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First quarter ended 31 May 2018 ("1Q FY2019") vs First quarter ended 31 May 2017 ("1Q FY2018")
The Group recorded a revenue of RM117.4 million in 1Q FY2019, representing a decrease of 28.9% or RM47.7 million, over the revenue of RM165.1 million in 1Q FY2018. The drop was largely due to shortage of supply of certain popular products in the global market, and accordingly had 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 1Q FY2019, the value of the closing inventories was lower than the value of the opening inventories by RM2.5 million. In 1Q FY2018, the value of the closing inventories was lower by RM26.1 million. This resulted in a variance of RM23.6 million for 1Q FY2019 vis-à-vis 1Q FY2018, which was mainly due to timing differences in purchases and consumption of inventories in the respective quarters.
Inventories purchased and material consumed
Inventories purchased and material consumed decreased by 17.3% or RM15.5 million, from RM90.0 million in 1Q FY2018 to RM74.5 million in 1Q FY2019. This was mainly due to lower purchases as compared with the corresponding quarter of the previous financial year.
Total professional fees increased by RM0.8 million or 219.2%, from a negative position of RM0.4 million in 1Q FY2018 to RM0.5 million in 1Q FY2019. The negative position was mainly due to reversal of over accrued professional fees of RM0.8 million in 1Q FY2018. The professional fees incurred for 1Q FY2019 was mainly due to advisory and consultancy services incurred in relation to certain corporate exercises.
Gain arising from changes in fair value of option
There is no gain arising from changes in fair value of option in 1Q FY2019 as compared to RM6.0 million in 1Q FY2018. The 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 gain/(loss)
Realised gain in foreign exchange in 1Q FY2019 was RM2.3 million as compared to RM0.2 million realised foreign exchange loss in 1Q FY2018. This was mainly resulted from settlement of payment in relation to the Group's purchases to overseas suppliers with better currency conversion rate during the quarter under review compared to the rate recorded in the book.
Unrealised foreign exchange loss
Unrealised loss in foreign exchange in 1Q FY2019 was RM0.06 million as compared to RM5.8 million in 1Q FY2018. This was mainly due to the currency translation to Ringgit Malaysia of the Group's deposits in financial institutions of SGD2.6 million and USD29.2 million as at 31 May 2018, whereby Ringgit Malaysia had remained largely unchanged against Singapore Dollar and US Dollar as at 28 February 2018 compared to 31 May 2018.
Other operating expenses
Other operating expenses in 1Q FY2019 increased by 26.8% or RM1.6 million, from RM6.1 million in 1Q FY2018 to RM7.7 million in 1Q FY2019. This was mainly attributable to donations of RM3.0 million as well as higher bank charges by RM0.3 million. However the increase was partly offset by a decrease in packing materials of RM0.1 million as well as a decrease in management fee and transportation costs of RM0.2 million each as compared to 1Q FY2018.
The rest of the expenses on the Group's profit and loss account remained largely unchanged in 1Q FY2019 as compared to 1Q FY2018.
Profit before income tax
The Group reported a profit before income tax of RM14.3 million for 1Q FY2019, which was 34.9% or RM7.7 million lower than the profit before income tax of RM22.0 million recorded in 1Q FY2018. The decrease was mainly due to the lower revenue recorded, donations of RM3.0 million and the absence of gain arising from changes in fair value of option amounting to RM6.0 million as compared to 1Q FY2018. However, the negative effects was partially offset by net gain in foreign exchange of RM2.2 million as compared to net foreign exchange loss of RM6.0 million in 1Q FY2018.
Non-current prepayments decreased by RM2.5 million, from RM39.5 million as at 28 February 2018 to RM37.0 million as at 31 May 2018 which were mainly related to rental paid in advance for the Group's retail outlets.
Trade and other receivables
Trade receivables decreased by RM4.5 million, from RM5.5 million as at 28 February 2018 to RM1.0 million as at 31 May 2018, which was mainly due to timing differences in traderelated collections. In addition, sundry receivables also decreased by RM1.4 million, from RM9.8 million as at 28 February 2018 to RM8.4 million as at 31 May 2018. The decrease was, however partially offset by an increase in other receivables of RM30.0 mil due to an investment in debt securities.
