MISC Integrated Annual Report 2020

MISC Berhad / Integrated Annual Report 2020 6 127 //// Leadership / Business Review / Financial Review / Sustainability / Strategic Review //// Section //// Strategic Review / Sustainability / Financial Review / Business Review / Leadership //// MISC Berhad / Integrated Annual Report 2020 6 Section 126 2020 has been a challenging year for all, with the pandemic causing unprecedented impacts on the global economy. MISC has been fortunate as our overall financial performance and financial position have remained strong. This is mainly due to most of our assets being under long-term time charters. MISC’s reliance on long-term contracts as the primary source of our cash flow has insulated us from volatilities that other businesses suffered during the year. MISC recorded robust financial performance in 2020, and revenue improved by 4.9% to RM9.4 billion, from RM9.0 billion in 2019. The Group’s strong financial trajectory is reflected in our cash flows from operating activities, low gearing ratios and stable credit ratings. During the year, the Group had to contend with the financial impacts of the COVID-19 pandemic. The Marine & Heavy Engineering segment had to close its shipyard and suspend GROUP FINANCIAL REVIEW VICE PRESIDENT’S REMARKS RAJA AZLAN SHAH RAJA AZWA Vice President, Finance operations during the Movement Control Order (MCO) period in March 2020. This led to a loss of revenue and higher unabsorbed overheads as a result of slower progress on ongoing heavy engineering projects. The unfavourable decision in relation to the Gumusut-Kakap (GKL) arbitration further compounded matters, resulting in a one-off write-off of trade receivables and loss on re-measurement of finance lease receivables and a provision for litigation claims. Despite those impacts, MISC recorded higher revenue by 4.9% and its growth was mainly driven by construction revenue for the deepwater Mero 3 FPSO project, and higher revenue from the ongoing Kawasari Gas Development Project which is the region’s largest offshore platform. Although the unfavourable decision in relation to the GKL arbitration had impacted the Group’s bottom line by RM1.9 billion, if this one-off impact is excluded, profit before tax (PBT) would be RM1.8 billion in 2020, which is 17.2% higher than the reported PBT of RM1.5 billion in 2019. This was mainly from higher margins on freight rates in the Petroleum & Product Shipping segment as well as higher share of profit from joint ventures recognised in the Offshore Business segment following the recognition of a one-time gain from a contract extension secured during the year. We believe cash flow from operating activities is a better reflection of MISC’s performance and financial strength, which we have maintained at the RM5.6 billion threshold in 2019 and 2020. 2020 has been a landmark year in terms of securing new contracts. We were awarded long-term contracts for three dynamic positioning shuttle tankers (DPSTs) with Petrobras and two dual- fuel VLCCs with Total in our Petroleum & Product Shipping segment. The LNG Asset Solutions segment acquired six of the largest very large ethane carriers (VLECs) in the world with long-term contracts. We also secured the Mero 3 FPSO project, which is a pivotal milestone as we have successfully achieved our goal of penetrating the Atlantic basin. The Group took delivery of six DPSTs, one VLEC and an LBV, and successfully sailed away the FSO Golden Star , all of which bolsters our secured income for the future. We also completed the construction of Dry Dock 3 at MHB, increasing our capacity and future earnings from the Marine & Heavy Engineering segment. Now, more so than ever, we are finding that our dedicated pursuit of long-term contracts and diligent risk assessments are proving to be the right management strategy for the Group. These long-term contracts with reputable clients provide MISC with sustainable secured income even through trying times, and our contract wins in 2020 contribute towards replenishing and growing our secured income in the future. We practice a strict and disciplined project risk assessment process that looks at contractual, project execution and financial risks. By employing this approach, we are able to match the targeted return to the relative risks of the projects which we undertake in a disciplined and conscientious manner. MISC’s balance sheet has also remained healthy in 2020. Our gearing ratio of 0.41 is one of the lowest in the industry with ample headroom for growth. The strength of our balance sheet is demonstrated by the Group’s stable credit ratings despite the external headwinds. During the year, S&P Global Ratings, Moody’s Investor Service and MARC maintained