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Management Discussion and Analysis
(EXTRACTED FROM THE ANNUAL REPORT 2016)

 

  1. Overview of Goldis Berhad (“Goldis” or “the Company”)

    The principal activities of the Company are those of investment holding and the provision of management services. The principal activities of the Group consist mainly of property investment and management, owner and operator of malls, hotel operations, property development, construction, information and communication technology services, the provision of engineering services for water treatment plants and related services, education, investment holding and management of a real estate investment trust. Today, we have private equity investments in Malaysia and China and through our subsidiary IGB Corporation Berhad (“IGB”), have a footprint that spans across Asia, Australia, the United States and Europe.

  2. Delivering Sustained Results

    A slowdown in growth, rising costs of living, low oil and gas prices and a ringgit that remained weak, continued to weigh on the Malaysian economy in 2016. This was further impacted by global developments, in particular, the United Kingdom’s vote to exit the European Union (“Brexit”) and a change of President in the United States of America, both of which contributed to market volatility and increased global economic uncertainty.

    Against this backdrop, companies in Malaysia continued to review their operations, with many, particularly in the oil and gas sector, downsizing their presence. Additionally, with Malaysians experiencing a rise in the cost of living, weaker job prospects and a reduction in purchasing power, consumer sentiment remained low, with many consumers reining in spending.

    Despite this, Goldis delivered sustained results and pushed ahead with new initiatives, remaining focused on driving sustainability in our business and creating long-term value for our shareholders.

  3. Key Financial Highlights

    Financial Chart

    Financial Year Table

    * Statement of financial position figures have been restated following the adoption of MFRS 1 & MFRS 15
    ^ The Company has changed its financial year end from 31 January to 31 December. Thus, the audited financial statements of the financial period ended December 2013 were made up from 1 February to 31 December 2013 for a period of eleven (11) months. The figures also have been restated following the adoption of MFRS 1 & MFRS 15
    # Including results from discontinued and discontinuing operations
    & Being total borrowings less deposit, cash and bank balances (including cash held under Housing Development Accounts)

    For the financial year ended 31 December (“FY”) 2016, Group revenue was RM1,255.5 million, down 2% from FY2015 where the corresponding figure was RM1,278.2 million. The decrease was mainly from the Property Development and Property Investment (Commercial) divisions which saw contributions to the Group decrease by 40% to RM93.6 million (FY2015: RM155.6 million) and 7% to RM171.9 million (FY2015: RM185.0 million), respectively. The higher revenue from the Property Development division in FY2015 was mainly due to the completion and handing over of the 468 units of service apartments at G Residence in March 2015, while the decrease for the Property Investment (Commercial) division in FY2016 was due to lower occupancies in office towers. These decreases were mitigated by higher contributions from other operating divisions. Notably, the Property Investment (Retail) division saw revenue increase by 5% to RM491.4 million while the Hotel division saw revenue increase by 9% to RM403.1 million.

    Our Group recorded higher profit before taxation of RM482.9 million for FY2016 as compared to RM390.4 million in the preceding year, which represented an increase of 24%. This was mainly due to a one-off gain on disposal of a property, plant and equipment by a subsidiary.

  4. Operations Overview

    Property Development Segment

    2016 was a challenging year for the property development division as the rising costs of living, weaker job prospects, more stringent bank lending policies, and general economic uncertainty, led many potential buyers to hold off on purchasing new properties. We have therefore been extremely conservative. This year, we completed 2 developments - Three28 Tun Razak, a boutique development with 166 units located on Jalan Tun Razak, and Park Manor, a development comprising 41 villas located in the award winning Sierramas residential estate. Take up rates for Three28 Tun Razak and Park Manor as at 31 December 2016 were 96% and 22% respectively. We also have two ongoing projects - Stonor 3, a collection of 400 luxury curated homes located in the heart of KLCC, which was launched this year, and Damai Residence, a boutique, luxury, residential offering comprising 31 family-sized homes.

    We remain cautious about the local market in 2017 and believe that the first half of the year will continue to be soft.

    We are proud that IGB was ranked amongst the top 10 developers once again in The Edge Malaysia’s Top Property Developers’ Award. This marks the fourteenth consecutive year that IGB have been an award recipient.

    Hotel Segment

    The hotel division posted positive growth in FY2016, bolstered by the performance of four hotels which opened in 2015, namely Cititel Express Ipoh, Cititel Express Penang, The Wembley Penang, and The Tank Stream Sydney. This was in spite of a generally challenging year for the hospitality industry, which saw a reduction in the volume of travel, entertainment and meetings, as many companies, particularly those in the oil and gas sector, downsized their operations in Malaysia and cut costs. Additionally, with Malaysian Airlines withdrawing flights from several key markets as part of its ongoing restructuring plans, international arrivals have been impacted.