Inventories decreased by RM2.8 million, from RM135.4 million as at 28 February 2018 to RM132.6 million as at 31 May 2018, mainly due to a decrease of overall purchases during the period.
Other than Cash and Bank balances which decreased by RM77.4 million from RM373.0 million to RM295.6 million, the rest of the asset items on the Group's statement of financial position remained largely unchanged as at 31 May 2018 vis-à-vis 28 February 2018.
Trade and other payables
The decrease in trade and other payables was mainly due to a decrease in trade payables by RM12.7 million, from RM66.4 million as at 28 February 2018 to RM53.7 million as at 31 May 2018 and decrease in other payables of RM1.8 million, from RM21.7 as at 28 February 2018 to RM19.9 million as at 31 May 2018 as well as 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 May 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 remaining 10% additional equity interest in DFZ Capital Sdn Bhd (formerly known as DFZ Capital Berhad) (“DFZ”), a subsidiary of the Company.
Total borrowings decreased by RM15.3 million, from RM16.4 million as at 28 February 2018 to RM1.1 million as at 31 May 2018, mainly due to decrease in trade facilities utilisation of RM15.2 million.
As at 31 May 2018, the Group was in a positive working capital position of RM453.5 million.
Total equity increased by RM10.0 million, from RM599.7 million as at 28 February 2018 to RM609.7 million as at 31 May 2018, mainly due to profit for the period of RM9.0 million and an increase in non-controlling interests of RM1.0 million.
The Group net cash flow used in operating activities was RM0.2 million in 1Q FY2019. Net cash used in investing activities was RM27.9 million for 1Q FY2019, mainly due to investment in Medium Term Note of RM30.0 million and purchase of plant and equipment amounting to RM0.9 million. However, the cash flow was partially offset by interest received of RM3.0 million. Net cash used in financing activities for 1Q FY2019 of RM51.5 million was mainly due to dividend payout of RM36.2 million and repayment of short term borrowings of RM15.2 million. Overall, the cash and cash equivalents of the Group decreased by RM79.7 million in 1Q FY2019, ending the period with cash and cash equivalents of RM286.7 million.
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.
In addition, SMSB will also file 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.
Under the Agreement, it is a condition precedent to completion of the Company's subscription (“Completion”) that the Founders and Brand Connect complete an internal restructuring exercise of the Brand Connect group of companies (together, the “Target Group”), and Brand Connect will increase its share capital to US$1,200,000 comprising 1,200,000 ordinary shares. Completion is also subject to other conditions precedent customary in transactions of this nature. The Target Group 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.
At Completion, the Company will pay the consideration amount of US$2,800,000 (“Consideration”) for the Subscription Shares, being 70% of the enlarged share capital of Brand Connect, and thereafter, Brand Connect's issued and paid up share capital will be US$4,000,000 comprising 4,000,000 ordinary shares. The Company will also enter into a shareholders' agreement with the shareholders of Brand Connect. Upon Completion, Brand Connect will be a 70% subsidiary of the Company.
The Consideration of US$2,800,000 was arrived at following arm's length negotiations, based on the parties' agreed net asset value of the Target Group of approximately US$1.4 million as at 31 May 2018, as well as representing the proportion attributable to the equity interest of the Company in Brand Connect. No independent valuation was conducted in respect of the value of the Target Group. The Consideration shall be satisfied in cash at the date of Completion and is funded from the Company's internal resources.
The rationale for the Proposed Subscription 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.
Upon Completion, Mr Robert Justin Frizelle will be appointed as the Chief Executive Office, and Mr. Patrick James Looram as the Chief Operating Officer of the Brand Connect Group of Companies.
The Proposed Subscription is not expected to have any material impact on the net tangible assets per share or earnings per share of the Company for the current financial year ending 28 February 2019. None of the directors of the Company has any interest, direct or indirect, in the Proposed Acquisition, other than through their respective shareholding interests in the Company.