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Second Quarter Financial Statement And Dividend Announcement for the Year Ended 31 August 2018

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Second Quarter Ended 31 August 2018

Consolidated Income Statement

Income Statement

Consolidated Statement of Comprehensive Income

Comprehensive Income Statement

Balance Sheet

Balance Sheet

Review of Performance

Statement of Comprehensive Income

Second quarter ended 31 August 2018 ("2Q FY2019") vs Second quarter ended 31 August 2017 ("2Q FY2018")

Revenue

The Group recorded a revenue of RM114.4 million in 2Q FY2019, representing a decrease of 21.8% or RM31.9 million, over the revenue of RM146.3 million in 2Q FY2018. The drop was largely due to lower availability of certain popular products for sale, which affected the revenue performance of the Group.

Changes in inventories

Changes in inventories comprised the difference in the value of inventories at the beginning and at the end of the financial period reported on. In 2Q FY2019, the value of the closing inventories was higher than the value of the opening inventories by RM6.9 million. In 2Q FY2018, the value of the closing inventories was lower by RM24.5 million. This resulted in a variance of RM31.4 million for 2Q FY2019 vis--vis 2Q FY2018, which was mainly due to consolidation of the inventories of the newly acquired Brand Connect Group as well as timing differences in purchases and consumption of inventories in the respective quarters.

Inventories purchased and material consumed

Inventories purchased and material consumed increased by 6.5% or RM5.0 million, from RM76.3 million in 2Q FY2018 to RM81.3 million in 2Q FY2019. This was mainly due to consolidation of purchases from the newly acquired Brand Connect Group as well as higher purchases as compared with the corresponding quarter of the previous financial year.

Other operating income

Other operating income increased by RM1.0 million from RM3.6 million in 2Q FY2018 to RM4.6 million in 2Q FY2019. The increase was mainly due to increase in interest income of RM1.0 million.

Professional fees

Total professional fees increased by RM0.3 million or 86.4%, from RM0.4 million in 2Q FY2018 to RM0.7 million in 2Q FY2019. The professional fees incurred for 2Q FY2019 was mainly due to advisory and consultancy services incurred in relation to corporate exercises.

Gain arising from changes in fair value of option

There is no gain arising from changes in fair value of option in 2Q FY2019 as compared to RM1.6 million gain in 2Q FY2018. The gain in fair value was in relation to the call option issued which gives Heinemann Asia Pacific Pte Ltd the option to acquire a maximum of 15% additional equity interest in DFZ Capital Sdn Bhd (formerly known as DFZ Capital Berhad), a subsidiary of the Company.

Realised foreign exchange (loss)/gain

Realised loss in foreign exchange in 2Q FY2019 was RM1.0 million as compared to RM0.8 million realised foreign exchange gain in 2Q FY2018. This was mainly due to the currency translation loss on Group's purchases from overseas suppliers as a result of weak Ringgit Malaysia against US dollar.

Unrealised foreign exchange gain/(loss)

Unrealised gain in foreign exchange in 2Q FY2019 was RM4.1 million as compared to RM0.5 million unrealised foreign exchange loss in 2Q FY2018. This was mainly due to the currency translation to Ringgit Malaysia of the Group's deposits in financial institutions of SGD1.8 million and USD26.5 million as at 31 August 2018, whereby Ringgit Malaysia had weakened against Singapore Dollar by approximately 1.0% from RM2.97 as at 31 May 2018 to RM3.00 as at 31 August 2018 and US Dollar by approximately 3.5% from RM3.98 as at 31 May 2018 to RM4.12 as at 31 August 2018.

The rest of the expenses on the Group's profit and loss account remained largely unchanged in 2Q FY2019 as compared to 2Q FY2018.

Profit before income tax

The Group reported a profit before income tax of RM16.9 million for 2Q FY2019, which was 21.3% or RM4.6 million lower than the profit before income tax of RM21.5 million recorded in 2Q FY2018. The decrease was mainly due to the lower revenue recorded, and absence of gain arising from changes in fair value of option amounting to RM1.6 million as compared to 2Q FY2018. However, the negative effects were partially offset by higher net gain in foreign exchange of RM2.8 million as compared to 2Q FY2018.

Income tax expenses

The Malaysia statutory income tax rate is 24% for year of assessment 2019 (2018: 24%). The provision for taxation for the financial year to-date was calculated based on the taxable profit attributable from certain profit making subsidiaries. The income tax expense of RM3.3 million mainly comprised of provision for taxation for current year to date profits of RM3.6 million. The effective tax rate of the Group for 2Q FY2019 at 19.5% was lower than the statutory rate, principally due to higher non-taxable income relating to unrealised foreign exchange gain for the period.

Half year ended 31 August 2018 ("1H FY2019") vs Half year ended 31 August 2017 ("1H FY2018")

The Group reported a profit before income tax of RM31.3 million for 1H FY2019, representing a decrease of 28.2% or RM12.2 million as compared to RM43.5 million recorded in 1H FY2018. The decrease in profit was mainly due to lower revenue recorded, donation of RM3.0 million in 1H FY2019 and the absence of gain arising from changes in fair value of option amounting to RM7.5 million as compared to 1H FY2018. However, the negative effects was partially offset by net gain in foreign exchange of RM5.3 million as compared to net foreign exchange loss of RM5.7 million in 1H FY2019.

