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Extracted from Annual Report 2020

Chairman

Dear Valued Shareholders,

On behalf of the Board of Directors, I am pleased to present to you Megachem's annual report for the financial year ended 31 December 2020 (“FY 2020”).

Diversified business model proves resilient and sustainable

FY 2020 became an unpresented year with the emergence and widespread of COVID-19 globally. To curb the spread of the highly contagious virus, many countries imposed lockdowns on non-essential industries and border restrictions, which led to supply disruption and lower demand for certain goods and services.

While sectors such as constructions, coatings and automotive were negatively affected, others such as electronics, healthcare and cleaning segments saw some growth. As Megachem supplies to a wide spectrum of industries, the impact on Megachem's business was partially mitigated. On the supply side, due to our diversified supply sources, the supply chain disruption did not have much impact on the Group. Hence, the diversified business model of the Group, in terms of geography and market segments, enabled us to remain resilient and sustainable in the challenging operating environment in FY 2020, and achieve a commendable performance of net profit after tax growth of 32.0% to S$5.3 million from the previous year.

Profitable track record remains intact

In FY 2020, Megachem achieved S$105.2 million in sales, a 7.5% decrease compared to the S$113.8 million recorded in the previous corresponding financial year (“FY 2019”). This was largely due to the emergence of COVID-19, which hampered the Group's business across its major markets, especially in the second and third quarters. Our core markets of ASEAN and North Asia were the most affected by the pandemic, while other markets of Europe, South Asia and Australia bucked the trend.

Year-on-year, sales from both the Distribution and Manufacturing segments experienced a fall. The Distribution segment decreased by 7.5% to S$101.8 million, while sales from the Manufacturing segment declined by 7.4% to S$3.5 million.

Correspondingly, gross profit decreased by 5.9% to S$26.5 million in FY 2020, as compared to S$28.2 million in FY 2019. However, gross profit margin improved by 0.4 percentage points year-on-year, from 24.8% to 25.2% in FY 2020.

Total operating expenses and finance costs decreased by 3.2% or S$0.8 million from the previous year, largely due to lower travelling and transport expenses, as well as lower finance cost.

Net profit before tax increased by 19.6% year-on-year to S$5.9 million from S$5.0 million. This was due to higher contributions from other income, including grant income of S$1.2 million as part of COVID-19 stimulus from the Singapore government, higher share of profit of associated companies, and the lower total operating expenses and finance costs. Correspondingly, the Group saw a growth in the net profit after tax of 32.0% to S$5.3 million from S$4.0 million. Excluding the grant income, the Group's net profit after tax expanded 3.9% in FY 2020 from FY 2019.

Earnings per share for FY 2020 stood at 3.85 Singapore cents, a 33.7% increase from the earnings per share of 2.88 Singapore cents in the previous financial year. Net asset value per share increased to 39.33 Singapore cents as at 31 December 2020, from 37.24 Singapore cents as at 31 December 2019.

As a result of positive net profit after tax and lower inventory purchases, this generated positive cash flows from operating activities which was partially utilised on capital expenditure, satisfying dividends and other financing obligations. With strong cash generated from operating activities in FY 2020, cash and cash equivalents increased by S$1.0 million from S$14.9 million as at 31 December 2019 to S$15.9 million as at 31 December 2020. Gearing ratio remained unchanged from previous year at 0.37 time as at 31 December 2020.

Overall, our robust balance sheet enabled us to maintain a healthy financial position, providing us with financial flexibility for future growth and expansion of the business.

Positioning for recovery

Following concerted government stimulus, discovery of COVID-19 vaccines and countries easing lockdowns, business sentiments have improved. However, there are some concerns regarding resurgence of cases worldwide and rise of new coronavirus variants, which may derail the recovery of the economy. While we are seeing early signs of recovery, the pace and extent of it are dependent on developments on the COVID-19 front. Meanwhile, geopolitical tensions also pose a risk to the global economy.

As chemicals are widely used in many sectors, the chemical industry and performance of Megachem is closely tied to the global economy. Hence along with the improving business sentiments, we are seeing a pick-up in business activities and price recovery in the chemical industry.

Despite the outbreak of the pandemic which hindered the growth of the economy, we remain optimistic that this is still the decade of opportunities, especially for Asia. In line with this, the Asian region remains our main driver of growth. We are focused on building our strategy around Asia-centric markets and deepening our presence in high growth sectors. Besides our strong customer centricity, we are committed to enhancing our product offering and providing value-added solutions to our customers.

In addition to increasingly building our resilience, we will leverage on our diversified business model, extensive track record of operational excellence and financial discipline to bring about greater long-term value to our stakeholders. Megachem is therefore well-poised to take advantage of the vast opportunities in this decade.

Providing value for our shareholders

Since Megachem was listed in 2003, we have always strived to provide value to all our stakeholders, including our shareholders. Aside from providing long-term returns to our shareholders, we do this through consistent distribution of dividends.

For FY 2020, the Board is pleased to recommend a final dividend of 1.0 cent per share, to show appreciation to our valued shareholders. In addition to the interim dividend of 0.5 cent per share, the collective dividend of 1.5 cents per share represents a total payout ratio of 39.0% against net profit. This is subject to the approval by shareholders at the Annual General Meeting to be convened.

Words of appreciation

At this point, I would like to extend my deepest appreciation to our management team, staff, bankers and business associates for their contribution towards the Group. I would also like to thank my fellow directors for their guidance amidst this tumultuous period. Last but not least, I would like to extend my gratitude to our shareholders for their loyal support.

In this new normal, we will continue to strive towards transforming into a more sustainable specialty chemical business for our customers, as well as lifting our shareholders' value.

Lee Bon Leong

Independent and Non-Executive Chairman
Megachem Limited