CHAIRMAN’S MANAGEMENT DISCUSSION & ANALYSIS DISCLOSURES

“ON BEHALF OF YOUR BOARD OF DIRECTORS, IT IS MY PLEASURE TO PRESENT TO SHAREHOLDERS THE ANNUAL REPORT OF JOHAN HOLDINGS BERHAD FOR THE FINANCIAL YEAR ENDED 31 JANUARY 2017 (“FY 2016/17”) AND MANAGEMENT DISCUSSION & ANALYSIS DISCLOSURES.”

 

ECONOMIC AND BUSINESS ENVIRONMENT REVIEW

The global economy was subdued in 2016, with volatility in prices of almost all major commodities including crude oil, base metals and agricultural products. The world’s economy grew by approximately 2.3% in 2016 compared to 2.7% in 2015. Major economies such as China and the European Union experienced slowdown in their economies. China’s economy continued growing at a slower pace as it transitioned from an export-oriented economy to a more sustainable consumer-driven economy. The effect of China’s economic slowdown reverberated across countries in ASEAN which count China as their major trade partner. The decision by the United Kingdom to leave the European Union and the unexpected win by Donald Trump in the 2016 US presidential election caused even more uncertainty in the market.

In Malaysia, our economy also registered a lower growth of 4.2% against 5.0% in 2015. As a trading nation, we were affected by global slowdown in demand for goods. However our exports were supported by the weaker Ringgit against the world’s major currencies. Malaysia’s future economic growth will hinge on its choice of fiscal discipline, its dependency on oil prices while external demand for its goods will likely be influenced by the health of the global economy growth in 2017.

The Singapore economy ended on a muted note in 2016 with a GDP growth of 1.8%, down from 2.1% in 2015. Downside risks such as a weak property market, ongoing economic restructuring efforts and rising local interest rates will likely continue to weigh on growth. Given the current political situation in the US, the impending Brexit and other geopolitical uncertainties in Europe, GDP growth in 2017 is anticipated to be similarly subdued, with growth expected to range between a modest 1% to 2%.

 

REVIEW OF GROUP FINANCIAL RESULTS

FY 2016/17 remained a challenging year for your Group as uncertainty in the global economic environment and the weakening Ringgit coupled with market volatility weighed on business sentiment, affecting domestic demand.

Against this difficult business environment, Group revenue of RM185.4 million for FY 2016/17 was lower by 16% from RM221.8 million in financial year ended 31 January 2016 (“FY 2015/16”). All operating subsidiaries registered lower revenue, attributed mainly to lower revenue by Diners Club (Malaysia) Sdn Bhd due to cessation of its local Diners Club cards business effective from 30 November 2015; lower production yield of ceramic tiles by Prestige Ceramics Sdn Bhd; and drop in room occupancy of The Orient Star Resort Lumut hotel.

The Group Marketing & Distribution expenses, Administrative expenses and Other Operating expenses for FY 2016/17 amounted to RM161.9 million, a drop of 9.35% from RM178.6 million in FY 2015/16. With the exception of Prestige Ceramics Sdn Bhd, all other operating subsidiaries recorded significant drop in such operating expenses due to across the board measures implemented to reduce operating costs.

Group loss before tax was RM35.4 million, lower by 26.1% when compared to loss of RM47.9 million (FY 2015/16). On a positive note, Diners Club Malaysia returned to profitability by recording a profit before tax of RM1.3 million (loss of RM4.5 million in FY 2015/16) as a result of termination of its Diners Club card business whilst Johan Equities Sdn Bhd recorded fair value gain of RM27.6 million from its quoted investment securities. However these positive results were outweighed by higher losses incurred by Prestige Ceramics Sdn Bhd coupled with an impairment of its plant & machinery of RM15.9 million.

 

OPERATIONS & FINANCIAL PERFORMANCE REVIEW BY BUSINESS SEGMENTS

1. CARD SERVICES & HOSPITALITY SEGMENT

This segment encompasses the following businesses carried out by the following wholly-owned subsidiaries:-

(i) DINERS CLUB (SINGAPORE) PTE LTD, the franchise operator for the Diners Club International charge and credit cards business in Singapore;

(ii) DINERS CLUB (MALAYSIA) SDN BHD, the franchise operator for the Diners Club International charge and credit cards business in Malaysia:

(iii) DINERS WORLD TRAVEL PTE LTD, which operates air ticketing & travel management business in Singapore;

(iv) DINERS WORLD TRAVEL (MALAYSIA) SDN BHD, which operates air ticketing & travel management business in Malaysia; and

(v) LUMUT PARK RESORT SDN BHD, which owns and operate the Orient Star Resort Hotel in Lumut, Malaysia.