Statement of Financial Position

Assets

Non-current prepayments

Non-current prepayments decreased by RM4.9 million, from RM39.5 million as at 28 February 2018 to RM34.6 million as at 31 August 2018 which were mainly related to rental paid in advance for the Group's retail outlets.

Trade and other receivables

Trade receivables increased by RM5.3 million, from RM5.5 million as at 28 February 2018 to RM10.8 million as at 31 August 2018. The increase was mainly due to consolidation of trade receivables of the newly acquired Brand Connect Group which amounted to RM7.7 million as well as timing differences in trade-related collections. In addition, sundry receivables also increased by RM1.0 million, from RM9.8 million as at 28 February 2018 to RM10.8 million as at 31 August 2018. There was also an increase in other receivables of RM30.0 mil arising from an investment in debt securities.

Inventories

Inventories increased by RM4.1 million, from RM135.4 million as at 28 February 2018 to RM139.5 million as at 31 August 2018, mainly due to consolidation of inventories of the newly acquired Brand Connect Group amounting to RM6.7 million.

Other than Cash and Bank balances which decreased by RM116.1 million from RM373.0 million to RM256.9 million, the rest of the asset items on the Group's statement of financial position remained largely unchanged as at 31 August 2018 vis--vis 28 February 2018.

Liabilities

Trade and other payables

The decrease in trade and other payables was mainly due to a decrease in trade payables by RM14.2 million, from RM66.4 million as at 28 February 2018 to RM52.2 million as at 31 August 2018 and absence of dividends payable to ordinary shareholders by the Company of RM36.2 million. The aforesaid decrease in trade payables was due to lower purchases during the period and also timing differences in the settlement of payables.

Derivative financial liabilities

Derivative financial liabilities of RM1.0 million as at 31 August 2018 and 28 February 2018 was mainly in relation to the fair value of call options issued which gives Heinemann Asia Pacific Pte Ltd ("HAP") the option to acquire the remaining 10% additional equity interest in DFZ Capital Sdn Bhd (formerly known as DFZ Capital Berhad) ("DFZ"), a subsidiary of the Company.

Borrowings

Total borrowings decreased by RM13.6 million, from RM16.4 million as at 28 February 2018 to RM2.8 million as at 31 August 2018, mainly due to decrease in trade facilities utilisation of RM13.5 million.

As at 31 August 2018, the Group was in a positive working capital position of RM434.3 million.

Equity

Total equity decreased by RM10.1 million, from RM599.7 million as at 28 February 2018 to RM589.6 million as at 31 August 2018, mainly due to profit for the period of RM21.3 million as well as increase in capital contribution from non-controlling interest in subsidiaries of RM4.9 million in relation to the new acquisition of Brand Connect Group and an increase in non-controlling interests of RM2.3 million, partially offset by purchase of treasury shares of RM5.3 million and total dividends paid of RM33.3 million.

Statement of Cash Flows

The Group net cash flow used in operating activities was RM14.3 million in 2Q FY2019. Net cash generated from investing activities was RM7.3 million for 2Q FY2019, mainly due to net cash inflow on acquisition of a subsidiary of RM1.7 million, capital contribution from non-controlling interest in subsidiaries of RM4.9 million and interest received of RM2.8 million. However, the cash flow was partially offset by purchase of plant and equipment amounting to RM2.1 million. Net cash used in financing activities for 2Q FY2019 of RM37.3 million was mainly due to dividend payout of RM33.3 million and purchase of treasury shares of RM5.3 million. Overall, the cash and cash equivalents of the Group decreased by RM44.3 million in 2Q FY2019, ending the period with cash and cash equivalents of RM247.8 million.

Commentary

  1. Given the present economic outlook and the weak consumer sentiment, on the back of rising inflationary environment, the Group expects its operating environment to remain challenging. The Group will continue its efforts in enhancing operational efficiency, stringent cost control measures, intensifying marketing efforts and improving its core business by focusing on product quality and product mix as well as exploring further business opportunities and strategies.
  2. On 30 November 2017, the Company announced that the Company's subsidiary, Seruntun Maju Sdn. Bhd. ("SMSB") had received the bills of demand dated 14 November 2017 from the Royal Malaysian Customs of Perak Darul Ridzuan ("Customs"), which SMSB received on 21 November 2017, demanding payments of customs duties, excise duties, sales tax and Goods and Services Tax ("GST") all totalling RM41,594,986.86.

    The said Bills of demand were raised by the Customs Department who alleged that SMSB did not comply with certain conditions of a duty-free shop located at the border.

    On 29 November 2017, the High Court granted leave to SMSB's application for judicial review, as well as an interim stay of the enforcement of the bills of demand until the disposal of the inter partes stay hearing under the Customs Act 1967 and Excise Act, 1976.

