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 2018 (“FY 2017/18”) AND MANAGEMENT DISCUSSION & ANALYSIS DISCLOSURES.”

 

ECONOMIC AND BUSINESS ENVIRONMENT REVIEW

The global economy in 2017 strengthened, improving to an estimated growth of 3.6% from 3.2% in 2016. Consumers in emerging markets continued to drive spending growth. China continued with stronger economic growth and the Eurozone ended year 2017 with its strongest growth since 2007. On the downside, Brexit continued to weigh on business confidence in the UK and weak productivity growth in many markets remains a concern. Geopolitical instability posed a risk as consumers move into 2018 continuing to question priorities, values and purchasing decisions. Shifting consumer attitudes and behaviours will continue to cause disruption for business, with mobile technology and internet accessibility playing a crucial role in shaping these changes. The unorthodox economic policies of Donald Trump, who took office as the President of the United States in January 2017, have given rise to concern in respect of Trump’s adverse policies and trade war risks.

The Malaysian economy outshone many in the region, registering growth of 5.9% for year 2017 (2016: 4.2%), supported by strong exports and domestic demand amid steady employment rate. Inflation averaged at 3.7% (2016:2.1%), with higher transportation and food prices being the two main components that continued to push up inflation. The Ringgit regained some strength supported by the return of foreign interests in Malaysian equities and debt papers. The country’s GDP growth accelerated at the fastest pace in three years, a surprise to many, despite the prolonged downturn in the Oil & Gas industry and the soft Property market. Brent crude oil’s steady rise, breaching the US$60 level per barrel has fuelled inflation with the Consumer Price Index staying above 3% throughout the year. 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 2018.

The Singapore economy expanded 3.6% in year 2017 (2016:2.4%), largely due to strong growth in the Manufacturing sector, on the back of surging global demand for electronic gadgets. This trade driven lift helped push 2017 growth above an earlier estimate of 3.5%, which was already more than double initial forecasts. Domestically oriented sectors such as retail and food services are expected to pick up pace on the back of improving consumer sentiments amid the ongoing recovery in the labour market. Singapore’s external demand outlook is likely to be slightly weaker compared to last year, as Singapore’s key trading partners enter a more mature phase of recovery. While risks have receded since 2017, some remain, including concerns over protectionist sentiment and trade policies, especially in the United States.

 

REVIEW OF GROUP FINANCIAL RESULTS

FY 2017/18 remained a challenging year for your Group as uncertainty in the global economic environment and the weak Ringgit coupled with market volatility weighed on business sentiment, affecting domestic demand.

Against this difficult business environment, Group revenue from its continuing operations was RM122.5 million for FY 2017/18, 5% lower from RM128.8 million in financial year ended 31 January 2017 (“FY 2016/17”). All operating subsidiaries registered lower revenue, attributed mainly to lower revenue by Diners World Travel Pte Ltd due to loss of a significant corporate customer and lower service charges income by Diners Club (Singapore) Pte Ltd.

The Group Marketing & Distribution expenses, Administrative expenses and Other Operating expenses for FY 2017/18 amounted to RM104.2 million, a drop of 23.77% from RM136.7 million in FY 2016/17. The drop in such expenses are mainly due to streamlining operating overhead implemented to reduce operating costs and forex gain of RM8.65 million (forex loss RM10.63 million in FY 2016/17) in AIH Holdings Ltd.

We are delighted to highlight that the Group registered a turnaround, achieving profit before tax from continuing operations of RM25.7 million, 269% higher when compared to loss of RM15.2 million (FY 2016/17). This is mainly due to Johan Equities Sdn Bhd which recorded a fair value gain of RM42.46 million (gain of RM27.65 million in FY 2016/17) from its quoted

investment securities. However after taking into account the loss by Prestige Ceramics Sdn Bhd of RM45.189 million, which included impairment of RM30.683 million for its factory building and plant & machinery as a result of closure of its ceramic tiles operation, Group loss for FY 2017/18 was RM23.224 million compared to loss of RM38.329 million for FY 2016/17.