    To address these challenges, we adopted a more aggressive approach to marketing and sought to better manage our costs. For example, we intensified our distribution through electronic channels, launched a digital campaign and worked with online travel portals. We also implemented an energy savings programme among other initiatives.

    Several assets were disposed of in the year, namely, The Renaissance Kuala Lumpur Hotel, Cititel Express Kuala Lumpur and Micasa Hotel Apartments, Yangon.

    We expect 2017 to continue to be challenging, particularly if the Government goes ahead to implement the Service Charge Top Up and the proposed Tourism Service Fee which will result in an increase in cost pressure. We anticipate seeing a slight improvement in visitor numbers as a result of a weak ringgit, improved connectivity between China and Malaysia and the easing of the visa process for tourists from China and India.

    Property Investment and Management, Commercial Segment

    The property investment and management, commercial segment posted a decline in both segmental revenue and profit due to the general slowdown in the economy and oversupply of office space in the Klang Valley. Occupancy of four of the office towers in Mid Valley are currently above 90%, while occupancy of the fifth tower, Centrepoint North, which saw its previous single occupant vacate the building in 2015, is currently about 55%. The occupancy of Plaza Permata, GTower and Menara Tan & Tan are 92%, 82% and 81% respectively. GTower was particularly impacted by companies in the oil and gas industry downsizing their operations in Malaysia, as these companies made up its key tenant profile.

    This year, we remained focused on enhancing customer service, the environment within our buildings and attracting new tenants. We offered a range of incentives such as longer rent free periods, worked to secure longer term tenancies across a range of businesses and industries and ensured top notch security, cleanliness and maintenance.

    In the new year, we will work to strengthen our management team so that they are better able to support our business objectives. We are confident that given the prime locations of our buildings and captive market, we will be able to maintain healthy occupancies across all our assets in 2017.

    Property Investment and Management, Retail Segment

    Despite a slight improvement in consumer sentiment in 2016, the retail market remained challenging as new malls opened in the Klang Valley and the popularity of online shopping increased. IGB Real Estate investment Trust (“IGB REIT”), which owns Mid Valley Megamall (“MVM”) and The Gardens Mall (“TGM”), continued to post positive growth in the year. Both malls worked to maintain their competitiveness through carrying out asset enhancement initiatives (“AEI”) to improve the shopper experience and shopping ambience and bringing in new brands to keep the tenant mix fresh and on trend.

    New brands at MVM included Go Noodle House, Elianto Make Up, Oakley, CK Performance, Stride Rite, Obermain, Kit Kat Chocolatory, Ray Ban, Watchfinders, Sheldonet Toystore, Llao Llao and Marry Merry. While at TGM, luxury brands such as Tory Burch, Bulgari, Lancome, Lalique, Kens Apothecary and Bowers & Wilkins, were introduced. A new premium area, Les Suites at TGM, also made its debut this year. The area, which is a one-stop destination for customers looking to plan a wedding, houses The Occasions Eventeur, Mun Keat Photography, Celest Thoi and The Studio, a multi-brand store featuring local and ASEAN designer.

    2017 is looking to be another challenging year. However with a proactive asset management strategy and focus on sustainable long term growth, IGB REIT is well positioned to weather the challenges ahead and continue to create value for all its stakeholders.

    Construction

    The construction arm of the Group has been busy with several large ongoing projects as listed below:-

    1. Mid Valley City Southpoint (Parcel 3)

      Mid Valley City Southpoint (Parcel 3) is the last major component of our Mid Valley City development. Including car park, the development has a Gross Floor Area of 2.2 million square feet.

      Construction works are still ongoing, with the 55-storey structure anticipated to top out by July 2017. A decision last year to convert 19 floors of the upper levels of the tower from offices to residences has necessitated amendments to the approved Development Order (D.O.). The amended D.O. is currently awaiting approval from the authorities.

      The office levels are expected to be completed for fit out by September 2017, with the residential levels planned to be completed by the second quarter of 2018.

    2. Mid Valley Southkey

      Works on Mid Valley Southkey, located in Johor Bahru, is progressing, with substructure works completed, and superstructure works targeted for completion by the first quarter of 2018. Architectural, mechanical, and electrical works have commenced and are scheduled for completion in late 2018.

      An amendment to the approved D.O. rationalising the 33-acre development from a single parcel into two parcels is currently under application to the authorities. The first parcel currently under development will include the MVM Southkey, which will have a net lettable area of 1.5 million square feet. The mall is targeted to open its doors to the public at the end of 2018.

