On behalf of the Board of Directors, I am pleased to present the Annual Report of Melewar Industrial Group Berhad and its group of companies ("the Group" or "Melewar") for the financial year ended 30 June 2016.

FINANCIAL RESULTS

The Group is principally involved in the mid-stream sector of the steel industry, with the manufacture of Cold Rolled Coil ("CRC") steel sheets and Steel Tubes.

The Steel Division is operated through its 71.5% effectively held public listed subsidiary, Mycron Steel Berhad.

In March 2015, the Group sold its 100% subsidiary, Melewar Steel Tube Sdn Bhd ("MST"), a manufacturer of Steel Tubes and Pipes, to Mycron Steel Berhad, through a share swap exercise. The rationale for the disposal was to concentrate Melewar’s steel activities under one company, giving the enlarged operations a stronger bargaining position when negotiating for the purchase of the Group’s core raw material, Hot Rolled Coils ("HRC").

The Group is also involved in Engineering Services through its 100% subsidiary, Melewar Integrated Engineering Sdn Bhd ("MIE").

For the year under review, the Group recorded total revenue of RM607 million, which was 9.2% lower than the preceding financial year's revenue of RM668 million. In terms of Profit After Tax, the Group achieved RM14.9 million profit, compared to a loss of RM34.2 million in the previous year. It should be noted that the bulk of the loss of the previous year was due to the Group's associate company, Siam Power Generation Public Company Ltd ("Siam Power"), of RM21.2 million. The Group’s interest in Siam Power had subsequently been disposed after the close of the current financial year.


DIVIDEND

Although the Group turned in a profitable performance for the year under review, the cash flow position of the Group is still not considered stable enough, especially in an environment of limited banking facilities. Therefore, the Directors do not recommend the payment of any dividend for the financial year ended 30 June 2016.

DIVISIONAL PERFORMANCE

The Group's business activities can be analysed under its two core business divisions, namely:-
  1. Steel Division, and
  2. Engineering Division

1.0 STEEL DIVISION

The Group's Steel Division is mainly represented by its 71.5% effective interest in the public listed company, Mycron Steel Berhad, which manufactures Cold Rolled Coil ("CRC") steel sheets and Steel Tubes.

For the period under review, the steel industry continued to operate in a depressed market, with cheap imports from China being a bane to the domestic and global sector.

For the financial year ended 30 June 2016, the CRC Division chalked up sales revenue of RM384 million, compared to RM467 million, a drop of 17.9% compared to the preceding year. Despite this drop, the CRC Division managed to register a Profit Before Tax of RM23.1 million, compared to a Loss Before Tax of RM8.4 million previously, an increase of RM31.5 million. This creditable performance was made possible by the Group’s continuous effort in controlling costs, improving efficiencies, and an improved sales margin as a result of better sales price and stabilised Hot Rolled Coil (“HRC”) steel sheet raw material.

The improved sales price was principally reflected in the later part of the financial year following the Government's imposition of anti-dumping duties on CRC imports from selected companies from China, South Korea and Vietnam in May 2016.

The Steel Tube Division experienced a drop in revenue of 5.8% to RM206 million, compared to RM219 million in the preceding year. The Division, however, managed to generate a Profit Before Tax of RM9.4 million, compared to a pre-tax loss before impairment of RM0.79 million in the preceding year, principally due to a more stabilised cost environment of its core raw material, HRC.

2.0 ENGINEERING DIVISION

The Group's Engineering Division is mainly represented by its 100% interest in Melewar Integrated Engineering Sdn Bhd ("MIE") together with other smaller subsidiaries.

MIE serves as the technical development engineer and turnkey project manager for the Group, whilst also undertaking third party engineering, consultancy and construction works.

MIE besides being a Class A contractor, has recently received a license from the Ministry of Finance, as an approved waste management company, for the operations and maintenance of small and medium sized incinerators in Malaysia. MIE continues to successfully operate and maintain the Tioman incinerator, and is seeking the Government's approval to take over other such plants. MIE further has become a fully licensed telecom tower and fibre optic cable laying contractor, and is now ramping up this still relatively small business. MIE has also secured consultancy and engineering services contracts, in particular, in the bulk material handling sector of the industry.

At present, the Engineering Division of the Group is relatively small, but with concentrated efforts and focused strategies, the division is expected to play a larger role in the Group’s future activities.

LONG-TERM OUTLOOK

The Malaysian government's current import duty for flat steel material of 15% is considered reasonable enough, to shield the industry from dumping practices of steel manufacturers that enjoying export subsidies from their respective governments (e.g. China). As CRC is an important component for the manufacture of many downstream products such as automobiles, white goods (e.g. television, computers, handphones, rice cookers, refrigerators, air-conditioners, etc.), drums for petroleum and palm oil export, furniture, and roofing sheets, protecting the supply of CRC is key to securing the country’s long-term position as a major trading and manufacturing base for the world.

China's total steel export recorded an all-time high of 112 million tonnes in 2015, up 20% year-on-year, while its exports to ASEAN countries was even higher, at 28% year-on-year, at 31.9 million tonnes. It was therefore of no surprise that between 2013 and 2015, a total of 65 unfair trade complaints were made by countries all over the world against China's steel trade practices.

It is the Group's long-term view that the Malaysian government will continue to practice sound judgement in its flat steel policy, which bodes well for the Group's activities. The ability to keep Malaysia as a competitive manufacturer, whilst protecting its industries from unfair trade practices, takes great skill, and can only be achieved with open dialogue between regulators and industry.

Although the steel industry is highly competitive and is subject to significant global supply and demand anomalies, the prospects for the business are still positive as global demand grows. To this end, the Group is currently exploring the opportunities for the export of its CRC and Steel Tube products, to take advantage of recently signed free trade agreements.

The ability to turn a profit from this mid-stream steel activity, is paramount for the Group’s ability to survive in this industry. Maintaining strict control on operating costs with the consistent monitoring of production efficiencies is the key for success. The Group has been successful in these activities, which has allowed it to generate profits, as the results of this financial year illustrates. With regard to the Engineering Division, it is envisaged that this sector will play a larger role towards the Group’s performance going forward.

Subject to unforeseen circumstances, the long-term prospects for the Group's activities is positive.

PROSPECTS FOR THE NEW FINANCIAL YEAR

Even though the Group has performed well for the period under review, there is no guarantee that the same performance will be attained in the coming year. There are both internal and external factors that can affect the performance of the domestic steel industry, including the direction of the local and global economies, the strength/weakness of the Ringgit, the China export factor, and how the Government reacts to dumping practices.

A plus point for local CRC manufacturers was the recent anti-dumping action taken against CRC imported from South Korea, Vietnam and China in May 2016.

Going forward, domestic demand will continue to be the main driver of growth, supported primarily by private sector spending. Private consumption is expected to expand further, underpinned by continued growth in wages and employment, as well as additional disposable income following government stimulus measures. Projects under the newly launched 11th Malaysia Plan should also augur well for the steel industry as a whole.


ACKNOWLEDGEMENT

On behalf of the Board, I would like to express my heartfelt appreciation and thanks to all members of the management team and their staff for their hard work and dedication as well as contribution to the Group.

It is during these hard times that we differentiate ourselves by focusing our efforts in making quality products, backed by excellent after sales services. The Group will continue to be a force in the domestic mid-stream steel industry for many years to come. Success does not always come easy and usually start from humble origins.


Tunku Dato' Yaacob Khyra
Executive Chairman