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 "MIG") for the financial year ended 30 June 2018.

FINANCIAL RESULTS

The Group's principal activity, is in the mid-stream sector of the steel industry, principally with the manufacturing of Cold Rolled Coil ("CRC") steel sheets and Steel Tubes and Pipes ("Steel Tubes"), through its 71.3% interest in its public listed subsidiary, Mycron Steel Berhad ("Mycron").

The other business of the Group, is conducted through its 100% owned subsidiary, Melewar Integrated Engineering Sdn Bhd ("MIE"), involved in engineering services.

For the year under review, total revenue of RM816.1 million was recorded by the Group, an increase of RM43.3 million or 5.6% over the preceding financial year. This is mainly due to higher contribution from the steel division (up by 10%) despite a 50% drop in the Engineering revenue which is nearing the tail end of its construction contracts.

The Group registered a Profit After Tax of RM4.0 million for the current financial year, as compared to a Loss After Tax of RM67.0 million in the preceding year, which is mainly attributed to the absence of the substantial losses from the Engineering Division’s onerous contracts in the preceding year.


DIVIDEND

Given the small profit and rather weak cash flow for the year under review, the Directors do not recommend the payment of any dividend, for the financial year ended 30 June 2018.

STEEL DIVISION

For the period under review, the Steel Division under Mycron, had a weaker performance despite a higher revenue contribution.

For the financial year ended 30 June 2018, the Steel Division contributed positively to revenue with the CRC sales of RM546.9 million, compared to RM482.1 million in the preceding financial year, an increase of 13.4%. The CRC unit registered a Profit Before Tax of RM6.6 million, compared to RM15.8 million in the preceding financial year, representing a drop of 58.2% reflecting the prevailing competitive conditions and margin squeeze.

The margin squeeze was caused by cheap imports of CRC, which have been dumped into the country. To make matters worse, customers were also getting duty exemptions, from the Ministry of International Trade and Industries ("MITI") to import CRC, rather than buy from the domestic producers.

The Steel Tube unit, meanwhile recorded a revenue of RM274.2 million, compared to the preceding financial year's RM266.8 million, a small growth of 2.8%. However, Steel Tube sales tonnage decreased from 102,527 tonnes in the preceding financial year, to 90,823 tonnes, representing a decrease of 11.4%, reflecting the challenging task of competing with 30 other domestic Steel Tube manufacturers.

In terms of Profit Before Tax, the Steel Tube unit registered a poorer performance with a significant drop by 48.7% from RM30.0 million in the preceding financial year, to RM15.4 million in the current financial year.

The domestic steel market has turned bearish, partly due to the spillover effects, of the halt of various mega projects, of the previous Malaysian administration, amid a soft property and construction sector, which saw a shrinking of steel sales tonnage.

In addition to that, domestic steel manufacturers faced severe margin squeeze, due to underpriced imports of CRC, which were diversion from the United States (“US”) and European Union ("EU"), when both territories imposed import duties on steel, of 25% respectively. Malaysia’s weak border controls, have allowed these steel products to be dumped into the country, without the payment of import duties. While other ASEAN countries and Australia have also tightened their controls, to prevent the dumping of cheap steel into their countries, the Malaysian authorities appear to be not so effective in implementing this policy.

Some of the possible methods to by-pass paying Malaysian import duties, include:

(1) Adding Boron in the manufacture of CRC, which has zero metallurgical effect on steel, qualifying the CRC as an "Alloy", which allows the CRC to be imported on a duty-exempt basis.

(2) CRC for the automotive industry, having a width above 1.3 metres, are treated as duty-exempt steel, to support the automobile manufacturing industry. Unscrupulous importers have started to import CRC, with widths slightly above 1.3 metres, and have been dumping the CRC to the general steel industry, and not to the automotive industry, and have successfully avoided paying import duties.

(3) Vietnam has started the manufacture of HRC, which under the ASEAN Free Trade Agreement (AFTA), permits HRC, and therefore the CRC made from the HRC, to be exported in ASEAN on a duty-exempt basis. Currently, importers have been bringing in Vietnamese CRC into Malaysia, which are made from non-ASEAN HRC, under the pretense that they are made from Vietnamese HRC, and have been enjoying dutyexempt import status.

(4) Using smaller Malaysian port, which may not be as vigilant as Port Klang, to smuggle CRC into the country, usually at night, when security is more lax.

There are indeed many tricks to foil the Malaysian authorities, and the government needs to be vigilant and take proactive action, to put a stop to these activities. Indeed, more severe penal action against these culprits, needs to be undertaken, to ensure that they stop piercing every regulation, the authorities adopt.