    3. Pangkor Island Resort

      The Pangkor Island Resort is undergoing redevelopment work, and will be converted into 68 luxury villas with 5-star amenities. A D.O. from the local authorities has been obtained, and an application for the amalgamation of land titles is currently pending approval. Submission of our building plans will be made once the issuance of a new land title is obtained. Subject to these being received, construction work for the resort will commence in 2017.

    Other Operating Segments

    Water Treatment in China

    The China Water Group currently operates in Jiangsu Province Ganyu, Shandong Province Yantai and Zoucheng, China. Our principal activities include the management, operations and maintenance of waste water treatment plants for concession periods ranging from 23 to 25 years.

    Our main challenges this year have been attracting and retaining talent with the right skillsets for our business and managing revisions in water tariffs to better manage increasing operating costs. To address these challenges, we will monitor water tariffs periodically and work closely with the local authorities to ensure that tariffs are adjusted in a timely manner in line with increasing costs. We will also review our remuneration packages to ensure that they remain competitive and continue to enhance both the working environment and culture so as to support the continued growth and development of key management personnel. Additionally, we will be broadening our search for new talent as we continue to expand our business so that we are better able to find personnel with the right competencies to support our growth.

    Moving forward, we are confident that we will be able to sustain our growth and expect sales to continue to improve as we commence the trial run for the Zoucheng upgrade project. Revisions to the water tariffs for select plants are also expected in the coming year, pending approval from the local authorities.

    Education

    International schools, including IGB International School (“IGBIS”), have not been spared from the challenging economic environment as increased economic uncertainty and a slowdown in the oil and gas sectors in particular, have resulted in an out ow of expatriates in the year. The school therefore stepped up its marketing efforts this year to reach out to a broader pool of families as well as to increase brand awareness.

    Initiatives were carried out to both attract new students to the school as well as build loyalty amongst existing students and their families. For example, IGBIS started offering scholarships to new students transferring to IGBIS from other schools in Malaysia and offered discounts to those who enrolled with the school on Open Days held. It also introduced a two tiered fee structure to pioneer families to encourage them to continue with IGBIS and enrol siblings of pioneer students at the school as well. Fees for the Early Years Programme were also frozen and 3 and 5 year loyalty discounts applicable to families who stay with the school were introduced.

    This year, we expanded our student body and celebrated the outstanding results of our first batch of IB Diploma graduates. 100% of students who took the examinations passed, achieving an average score of 34 points out of 45 (the worldwide average is 29 points), with nearly 20% of students scoring 40 points or higher.

    2017 is set to be another challenging year for international schools in Malaysia. Despite this, we believe however that IGBIS has significant headroom for growth and is well-positioned to take advantage of the potential market available.

    Healthcare

    2016 saw the soft launch of Elements Medical Fitness Sdn Bhd (fka Elements Gym Sdn Bhd) (“Elements Medical Fitness”), Malaysia’s First Integrated Medical Fitness Centre with professionally administered well-being programmes. Since our launch, we have received positive response from the public. Take up of our programmes however have been slow as consumers reined in their spending on the back of slower economic growth, weaker job prospects and rising costs of living. Moreover, as a business offering a new lifestyle concept, we have had to work hard to educate the public about our offers, including the benefits of our programmes and what sets us apart from other similar programmes in the market.

    To address these challenges, we have focused our marketing efforts on the corporate wellness segments and have formed strategic alliances and partnerships with other organisations in the healthcare industry. Additionally, we have worked to ensure that clients who do sign up with us receive top notch care and attention, so that they go away with a positive experience and an appreciation of the full benefits of our programmes.

    We are confident that as we work towards officially launching our offering and broadening our marketing efforts to new segments in the year ahead, we will attract an increasing number of clients.

    IT & Data Analyst

    It has been a tough year for our businesses in IT and data analytics. Macro Lynx Sdn Bhd (“Macro Lynx”) has seen increased margin pressure as a result of ongoing broadband price wars and rising costs. Additionally, with a slowdown in the economy, occupancies of the buildings we cover have dropped and the number of new sign ups have also been slow.

    To address these challenges, we worked hard to ensure that we continue to provide excellent service both in terms of customer service support and operationally, providing continuous network improvements and ensuring that our customers receive uninterrupted service. We also developed new products which allowed us to penetrate the SME segment and developed technology partnerships to support our pursuit of providing a wide range of connectivity options and robust business continuity solutions.

    We believe that as we continue to enhance our service offerings, introduce new streams of business and penetrate new market segments, we will be able to grow our business sustainably.