their ratings for MISC, at BBB+, Baa2 and AAA IS respectively. Complementing this is the strong support from MISC’s existing group of banks. MISC has access to various financing options, which provides ample liquidity at competitive costs, which in turn allows us to reduce our financing cost. MISC has successfully closed financing for its six VLECs and secured sufficient commitments for the Mero 3 FPSO project. The milestones have been achieved amidst the current challenging financial market landscape which has been exacerbated by the pandemic. This has resulted in banks being more selective. The Group’s ability to close financing despite the difficulties is a strong testament to the Group’s credit worthiness and confidence the lenders have in the Group. In response to the investor community having become more focused on climate change concerns in assessing their investments, MISC will be embarking on our Task Force on Climate-related Financial Disclosures (TCFD) journey in 2021 to remain as the market’s investment of choice. We have developed a TCFD Roadmap and as part of our 2021-2025 Sustainability Strategy, we intend to roll out the TCFD Programme beginning with our core businesses, before including our other strategic enabling businesses. The aim is to progressively provide more TCFD aligned disclosures on climate- related risks and opportunities, with the end goal of full compliance by 2023. This will be another achievement demonstrating MISC’s commitment to a more sustainable way of conducting our business. We will also be continuing our internal transformation efforts in the areas of finance, procurement and document management towards becoming a data-driven organisation. 2021 is going to be a year of execution, where MISC will be working closely with our vendors, suppliers, contractors and our banks, to ensure smooth and seamless delivery of our projects. We are confident, that with long-term secured income tagged to our new CAPEX, our secured cash flow stream will only grow and augment the strength of our balance sheet and credit worthiness, providing us with the ability to sustain consistent dividend pay-outs. HIGHLIGHTS OF FINANCIAL PERFORMANCE REVENUE For the financial year ended 31 December 2020 (FY2020), Group revenue of RM9,401.2 million was 4.9% higher than the financial year ended 31 December 2019 (FY2019) revenue of RM8,962.7 million. The increase in revenue was mainly from higher contribution from on-going heavy engineering projects from the Marine & Heavy Engineering segment and recognition of construction revenue for a floating production, storage and offloading unit (FPSO) in the Offshore Business segment. OPERATING PROFIT The Group’s operating profit of RM2,017.2 million was 4.6% higher than FY2019 operating profit of RM1,929.3 million. The increase was mainly driven by higher margin on freight rates achieved in the Petroleum & Product Shipping segment and higher profit in the Offshore Business segment following the recognition of construction profit of an FPSO. LOSS BEFORE TAX The Group reported loss before tax of RM123.6 million compared to profit before tax of RM1,512.3 million in FY2019. The current year loss was mainly due to the recognition of provision for litigation claims amounting to RM1,049.2 million, as well as a write- off of trade receivables and loss on re-measurement of finance lease receivables of RM846.2 million relating to the adverse decision on arbitration proceedings by Gumusut-Kakap Semi-Floating Production System (L) Limited (GKL) against Sabah Shell Petroleum Company Limited (SSPC). Excluding the impact from GKL’s arbitration decision, the Group would have recorded profit before tax of RM1,771.8 million which is 17.2% higher than FY2019’s profit before tax of RM1,512.3 million. This was contributed by higher operating profit as explained above coupled with higher share of profit from joint ventures following the recognition of a one-time gain from a contract extension secured during the year. LOSS PER SHARE (SEN) Loss attributable to the equity holders of the Corporation amounting to RM43.1 million translates to loss per share of 1.0 sen in FY2020 as opposed to earnings per share of 32.0 sen in FY2019. DIVIDENDS In respect of FY2020, the Board had approved and declared on quarterly basis a total tax exempt dividend of 33.0 sen per share or RM1,473.0 million which was consistent to the total dividend declared and paid in respect of FY2019. The dividends were declared in line with the commitment to provide sustainable distribution to the shareholders. The Group’s income statements for the year ended 31 December 2020 can be found on page 319 of this Integrated Annual Report. RAJA AZLAN SHAH RAJA AZWA Vice President, Finance