    The High Court on 17 April 2018 heard the case and had fixed 25 May 2018 for decision of the matter. In addition, the High Court also granted interim stay of enforcement of the Bills of demand until the date of decision.

    The High Court subsequently postponed the date for decision on the matter from 25 May 2018 to 29 June 2018.

    On 29 June 2018, the decision of the High Court was not to grant an application for judicial review to SMSB. On 2 July 2018, SMSB filed an appeal to the Court of Appeal against the High Court's decision of not granting an application for judicial review. Simultaneously, SMSB also filed a formal application to stay the effect and enforcement of the bills of demand raised on SMSB for import and excise duties.

    On 28 August 2018, the High Court granted interim stay pending the disposal of the stay application, which was to be heard on 5 October 2018 before a new Judge. The hearing has since been postponed to 10 December 2018.

    In addition, SMSB also filed a Notice of Motion before the Court of Appeal to stay the effect and enforcement of the said notices of additional assessment pending the appeal on stay before the Court of Appeal.

    On 12 December 2017, SMSB had appealed to the Director-General in respect of the sales tax pursuant to Section 68 of the Sales Tax Act and had submitted an application to the Director-General in respect of GST pursuant to Section 124 of the GST Act. To-date, the matter is still pending a decision from the Director-General.

    The Company, after consultation with its solicitors, strongly believes that there is no legal and/or factual basis for Customs Department to arrive at their decision to raise the said Bills of demand. This is especially so when SMSB's duty free shop is located after the last customs station en-route out of Malaysia and before the first customs station en-route into Malaysia, where no duties, sales tax and/or GST are payable.

    The Company will make further announcement(s) if there is any material update on the above said matter.

  3. On 9 July 2018, the Company announced that it had entered into a conditional subscription agreement ("Agreement") with Mr. Robert Justin Frizelle and Meridian Compass Ltd ("Founders"), and Brand Connect Holding Pte Ltd ("Brand Connect") pursuant to which the Company shall subscribe for 2,800,000 new ordinary shares in the capital of Brand Connect ("Subscription Shares") (the "Proposed Subscription").

    Under the Agreement, one of the conditions precedent to the completion of the Company's subscription ("Completion") was that the Founders and Brand Connect complete an internal restructuring exercise of the Brand Connect group of companies ("Brand Connect Group"). Completion was also subject to other conditions precedent customary in transactions of this nature.

    On 8 August 2018, the Acquisition was completed. The Company subscribed 2,800,000 new ordinary shares in the Capital of Brand Connect Holding Pte. Ltd. at the consideration of US$2,800,000 following the satisfaction of the conditions precedent to the Agreement ("Acquisition"). Following the completion of the Acquisition, Brand Connect Holding Pte. Ltd. became a 70% owned subsidiary of the Company.

    Brand Connect group of companies is engaged in the business of marketing and the trading, wholesale and retail distribution of alcohol and other beverage products across countries in the Asia Pacific region. The acquisition of Brand Connect group of companies by the Company is to develop and grow the Group's alcohol distribution business as well as to expand the Group's market operations beyond the current sales channels in the duty free market of Malaysia to include the duty paid market across South East Asia.

    Mr. Robert Justin Frizelle has been appointed as the Chief Executive Officer, and Mr. Patrick James Looram as the Chief Operating Officer of the Brand Connect Group of Companies.

    The fair value of assets acquired and liabilities assumed and purchase consideration have been determined on a provisional basis pending completion of purchase price allocation ("PPA") exercise. The PPA exercise is expected to be completed not exceeding one year from 8 August 2018, being the date of acquisition. Provisional goodwill of RM0.6 million has been recorded in the statement of financial position of the group at 31 August 2018. Accordingly, the fair value of assets and liabilities of Brand Connect will be adjusted accordingly on a retrospective basis upon finalisation of PPA exercise.

    The consolidated financial information reflects the following:

    Consolidated statement of financial position

    1. The assets and liabilities of the Brand Connect Group as at 31 August 2018 were recognised and measured in the consolidated statement of financial position at their carrying amounts after the restructuring exercise;
    2. The assets and liabilities of the Brand Connect Group on acquisition date were recognised and measured in the consolidated statement of financial position at their acquisition date fair values as provisionally determined by the management;
    3. The comparative figures as at 28 February 2018 presented in the consolidated statement of financial position relate to the Duty Free International Limited ("DFIL") Group;
    4. The retained earnings of the Group as at 31 August 2018 included that of the DFIL Group at their carrying amounts and the post-acquisition reserves of the Brand Connect Group.

    Consolidated statement of profit and loss and other comprehensive income

    1. The consolidated statement of profit or loss and other comprehensive income for the period from 1 March 2018 to 31 August 2018 ("1HFY2019"), reflect that of DFIL Group and the post-acquisition results of Brand Connect Group;
    2. The comparative figures for the period from 1 March 2017 to 31 August 2017 ("1HFY2018") presented in the consolidated statement of profit or loss and other comprehensive income were that of DFIL Group.