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Extracted from Annual Report 2016


It is the diversified nature of Boustead that has enabled us to generate such a handsome profit.

Dear Shareholder,
We have crossed a significant milestone in the Group's history, as we achieved the second highest profit before tax since our establishment. If you recall in my review last year, we were hampered by significant external conditions that drove earnings down. We are pleased to note that in this financial year, we overcame these external conditions and achieved commendable success.

Most of our Divisions performed over and above expectations, as we strengthened our resolve to improve efficiencies, unlock value and most of all, maintain a keen focus on our bottom line.

Financial Performance

It was not all smooth sailing during the year, more so as market forces weighed down on your Group's potential. In spite of these challenges, we delivered an impressive profit of RM740 million. This included gains from divestment of an associate company and disposal of lands that would not have contributed significantly to the bottom line over the long-term.

This was achieved on the back of a revenue of RM8.4 billion. Profit after tax clocked in at RM589 million, a significant fourfold increase from the previous year. Our businesses and operating companies performed handsomely with the Property Division leading in profit contribution, followed by our Plantation and Trading & Industrial Divisions. The Finance & Investment and Pharmaceutical Divisions also contributed to the bottom line. The Heavy Industries Division recorded a deficit as it experienced unexpected tough external conditions.

As you would recall, even during tough times and depressed earnings, your Group has maintained its firm resolve to deliver shareholder value.

For this financial year and reflecting excellent results, we are committed to award our shareholders through attractive dividends. Given our prudent management of cash flow and to enhance shareholder value further, total dividends for the year will be 17.5 sen per share. This represents a yield of 6.6% and a total payout of RM305 million based on an enlarged share capital which took effect in 2016 compared with the payout of RM207 million in 2015.

On the back of our strong balance sheet, our gearing ratio was comfortable as it stood at 0.9 times. At the same time, shareholders' funds were RM5.7 billion.

Our key performer, particularly over the last few financial years, was the Property Division. This year, the Division maintained its track record with an even higher profit of RM324 million, marking a 133% increase from the previous year. Its achievements were driven by gains realised on disposal of an associate company as well as contributions from ongoing property development projects. The Division's contribution to the Group's bottom line was a significant 44%.

Propelled by Boustead Plantations Berhad, which is into its second full year as a listed company, the Plantation Division delivered an exceptional performance, recording a profit of RM276 million, a 190% jump from the previous year. This was supported by gains realised on disposal of lands and divestment of a subsidiary, along with higher product prices which boosted earnings. The Division's profit contribution to the Group amounted to 37%.

The Trading & Industrial Division achieved a profit of RM147 million, up by 287% from last year, representing a profit contribution of 20% to the Group. These results were primarily driven by better performances by Boustead Petroleum Marketing Sdn Bhd (BHPetrol), which today remains a key participant in Malaysia's retail petroleum market and UAC Berhad, a leader in the building materials segment.

The Finance & Investment Division recorded a higher profit of RM61 million, a 39% increase from last year. The banking and finance sector experienced a tough environment, given macroeconomic conditions. In spite of such challenges, the Affin Group led the Division in terms of profit.

The Pharmaceutical Division registered a profit of RM52 million, contributing 7% to the Group's profit. The Division was impacted by lower Government orders during the year. This was partially due to reduced buffer stocks required by Government hospitals, owing to higher delivery efficiency arising from the implementation of the Pharmacy Information System. Higher operating and finance costs also had an impact.

The key contributor to the Heavy Industries Division was Boustead Heavy Industries Corporation Berhad (BHIC), turning in a strong profit of RM77 million. However, the Division was affected by deficits incurred by Boustead Naval Shipyard and MHS Aviation, which offset the progress achieved by BHIC.

Corporate Initiatives

As we focused on delivering operating profit for our respective businesses and companies, we pursued effective solutions to strengthen the Group's corporate position while improving operating efficiencies to drive bottom line growth.