 

The financial performance of the Card Services & Hospitality segment in FY 2016/17 as compared with FY 2015/16 is summarized below:

 

  FY2016/17 FY2015/16 Variance
  (RM'000) (RM'000) (RM'000)
Total Revenue 127,057 151,478 - 24,445
Segment results 17,724 34,063 - 16,339
Interest income 21,899 25,968 - 4,069
Operation profit 49,301 26,632 + 22,669
Depreciation & amortisation 7,652 6,116 + 1,536
Finance cost 35,327 38,558 - 3,231
Other non-cash expenses 5,507 5,527 + 20
Profit / (Loss) before taxation 480 (23,569) + 24,047

 

Diners Club (Singapore) Pte Ltd (“DCS”)

DCS recorded 8.3% lower Revenue when compared to the previous financial year due to lower service charge income as a result of lower receivables, lower membership fees due to higher level of renewal fees waiver and lower commission earned.

Resulting from continuous measures taken to reduce operating costs, Marketing & Distribution expenses and Administrative expenses for FY 2016/17 were lower by 13% and 25% respectively when compared to FY 2015/16. As a result, EBITA for FY 2016/17 improved to RM39.8 million when compared with RM21.5 million (FY 2015/16). DCS recorded Loss after tax of RM1.154 million compared to loss of RM19.2 million in FY 2015/16.

During FY 2016/17, DCS continued to focus card acquisition growth through existing cobrand partnerships and new partners. The focus was on high yield partnerships such as Sheng Siong Supermarket Group, Mustafa Departmental store and Vicom Cobrand Programs. These have proven over time to have good traction, both in card number growth and turnover. The Diners/VICOM ‘V’ Card, launched in August 2015, had garnered 20,000 members by the end of 2016. For Sheng Siong Supermarket Group, their outlet growth now numbered 44 stores and their 24 hours business operations had expanded both card growth and spend opportunities.

Besides card growth, DCS continued its focus on money lending products including Ready Cash and Dcash with more extensive sales channels. Additionally, new programs was implemented to increase receivables such as capturing large ticket size transactions such as hospitals with BNPL.

On the corporate front, DCS will continue to pursue new traction with our electricity billing for Industrial and commercial sectors. During the year, very strong growth was achieved in this segment of the market.

DCS continued to maintain momentum to actively acquire new merchants through organic growth and with focus on large brand names and customised promotion with selected partners. Diners acceptance network remained strong with key sectors and effort has been refocused to ensure more wider acceptance in SME merchants.

The renewal of the Securitisation Program in September 2016 with DBS/UOB has provided more working capital to enable DCS to grow its receivables. Along with the Government Fintech initiative, the company will be launching a fully automated mobile and online loan application system in the second quarter 2017 which will enable card members to apply online and receive in principal approval within 60 seconds. In addition, the company is looking at Fintech solution to acquire merchant in a more cost effective way via QR code.

For the new financial year, DCS will also enable strong infrastructure including our PCI compliant gateway with customised features for integration with Diners BNPL platform, loyalty rebate system and mobile platform for the purpose of improving online acceptance.

 

Diners Club (Malaysia) Sdn Bhd (“DCM”)

DCM ceased its local Diners Club cards business with effect from 30 November 2015. However, DCM continued with the servicing of Diners Club foreign cardholders to facilitate their spending in Malaysia up to 31 December 2016. As a result, DCM achieved profit before tax of RM1.3 million as compared to loss of RM4.5 million in FY 2015/16.

Net Trade receivables stood at RM18.3 million as at 31 January 2017, down 42% from RM31.3 million as at 31 January 2016.

 

Diners World Travel Pte Ltd (“DWTS”)

DWTS’s revenue for FY 2016/17 dropped by 33.7% when compared to the previous financial year. As a result it recorded a loss after tax of RM963,000 compared to profit of RM340,000 in FY 2015/16.

