Annual Report 2011/2012 - Colombo Stock Exchange

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ANNUAL REPORT 2011 / 12 CHAIRMAN'S REVIEW FOR THE YEAR 2011/2012 It is with much pleasure that I welcome all of you to the 31st Annual General Meeting of the Company. During the year under review the Group made a net loss of Rs. 32.2 million compared to a net loss of Rs. 23.3 million last year, whilst the Company showed a net profit after tax of Rs. 5.5 million as opposed to a net loss after tax last year of Rs. 8 million. The Company’s main source of income is a management fee paid to it by its wholly owned, BOI approved subsidiary, which owns and operates the two new vessels, Mercs Uva and Mercs Uhana. The shareholders will be aware that the main and substantial source of income for the Group is the charter hire derived by its subsidiary from its aforementioned two vessels, which have been given out on time charter for operations in the international trade. I indicated in the Review last year that the shipping industry worldwide was in a depressed state, consequent to worldwide economic problems and that charter rates had to be reduced last year owing to pressures in the market. Although in Euro terms there was a reduction in Group Revenue consequent to reduction in the charter rate, in Rupee terms Revenue has increased from Rs. 599 million in the last financial year to Rs. 609.5 million in the year under review owing to the devaluation of the Rupee. However, in Rupee terms expenditure has also increased resulting in increased losses. I regret to state that the position has become even worse throughout the current year. As you would be aware many European countries are in grave economic crisis and even China and India, the major Asian economies, have shown a significant reduction in their growth rates. The shipping industry, being linked to the international economy, has had to face even further depressed charter rates to carry the limited cargo available. In fact as recently as March this year we were compelled to accept a still further reduction in the charter rate that was payable to us, as the charterer was facing huge losses at the rates they were earlier paying to us and other ship owners, whose vessels they were operating. The charterer, in fact, offered to return the vessels to us if we could not accept the reduced rate, but since inquiries by Reederei Eugen Friederich (REF), our foreign partners, in the international shipping market revealed that we could not obtain a higher rate, it was decided that we should accept the reduced charter rate as the best option. The reduced charter hire earned by the Group is adequate to meet operational expenses and maintain the vessels to their customary high safety and technical standards, but will enable us only to pay the interest payable on the loans granted by the German lending Bank. The Bank has agreed in principle to a further rescheduling of our loans, as the shipping industry is in difficulties worldwide, and formal approval, specifying the details, is expected in the near future. I must in this connection place on record the Company’s deep appreciation of the assistance rendered to us in our negotiations with the foreign charterers and the German lending Bank by REF, and especially by our Managing Director, Mr. T. Kriwat. Your Company has been exploring opportunities in shipping or shipping related activities in Sri Lanka and has now identified an investment opportunity. International carriers transiting our waters have required a change of crew and security personnel in Galle which has resulted from the threat of pirate attacks on those vessels when operating in the Gulf region and in the Indian Ocean. This operation requires the use of crew transport boats, and your Company, in collaboration with Hemas Transportation Ltd. has formed a joint venture company on a 50% / 50% basis to own and operate these crew transport boats, under the name and style of H & M Shipping Services (Pvt) Ltd. The Board of Directors of your Company has after evaluation decided to invest up to Rs. 30 million in this new venture. The joint venture Company has ordered two boats initially and operations are expected to commence in the near future. It must be mentioned however that crew transport vessels, such as ours, are small boats, plying for short distances, from shore to the big ships lying offshore and their earning too will be correspondingly extremely low compared to international charter rates for the larger vessels owned by the Company’s subsidiary. It is expected however, that crew boat services will be a growing area of business. 03
MERCANTILE SHIPPING COMPANY PLC CHAIRMAN’S REVIEW FOR THE YEAR 2011 / 2012 Contd... I must underscore however that the earnings from our main line of business, namely international carriage by sea, will be inextricably linked with the fortunes of international charter operators, whose earnings in turn will depend on when the world economy will recover and get to a period of steady growth. We welcome to the Board Mr. S. Obadage, from the Ceylon Shipping Corporation and Ms. K.A.C Wilson from the Hemas Group, who joined us as Directors in place of Mrs. M.K.M. De Silva and Dr. M.I.M. Musheen, who retired in the current financial year, and we are certain that their contribution will be of immense value to us in the challenging period we are facing.In conclusion may I extend my gratitude and thanks to my fellow Board Members and to the Management and staff of the Company for their unstinted support throughout this difficult year. A N U Jayawardena Chairman Colombo 18th July 2012 04
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