Given our reach and magnitude, we have at our disposal various opportunities to achieve better economies of scale for the benefit of the Group. In tandem, we strive to enhance our balance sheet and liquidity. In 2016, we successfully concluded our rights issue, raising gross proceeds of RM1 billion. This has enabled us to strengthen our financial position and reduce interest costs for the Group. It will provide us with a stronger impetus to accelerate our growth given our cash position.

Concurrently, we embarked on a bonus issue to reward our loyal shareholders for their support through the opportunity for greater participation in the equity of BHB. This corporate exercise involved the issuance of bonus shares on the basis of two bonus shares for every five shares held by shareholders after the rights issue. In total, we issued 579 million bonus shares thereby expanding our capital base, which is now in excess of RM1 billion.

We remain committed to enhancing value for the Group, both organically and inorganically. As a reflection of this, we completed the disposal of non-core lands in Kulaijaya, Johor, along with the divestment of Boustead Sedili Sdn Bhd. This is part of our objective to ensure the effective management of our plantation land bank, especially for assets that do not meet our expectations in terms of yield and contribution.

Meanwhile, we are supportive of the Government's aspirations to build an integrated and efficient urban rail transport network via the Mass Rapid Transit (MRT) system. In line with this, we recorded a gain arising from the Government acquisition of land on which BHPetrol service stations were situated for the development of the MRT.

In the last many years, we have taken a more decisive and strategic analysis of our businesses and investments. This is premised on our intention to unlock the potential of our portfolio of investments and improve our corporate structure. Our efforts over the years have borne much fruit and in 2016, we further streamlined our operations which saw a restructuring of UAC Berhad. With this new structure, Boustead Sissons Paints Sdn Bhd and Boustead Global Trade Network Sdn Bhd are now subsidiaries under the direct management and leadership of the UAC Group.

Further to this, we are committed to improving efficiencies by divesting investments that do not have long-term prospects and are not strategically aligned with the Group's business plans. In light of this, following a review of our portfolio, Boustead Engineering Sdn Bhd and Boustead Atlas Hall Sdn Bhd will be ceasing operations. Similarly, we have completed the disposal of the property and assets of Johan Ceramics Berhad and the company is in the process of winding up. This is part of our aim to ensure that our various businesses continue to perform and contribute to our growth.

We have renewed our focus and deployed additional resources at the leadership level to strengthen the Heavy Industries Division. There are clear low hanging fruits to improve cost structure and concentrate on businesses that will provide long-term viability to the Division, minimising pressure on its balance sheet.

Sustainability Commitment

Your Group has executed numerous initiatives over the many decades to contribute to the development of Malaysia. As testament to this philosophy of supporting the betterment of society, we are conscious that sustainability is vital to our success. By adhering to a strategy of sustainable growth and inculcating an organisational culture founded on sustainable development, we have been able to create long-term value for the Group as well as for society.

In this year's Annual Report, we have taken a more thorough evaluation of our sustainability practices, which are segmented into three core pillars, namely Economic, Environment and Social. To cement this drive, we have also developed a Sustainability Vision, themed Building a Legacy of Sustainable Growth as a Leading Diversified Conglomerate.

In order for any initiative to achieve its objectives, it must be led by various levels of leadership within the Group. A comprehensive mandate has been put in place which sets out a clear road map from Board to Management to operating units to achieve alignment towards sustainable success.

Outlook

At Group level, we are currently in talks with our financial advisors to draw up an effective strategy to determine funding options for our two bonds worth RM1.2 billion that will mature in the next 12 months. This prospective refinancing exercise is aimed at providing the Group with further financial flexibility.

In tandem, our capital expenditure for the coming year will be in the region of RM700 million. Core areas will include the ongoing construction of Nucleus Tower in Mutiara Damansara and the development of The Royale Chulan Cherating. In order to expand our retail petroleum network, capital expenditure will also be deployed for new BHPetrol service stations. This is in addition to ongoing capital expenditure commitments by the respective Divisions.