 

OPERATIONS AND 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) DINERSPAY PTE LTD, which is in the business of merchant acquiring and payment processing services.

(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.


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

DCS recorded 3.4% lower Revenue when compared to the previous financial year mainly due to lower service charge income attributable to lower receivables and lower membership fees from higher level of renewal fees waiver.

Resulting from continuous streamlining measures taken to reduce operating costs, Administrative expenses for FY 2017/18 was 16% lower when compared to FY 2016/17. EBITA for FY 2017/18 was SGD12.623 million when compared with SGD13.324 million for FY 2016/17. DCS recorded Loss before tax of SGD0.354 million compared to profit of SGD0.101 million in FY 2016/17.

During FY 2017/18, DCS continued to focus on card acquisition through existing cobrand partnerships such as Sheng Siong Supermarket Group, Mustafa Departmental store and Vicom Cobrand Programs. These have proven over time to have good response, both in card number growth and turnover. The Diners/VICOM ‘V’ Card, launched in August 2015, had gained 28,000 members by the end of 2017.

Besides card growth, DCS continued its focus on money lending products including Ready Cash and Dcash with more extensive sales channels. DCS launched an online instant approval Dcash loan application module in Q2 of 2017 where Diners card members can conveniently apply for the Dcash loan via online or their mobile phone and receive instant approval in principle. Additionally, new programs were 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 opportunities with our electricity billing for Industrial and commercial sectors.

Along with the Government Fintech initiative, DCS will be launching a fully automated mobile and online card application system in the second quarter of year 2018 which will enable card members to apply online using MyInfo and receive approval in principle via SMS. In addition, DCS is looking at Fintech solutions to acquire merchant in a more cost effective way via QR code payment gateway.


DinersPay Pte Ltd (“DinersPay”)

On 21 July 2017, an existing dormant subsidiary, Lifestyle Collection (S) Pte Ltd was renamed DinersPay Pte Ltd and re-activated to provide payment processing and merchant acquiring services to DCS. In July 2017, DinersPay signed an agreement with Alipay, making DinersPay the first subsidiary of a financial institution in Singapore to collaborate with Alipay for expanding merchant acceptance in Singapore.

During FY 2018/19, DinersPay has been successful in acquiring, merchants such as LVMH, Mustafa, SISTIC, Harvey Norman, OG Department Store, Sheng Siong Supermarket and Diary Farm Group. We are close to acquiring several key merchant outlets popular with tourists from the People’s Republic of China.

DinersPay has also agreed in principle to undertake a referral program with Wirecard, a 3rd party Visa/Mastercard merchant acquirer, to assist in referring merchants to Wirecard for which DinersPay will receive a referral fee for on-going transactions. In addition, DinersPay is looking at strengthening its merchant acquiring capability with major payment Apps and major card schemes.

 

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

DCM ceased its local Diners Club cards business with effect from 31 October 2015 and ceased being processor for local transactions incurred by Diners Club cards issued by overseas franchisees with effect from 1 January 2017. Currently, DCM continues to collect the outstanding principal and earn interest income from the outstanding cardholders receivables. DCM achieved profit before tax of RM4.2 million as compared to RM1.3 million in FY 2016/17 mainly due to dividend income received from Diners World Travel (M) Sdn Bhd of RM2.8 million.

Diners World Travel Pte Ltd (“DWTS”)

DWTS’s revenue for FY 2017/18 was 48% lower when compared to the immediate preceding financial year. Resulting from continuous streamlining measures taken to reduce operating cost, Marketing & Distribution and Administrative expenses for FY 2017/18 were 60% and 26% lower respectively as compared to FY 2016/17. As a result, DWTS recorded a lower Loss after tax of RM760,000 compared to Loss of RM963,000 in FY 2016/17.

The economic climate for FY 2018/19 is expected to stabilise and the air travel business to be at similar volume as at FY 2017/18. DWTS is targeting to secure more business with local SME and local MNC companies and exploring partnership with co working space providers or business centres, start-ups and established companies for travel services. In addition, DWTS is exploring at strategic partnership with pocket WIFI business partner to provide value added services to its customers.

