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Group Financial Review

Overview
The Group achieved a growth in turnover of 28% to S$5.9 billion during the year. Our Utilities and Marine Engineering businesses contributed 49% and 23% respectively to Group turnover. Profit After Tax and Minority Interest (PATMI) before exceptional items grew by 26%, from S$183.7 million to S$231.7 million. The Group also recorded a net exceptional gain of S$163.8 million arising from the gains on disposal of investments, offset by the write-off of Work In Progress and increased provisions for legal claims and costs.

Turnover
All five key businesses recorded an increase in turnover. Utilities and Marine Engineering were the top contributors, bringing in a combined 72% of the Group’s turnover. Growth in Utilities’ turnover was robust, rising 51%, or S$975.7 million, to S$2.9 billion. This reflected strong contributions from its gas business, as well as its integrated utilities businesses in Singapore and UK. The S$289.2 million increase in Marine Engineering’s turnover from S$1.1 billion to S$1.4 billion was attributable to higher volume of ship conversion and ship repair services. Logistics’ turnover increased by S$35.4 million, on the back of growth in its supply chain management business in North Asia. Environmental Engineering’s turnover grew by S$10.4 million on the back of stronger demand for cleansing services while Engineering & Construction’s turnover increased by S$19.9 million to S$822.8 million. 41% of Engineering & Construction’s turnover was from overseas (2003: 27%), while 54% was from process engineering projects (2003: 39%).

48% of the Group turnover in 2004 came from overseas businesses, mainly from Europe and China. Contributions from overseas increased by S$715.8 million, or 34%, to S$2.8 billion.

 

Earnings
Group earnings for the year after exceptional items totalled S$395.5 million, up 39% from 2003, an increase of S$110.4 million.

With most business segments reporting significantly higher profits in 2004, the Group recorded a growth in earnings before exceptional items of 26%. This was contributed mainly by Utilities and Marine Engineering. Utilities achieved a record PATMI of S$108.9 million, or 47% of the Group’s PATMI before exceptional items. Its integrated utilities business in Singapore and UK grew by 92% or S$40.5 million, while the overall energy business grew by 61% or S$28.1 million over the previous year. This growth, however, was offset by poor performance in its Offshore Engineering unit, resulting in Utilities recording a growth of only 11%.

The Group’s share of Marine Engineering’s PATMI before exceptional items increased by 24% to S$60.8 million. This growth in profit came mainly from better performance by its ship conversion and repair businesses, as well as higher contributions from a joint venture and associates. Marine Engineering’s 2004 results also had the benefit of lower tax expenses. The Group’s share of Logistics’ PATMI before exceptional items was S$64.8 million, a 16% growth over 2003. This growth came mainly from the supply chain management business, which recorded higher profits from its overseas joint ventures. Environmental Engineering’s PATMI growth of 16% came from better cost management through recycling activities in its Singapore’s operations as well as better operating performance from its Australian associate.

 

Cash Flow And Liquidity
As at December 31, 2004, the Group had cash and cash equivalents balance of S$2.1 billion as compared to S$623.2 million as at end-2003. Cash generated from operations was S$528.5 million as compared to S$337.4 million the previous year. The increase was mainly attributed to better performance of underlying businesses, better working capital management and lower tax paid.

Cash inflow from investing activities was S$1.2 billion. This was substantially contributed by the proceeds from the divestment of Logistics’ stake in Kuehne & Nagel International (KNI) of about S$1.3 billion.
Capital expenditure for the year was S$280.9 million, incurred mainly with respect to the acquisition of plant and machinery for the integrated utilities business in UK, the 30% stake in Shanghai Caojing Cogeneration, and the additional 4.4% stake in Footwork Express. Free cash flow for 2004 increased substantially to S$2.0 billion as compared to S$530.4 million in 2003. This is due primarily to the proceeds from divestments.

Repayment of loans and interest of S$206.6 million led to a cash outflow from financing activities of S$267.9 million.


Shareholders’ Returns
Return on Equity improved from 18% to 21% on the back of higher Group earnings for 2004.

Earnings per share rose to 21.7 cents in 2004, from 15.7 cents in 2003.

A special interim dividend of gross 6.25 cents less tax at 20%, or net 5.0 cents per share, amounting to S$91.3 million was declared on December 8, 2004. This special dividend was paid out of the distribution by Logistics from the sale proceeds of its stake in KNI. A final dividend of gross 5.0 cents per share less tax at 20% was proposed for the financial year ended December 31, 2004. Together with the special dividend, the total dividend to be paid is gross 11.25 cents per share, which is an increase of 61% over last year. The section 44 balance as at December 31, 2004 stands at S$98.3 million after the special dividend payout.

To reward shareholders further, on February 18, 2005, the Board announced the details of the capital reduction which is subject to shareholders’ approval at the Extraordinary General Meeting in April 2005. It is proposed that the exercise be effected by cancelling 6% of the issued share capital at S$1.95 per share. The price of S$1.95 for each share cancelled is based on a premium of 2.6% over the volume weighted average trading prices of the shares traded on the Singapore Exchange Securities Trading Limited for the five market days from (and including) February 11, 2005 to (and including) February 17, 2005. An aggregate amount of approximately S$215 million would be returned to the shareholders pursuant to the capital reduction.

Critical Accounting Policies
The Group’s financial statements have been prepared in accordance with the Singapore Financial Reporting Standards (FRS) including related Interpretations promulgated by the Council on Corporate Disclosure and Governance. The Group has adopted FRS 103 on Business Combinations, revised FRS 36 Impairment of Assets and FRS 38 Intangible Assets and they have therefore been applied to the current financial year beginning January 1, 2004. Details of the effect of adopting the standards are set out in Note 33 in the Notes to the Financial Statements.

The following are two critical accounting policies which form the basis for which the financial statements
are prepared:

Revenue Recognition
Revenue on goods sold is recognised when the significant risks and rewards of ownership have been transferred to the buyer. Revenue on service work is recognised when the work is completed. Revenue from repair work, engineering, overhaul, service work and marine and civil construction contracts is recognised based on the percentage of completion method. The stage of completion is assessed by reference to surveys of work performed. Electricity revenue is billed and recognised upon delivery.

Impairment of Assets
The recoverability / realisable value of the Group’s assets is assessed in accordance with the various FRS. Goodwill and intangible assets with indefinite useful lives are tested for impairment annually and as and when indicators of impairment exists. For other assets, they are reviewed at each balance sheet date to determine whether there is any indication of impairment. An impairment loss is recognised for the amount by which the asset’s carrying amount exceeds its recoverable / realisable amount.

The rest of the significant accounting policies are set out in Note 2 in the Notes to the Financial Statements.