On behalf of the Board of Directors, I am pleased to present the Annual Report of Melewar Industrial Group Berhad and its group of companies ("the Group") for the financial year ended 30 June 2017.

FINANCIAL RESULTS

The Group's principal activity is in the mid-stream sector of the steel industry, principally with the manufacturing of Cold Rolled Coil ("CRC") steel sheets and Steel Tubes and Pipes ("Steel Tubes"), through its 71.3% interest in its public listed subsidiary, Mycron Steel Berhad ("Mycron").

The other business of the Group, is conducted through its 100% owned subsidiary, Melewar Integrated Engineering Sdn Bhd ("MIE"), involved in engineering services.

For the year under review, total revenue of RM772.8 million was recorded by the Group, an increase of RM166 million or 27.4% over the previous year. Despite the increase in revenue, there was a Loss After Tax of RM67.0 million, compared to a Profit After Tax of RM14.9 million in the previous year. This was largely due to two onerous projects under MIE, which were not only under-bidded but were also fraught with technical problems. This brought down the strong performance of the Steel Division with RM92 million being losses recognised for the projects undertaken by MIE for the current financial year.


DIVIDEND

Given the substantial loss for the year under review, the Directors do not recommend the payment of any dividend for the financial year ended 30 June 2017.

STEEL DIVISION

For the period under review, the Steel Division under Mycron, performed creditably, despite facing turbulence in the industry, caused by volatile raw material prices, a weakening Ringgit, coupled with cheap imports from China.

For the financial year ended 30 June 2017, the Steel Division performed well with the CRC sales of RM482.1 million, compared to RM383.6 million the previous year, representing an increase of 25.7%. The CRC unit registered a Profit Before Tax of RM15.8 million, compared to RM23.1 million the previous year, representing a drop of 31.6% reflecting the prevailing competitive conditions.

The Steel Tube unit, meanwhile recorded a revenue of RM266.8 million, compared to the previous year's RM206.1 million, a significant growth of 29.5%. Steel tube sales tonnage increased to 102,528 tonnes, compared to 96,604 tonnes the previous year, representing an increase of 6.1%. In terms of Profit Before Tax, the Steel Tube unit performed very well, with an upward improvement by 219.3% to RM30 million, over the previous year. This significant improvement was due to the substantial drop in the Hot Rolled Coil ("HRC") raw material price, as a result of the ability to import HRC competitively, with the cessation of operations by both the domestic HRC producers, namely Megasteel Sdn Bhd and Southern Steel Berhad. The strengthening of the sales team which forged stronger relationships with its key customers was also a significant contributing factor to the success of the Steel Tube unit.

ENGINEERING DIVISION

For the period under review, the Engineering Division under MIE, performed poorly, contributing to Loss After Tax of RM100.3 million, compared to the Loss After Tax of RM9.9 million in the previous year.

MIE is involved in undertaking third party engineering, consultancy and construction work, in their main role as technical development engineer and turnkey project manager for the Group. Despite receiving a license from the Ministry of Finance several years ago, as an approved waste management company for the operation and maintenance of incinerators in Malaysia, MIE has not been able to secure significant related work, and has since ceased pursuing work in this segment.

MIE also became a fully licensed telecom tower and fibre optic cable laying contractor and is trying to develop this relatively new and small business.

MIE's key bread and butter work, is in consultancy and engineering services contracts, especially in bulk handling systems, for the transport of material such as coal and sand.

MIE's present focus is the completion of the two ongoing bulk handling projects, which has been the source of the unit's significant losses to-date. One of the project involves the installation of a thermal coal handling system, for an electric power station in Johor. The project has encountered significant problems in engineering and piling works, and poor management of subcontractors. This project has incurred significant cost overruns, and additional works, for which some Variation Order Claims have yet to be approved by the client.

The other key project involves the installation of a material transport system for silica, for a client in Terengganu. This project, which is nearly completed, had incurred some cost overruns, which has been absorbed by the company.

Other factors that have also attributed to the cost overruns, include the hike in material costs, as a result of the weakness of the Malaysian Ringgit, which was RM4.21 per USD1 at the start of bidding for the coal transport project in August 2015, versus a record low of RM4.49 per USD1 at the weakest in December 2016.

Both clients have been working closely with MIE, in a friendly and mutually supportive manner, for the successful completion of these high profile projects. MIE is confident that a large part of the losses accounted to-date, will eventually be recoverable, through mutually agreed settlements.
LONG-TERM OUTLOOK

As can be seen, the Steel Division is the major profit generator for the Group. Be that as it may, there are many factors that affect the long-term outlook of the sector, including the volatile price of raw materials used in steel making, like coking coal and iron ore, global demand for steel, the dumping of cheap steel into Malaysia by other countries like China, the weakness of the Malaysian Ringgit, and the Malaysian government's policy for the steel industry.

Following worldwide anti-dumping action against China, the Chinese government has been actively undertaking production cuts, to curb steel oversupply. This is in addition to their initiative to reduce pollution caused by steel factories, during the winter months, by reducing steel output, during that period. These measures are expected to temporarily check the uptrend for subsidised steel exports, which is a welcome respite for domestic steel producers.

The Group is working closely with the industry, to engage the Malaysian government, in its CRC anti-dumping rate administrative review, due at the end of 2017.

For the Engineering Division, the Group's ongoing strategy, is to mitigate further losses, and to finish the two major projects, which have proven to be onerous. The Group does not envisage any new projects for MIE, until all internal weaknesses have been sufficiently dealt with and addressed.

PROSPECTS FOR THE NEW FINANCIAL YEAR

The Group is cautiously optimistic on the prospects for the new financial year, given the strong performance of the Steel Division. The losses of the Engineering Division have been fully accounted for, and should not materially impact the performance of the Group in the near future.

ACKNOWLEDGEMENT

On behalf of the Board, I would like to express my heartfelt appreciation and thanks to all members of the management team and their staff for their hard work and contribution to the Group.

These are challenging times indeed and it is during these hard times that we differentiate ourselves by focusing our efforts in making quality products, backed by excellent after sales services.

To our valued customers, suppliers and other stakeholders, I wish to thank them again, for their patience, unwavering support and backing. We truly appreciate your loyalty, and we look forward to strengthen the bond and strong relationship between us.


Tunku Dato' Yaacob Khyra
Executive Chairman