Management Discussion
& Analysis

MANAGEMENT DISCUSSION AND ANALYSIS


OVERVIEW OF BUSINESS OPERATION

JF Technology Berhad ("JF Tech" or "the Company"), one (1) of the world’s pre-eminent manufacturers of test contacting solutions in test sockets and contact pins for the integrated circuits ("IC") testing industry has reported a 95% decrease in the profit after taxation ("PAT") to RM0.33 million for the financial year ended 30 June 2018 ("FYE 2018"). Revenue was up by 1% to RM24.93 million for the FYE 2018 primarily contributed by exports to the United States, Southeast Asia and increasingly to North Asia as its market share gains abroad has begins to gain traction. Earnings before interest, tax, depreciation and amortisation ("EBITDA") has reduced by 77% to RM1.96 million for the FYE 2018 with an EBITDA margin of 8%.

Market growth of the Company was flat for the FYE 2018 due to the uncertainties of the litigation case coupled with the strengthening of Ringgit Malaysia (“RM”) against United States Dollar (“USD”).

For the FYE 2018, our test contacting solutions for automotive application contributed 50%, radio frequency (“RF”) application contributed 23% and original equipment manufacturer (“OEM”) contributed 27% revenue to the Company and its subsidiaries (“the Group”). Automotive test socket solution contributed more than 50% of the new projects for the FYE 2018. For the mobile devices and internet of things (“loT”) segments, demand for our RF product lines such as ETA and others continued to be encouraging. Sales of recurring and compounding consumables such as contact pins and elastomers have increased by 21% for the FYE 2018. In addition, the sales of OEM products have contributed 27% to the Group’s revenue for the FYE 2018 mainly from the domestic customers including leading test handler manufacturers such as SRM Integration Sdn. Bhd., outsourced semi-conductor assembly and test providers (OSATs) and major multinational semi-conductor manufacturers companies in Malaysia.

Excluding the legal fees, the operating profit as measured by EBITDA was down by 66% year-on-year (“YoY”) to RM3.38 million for the FYE 2018 mainly due to decreasing exports of Zigma sockets particularly to the RF IC devices segment and reducing contribution of contact pins. EBITDA margin has now reduced to 14% for the FYE 2018.

Both subsidiaries of the Company, J Foong Technologies Sdn. Bhd. (“J Foong”) and JF Microtechnology Sdn. Bhd. (“JFM”) are certified with the latest ISO Quality System ISO9001:2015 which includes risk managements in the Quality Management System.

FINANCIAL REVIEW

STATEMENTS OF COMPREHENSIVE INCOME


Revenue recorded at RM24.93 million for the FYE 2018 which was a 1% growth as compared to the preceding year corresponding period. PBT stood at RM0.58 million, representing a reduction of 92% for the FYE 2018. During the FYE 2018, the Company has incurred approximately RM1.42 million on legal fees and a provision of damages of RM6.12 million (based on United States Court Order dated 6 August 2018) for the on-going lawsuit in United States.

As a result of the decrease in PAT for the FYE 2018, the basic EPS was 0.16 sen (please refer to the note * above) for the FYE 2018 as compared with the basic EPS of 3.04 sen for the financial year ended 30 June 2017.

The main factors that contributed to the flat revenue growth and net profit decline were as follows:

  • Uncertainty arising from the frequent postponements of the hearing dates of the lawsuit.
  • Provision of damages of RM6.12 million was made during the FYE 2018 based on United States Court Order dated 6 August 2018.
  • Lower legal fees incurred for the FYE 2017 of RM1.55 million as compared to RM3.75 million for the FYE 2016.
  • Being an export driven business, the performance of the Group was also affected to a certain extent by the strengthening of the RM against the USD during the year.

Operational and Financial Risks

Operational Risks

(a) Competition Risk

The semi-conductor industry is highly competitive, subject to rapid technological changes and new product developments. Many of the Group’s customers are multinational companies in Malaysia and overseas where the selection of the test contacting solutions for their manufacturing processes are based on stringent criteria such as high reliability and sustainability of test performance, good after sales service support and keeping up with the latest trend in IC packaging.

The Group is actively and continuously pursuing new product and technology innovations to address the increasing sophisticated needs of its customers. The Group regular participation in overseas exhibitions provides the opportunities for the Group to understand the latest market requirements and keep abreast of the current technological changes.

