What mainly accounted for the huge fall in Ryobi Kiso’s FY2011 net profit from FY2010 and FY2009 levels?
From 2007 to 2009, there was a sharp spike in construction demand from the two integrated resorts projects that led to significant investment in equipment. Once these two projects were completed, the idle capacity resulted in more intense competition and therefore pressure on rates. Also in the last two years, we faced cost pressures in the form of rising prices of materials, especially concrete and rebar, as well as rising labour costs.
In addition, it should be noted that we have also invested S$63 million in new specialised equipment in the last two years and this resulted in significantly higher depreciation charges. In FY2011, we incurred a total of S$11 million in depreciation charges, which was more than our net profit of S$8.9 million, and this exacerbated the decline in earnings. In reality, our cash profit is in fact higher since depreciation is a non-cash item.
On a full year basis, our net cash from operating activities actually grew to S$8.5 million for the six months ending 31 December 2011 from a negative S$0.2 million for the six months ending 31 December 2010. Our net cash from operating activities grew even stronger to S$10.5 million for the three months ending 31 December 2011 from a negative S$0.2 million for the three months ending 31 December 2010.
While these factors culminated in the decline in group earnings over the last two years, we continued to take stringent control measures both in terms of cash and cost control. As it stands, the industry remains competitive as construction demand, while still strong, has not fully recovered to the previous peak level of S$36 billion in 2008. That is why Ryobi Kiso has been spreading its wings overseas, starting with Vietnam in 2009.
Significantly lower revenue contribution from your eco-friendly piling services dragged down your overall revenue for 1HFY2012 ending 31 December 2011 because you took on smaller-scale eco-friendly projects. What factors affected your project size?
Our eco-friendly projects are largely for public sector projects and in FY2010, we benefited from participating in the Punggol Waterway project. The availability of large-scale projects really depends on the type of government spending and its demand for eco-friendly piling.
What is your orderbook to date? What is your expected orderbook for FY2012?
Historically, our quarterly revenue averages between S$30-40 million each quarter. We have been consistently securing contracts every quarter as reflected in our net orderbook value of S$75 million to S$80 million for the past few quarters.
Intense competition and higher costs remain key factors that have weighed on your profits. How do you plan to address both in the current 3QFY2012 quarter and over the longer term?
Competition has remained keen as there is still excess capacity following the completion of the two integrated resorts projects. And construction volume is now lower than in 2008, so we expect continuing pressure on rates.
We were affected by the rise in material costs, mainly concrete and rebar. In recent months, these prices have moderated. Labour costs will always be a factor, so we strive to improve productivity through training our workers.
Ryobi Development plans to develop Ready Built Factories and Built-To-Suit projects for small and medium enterprises and multinational corporations in Vietnam’s Ascendas-Protrade Singapore Tech Park (APSTP). What is the latest update on this?
This is an exciting project that holds attractive long-term potential for us. So far, we are the sole developer for the project. We are embarking on Phase 1 on a 3.56-hectare site, which will be completed within two years. Ascendas will be marketing the factories for us and they have an excellent track record and successes in similar industrial parks elsewhere. Currently, we see high levels of interest from companies that are looking to rebuild their facilities there as they were affected by the tsunami in Japan and the floods in Thailand.
The total investment (including land cost) in Phase 1 is about US$8.9 million and we expect a yield of about 10 per cent. We also have the rights of refusal for the subsequent Phases 2-6.
Going forward, how do you plan to further increase your presence in Vietnam and capitalise on the country’s growing demand in the property and construction sectors as the population becomes more affluent and urbanised?
We will continue to work closely with both local Vietnamese and foreign partners. Already, we have expanded beyond our traditional foundation works and into industrial property development in the Ascendas-Protrade Singapore Tech Park.
Besides Vietnam, are there plans to expand into other countries in the region?
Certainly, we intend to expand overseas into countries where demand for construction is buoyant and in markets that the management is familiar with.
The Singapore government recently tightened the employment pass requirements for foreign workers and raised the admin fees for work passes. How will this affect Ryobi Kiso in terms of manpower and associated costs?
In terms of direct impact, the manpower cost rises for the employment of foreign workers. But we believe that with improved efficiency and utilisation rates of our equipment, we should be able to digest the increase in manpower and associated costs.
How are you addressing the foreign worker issue mentioned earlier?
The best way to deal with the increased cost of labour, either local or foreign, is to raise their individual work efficiency, skills and capabilities. We continue to invest in training, improve work processes, reduce idle time and create an encouraging work environment. These are drivers for higher productivity, which will ultimately drive down unit labour cost.
What is your outlook for the piling services sector for the rest of FY2012 and FY2013 given the expected slowdown in Singapore’s economy this year and uncertain global business environment?
Demand for piling is dependent on the construction volume in Singapore and this will be lower compared with previous years. According to the Building and Construction Authority, Singapore’s construction demand for 2012 will be S$21-27 billion, down from S$32 billion in 2011. For 2013 and 2014, the average construction demand is projected to range between S$19 billion and S$27 billion per annum. More than half of the demand will come from public sector spending on public building and civil engineering projects.
Certainly, developments in Europe and the US will have an impact on business conditions and this may largely impact the private property development sector, which is driven by sentiment.
How will Ryobi Kiso deal with such external uncertainty for the rest of FY2012 and FY2013?
In Singapore, we have to stay competitive and yet flexible. We will continue to develop new products for the market to meet niche needs. For example, the buzz words in the construction industry currently are “productivity” and “efficiency”. We have to constantly innovate to develop new products and services that are aligned to the industry’s drive to enhance productivity and efficiency on the work site. For example, we have developed a new subterranean precast technology for the construction of basements.
We will also venture beyond Singapore to capture growth opportunities. We have already set in place a strategic diversification plan since 2009, to diversify revenue streams across countries, business segments and clients. We have gone into Vietnam; we started with piling and now we are involved in tech park development. We are also exploring other markets in the region where the domestic demand is more resilient.