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Extracted from Annual Report 2017

Chairman

Dear Shareholders,

On behalf of the Board of Directors, it is my pleasure to present to you Megachem Limited’s (“Megachem”, and together with its subsidiaries and associated companies, collectively the “Group”) annual report for the financial year ended 31 December 2017 (“FY 2017”).

FY 2017: DELIVERING A RESILIENT PERFORMANCE AMIDST A CHALLENGING GLOBAL CLIMATE

In FY 2017, unstable economic and political climate seen in 2016 subsided, enabling our business activity momentum to pick up across our core market segment. Megachem’s efforts to optimise its operations and grow its business have paid off, allowing it to achieve a better performance in FY 2017 for the Group. Our intensified marketing efforts have also led to an expansion of Megachem’s portfolio of customers and products.

IMPROVEMENT IN BOTTOM-LINE PERFORMANCE

For the year under review, our revenue saw a 8.4% increase to S$108.1 million in FY 2017, as compared to S$99.8 million in the previous corresponding financial year (“FY 2016”). This was largely due to stronger sales performances in markets such as ASEAN, Europe, Australia and Middle East operations, which more than offset lower sale performances from our North and South Asia and America markets.

Net profit before tax increased S$1.6 million or 42.9% to S$5.2 million from S$3.6 million in FY 2016. This was mainly due to the one-time valuation gain arising from the listing of our associated company, higher gross profit, higher share of profit of associated companies and fair value gain from listed equity, which was partially offset by higher operating expenses. Excluding the one-off gain and further adjustment for allowance for impairment of trade receivables from Venezuela, the Group’s net profit before tax would have remained fairly constant.

Our distribution business segment remained the largest contributor to our topline. Sales from our distribution activity was 9.5% higher year-on-year at S$105.5 million while sales from our manufacturing segment decreased by 24.4% to S$2.6 million in FY 2017.

During the financial year, the Group’s gross profit expanded by 5.3% to S$26.6 million, while gross profit margin dipped marginally by 0.7 percentage point in FY 2017 in line with lower gross profit margins in key markets and partly due to higher inventory write down in the current year.

In FY 2017, total operating expenses increased by S$1.9 million or 8.4% to S$24.2 million largely due to net foreign exchange losses and increase in staff costs on the back of an expansion in staff strength.

Correspondingly, EBITDA improved 22.0% to S$6.8 million whilst net profit after tax rose 88.1% to S$4.2 million in FY 2017 largely due to higher sales and the one-off valuation gain arising from the listing of our associated company. Earnings per share rose 107.8% to 3.18 cents in FY 2017, in comparison to 1.53 cents in FY 2016.

Total borrowings increased from S$15.3 million as at 31 December 2016 to S$16.7 million as at 31 December 2017. Even though cash and cash equivalents dipped slightly by 2.2% from S$11.6 million as at 31 December 2016 to S$9.3 million as at 31 December 2017, our financial position continues to be sound and healthy.

As at 31 December 2017, the Group’s gearing ratio is fairly consistent at 0.37 times as compared to 0.36 times in the previous year. Net asset value per share rose to 33.47 cents as at 31 December 2017, from 31.50 cents as at 31 December 2016.

FOCUSING ON LONG-TERM GROWTH TO DELIVER SUSTAINABLE RETURNS TO OUR SHAREHOLDERS

Looking ahead, even though the global economic climate and chemical industry continues to be plagued by factors such as political uncertainties, tighter monetary policies, concerns over the after-effects of the Brexit referendum as well as the volatility in financial markets and China’s economic transition, global economy is forecasted to remain on a positive growth path.

Megachem is a specialty chemical solutions provider with a wide base of customers across a diverse range of industries and geographical regions. Our business model of providing integrated value-added solutions has been tested and proven to be resilient and has served us well.

We envisage that the combination of a positive economic environment and a robust business model should provide the catalyst for us to fortify our business further provided the risks mentioned above do not materialise.

For the longer term, we will persist in pursuing a strategic approach of further diversification of our business portfolio and expanding our geographical reach, product and service offerings as well as cementing stronger business partnerships, to solidify our position in the market.

In terms of geographical regions, our Asia segment, which is a major contributor to the Group’s revenue, remains a strategically important market for us. The specialty chemicals industry in Asia is one of the largest markets and we anticipate the growth to remain robust in the long-term. Backed by our solid track record in the industry and extensive network, we are well-poised to seize any opportunities that the markets may present. In addition, we intend to remain resilient by creating long-term sustainable values through a sound business model, financial discipline and operational excellence, which are a key foundation for our long-term growth.

MAINTAINING TRANSPARENCY AND GOOD CORPORATE GOVERNANCE STANDARDS

For the year 2017, we were able to achieve another significant milestone by being accorded the Best Annual Report Award (Gold), in the “less than $300 million market capitalisation” category at the 2017 Singapore Corporate Awards. Till date, Megachem has received at least one award in nine out of twelve years since the launch of the Singapore Corporate Awards in 2005. This is testament to the high standards which we adhere to for shareholders’ communication and commitment towards achieving good corporate governance practices.

This is also the second year which we have incorporated Global Reporting Initiative (“GRI”) standards for our Sustainability reporting. We acknowledge our responsibility to build a sustainable business and will continue to find ways to adopt good industry practices to ensure that sustainability objectives are met.

Even though the awards are testament to our continuous efforts to cultivating good corporate governance practices and fostering transparency within the organisation, it will further serve as a constant reminder for us to continually uphold good corporate governance standards and communication with our stakeholders in a transparent and timely manner.

REWARDING OUR LOYAL SHAREHOLDERS

To show appreciation to our shareholdings for the strong and continued support for Megachem, the Board has recommended a final dividend of 0.7 cent per share. Together with the interim dividend of 0.5 cent per share, the collective dividends of 1.2 cents per share represents a 37.7% payout ratio of Megachem’s FY 2017 net profit.

30 YEARS DEVELOPING SUSTAINABLE CHEMISTRY

This year is Megachem’s 30th Anniversary. With single-mindedness and unwavering passion, we have made our vision a reality. Our achievements over the last 30 years calls for celebration. More importantly it also calls for forward thinking because, without a doubt, greater future is ahead of us.

I would like to express my sincere gratitude to our management team, staff, bankers and business associates for their hard work and ongoing dedication over the past year in contributing to Megachem’s continued growth. I would like to also thank my fellow directors for their counsel and professionalism in helping to position Megachem for its long-term success. Lastly, I would like to take this opportunity to thank all our loyal shareholders.

With the support from our stakeholders, we will continue to strive towards building a more sustainable specialty chemical business and enhancing shareholders’ value in the near and long term.

Sidney Chew

Executive Chairman & Managing Director
Megachem Limited