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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"), I present to you our annual report for the financial year ended 31 December 2015 ("FY2015").

2015 was a year filled with many trials and tribulations in the global equities, offshore and marine markets. Several macroeconomic factors have severely affected businesses across the spectrum and caused disorientation for many industries.

Kim Heng was no exception to this as we endured the impact of these factors on the offshore marine industry.

FY2015 Performance

In FY2015, the global oil and gas industry continued to suffer from an imbalance between supply and demand of oil, a situation that has persisted since the second half of FY2014. This negatively affected oil related businesses across the value chain which gave rise to capital expenditure cuts at the beginning of the year.

Midway through the third quarter of FY2015, adding to the pressure, the prospect of Iranian crude returning to the market and a global stock sell-off, also known as Black Monday, forced oil prices below US$50 a barrel, 25% lower than prices at the beginning of the year. Oil prices continued to fall thereafter, breaking below US$30 a barrel in January 2016.

As a result of falling oil prices and pivotal occurrences in the market, we experienced downward pressure on both demand and pricing for the maintenance of rigs, as well as the provision of goods and services. As such, despite several new charter contract wins, our revenue performance by our core Offshore Rig Services and Supply Chain Management ("ORS-SCM") segment recorded a 35.9% dip to S$44.4 million for FY2015.

Revenue from our Vessel Sales & Newbuild ("VS-NB") segment was also affected due to lower-value vessels sold, recording a slump of 15.3% to S$7.3 million for FY2015.

As a repercussion of lower contributions from our higher margin ORS-SCM segment, our gross profit margin declined from 34.6% in FY2014 to 26.2% in FY2015, where gross profit for FY2015 was S$13.6 million.

Overall, the Group reported a loss after tax of S$4.9 million for FY2015, compared to net profit of S$5.6 million in FY2014. However, we note that on a cash flow basis the Group was able to generate positive net operating cash flow of S$2.1 million for FY2015 and our balance sheet remains in a strong net cash position.

Kim Heng has been in the offshore and marine industry for over four decades and is intently aware of the effects a severe oil price downturn can have on the industry. As we progress into FY2016, we will continue to strengthen our knowledge and remain resilient during this period of challenges, while also embarking on a diversification strategy into infrastructure, power, and water projects. As an experienced integrated offshore and marine value chain services provider, we at Kim Heng are equipped with the adequate skills and infrastructure to adapt our Group to the cyclical downturn and also to capitalise on viable business opportunities once the oil market reverses.

Industry Outlook

The current sentiment in the market is one of belt tightening, with demand in the offshore and marine industry continuing to wane as upstream companies maintain their cost cutting measures. Oil price forecasts have been declining into FY2016 with oil demand easing back due to an expected slower recovery on a weaker global growth outlook. Such effects are expected to remain for a prolonged period, and growth in the offshore subsea services sector is expected to remain subdued in the near term.

Given these obstacles in our operating environment, we expect our business to be volatile and challenging through 2016.

Despite this challenging forward operating environment, we will continue to capitalise on our vast experience to deliver timely and quality services to our valued customers while also seeking opportunities to strengthen our company's offerings.

Future Plans & Growth Strategy

In view of the negative oil and gas industry outlook, we have put standards in place for prudent business practices and conservative resource allocation while also embarking on a diversification strategy to service non-oil and gas industries.

We will continue to engage rigs from around the region that will still require servicing needs as well as capitalise on servicing today's increased stringency in global safety regulations and compliance standards for offshore operations, which may provide a cushion for our business in this harsh operating environment.

We are exploring new markets in the infrastructure, power generation and water treatment industries where we can leverage our existing strengths to diversify our business and service offerings. By doing this, we aim to reduce our overall oil and gas industry exposure during the current period of challenges and emerge as a stronger company when the oil market recovers.

In our efforts to diversify our capabilities, we have expanded our range of equipment and machineries to include crawler cranes, lorry cranes and mobile cranes, so as to enable us to more profitably undertake a wide variety of maritime and marine infrastructure projects.

We have also developed Kim Heng's waterfront yard and facilities at 48 Penjuru Road to ensure that we have sufficient workspace with the necessary infrastructure to provide competitive services. This involved the setting up of a new fabrication and engineering workshop, the construction of a quayside jetty and wharf improvements. These upgrades will help us move up the value chain and secure higher-value jobs in both oil and non-oil related market segments.

Towards the end of 2015, we have also obtained an offer to renew the lease for our 9 Pandan Crescent yard for 20 years starting from January 2016. Our waterfront engineering yards remain a key competitive asset for our business and we remain committed to investing in their productivity for the years to come.

Words of Appreciation & Proposed Dividends

On behalf of the Board, I would like to express my sincerest appreciation to our dedicated team of management staff and employees. It is the severity of the storm that tests the fortitude of the individual and all of you have shown tenacity and made significant contributions to ensure the smooth operation of the Group.

I would also like to thank our partners, suppliers, customers and business associates for their trust in us and support through the years. I hope to continue to forge strong relationships with all of you to pull through this volatility and emerge even more robust.

Also, I wish to thank our key institutional investors, Credence Partners and Zana Capital, for their vote of confidence and support during this time.

In order to reward our loyal shareholders for their enduring support, the Board has recommended a final dividend of 0.3 Singapore cents per share, subject to shareholders' approval at the forthcoming annual general meeting.

As the Group begins 2016, we invite shareholders to stand fervent as we strengthen Kim Heng as a whole and aim to achieve greater value for all our shareholders.

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