MISC Integrated Annual Report 2020

Introduction / Who We Are / Key Messages / Highlights / Strategic Review //////// MISC Berhad / Integrated Annual Report 2020 42 MISC Berhad / Integrated Annual Report 2020 43 //////// Strategic Review / Highlights / Key Messages / Who We Are / Introduction 2 2 Section Section OUR STRATEGIC FOCUS AND FINANCIAL DISCIPLINE VALIDATED Tailwinds and luck always help. Who will be foolish not to accept any free assistance? However, I would like to stress that our successes the past few years, especially in 2020 are not random occurrences and circumstantial. Far from it. It has been a deliberate attempt and effort over the years. Hence, it is worthwhile for me to reiterate and recap what I shared in last year’s annual report on the MISC Group’s strategy formulation process and the financial discipline and governance that we subject ourselves to. I shared in my message last year the importance of identifying and using long-term economic and industrial trends/ inflexion points as strategic PRESIDENT/GROUP CEO’S REVIEW decision drivers in setting the growth agenda of the Group. This approach helps any organisation to achieve steady and sustainable growth over time but more importantly provides the necessary focus on long-term fundamental issues. We need to avoid the risk of being distracted or misled by short-term noise and volatility into making knee- jerk short-term decisions that may harm the longer-term prospects of any organisation or institution. I admit that the volatility and unpredictability of the past few years have tested our beliefs and convictions from time to time. We asked ourselves if we have focused on the wrong long-term fundamental trends and indicators. Did we miss or overlook anything? We never stop questioning ourselves to ensure that we are not complacent in our views. With each revisit, review and scrutiny, our views of the long-term economic and industrial trends continued to hold true. It gave us the resolve to maintain our strategic course and not self-doubt, despite short-term circumstances creating fear and doubt. All the more, as volatility and chaos seems to be on the agenda for the world in the years to come, we will need to remind ourselves to always look at the core long-term fundamentals. We need to know our economic, business and technology drivers for our industry inside out to be able to navigate our strategies with conviction. I also highlighted in my message last year that the MISC Group is fundamentally an asset leasing company, whereby the assets we own are leased or hired to charterers. Our assets require sizeable CAPEX and to fund their construction, we need to raise debt funding besides the equity capital that we will provide as owners. To ensure that we will consistently honour our loan obligations as well as generating return for our equity shareholders, we prefer to work on long-term leases with our clients. By attempting to match our long-term leases or charters with our long-term debt repayment obligations, we can achieve sustainability and predictability in our annual operating cash flow management. This approach has been the cornerstone of our ability to achieve our objective of generating sustainable and recurring income. The coming together of these philosophies and how they are put to work is best illustrated by the five-year strategic focus that we ran from FY2016-FY2020. This is the strategic focus that we named MISC2020. Given that MISC2020 concluded in 2020, OUR FINANCIAL REPORT CARD FOR THE YEAR Amidst the pandemic, I am happy to report that the MISC Group recorded better operating results for the financial year ended 31 December 2020 (FY2020). The Group’s revenue increased by 4.9% to RM9,401.2 million year on year, while operating profit rose by 4.6% to RM2,017.2 million. Despite the higher operating profit, the Group recorded a statutory loss before tax of RM123.6 million. This 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 GKL against SSPC as mentioned earlier. Excluding the impact from the GKL arbitration decision, MISC would have recorded a profit before tax of RM1,771.8 million which is 17.2% higher than the previous financial year. Notwithstanding the consequences of the necessary accounting provisions related to the GKL arbitration decision, we have a fundamentally sound business, with cash flow generated from operating activities for FY2020 of RM5,587.9 million, in line with FY2019, and the Group continued to maintain a very robust balance sheet. I am indeed very pleased that the Group is able to maintain a dividend payment of 33.0 sen for the financial year, similar to FY2019 whereby we had increased our annual payment by 3 sen over the average of 30.0 sen in the prior years. Our ability to pay this higher dividend reaffirms the strength and quality of our operating cash flow, despite the statutory loss before tax for FY2020. I would be remiss if I do not also highlight a low note for us during the year that marred our otherwise excellent performance. We started 2020 with an unfavourable arbitration decision relating to the dispute between Gumusut-Kakap Semi-Floating Production System (L) Limited (GKL) and Sabah Shell Petroleum Company Limited (SSPC), after a drawn-out arbitration process. As a consequence, we have to adopt the necessary financial provisions required in our financial reporting that has resulted in an overall statutory loss for the Group for the financial year 2020. However, MISC intends to challenge various aspects of the decision through the Malaysian courts for what we believe to be a fairer outcome. Beyond the successes and the low point in the arbitration, at the core, the Group’s cash flow generation machinery continued to run robustly in 2020, generating precious liquidity that underpins our financial strength and credit quality. We were not left wanting in any way from a financial resource standpoint during the year. It is a bold statement to make despite the well- described difficult operating conditions for many in 2020. it is also timely that we do a self-assessment as to whether we achieved what we set out to do. When we embarked on MISC2020 five years ago, we set ourselves two core goals that will underpin our financial sustainability as an organisation into the future. The first was to reach a sustainable level of secured income to remain resilient even during the most difficult times, while the second was to achieve a double-digit return on all our assets, a measure of the quality of the investments that we have made. In FY2020, we generated cash flow from operations of approximately RM5.6 billion, of which approximately 90% comes from long-term secured income contracts. What this effectively means is that come rain or shine, regardless of the economic backdrop that we are operating in, we have visibility and predictability of up to 90% of operating financial resources for the year. This level of visibility and security of cash flow at our disposal allows us to confidently plan our growth ambitions whilst ensuring we meet our annual capital and operating commitments and last but not least, ensuring a healthy dividend payment to our shareholders. In terms of return on assets, using a cashflow-derived formula (cash flow from operations over total assets) instead of the more traditional return on equity (ROE) or return on average capital employed (ROACE), we have achieved a double-digit return since 2019. The relevance and effectiveness of MISC2020 was greatly stress-tested in 2020 under the extreme economic conditions brought about by COVID-19. I believe our financial health in terms of cash flow generation during the year as well as the balance sheet of the Group at the end of the financial year reflects the resilience and robustness that MISC2020 has delivered. Whilst MISC2020 may be behind us as we move into 2021, the same dual discipline of generating secured and recurring operating cash flow from our operations/assets and the application of quality checks on our investment decisions will remain part of our day-to-day decision-making process going forward. They will continue to keep us on the straight and narrow path of financial discipline critical to our financial resilience as a Group. It bears repeating, as I have mentioned in my message last year, that these dual disciplines form the heart of the ‘virtuous cycle of growth’ that we promote.