In order to pursue MNC’s prospect, DWTS is exploring participation in a global fare system such as eGlobalfares, which will provide air fares from regional and cross continents, allowing consumers to gain benefit from marginally low fares in comparison with fares from local Global Distributing System (GDS). Similarly, DWTS is able to supply local fares to other travel management companies within the network with incremental revenue.

For FY 2018/19, DWTS will also focus in growing the MICE Group Business for new customers and existing Corporate clients. MICE Department will organise road shows at Corporate customers’ office to generate more FIT/MICE businesses. 2nd Quarter seems to show that MICE Growth is on the rise.

DWTS being a service orientated company, will focus on improving the service level and operations processes.
 

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

DWTM recorded 26% higher revenue when compared with the previous financial year. Profit before tax was RM265,000 compared with RM471,000 (FY 2016/17).

Due to the economic downturn, the weak Ringgit Malaysia and global terrorism threat, many corporate and multinational companies have cut their travelling budgets and using online booking platform to save costs. These had resulted in the poor performance of DWTM for FY 2017/18. DWTM also faced several hurdles in the corporate bidding processes especially where pricing was concerned.

Due to the weak Ringgit against the US Dollar, DWTM sees great potential and good opportunity to develop inbound business namely tourists from China and S.E.A region.

 
The Orient Star Resort Lumut Hotel (“OSRL”)

The operating environment in FY 2017/18 was tougher in terms of business challenges as compared to previous years, due to decline of business in OSRL’s core market segment, i.e. Oil and Gas, Shipping and Government agencies. In addition, the lower revenue was reflective of the softer domestic leisure demand, weak Ringgit and mushrooming of budget hotels and home stay amid more challenging market conditions.

For FY 2017/18, revenue for OSRL was down by 16.91% compared to the immediate preceding financial year. Total gross operating income was lower by 22.66%, mainly attributed to lower sales from the hotel core market segment.

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 amounted to RM0.53 million was 40.28% lower from RM0.9 million in the previous financial year. This was mainly attributable to lower global crude oil prices, suspension and deferment of ongoing Oil and Gas projects by major players within the region of Manjung.

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. Free Individual Traveller (FIT) and Travel Agent spending also declined.

Moving forward into FY 2018/19, continuing weak market conditions will cause further uncertainties and apprehension amongst businesses supporting the performance of OSRL in Lumut. However, we will focus to build business from other core market segment other than traditional market segments of Oil and Gas, Government and Shipping to Online Travel Agents (OTA). We will put more efforts to participate in Trade Fair and Exhibition to promote the hotel, and to secure more business from Association and Leisure Clubs with provision of an event organiser for corporate team building, incentive tours and family day to diversify revenue stream in order to cushion the negative impact from weak market condition.

 

2. BUILDING MATERIALS SEGMENT

Prestige Ceramics Sdn Bhd (“Prestige”) which manufacture and market ceramic tiles at its manufacturing plant in Puchong, Selangor Darul Ehsan for the housing industry in Malaysia is categorised under this segment.

The operating environment in the beginning of FY 2017/18 was far tougher in terms of business challenges in comparison to previous years. Intensive market competition arising from the continued pricing pressure contributed to lower average selling price.

Prestige had been incurring losses since FY 2010/11, despite of all efforts and measures taken by the management to turn the company around. In view of the unfavourable 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, your Board decided that it was no longer commercially viable for Prestige to continue with its tile manufacturing business. Accordingly, on 30 August, 2017, your Board decided to proceed with winding down of Prestige’s business operations. Prestige eventually ceased the loss-making ceramic tiles business at the end of FY 2017/18.

In respect of the FY 2017/18, Prestige registered turnover of RM24.0 million and incurred net loss of RM45.245 million. The loss was mainly attributable to the impairment of building, plant and machinery of RM30.683 million due to closure of the manufacturing plant.

 

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 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 or ceased operating 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: 3 May 2018