    This year, AFMS Solutions Sdn Bhd kicked off its operations following its establishment in 2015. We are in the business of providing consultancy services, focusing on the areas of building and mall management. Specifically, we aim to provide clients with innovative business solutions using big data analytics to improve people, processes and systems. As a new business, we worked to raise awareness around who we are and what we offer this year, seeking to educate potential clients about the benefits of our services.

    The main challenges we faced were obtaining stakeholder buy in from potential clients and, once engaged, managing the availability of information needed to do our job.

    Moving forward, as we continue to expand our business, we will be focusing on extending our marketing efforts to penetrate new markets, considering strategic partnerships to enable us to launch new products and enhancing the experience that clients have with us.

    New Ventures

    18@Medini, a mixed development in Iskandar Malaysia, Johor Bahru, remains under re-evaluation pending an improvement in market conditions.

    In Thailand, we remain committed to developing a mixed-use project with our joint venture partners, the Immortal Group Co Ltd and are finalising the design and development concept for submission to the authorities. The project will sit on a 6-acre site fronting the Chao Phraya River.

    We have submitted our plans for our mixed-use development project in London — Blackfriars and expect to obtain consent from the authorities this year. We are working towards launching the project at the end of 2017.

  5. Risk Management

    The Board of Goldis is responsible for overseeing and maintaining a sound system of internal controls and risk management so as to safeguard shareholder investments and the assets of the Group. We recognise that doing so is a fundamental requirement for our continued growth and that risk management is not about completely eliminating risk, but about managing it in a manner that allows for the Group to achieve its business objectives.

    1. Market Risk

      The Group is exposed to developments in major economies and key financial markets around the world which may impact our performance. In order to mitigate this, we hold a diverse portfolio of assets across geographies and industries and have adopted a disciplined approach to financial management. Our businesses closely monitor developments in the markets in which they operate as well as assess the implication of global developments on their performance and strategies. These factors may then impact their investment and strategic objectives.

      (i)

      Foreign currency exchange risk

      Currency risks arise as a result of monetary assets and liabilities denominated in a currency that is not the functional currency.

      The Group and the Company are exposed to foreign currency risk as a result of advances from and to subsidiaries, associates, as well as joint ventures. We are also exposed through the deposits and borrowings we have with licensed banks. To manage our exposure, management regularly monitors foreign currency fluctuations so that we can work to minimise any long term adverse effects to our financial performance.


      (ii)

      Cash flow interest rate risk

      The Group and Company’s cash flow interest rate risk arises from floating rate term loans and revolving credit.

      Our interest rate exposure is correlated with changes in the cost of funds (“COF”) of our lenders and is part of the inherent risks associated with carrying on a business as a going concern. Management closely monitors our exposure and works to ensure that it is in accordance with the Group’s financial risk management policies and in line with the overall financial objective of creating value for our stakeholders.


    2. Competition Risk

      The Group faces ever-growing competition, both from established players as well as new entrants seeking to gain a foothold in the industry and grow their market share. In this environment, our businesses adopt a rigorous approach to strengthening their competitiveness through constantly monitoring the market, enhancing their offerings, bringing a fresh perspective to established industries and innovating to stay ahead of the curve.

      Macro Lynx for example, has experienced intense competition from next generation high speed broadband players which has caused a price war, driven players in the industry to introduce new and innovative products and created a market whereby customers expect only the best service and quality offerings. Undoubtedly, these factors have served to push the industry forward but it has also meant that we must have a constant ear to the ground, regularly realign our packages to meet evolving market circumstances and consumer demands, enhance our customer service and diversify our product offerings in order to remain competitive.

    3. Human Capital Risk

      Central to our success is our people. As such, continuing to attract and retain talent continues to be a priority. We remain committed to being an employer of choice and invest in the skills of our existing workforce, providing them with ample opportunities to grow. We also offer competitive salaries and comprehensive benefit packages, and support employee well-being through promoting a work-life balance and encouraging a healthy lifestyle. The Group also works hard to cultivate a positive work culture that promotes diversity, professionalism and respect.

      Succession planning is critical to ensure the continuity of our business in the long run. We therefore actively identify individuals with the potential to take on more responsibilities and play a larger part in driving our business forward. We ensure that these individuals are given the support and exposure needed to grow into ever larger roles within the business.

    4. Regulatory & Compliance Risk

      The Group is subject to the laws and regulations of the markets in which we operate. In order to ensure that we are both up to date and in compliance with new regulatory developments, we have in place a robust framework which allows us to monitor ongoing discussions and changes, assess the impact to the Group, and communicate these changes in a timely manner so that the affected businesses can take the necessary steps to embed them into their operations.