It is the diversified nature of Boustead that has enabled us to generate such a handsome profit in trying times. We do not expect the year ahead to be rosy, as we are certain global geopolitical shifts will impact Malaysia. Your Group continues to evaluate and fine-tune our business strategies while preparing our various operating units for the challenges that will come our way. Not only are we confident, we are bullish that we will weather these storms to deliver another set of good earnings.

On this note, our Property Division, with its vast array of prime commercial assets and office buildings, is expected to deliver recurring earnings to the Group's bottom line. In particular, our portfolio of retail assets is expected to do well, more so as we are the only owners of two retail commercial precincts located on the MRT line, namely our Mutiara Damansara township and MyTOWN Shopping Mall. These properties are set to benefit significantly from the greater connectivity and accessibility provided by the MRT. In addition, we have progressively commenced development of Mutiara Balau in Semenyih, which is set to become our third township.

Though our Plantation Division will no doubt be bound by the vagaries of commodity prices, we will redouble our efforts to improve yield and agronomic practices to deliver a more efficient plantation business. In the coming year, we will also see the divestment of assets as the Division expects to conclude the disposal of lands in Seberang Perai Utara, Pulau Pinang, for a total cash consideration of RM620 million. The sale consideration is at the highest end of the premium for land of this nature. Weighing the prospects of maintaining the asset, the sale of the land offers greater value to the Group. This will further strengthen our cash flow position tremendously.

In our Pharmaceutical Division, we are focused on expanding our presence in Indonesia, where we have seen an increase in top line growth. Although we do not foresee immediate contributions to our bottom line due to thin margins, Indonesia remains an exciting market.

Along with this, we will be expanding our portfolio of products through our partnership with international companies to bring the latest cancer treatment drugs to hospitals in Malaysia.

The landscape of the banking industry is evolving with heightening competition. Financial technology, also known as fintech, will certainly impact this sector. Amidst this environment, we are confident that our investment in the Affin Group will make a sustained contribution.

Through our involvement in the automated traffic enforcement segment via Irat Properties Sdn Bhd, we are optimistic that the concession agreement with the Government will be concluded in 2017, which will have a direct impact on our bottom line. Beyond commercial objectives, this is another effort by the Group to participate in nation building by assisting to reduce the increasing rate of traffic accidents in Malaysia.

We expect the construction industry to see positive growth in the year ahead. In particular, the domestic demand for Industrialised Building System (IBS) will grow in tandem with the Government's push for its greater use in the construction industry. This certainly bodes well for UAC Berhad, given its well-established innovative IBS Wall System product range.

In our Heavy Industries Division, we are committed to our ongoing cost optimisation exercise and expect to see much progress on this front in 2017. Over the years, the Division has contributed significantly to the enhancement of the Royal Malaysian Navy's (RMN) assets and we remain fully dedicated to delivering superior quality ships to meet the nation's vision to achieve self-reliance in maritime defence. On this note, we are on track to complete the construction of our first Littoral Combat Ship for RMN in 2019.

MHS Aviation Berhad is in discussions to resolve a contractual dispute with key clientele. It aims to reach an amicable settlement in the coming year, which will positively impact its operations.

The following Divisional commentaries will provide you with a further elaboration on how the various operating units have performed. What is glaringly clear is the fact that we have intensified our efforts and pushed harder to deliver results. As the entire business landscape evolves due to technology and local and foreign market trends, the Boustead Group will explore new avenues to unlock value and improve shareholder confidence.

We have a synthesis of seasoned business leaders with young bright professionals who form the backbone of the Group's talent pool. This will drive the multitude of businesses that we have, irrespective of the economic climate.

I would like to thank our shareholders who have been with us these many years for their unwavering loyalty. To new shareholders, we assure you that ours is a Group that will not rest on its laurels and we will find new ways to deliver value.

TAN SRI DATO' SERI LODIN WOK KAMARUDDIN
Deputy Chairman/Group Managing Director
1 March 2017

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