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Chairman's Statement

 

Chairman's Message

Dear Shareholders,

On behalf of the Board of Directors ("Board") of Kim Heng Offshore & Marine Holdings Limited and its subsidiaries ("Kim Heng" or the "Group"), it is my pleasure to present to you Kim Heng's annual report for the financial year ended 31 December 2016 ("FY2016").

Notwithstanding some recovery in oil prices, the weakness in the oil and gas sector continued through the year. Many in the industry are still caught in the storm and are struggling to survive due to the reduced demand for services and equipment by the oil majors.

While we could not completely avoid the effects of an industry downturn, our prudent management initiatives have allowed us to remain resilient in the face of the challenging market conditions.

FY2016 Performance

The general sluggishness in the oil & gas industry continued due to the global imbalance between supply and demand of oil. Despite the early signs of an initial oil price recovery and stabilisation, the oil & gas players were impacted by weaker demand during the year as cost-cutting measures and capital expenditure cuts trickled down the value chain.

Kim Heng was not exempted, as depressed oil prices resulted in lower demand for the maintenance of rigs and related services, and delays in several projects. Revenue from the Group's Offshore Rig Services and Supply Chain Management ("ORS-SCM") segment fell by 30.5% yearon- year ("y-o-y") to S$30.9 million for FY2016, while revenue from the Vessel Sales and Newbuild ("VS-NB") segment also declined by S$6.8 million to S$0.5 million due to the absence of new build projects being undertaken during the year.

Notably however, gross profit margins improved slightly to 27% from 26% during the year due to a shift in revenue mix, with an increase in contribution from the higher margin ORS-SCM segment. Gross profit came in at S$8.4 million in FY2016, down from S$13.6 million in FY2015.

Despite the fall in revenue, we continued to explore ways to improve cost efficiencies on the operating level and have made headway in this aspect. Cost cutting initiatives were successful during the year with SG&A expenses falling 11.6% y-o-y.

Overall, the Group reported a net loss for FY2016 of S$17.8 million, compared to the loss of S$4.9 million in FY2015. This included a non-cash impairment of S$8.3 million due to the decrease in carrying value of some assets. By the careful management of our working capital and balance sheet, the Group was able to achieve positive net cash generation from operating activities amounting to S$2.0 million in FY2016. As at 31 December 2016, the Group still maintained a healthy balance sheet with our cash & cash equivalents balance of S$20.1 million and a modest net debt of S$4.9 million.

Industry Outlook

During 2014, we anticipated that the market would be flushed with an oversupply of assets and that the oil prices would decline. Hence, we were prudent in preserving our cash resources at a time when many of our peers were continuing to invest and take on debt. In the years following, the industry environment declined rapidly. This threatened the viability of offshore drilling and development projects worldwide, leading to many project cancellations. The industry then was faced with weakness and extreme uncertainty.

The year ahead will be challenging, but we are expecting oil prices to stabilize in the midst of the current tepid recovery as there are signs that confidence is returning with oil majors expected to increase exploration and production spending.

Despite the challenges, the Group, with over 40 years of experience in the marine and offshore business, has a long history of managing industry cycles. This allows us to look to the future with confidence and ride through this downturn.

Future Plans & Growth Strategy

We avoided the use of excessive leverage before the oil price crisis and preserved our cash. As prudent spenders we are now exploring strategic growth plans, and ensuring careful consideration before making any financial decisions. Any investments we make must be justified with a clear return on investment.

During the year, we further explored the business opportunity in Iran. However, any potential future business activities of the Company in Iran will largely depend on the level of the economic sanctions imposed by the U.S. against the country.

We also moved our company headquarters to our new 4-story office/warehouse building at 48 Penjuru Road in July 2016, taking advantage of our extended waterfront land lease.

Notwithstanding the current pessimistic industry environment, we believe there will be many opportunities where we are well-placed to take advantage. While our experience informs us that it is challenging to forecast the shape of things to come, on-the-ground market intelligence indicates a base case scenario of industry stabilization in 2017 followed by possible improvements in the industry in 2018.

Our strategy is thus to take advantage of highly selective distressed investment opportunities that can improve our margins and broaden our service offerings, in anticipation of an eventual industry turn around. At the same time, we will continue to build resilience across our business to improve our expertise, overall productivity, efficiency and effectiveness.

Words of Appreciation & Proposed Dividends

On behalf of the Board, I would like to express my sincere thanks to our hardworking team of management staff and employees. Despite the challenges we are facing, it is your tenacity and resilience that has allowed us to not only endure, but come out stronger from the storms.

I would also like to thank our partners, suppliers, customers and business associates for their faith in us and their continued support through the years. I hope to continue to build stronger relationships with all of you during these volatile times.

Also, I wish to thank our key institutional investors, Credence Partners and Zana Capital, for their vote of confidence and continuous support through the years.

In order to reward our shareholders for their loyalty and support, the Board has recommended a final dividend of 0.07 Singapore cents per share, subject to shareholders' approval at the forthcoming annual general meeting.

We welcome your thoughts and support as we move forward into the year of the Company's Golden Jubilee and are hopeful for a better year ahead for Kim Heng in 2017!

Yours Sincerely,
Thomas Tan Keng Siong
Executive Chairman and Chief Executive Officer