FGV Annual Report 2016

ANNUAL INTEGRATED REPORT 2016 45 Diversifying Our Portfolio The Cluster managed to increase its external business income to comprise about 40% of total revenue from 30% in 2015 following a rigorous programme to increase its market position and maximise its assets utilisation, such as expansion in traditional markets, and increasing lorries and storage tanks utilisation rate. Our eventual goal for the cluster is to rebalance the ratio of internal and external businesses to 50:50 from about 60:40 at present. To that end, we entered into a number of new business arrangements with external partners in 2016 to further diversify our mix of business, e.g. through a service contract for three (3) years signed in December 2016 with Lhoist (Malaysia) Sdn Bhd, theMalaysian armof Lhoist S.A., a Belgianmultinational company and the world's leading producer of limestone and lime. MOVING FORWARD The Cluster is a relatively new addition to the Group and further investments are required before it can contribute meaningfully to the Group. We have earmarked a number of key initiatives for 2017 that will take us closer towards our goal of becoming a global leader in the areas of trading, logistics and storage, and a market leader in commercial services. In 2017, we aim to expedite our mineral logistics business in Perak and other external business opportunities to reduce our reliance on internal sources of business and to make greater use of our existing transport assets. The Cluster will be leveraging on its service contract agreement with Lhoist S.A to expand its logistics network. Finally, we will commence the construction of our first warehouse for our external business in Tanjung Langsat, Johor. The new warehouse will cater to the oil & gas players as well as from other industries. We expect a slight recovery in CPO price and production volume in early 2017. However, the external trends such as forex and general macroeconomic conditions will continue to be key determinants of our performance for the year. The year 2017 will be another challenging year, thus justifying our business plan to expand our income source from external business and reduce our reliance on internal Group business. The Cluster maintains our key 'choke-point' assets that are designed to optimise our value chain operations by providing supporting services. These assets are essential in ensuring the smooth operations of the Group's core plantation business. Although the Cluster was only established slightly more than two (2) years ago, we have already identified some of the challenges faced by the Cluster. The table below provides an overview of our SP20 targets for the Cluster. As part of theGroup's reorganisation, the Cluster will be renamed the Logistics and Others (LO) Sector. The Trading & Marketing segment of TMLO will be grouped under the Plantation Sector, while the LO Sector will welcome the existing Rubber Cluster as part of its business. The aim of the reorganisation is to introduce greater cost efficiency and enhanced focus to the Sector in executing its supporting role. KEY RISKS TO THE CLUSTER The Cluster faces a number of challenges ranging from volumes of cargo available and other business-specific risks. A discussion of the key risks affecting our business is published in our SORMIC. Strengthen trading strategy, capability and monitoring mechanism so that our strength is optimised. Expand storage capacity locally and globally through collaboration with trading and palm downstream cluster (e.g. FMCG). Nurture logistics, engineering and IT business as new growth engine in adjacent areas. Spin-off high potential assets to unlock value. Restructure and unlock values of non-performing assets and investments. Hospitality & property businesses to focus on operational excellence. TRADING & MARKETING, LOGISTICS AND OTHERS (TMLO) CLUSTER Aspiration: Global leader in trading, logistics & storage and market leader in commercial service business ("the others") CHALLENGES STRATEGIES Obtaining positive trading margin within challenging business environment and disparity market. Few non-performing assets and investment requiring fast resolution. Saturated internal business requiring us to develop external business aggressively. Competition from other MTO players and other terminals (bulking). Stagnant throughput from major customers. 2020 TARGETS Trading Volume: 5.60 million MT Transport Volume: 6.10 million MT Bulking Volume: 8.50 million MT CLUSTER PERFORMANCE: TRADING & MARKETING, LOGISTICS AND OTHERS (TMLO) MANAGEMENT DISCUSSION & ANALYSIS More information about the key risks is available on pages 136-137