CSFG.L Regulatory News (CSFG)

27 July 2018

CSF Group plc

("CSF" or "the Group")

FINAL RESULTS

CSF Group (AIM: CSFG), a provider of data centre facilities and services in South East Asia, today announces its audited full year results for the year ended 31 March 2018.  

Financial highlights:

Operational highlights:

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CHAIRMAN'S STATEMENT

The Board is pleased to report the successful disposal (the "Disposal") during the period of CSF CX Sdn Bhd ("CSF CX"), the Group's loss making subsidiary and also the tenant and operator of the CX2 and CX5 data centres. Albeit for a nominal consideration, the Disposal has significantly reduced the Group's operating losses and cash burn rate, and improved the Group's financial position.

Following the completion of the Disposal, the Group has been able to focus on improving the operational efficiency of its remaining data centre (i.e. CX1), whilst identifying additional sources of revenue from CX1 and other business divisions.

The Group's monthly revenues are still insufficient to cover its monthly operating overheads, and this has been exacerbated by the intense competition and pricing pressure experienced by the maintenance and the design and development segments of the business. The Board also notes that significant capital expenditure will be required for the replacement of aging equipment at the CX1 data centre and will continue to work closely with management in the careful planning and implementation of the Group's capital expenditure budget.

The Board will continue to support the efforts of management in implementing its stated business strategies in sustaining the rental revenue of the CX1 data centre, growing the design and development and maintenance business, and identifying further cost reduction measures, with the objective of preserving the Group's financial resources.

The Board expects for the Group to be able to reduce its operating losses in the next financial year, following the completion of the Disposal, although on significantly decreased revenues.

Phil Cartmell

Chairman

27 July 2018

CHIEF EXECUTIVE OFFICER'S REVIEW

Overview of the Year

CSF Group is a provider of data centre facilities and services in South East Asia. The Group's revenue is generated from the provision of data centre design and development services, support and maintenance agreements and the rental of data centre space. The Group's business model is to lease its data centre facilities from a freeholder, rather than own the property assets underlying its data centres.

The Group reported a profit for the financial year of RM113.0m (£20.9m*), which was mainly attributable to the recognition of a gain on disposal of CSF CX Sdn Bhd ("CSF CX") of RM132.6m (£24.5m*). On 28 September 2017, the Group entered into a sale and purchase agreement (the "Share SPA") to dispose of its entire equity interest in CSF CX (the "Disposal"), the tenant and operator of the CX2 and CX5 data centres, for a cash consideration of RM2.00 (approximately £0.37*). The Share SPA was conditional upon, inter alia, the receipt of various regulatory consents. The Group completed the transfer (the "Share Transfer") of its shareholdings in CSF CX to the purchaser in exchange for the consideration of RM2.00 (being approximately £0.37*) on 1 November 2017. Control of CSF CX passed to the purchaser at this date. All outstanding conditions were fulfilled by 8 May 2018.

The loss for the previous financial year of RM34.6m (£6.4m*) was mainly attributable to the operating loss of CSF CX.

The Group recorded a total gross profit margin of 1.0% in the current financial year as compared to a total gross loss margin of 3.9% in FY2017 mainly due to the cessation of the recognition of the gross losses of CSF CX with effect from 1 November 2017 (the date of completion of the Share Transfer).

The Group's closing cash position decreased from RM58.0m (£10.7m*) as at 31 March 2017 to RM49.2m (£9.1m*) as at the year-end mainly due to the utilisation of cash reserves to fund the working capital requirements of CSF CX up to the date of completion of the Share Transfer. However, the Group received the refund of cash deposits lodged by the Group for rental deposits in connection with CX2 and CX5 data centres amounting to RM9.1m (£1.7m*), on 31 May 2018.

Although the Group has been able to significantly reduce its recurring operating losses as a result of the Disposal, the Board is conscious that the Group's monthly revenues are still insufficient to cover its monthly operating overheads and that significant capital expenditure will be required for the replacement of aging equipment at the Group's remaining data centre, CX1. CX1 is a commercial data centre facility located in the Selangor state of Malaysia, which has been in operation since 2003 with a total net floor area of approximately 37,500 square feet.