Certainly, regular spot checks at factories that use CRC, need to be undertaken by the authorities, to check the authenticity of the CRC in question. A great deal of money, in terms of importduties, are being lost by the government, and proactive action, will earn that revenue back, to fund the country’s finances.

The industry has been in continued dialogue with MITI about these issues. We trust, that the Malaysian government will act quickly and decisively, and will stop the dumping of steel into the country, and will take action against the culprits who have been destroying Malaysian values.

ENGINEERING DIVISION

For the period under review, the Engineering Division under MIE has remained focused on the completion of the two loss-making Engineering, Procurement and Construction ("EPC") projects, for a material handling system for coal in Johor, and a material handling and ship loading system for silica in Terengganu. Through stringent cost management and control, the Loss Before Tax was reduced to RM3.4 million for this financial year.

The Johor coal handling project, was a large and complex brown field extension, of an existing coal handling system for a thermal power station, involving five units Stacker Reclaimer, and three units of Ship Unloaders, 3 km of new conveyor, and upgrade of 6 km of conveyor. During the reporting period, this project has successfully been completed and handed over to the client, in full compliance to the contract, and meeting all performance parameters. Following the successful completion of the works under this contract, MIE is now engaged in commercial settlement negotiations with the client, in a friendly and mutually supportive manner, so as to recover a part of the losses incurred. MIE maintains an expert team on site, to manage the Defects Liability Period, which will last until 12 August 2019.

The second project, in Terengganu, whilst physically completed, has yet to be handed over to the client. So far, 9 ships have successfully been loaded with Phase 1, but below the general contracted throughput rate. This issue is expected to be overcome, with the operation of Phase 2, which is presently being tested, after having required some structural modification, following its first operational testing in May 2018.

MIG remains committed to the successful completion of all its projects, so as to maintain its standing as a reliable, high quality partner, in all avenues of its business, and with that, is confident of recovering a substantial part of the losses incurred.

MIE has not entered into new projects, and is presently not bidding for any turnkey projects, but will re-focus its business, after the completion of these projects, on engineering, consultancy and project development, works and services, with higher margin and lesser risk.

Management has therefore decided, not to continue with the capital intensive telco tower and fibre optic business. MIE is in the process of handing over this business, including its staff, to a third party, and therewith, not carry any liabilities or operational risks.

LONG-TERM OUTLOOK

As in past years, the Steel Division is the major contributor, in terms of profit, to the Group. This was despite facing problems, ranging from dumping of steel in the country, local buyers of CRC getting duty exemption to import CRC rather than buying from local producers, and also the weak Malaysian Ringgit.

This scenario was exacerbated when both the US and the EU imposed a 25% tariff on steel imports. A direct result of these two actions, saw steel products, including CRC and Steel Tubes, being diverted to other parts of the world, including Malaysia.

Also adding to the fierce competition locally, increased CRC imports from Korea, Japan and India continued unabatedly, to the detriment of local CRC producers, thus significantly affecting their bottom lines. To counter this, the industry is in the midst of gathering data, to file Anti-Dumping ("AD") on Japan and India, and also file for a review on dumping duties, imposed on Korea and Vietnam, as the present AD duties imposed, are too low, and are not a deterrent, to stop price dumping.

The industry has approached MITI twice, to explain its situation, and has requested the authority, to not be too liberal, in granting duty exemption on imported CRC. After all, there are 4 local CRC producers, which manufacture high quality steel products, and who are operating, on average, at below 50% plant capacity utilisation. Instead, the industry is of the opinion, that the government, should instead, encourage CRC users, to buy locally manufactured goods.

PROSPECTS FOR THE NEW FINANCIAL YEAR

The new financial year, has thus far, proven to be very challenging, and it is expected that the prospects, for whole year will be equally, if not more, challenging. We are affected not only by local events and competition, but also by global events, which are beyond our control.

However, the Group will continue to persevere and weather the storm, to the best of our ability. Even though the losses of the Engineering Division have been fully accounted for, we are cautious to not undertake, similar major undertakings in the future, and will be looking at expanding MIG’s business into other, less risky areas.


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 tireless efforts, in contributing to the Group.

These are challenging times indeed, and it is during these hard times, that we differentiate ourselves from our competitors, by focusing our efforts in making quality products, backed by excellent after sales services.

To our valued customers, suppliers and other stakeholders, I wish to thank them again, for their patience, unwavering support and backing. We truly appreciate your loyalty, and we look forward to strengthen the bond and strong relationship between us.


Tunku Dato' Yaacob Khyra
Executive Chairman