    5. Information Technology (“IT”) Risk

      Our businesses and operations rely to varying degrees on IT. With cybersecurity threats on the rise around the world, we are exposed to the risk of cyber-attacks that can cause disruptions to our operations. To mitigate these threats, our IT departments have an established framework to manage IT security risks and have worked to ensure that there are relevant preventive, detective and recovery measures in place. Additionally, we review all IT policies and procedures regularly to ensure that they are up to date and provide the greatest level of protection for our people and business, and have in place an IT Disaster Recovery Plan.

    6. Terrorist Threat

      The frequency of reported terrorist attacks have increased around the world, imposing an urgent need for businesses to be prepared for such eventualities. The Group has therefore worked to heighten security across all our buildings and works closely with the authorities to keep up to date on any potential threats. We also have crisis management plans in place as well as a team of personnel who have been trained to respond to such circumstances.

      Management of our malls and of ce buildings have in particular increased the presence of security personnel, reviewed their crisis management procedures, enhanced training for security personnel and upgraded CCTV cameras on their premises.

    7. Malpractice Risk

      Elements Medical Fitness is Malaysia’s First Integrated Medical Fitness Centre. Our team of professionals take their jobs and responsibilities very seriously and will never knowingly cause harm to any of our clients. However, as with other organisations in the healthcare industry, the risk of malpractice lawsuits stemming from incorrect diagnoses, treatments, or adverse reactions to treatments or supplements prescribed, are very real. As such, we abide by stringent codes of practice. Examples of this include: ensuring that we take the time to fully understand the unique circumstances of our patients so that we can obtain detailed medical histories, engaging only professional and qualified doctors and practitioners, and using only registered laboratories for any testing required. Any diagnosis is then based on the test results received from these laboratories. We also refer all high risk patients to external conventional diagnostic centres.

    8. Credit risk

      Credit risk arises when sales are made on deferred credit terms.

      The Group and the Company control these risks by the application of credit approvals, limits and monitoring procedures. To minimise our credit risk, we ensure that we only work with business partners with high credit worthiness. Trade receivables are monitored on an ongoing basis through our management reporting procedures and we work to ensure that we do not have significant exposure to any individual customer or counterparty, or have any major concentration of credit risk related to any financial instrument.

      The credit quality of trade receivables that are neither past due nor impaired are substantially amounts due from customers with a good collection track record with us and management closely monitors any trade receivables that are past due. As a result, no additional credit risk beyond amounts allowed for collection losses is inherent in the Group’s and the Company’s trade receivables.

    9. Price Risk

      The Group and Company are exposed to debt and equity securities price risk because of investments held and classified on the statement of financial position either as available-for-sale or at fair value through profit or loss.

      To manage our price risk arising from investments in debt and equity securities, we have diversified our portfolio in accordance with the limits set by the Group. As such, our exposure to price risk is minimal.

    10. Liquidity and cash flow risk

      The Group actively manages its debt maturity profile, operating cash flows and the availability of funding so as to ensure that all refinancing, repayment and funding needs are met. As part of prudent liquidity management, the Group maintains sufficient levels of cash or cash convertible investments to meet its working capital requirements. In addition, the Group strives to maintain available banking facilities of a reasonable level to its overall debt position.

      As far as possible, the Group raises committed funding from both capital markets and financial institutions and prudently balances its portfolio with some short term funding so as to achieve overall cost effectiveness. As at 31 December 2016, the Group held cash and cash equivalents of RM1,012.0 million (2015: RM576.1 million) as part of our management of liquidity risk.

      As at 31 December 2016, Group borrowings stood at RM3,317.9 million, of which RM1,000.0 million has been secured for MVM Southkey. As we push ahead with ongoing projects, additional funding may be needed.

    11. Capital Risk Management

      The Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders, benefits for other stakeholders and to maintain an optimal capital structure to reduce the cost of capital. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, issue new shares or sell assets to reduce debt.

  6. Moving Forward Sustainably and with Confidence

    2017 is expected to be another challenging year, particularly as economies around the world grapple with the emerging political and economic landscape following Brexit and President Trump’s promise to put America first. At home, Malaysians will continue to struggle with rising costs and a ringgit that is unlikely to see a strong rebound in the near future. These factors will weigh on consumer sentiment and contribute to weakening employment prospects, as companies continue to downsize their operations here.

    Businesses across the board are likely to be impacted by these developments and Goldis is no different. We believe however that with our diversified portfolio, robust fundamentals and strong management teams, we are in a good position to ride out the challenges ahead and continue to create and deliver sustainable value for our shareholders.

 

 
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