Following completion of the Disposal, the Group has continued to operate its maintenance and data centre design and development business. In addition, the Group also continued to market its data centre services in respect of its CX1 data centre.

Current Trading

The Board and management will continue to implement measures to reduce the burn rate of the Group's cash reserves. The Board will continue to ensure that there are no significant cash outlays other than the sums required to cover the Group's committed lease rentals and other necessary operating overheads, subject to any further capital or operating expenditure that may be required in relation to tenancy contracts.

In view of the accumulated losses of the Group, the Board is not recommending the payment of a dividend. 

Data Centre Rental

Following the completion of the disposal of CSF CX, the Group has approximately 37,500 sq ft of data centre space and approximately 1 MW of IT power capacity in Malaysia.

During the year, the Group successfully renegotiated a contract with an existing tenant at CX1. The Group continues to actively pursue new customers directly and is working closely with a network of resellers and business partners to identify additional sources of revenue from CX1 and other business divisions.

The fibre optic cable linking CX1, CX2 and CX5 commissioned in the prior year has started to generate initial revenues for the Group and the management has now implemented cross-connect charges for the utilisation of network connectivity to/from and within the CX1 data centre.

Maintenance, Design and Fit-out of Data Centres

The maintenance and the design and development segments of the business have experienced intense competition and pricing pressure during the year. Notwithstanding this, management continues to pursue new contracts to enhance our recurring maintenance revenue streams and other revenues from design and fit-out projects.

Strategy

Our strategy remains clear and consistent, and involves focusing on achieving growth in sustainable revenues, while carefully implementing our capital expenditure plans to ensure that the Group's financial position is preserved. We will continue to invest in our employees - in terms of enhancing their technical knowledge and competency - and remain focused on improving the quality of our service to customers.

Michael Leong

Chief Executive Officer

27 July 2018

CHIEF FINANCIAL OFFICER'S REVIEW

Introduction

The Group incurred a net profit of RM113.0m (£20.9m*) for FY2018 as compared to a net loss of RM34.6m (£6.4m*) in FY2017. The basic loss per share ("LPS") for continuing operations amounted to 1.78 sen (0.33p*) per share as compared to earnings per share ("EPS") of 3.30 sen (0.61p*) per share in FY2017, whilst the EPS for discontinued operations amounted to 72.37 sen (13.38p*) as compared to a LPS of 24.93 sen (4.61p*) per share in FY2017.

The net profit for FY2018 was mainly attributable to the gain on the disposal of CSF CX amounting to RM132.6m (£24.5m*), a reversal of an overprovision for project costs of RM8.5m (£1.6m*) and a net decrease in a provision for onerous leases of RM3.1m (£0.6m*) as compared to a net increase of RM8.2m (£1.5m*) in FY2017, which was partly offset by RM32.7m (£6.0m*) of bad debts written off and a net increase in the allowance for doubtful debts of RM28.0m (£5.2m*) as compared to a net decrease of RM1.1m (£0.2m*) in FY2017.

The Group's closing cash position decreased from RM58.0m (£10.7m*) as at 31 March 2017 to RM49.2m (£9.1m*) as at the year-end. Based on the Group's unrestricted cash and bank balances at the financial year end of RM49.2m (£9.1m*), the restricted cash of RM2.1m (£0.4m*) and the net current assets balance of RM55.9m (£10.3m*) and taking into consideration the Group's financial projections, including cash flows, for the period up to 30 September 2019, the Board believes that the Group has adequate resources to continue in operational existence for the foreseeable future.

Financial results

The financial results of the Group are summarised below:

Financial results (Continued)

Revenue

Total revenue decreased from RM82.4m (£15.2m*) in FY2017 to RM55.9m (£10.3m*) in FY2018, mainly due to the cessation of recognition of the revenue (and costs) of CSF CX as a result of the completion of transfer of the Group's shareholdings in CSF CX on 1 November 2017 to the purchaser (the "Share Transfer") pursuant to the disposal of CSF CX (the "Disposal"). The decrease in data centre rental income attributable to the Disposal amounted to RM18.3m (£3.4m*). The decrease in maintenance income of RM2.0m (£0.4m*) was mainly attributable to the non-renewal of comprehensive maintenance contracts. The Group also recorded lower revenue from its design and development segment, due to its larger fit-out contracts having been completed during the previous financial year with no large contracts secured in the current year.