Emphasis is also placed on continuous quality checking to ensure that the products meet customers’ requirements and are of high quality. As the Group’s products are highly customised, after sales service is critical to ensure smooth running at customers’ operations.

The Group will continue to strengthen its market position and expand the customer base.

(b) Intellectual Property Risk

As a Technology Company, the Group always emphasis the importance of staying focused on research and development of new products and enhancing the performance of its existing products. The Group depends heavily on the use of its own intellectual property and technological know-how. In order to mitigate the risk, the Group continues to submit applications for patents for new products which are capable of being patented. In FYE 2018, there were four (4) patents granted or allowed for granting and another nine (9) new patents filed. To-date, the Group has twelve (12) patents granted in various countries whilst thirty-six (36) patents are still pending for approval.

All employees are required to sign a non-disclosure agreement (NDA) to protect the Company’s interest

(c) Dependence on Experienced Personnel and Shortage of Skilled Manpower Risk

The Group’s continuous success depends to a certain extent upon the abilities and continued efforts of its existing Directors, key management and technical personnel.

The Group has participated in various career fairs conducted by leading universities in the country. The Group has skill matrixes established and provides training to close the skills gaps of our existing workforce. Besides this efforts, the Group also provides industrial training to students from technical fields with the aim of developing their potentials prior to recruiting them. In FYE 2018, the Group had added six (6) new skilled machinists.

Financial Risks

The Group’s financial risk is set out under Note 33 of the Notes to the Financial Statements in this Annual Report.

OUTLOOK GOING FORWARD

The Group started in 1999 with J Foong as an OEM for one (1) of the world’s top turret handler machine maker, SRM Integration Sdn. Bhd. and three (3) years after its debut on Bursa Malaysia Securities Berhad in year 2011, the Group began its evolution to an original design manufacturer with the set-up of another 100%-owned subsidiary, JFM. Todate, the Group is a proud owner of twelve (12) patents and thirty-six (36) patents pending for approval which will make JF Tech one (1) of the most aggressive intellectual property owner regionally in the semi-conductor test socket industry.

In spite of the pending lawsuit in the United States which had caused the Company RM8.27 million in legal fees from June 2014 to 30 June 2018 and the provision of damages of RM6.12 million, the Group grew its revenue for the FYE 2018 by 1% YoY. The Group is now accelerating export growth opportunities for our new division, Test Interface Solution or TIS in numerous markets simultaneously while at the same time, continues its innovation on its products line-ups and stay consistently ahead of its competitors.

Management envisions further growth in the coming years as the Group is aligned with the market’s high growth applications such as the automotive, IoTs, smartphones and medical segments. The Group will continue to focus on long-term earnings sustainability by diversification of products and market expansion activities.

Dividend

The Group does not have an explicit dividend policy.

MESSAGE FROM THE BOARD AND MANAGEMENT

Premised on the above, the Board and Management are optimistic to meet the challenges for the coming years and would deliver results to the shareholders and investors.

APPRECIATION

My sincere appreciation to our valued customers, suppliers, business associates, bankers, authorities and most importantly our esteemed shareholders for their unwavering support and confidence to the Group.

Last, but not least, I wish to thank my fellow colleagues on the Board for their counsel, support and commitment this far as well as our staff for their invaluable commitment to the Group.

Thank you.

 

Dato’ Foong Wei Kuong
Managing Director

CORPORATE SOCIAL RESPONSIBILITY (“CSR”)

WORKPLACE

During the financial year under review, the Company has carried out its corporate social responsibility through various activities. These include offering technical and industrial training to interns from local vocational institutions and universities.

The Company is committed to the betterment of its employees. With regards to human capital, our development strategy focuses on building individual skills, accountability, competency and management leadership programmes.

The Company is an equal opportunity employer and all appointments and employment are based strictly on merits and experience.

COMMUNITY

The Company has organised a “Blood Donation” campaign for the National Blood Bank which was held at our own premises. We received over-whelming support from our employees as well as neighbour factories and a few from the public. More than sixty (60) volunteers queued up to donate blood.

The Company also contributed financially to support the SEMOA (Semenanjung Orang Asli), a non-profit charitable and non-governmental organisation with their farming equipment and the green house project.

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Environment

The Company continues to source for new methods to incorporate sustainability practices into all its processes and to operate in a responsible manner by optimising the Company’s resources and reducing the generation of waste.