of 32.9% over the previous year’s PBT of RM2,003.6 million. The Group’s balance sheet remained healthy with reported registered cash, deposits and bank balances of RM5,755.6 million as at 31 December 2018, lower than 2017’s figure of RM5,900.7 million. Following an increase in total borrowings, the Group’s net debt-to-equity ratio increased to 0.20 from 0.16 in 2017. The Group’s Earnings Per Share dropped to 29.4 sen in 2018 from 44.4 sen in the prior year. For the year ended 2018, profit attributable to the equity holders of MISC was lower by about 33.8% at RM1,311.5 million from RM1,981.5 million in 2017. In respect of the financial year ended 31 December 2018, a total of 30.0 sen per share of tax exempt dividend amounting to RM1,339.1 million was declared on a quarterly basis, consistent with the total dividend declared for the financial year of 2017. SUSTAINABILITY At MISC, we are passionate about moving energy to build a better world. We plan to further grow sustainable value in the coming years by focusing on our core businesses, expanding into new markets, investing in cleaner technologies and taking a leading global role in shaping the future of the maritime industry. The ocean and the maritime sector are part of the lifeblood of MISC, and on a wider scale, the maritime industry is responsible for the transportation of approximately 90% of world trade. We aspire to be in the front row of discussions on how to sustain the global maritime industry into the next century. Hence, we are doing our part and taking responsibility as a global maritime player by standing up, telling the world what MISC stands for, and backing our words with actions. We played an active role in the inaugural GMF annual summit in Hong Kong in October 2018 as one of six founding and strategic industry partners. We were one of 34 global businesses from across the maritime value chain to sign the GMF’s call to action in support of the IMO’s decarbonisation strategy. Whilst shipping has long been recognised as the most cost- effective and energy-efficient mode of transport, decarbonisation constitutes a crucial step on the long road towards more climate-friendly seaborne trade. At MISC, we leveraged our track record and expertise in the handling of LNG and its use as a marine fuel to commission two LNG dual-fuel Aframax tankers that are amongst the very first in the industry. We are also building two DPSTs with the same innovative technology. We see these vessels as proof that increasing environmental requirements are an incentive to increase efficiency rather than a threat to how we operate. Sustainability also goes far beyond environmental concerns, and GMF’s Global Maritime Issues Monitor for 2018 includes risks such as energy price variations, skills shortages, finance availability, and safety. Health, Safety, Security and Environmental (HSSE) issues are a core concern for MISC. These issues are always the first item on the agenda at our monthly management meetings, and we are working to ingrain the importance of HSSE matters as a cultural value across the MISC ecosystem. We drive home the importance of HSSE matters to all employees, from the shipping frontline to our office-based colleagues. For example, we have rigorously put particular emphasis on the safe use of mobile phones. A junior colleague recently pointed out that I was texting on my phone whilst walking, and he was quite right to call me out. In recognition of our increasing efficiency and service quality levels, as well as our strong health and safety credentials, MISC won the ‘ClassNK Tanker Operator of the Year’ award for the first time at the 2018 Lloyd’s List Global Awards in London. In addition, we won the ‘Safety Conscious Employer/Ship Operator of the Year’ at the IHS Markit Safety at Sea Awards 2018 in London in October. Closer to home, we improved our 2018 rating to 3.5 on the FTSE4Good Bursa Malaysia index, reflecting our consistent improvements in, and focus on, good environmental, social and governance-related practices. Since 2012 we have been formalising sustainability so that it clearly permeates our decisions on financial management and investment, human resources, knowledge-based intangibles, key relationships, our assets, and of course the environmental health of our oceans. This integrated thinking helps us ensure we have the right information to make informed decisions in these times of rapid advances in technology and resource scarcity. In turn, we are moving towards Integrated Reporting through this Annual Report. This ongoing process allows stakeholders a clearer view of our strategies, priorities, performance and a more forward- looking perspective on the business. GROWING PAINS - OUR CHALLENGES I am often asked “what keeps me up at night” managing the MISC Group. Let me share the issues and challenges that preoccupied me during 2018, with the hope that this understanding of the various business hurdles that we face will give a clearer perspective on MISC and how we strive to realise our growth aspirations. The energy and shipping markets are highly cyclical and volatile. And the cycles are also getting shorter. At the same time, our businesses are also very capital intensive with a large asset base, and we require predictable sources of funds to sustain our business and invest in future growth. To meet this challenge, we have a strategic focus to grow our secured and long- term business to reduce our exposure to the cyclicality and volatility. Over 2018, our LNG Business segment faced a market that is moving towards shorter charter periods and more spot fixtures. With these lower returns, our ability to win charters that sustain our business into the future could be affected. Finding the right trade off between risk (length of charter) and reward (rate of return) is often challenging. HIGHLIGHTS OF THE YEAR OUR BUSINESS OUR LEADERSHIP OUR PERFORMANCE OUR COMMITMENT TO SUSTAINABILITY OUR GOVERNANCE FINANCIAL STATEMENTS OTHER INFORMATION 50 TH ANNUAL GENERAL MEETING 89 MISC BERHAD ANNUAL REPORT 2018 88