The consultancy income was contributed by CSF Capital Advisory Sdn Bhd, which has provided financial and non-financial consultancy services since April 2017. This company was dormant in FY2017.

Gross profit/(loss)

The Group recorded a total gross profit margin of 1.0% in the current financial year as compared to a total gross loss margin of 3.9% in FY2017, as tabulated below:

Loss from operations

The Group recorded a loss from operations from continuing operations of RM2.8m (£0.5m*) as compared to a profit from operations from continuing operations of RM4.7m (£0.9m*) in FY2017. The adverse variance of RM7.4m (£1.4m) is analysed below:

The decrease in gross profit from continuing operations is explained in Gross Profit/(Loss) above.

The increase in administrative expenses was mainly due to the provision of one-off bonus payments to the executive management team of RM10.4m (£1.9m*), which was approved by the Board in recognition of the hard work, commitment and commendable efforts in substantially improving the financial position of the Company under the stewardship of the Board of Directors in respect of the successful completion of the disposal of CSF CX, further details of which were announced on 24 July 2018.

Loss from operations (Continued)

The increase in other operating income was mainly attributable to the accounting of the cash deposits lodged by the Group for rental deposits in connection with CX2 and CX5 data centres of RM9.1m (£1.7m*), refundable to the Group upon completion of the disposal of CSF CX.

In the current year, bad debts of RM32.7m (£6.0m*) were written off and the effect was partly offset by net reversal of allowance for doubtful debts of RM28.5m (£5.3m*). The bad debts written off mainly consist of trade receivables of RM29.3m (£5.4m*) that were due from Integrated DC Builders Sdn Bhd, which has been wound up during this financial year.

Taxation

The Group recorded a tax charge for the year in spite of reporting a loss for the year, which was mainly due to tax payable by a profitable subsidiary which was not subject to group tax relief.

Earnings per share

Basic and diluted earnings per share ("EPS") was 70.59 sen (13.05p*) as compared to a loss per share ("LPS") of 21.63 sen (4.00p*) in FY2017. The weighted average number of shares during the year used for basic and diluted LPS calculation is 160,028,667 (FY2017: 160,028,667).

Dividends

The Board does not propose any payment of dividends in respect of the current financial year.

Cash and treasury

The Group recorded a lower net cash used by operations before working capital movements and net finance cost of RM16.3m (£3.0m*) which was mainly due to the Disposal.

Cash and treasury (Continued)

The decrease in working capital movements from RM36.1m (£6.7m*) in FY2017 to RM6.9m (£1.3m*) in FY2018 was mainly due to the collection of a significant amount of overdue trade receivables in the previous financial year which did not recur in the current year. The decrease in net finance cost from RM8.5m (£1.6m*) in FY2017 to RM4.2m (£0.8m*) in FY 2018 was mainly due to the reduction in financing facilities attributable to the Disposal.

Critical accounting judgement and key sources of estimation uncertainty

The areas of critical accounting judgement and key sources of estimation uncertainty are disclosed in Note 1 (vi) to the Financial Statements below.

Going concern

These financial statements have been prepared on a going concern basis. The directors' consideration of going concern and the associated uncertainties are provided in Note 1 (v) to the Financial Statements below.

Lee, King Loon

Chief Financial Officer

27 July 2018

* The translation of the financial statements into pro forma balances in pounds Sterling is included solely for convenience and information. The pro forma balances in pounds Sterling are stated, as a matter of arithmetical computation only, on the basis of all balances (2018 and 2017) being translated from Ringgit Malaysia into pounds Sterling at the rate prevailing on 31 March 2018 of RM5.4102 : £1.00. This translation should not be construed as meaning that the Ringgit Malaysia amounts actually represent, or have been or could be translated into the stated number of pounds Sterling.