The shortfall in revenue were due to decrease in leisure travel due to uncertainty of global economic outlook and economic slowdown, coupled with loss of business due to Multinational Corporations (MNC) customers which switched their business to Global TMC. Gross profit dropped by 28% mainly due to lower margin yield in order to retain and acquire customers and loss of higher margin business of MNC customers. In light of the decrease in level of business, marketing and administration expenses were reduced in terms of staff cost and switching marketing efforts to obtain new business via online social media.

During the financial year, DWTS won the Top Agent for Trafalgar tours. DWTS was the top agent for Trafalgar for the past three consecutive years.

As part of the move towards embracing technology, DWTS also enter into a reseller partnership with Skyjunxion SA. Under this initiative, DWTS is able to offer cutting edge technologies that allow our customers to have better control of their travel planning and control. In December, DWTS successfully implemented Skyjunxion solution for Crimsonlogic, a leading solution provider and thus enabling it to manage its travel planning and budget to be ahead of its competitors in cost efficiency.

The economic climate for FY 2017/18 will not be promising and we expect that our air travel business will be at around the same volume as FY 2016/17. We lost our major customer, Singtel Group, whose contract ended on 31 January 2017. We have secured the account of a leading Solution Provider in November 2016 and we hoped to penetrate the Government related companies to increase our market share.

 

Diners World Travel (Malaysia) Sdn Bhd (“DWTM”)

DWTM recorded 17.7% higher revenue when compared with the previous financial year. Profit after tax was RM330,000 compared with RM640,000 (FY 2015/16).

In view of the slow economic downturn, the weakening of Ringgit Malaysia and the global terrorism threat, many corporate and multinational companies have cut their travel budgets, resulting in the poor performance of this business unit. DWTM faced several hurdles in the bidding processes especially where pricing was concerned.

Due to our weak Ringgit against the US Dollar, DWTM saw great potential and good opportunity to develop inbound business namely tourists from China and S.E.A region. In October 2016 we arranged a group tour to Kuala Lumpur of 20 tourists from Japan and Thailand. The programme comprised of tours, transfers and a factory visit. In September 2016, we secured an event held at One World Hotel, Kuala Lumpur. The event comprised of 530 persons from China to Malaysia to attend a conference and Gala Dinner.

Our wholesale business is based on a Business to Business (B2B) system. We have since acquired 8 groups of air tickets from a series tour agency which do not hold airline ticket stock. We also introduced many new FIT special tour packages to China, Vietnam and Thailand, Sri Lanka and Maldives.

In February 2016, we completed our own DWTM Facebook account. On 20th May 2016 we completed the setting up of our new Company’s website (www.dinersworldtravel.com.my) to be updated with the current social media trends, to create awareness and also as a marketing tool to publicise our promotions and products.

 

The Orient Star Resort Lumut (Owned by Lumut Park Resort Sdn. Bhd.)

The operating environment in FY 2016/17 was far tougher in terms of business challenges in comparison to previous years. This was due to decline of business in hotel main market segment; Oil and Gas, Shipping and Government packages. In addition, the lower level of hotel business revenue was reflective of the softer domestic leisure demand and weak Ringgit amid more challenging market conditions.

For FY 2016/17, revenue for The Orient Star Resort Lumut was down 24.2% when compared to the previous financial year. Total gross operating income was lower by 31.4%, mainly attributed by poor sales from the hotel main market segment. Marketing, Administrative and Other operating expenses totalled RM4.9 million, compared with RM5.0 million (FY 2015/16). In tandem with the lower level of business, a higher loss before tax of RM1.3 million was recoded as against a loss of RM342,000 in FY 2015/16.

Weak performance of the hotel market segment was mainly attributed to the unfavourable domestic and global economic climate, coupled with weak consumer spending sentiment impacted from post implementation of the Goods and Services Tax (GST) in the country and weakening of the Ringgit. Hotel accommodation revenue from Oil and Gas and Shipping market segment amounting to RM0.9 million was lower by 57.14% from RM2.1 million in the previous financial year. This was mainly attributable to lower global crude oil prices and suspension of ongoing Oil and Gas projects.