Consolidated Statement of PROFIT OR LOSS AND OTHER Comprehensive Income

.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

 CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (Continued)

1. General information

The Preliminary Announcement and the final accounts of the Group were approved by the Board of Directors on 27 July 2018. The financial information set out in this Preliminary Announcement does not constitute the Group's statutory accounts for the year ended 31 March 2018 but is derived from those accounts. The statutory accounts for 2018 will be delivered to the Jersey Registrar of Companies in August 2018. The auditors have reported on the 2018 accounts and their report was unqualified and did not draw attention to any matters by way of emphasis.

 (i) Basis of preparation

The consolidated financial statements of CSF Group plc, for the year ended 31 March 2018 have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the EU.

While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria, this announcement does not itself contain sufficient information to comply with IFRS. The Company expects to publish full financial statements that comply with IFRS on or before 30 September 2018. 

(ii) Pro forma balances

The inclusion of pro forma balances in pounds Sterling is included solely for convenience. The pro forma balances in pounds Sterling are stated, as a matter of arithmetical computation only, on the basis of all balances (2018 & 2017) being translated from Malaysian Ringgits into pounds Sterling at the rate prevailing on 31 March 2018 of RM5.4102 : £1.00. This translation should not be construed as meaning that the Malaysian Ringgit amounts actually represent, or have been or could be converted into the stated number of pounds Sterling.

(iii) Basis of accounting

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 31 March 2018, as described in those financial statements.

(iv) Forward-looking statements

Certain statements in these condensed consolidated financial results are forward-looking. Although the Group believes that the expectations reflected in these forward-looking statements are reasonable, we can give no assurance that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward-looking statements.

(v) Going concern

The Group's business activities, together with the factors likely to affect the future development, performance and position are set out in the Chairman's Statement. The financial position of the Group, its cash flows and liquidity positions are described in the Chief Financial Officer's Review. In addition, the notes to financial statements include foreign currency risk management, interest rate risk management, credit risk management and liquidity risk management.

As at 31 March 2018, the Group's cash and cash equivalents excluding deposits held on behalf of the Employee Benefit Trust stand at RM49.2 million.

The Directors have prepared financial projections, including cash flows, for a period up to 30 September 2019. The projections include sensitivity testing to consider a reasonable worst case scenario. Based on these projections and taking into consideration the current financial position of the Group and future capital and lease commitments, the Directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements. In reaching this conclusion the directors have paid particular attention to the following factors:

· The disposal of CSF CX Sdn Bhd ("CSF CX") has improved the Group's financial position due to the elimination of the net liabilities of CSF CX and the elimination of the Group's obligations on the lease payable;

· The return of rental deposits in connection with the CX2 and CX5 data centres, amounting to RM9.07 million on 31 May 2018;

· The existing cash reserves of the business, and the fact that the Group has low levels of bank borrowings with low financial covenants;

· The Group's business model is to lease its data centres as opposed to outright ownership. As a result, the Group is committed to regular lease rental payments, which constitute a significant proportion of the Group's cost base. The Group therefore needs to achieve a certain level of tenant occupancy to cover the minimum lease and other costs of ownership of a given data centre;

· Due to changes in the data centre rental market, current market rentals have declined. In this regard the group are monitoring closely its cost and looking at ways to improve the operation and procurement process including working closely with its suppliers to reduce the overall cost;

· The Group has completed the restructuring with the freeholder on the lease rental payments on CX1, with the revised lease rental rates commencing on 1 January 2016 whereby the lease rental payments shall be lower in the earlier years and progressively increasing thereafter; and

· The funding requirements of existing and proposed new ventures and/or projects.

Given prevailing market conditions, the Group is forecast to continue to make operating losses and have operating cash outflows. The Board is continuing to review the Group's business model with the aim of establishing sustainable profitable trading.

(v) Going concern (Continued)

Notwithstanding the above and taking into consideration the current financial position, future capital and lease commitments of the Group, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Thus they continue to adopt the going concern basis of accounting in preparing the consolidated financial statements for the year ended 31 March 2018.

(vi) Critical accounting judgement and key sources of estimation uncertainty

In the application of the Group's accounting policies, which are described in note 3, the directors are required to make judgements (other than those involving estimations) that have a significant impact on the amounts recognised and to make estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates.

The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods.

Critical judgements in applying the Group's accounting policies

The directors have not made any critical judgements in the process of applying the Group's accounting policies and that have the most significant effect on the amounts recognised in financial statements.

Key sources of estimation uncertainty

Provision for bad and doubtful debts

The provision for bad and doubtful debts includes the assessment of amounts receivable on an individual and collective basis. For individual provisions, events and circumstances such as breaching credit terms, evidence of the debtor experiencing financial difficulties, and potentially the probability of the debtor entering bankruptcy or financial reorganisation are considered. Based on these indicators a judgement is made whether a provision is required. In respect of a collective assessment, the estimation of the future settlement profile of trade receivables is judgemental and includes consideration of past experience in collecting payments, an increase in the number of delayed payments past the credit period as well as observable changes in the economic conditions that correlate with default on receivables.

The Group made an allowance for doubtful debts pertaining to trade receivables aged six months and above. 

Deferred tax asset recognition

The Group recognises deferred tax assets to the extent that it is probable that taxable profits will be available to utilise the asset. At each statement of financial position date, the Directors review the forecast taxable profits of the Group to assess the recoverability of the deferred tax asset. To the extent that it is no longer probable that sufficient taxable profits will be available for carry forward tax losses, the carrying amount of the deferred tax asset is not recognised.

2. Revenue recognition and contract accounting

Revenue represents amounts receivable for work carried out in the rental of data centre space (including reimbursement for electricity consumed by customers), design and development of data centre facilities, the maintenance of data centres and imputed interest on loans to data centre developers.

Revenue from contract works is recognised in the Consolidated Statement of Comprehensive Income based on the stage of completion which is determined based on the contract costs incurred for work performed to date in proportion to the estimated total contract costs.

Revenue on design and development activity is recognised over the period of the activity and in accordance with the underlying contract. Revenue is measured by reference to the fair value of consideration received or receivable from customers. Cost overspends on design and development are recognised as they arise and cost under-spends recognised when it is known with reasonable certainty, the final position of the relevant contract. Where design and development projects are in progress and where sales invoiced exceed the cost of work completed, the excess is shown as deferred income, within other financial assets. When it is probable that total fit-out costs will exceed contract revenue, the expected loss is recognised as an expense immediately.

Income from support and maintenance agreements and the rental of data centre space is recognised on a straight line basis over the period of the related activity. Data centre space is rented out under operating leases.

3. REPORTING SEGMENTS

The Management regularly reviews segment information based on the key products and services provided to its customers; rental of data centre space, maintenance (including support of data centres), the design and development of data centre facilities, and consultancy services.

3. REPORTING SEGMENTS (Continued)

4. GAIN ON DISPOSAL OF SUBSIDIARY

Discontinued operations

On 28 September 2017, the group entered into a Sale and Purchase Agreement to dispose of its entire equity in CSF CX Sdn Bhd ("CSF CX"), a wholly-owned subsidiary, for a cash consideration of RM2.00. The disposal was completed on 1 November 2017, on which date control of CSF CX passed to the acquirer.

The results of the discontinued operations, which have been included in the consolidated statement of profit or loss and other comprehensive income, were as follows:

During the year, CSF CX used RM2.6 million, RM1.3 million and RM0.4 million (2017: RM83.5 million, RM6.1 million and RM1.7 million) in operating activities, investing activities and financing activities respectively.

A gain of RM132.6 million arose on the disposal of CSF CX, being the difference between the proceeds of disposal and the carrying amount of the subsidiary's net liabilities.

5. tax

Malaysian corporation tax is calculated for the year ended 31 March 2018 at a rate of 24% (2017: 24%).

The tax charge for the financial year can be reconciled to the loss in the Consolidated Statement of Comprehensive Income as follows:-

6. earnings per share

The calculations for earnings per share, based on the weighted average number of shares, are shown in the table below.

The number of ordinary shares for diluted earnings per share is the weighted average number of ordinary shares of CSF Group plc in issue.

7. DIVIDEND

The Board does not propose any payment of dividends in respect of the current financial year.

8. CONTINGENCIES

The Group holds a number of guarantees with various banks in respect of banking facilities as follows:

-ENDS-