Lower revenue from Government, Industrial and Corporate segmentation was mainly due to suspension of budget spending from Government sector and decline in spending power from other sectors. Total revenue from the Leisure market; Free Individual Traveller (FIT) and Travel Agent also declined by 19%.

Moving forward into FY 2017/18, the slowdown of market conditions will continue to cause further uncertainties and apprehension amongst businesses supporting the performance of The Orient Star Resort hotel in Lumut, resulting in further pressure on the hotel revenue. Focus will be redirected from traditional market segments; Oil and Gas, Government and Shipping to Online Travel Agents (OTA), the growing segment, Association/Clubs and Leisure. While efforts will be to grow gross revenue, the hotel will also strive to increase revenue per available room from new market segments other than from its traditional market segments.

 

2. BUILDING MATERIALS SEGMENT

PRESTIGE CERAMICS SDN BHD (“Prestige”) which manufactures and market ceramic tiles at its manufacturing plant in Puchong, Selangor Darul Ehsan for the housing industry in Malaysia is categorised under this segment.

Prestige recorded 12.7% lower revenue when compared to FY 2015/16. Gross profit margin dropped to 6.17% from 13.0% in FY 2015/16. Depreciation and amortisation was RM4.3 million compared to RM4.2 million in FY 2015/16. Finance cost increased slightly at 4.4% to RM789,000.

The flood incidents in the beginning of 2016 within the region of the East Coast of Peninsular Malaysia had disrupted supply of quality raw material until May 2016. The desired results on the new ceramic body formulation were only achieved from June 2016 onwards. As a result, we missed out on sales during the peak demand season of Hari Raya. After the Hari Raya festive period from July 2016 onwards intense price competition from the local manufacturers coupled with weak customer sentiment had dragged down revenue and average unit selling price of Prestige tiles. The weakening of the local currency against the US Dollar which increased imported raw material cost and the escalating hikes in minimum wage and natural gas tariff with effect from July 2016 had further contributed to significant increase in cost of production. Furthermore, the aging plant and machinery, which have been utilised for production over 22 years, coupled with transition to new body formulation have given rise to low production yield.

The abovementioned factors i.e escalating cost of production, low production yield and weak revenue had adversely impacted Prestige’s performance for FY 2016/17.

Due to the aging Manufacturing Plant in Puchong, an impairment on Plant and Machinery of RM15.9 million was provided for in the last quarter of FY 2016/17. As a result, Prestige registered a loss after tax of RM21.6 million, compared with a loss of RM797,000 in FY 2015/16.

Going forward, the aging plant and machinery will require continuous annual repair and maintenance expenses of at least RM4 million to ensure that the production operation will continue to deliver the optimum production output. In the event of unforeseen circumstances, any temporary unexpected shutdown of major plant and machinery will significantly increase the unit cost of sales. As a result of the weaker local currency, margins are expected to remain under pressure due to the higher cost of raw materials, particularly imported raw materials. At the same time, we will struggle to retain the well-trained and experienced foreign workers, whose take home pay had been adversely impacted by the depreciating local currency.

Prestige had continued to report losses since FY 2000/11, despite all efforts and measures taken by the management to try to turn the company around. Coupled with the declining operating environment, high production costs vis-a vis the aging manufacturing plant and depressed selling prices of ceramic tiles due to intense competition in the local market, the Board is currently looking at various options for Prestige.

 

DIVIDEND

Your Board does not propose to declare any dividend for the financial year under review.

 

LOOKING FORWARD

Under the current global economic conditions and the volatility of our Malaysia Ringgit coupled with intense competition in the business operations of your Group, we expect the market outlook to remain challenging. Our foremost task is to return the Group to profitability and to stay focus on plans and strategies to enhance the growth of its various businesses, especially its credit cards business in Singapore, whilst at the same time exploring to venture into new businesses to replace those loss making businesses which the Group had disposed over the years. To this end, your Board is exploring to venture more extensively in property development as one of the core business of your Group.

 

ACKNOWLEDGEMENT

On behalf of your Board of Directors, I wish to thank the management and staff at all levels for their commitment, dedication and collective efforts and contribution. I wish also to thank our valued customers, suppliers, business partners and shareholders for their continued support.

 

 

TAN SRI DATO’ TAN KAY HOCK
Chairman
Date: 17 May 2017