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1. FINANCIAL PERFORMANCE
1.1 Selected Quarterly Financial Data
1.2 Turnover
FY2002 turnover increased by six percent or S$149 million to S$2,619
million compared to FY2001. The increase came mainly from the Electronics
and Land Systems sectors, but was partially offset by the lower
turnover of the Marine sector.
Aerospace sector’s turnover of S$1,043 million for FY2002 was
marginally higher than that achieved in FY2001. The increase was
mainly contributed by the Engineering and Materials Services (EMS)
business group arising from the completion of project milestones,
but was largely offset by the lower turnover of the Component/Engine
Repair and Overhaul (CERO) business group. The reduced sales in
DalFort Aerospace (DalFort) accounted for the lower turnover in
CERO business group.
All three business groups of the Electronics sector contributed
to the increase in turnover of 17 percent or S$82 million. This
increase can be attributed to the milestones completion in major
projects, such as the aircraft simulator projects, a ship console
project, the Hong Kong Fire Services project in the Software Systems
Group, the Ministry of Home Affairs’ (MHA) communication project,
as well as the sale of communication equipment and the delivery
of a shipboard integrated communication system by the Communication
and Sensor Systems Group.
The bulk of the increase in turnover of 18 percent or S$107 million
of the Land Systems sector came from the delivery of Bronco, Bionix
Launched Bridge as well as delivery of SAR 21, 155 mm howitzer and
an air defence weapon system within the Automotive (Auto) and Munitions
and Weapon (M&W) business groups respectively. However, the
higher turnover was partially offset by lower engine and trading
sales of the Services, Trading and Others (S&T) business group.
The turnover of the Marine sector in FY2002 of S$280 million was
16 percent or S$55 million lower than that achieved in FY2001, due
largely to lower Shipbuilding and Shiprepair revenues. FY2001 Shipbuilding
turnover was lifted by the delivery of a Landing Ship Tank (LST)
in 1Q2001. The lower Shiprepair turnover was mainly due to the disruptions
resulting from upgrade of the syncrolift in 4Q2002.
1.3 Profit
Group profit before tax (PBT) for FY2002 decreased by six percent
or S$27.1 million over the same period last year to S$413.0 million.
Aerospace and Marine sectors registered lower profits. The low interest
rate environment in 2002 contributed to a significant decline in
other operating income.
Aerospace sector’s FY2002 PBT of S$213.0 million was six percent
or S$12.7 million lower compared to FY2001. The lower profit was
primarily contributed by Airframe Maintenance and Modification (AMM)
business group due to significantly lower level of work at DalFort,
the lower profit from the B757 Passenger-to-Freighter (PTF) conversion
programme at ST Mobile Aerospace Engineering (MAE), the start-up
losses in Bournemouth Aviation Services Company (BASCO) and San
Antonio Aerospace (SAA) as well as the United Airlines Chapter 11
filing. The lower AMM PBT was largely cushioned by the higher PBT
from EMS business group, arising from higher turnover, lower engineering
and development operating expenses, and contribution from the biennial
Asian Aerospace 2002 exhibition.
The Electronics sector's FY2002 PBT grew by nine percent or S$4.5
million to S$56.7 million over FY2001. The increase was mainly attributable
to higher gross profit arising from higher sales, but was partially
offset by the increase in marketing and selling, and R&D expenses.
Overall, the performance of the Sector was also affected by lower
interest income.
PBT of Land Systems sector for FY2002 of S$96.9 million was comparable
to that achieved in FY2001. This was due mainly to lower profits
of the Auto and S&T business groups, but largely offset by higher
profits from the M&W business group. A restructuring charge
amounting to S$21.4 million was incurred in FY2002. Excluding restructuring
costs, FY2002 PBT was higher by S$21.2 million or 21.8 percent than
that of FY2001 despite lower interest income. Excluding restructuring
costs, the Auto business group’s profits increased due mainly
to higher turnover, write-back of stock provisions and higher gain
on disposal of NASDAQ quoted H Power shares, but was partially offset
by provision for foreseeable loss. The M&W business group had
higher profits, excluding restructuring costs, due mainly to higher
turnover and the write-back of provision for liquidated damages
as a result of rescheduling of project deliveries. The S&T business
group had lower profits due to lower investment income, but was
cushioned by lower operating expenses.
FY2002 PBT for the Marine sector was S$41.1 million, a decrease
of 34 percent or S$21.5 million over FY2001. The decrease was primarily
attributable to a weak Shipbuilding performance due mainly to the
lower turnover and weaker margins. The lower Shipbuilding profit
was partially offset by higher profits from Engineering as a result
of the absence of the share of loss in associated companies and
higher investment income.
1.4 Cash Flows and Cash
Management
For FY2002, the net cash generated from operating activities amounted
to S$134.9 million. In FY2001, the net cash generated from operating
activities amounted to S$423.9 million. The substantial reduction
in cash from operating activities was due to working capital movements
arising from higher debtor balances as well as lower advances from
customers. For the investing and financing activities, the Group
spent S$187.0 million on purchase of fixed assets and additional
investments in subsidiaries and associated companies. A further
S$250.5 million of cash was paid out as dividends to shareholders
of the Company and minority shareholders of subsidiaries. Consequently,
the net cash outflow for FY2002 was S$236.0 million, compared to
a net cash inflow of S$150.8 million in FY2001.
As at 31 December 2002, the Group's cash and cash equivalents stood
at S$2.0 billion, which is 11 percent or S$0.2 billion lower than
that of FY2001. The cash and cash equivalents are centrally managed
by the treasury unit in ST Engg, where excess funds from the bank
balances held by the various subsidiaries are pooled to common bank
accounts. The majority of the funds were invested in liquid assets
such as fixed deposits, floating rate notes and placements with
a related corporation.
1.5 Earnings Per Share
(EPS)
The basic and diluted EPS for FY2002 was 11.5 cents and 11.4 cents
respectively. Compared to FY2001, both basic and diluted EPS decreased
by 0.4 cents. The lower EPS was a result of lower profit after tax
for FY2002.
1.6 Capital Expenditure
Capital expenditure amounted to S$171 million. The acquisition of
SAA and VT Halter Marine contributed to the bulk of the capital
expenditure for the year. The details are shown in Note 8 to the
financial statements.
1.7 Dividend
The Directors are pleased to announce that gross dividends totalling
185 percent (i.e. S$0.185 for each share of par value S$0.10) have
been recommended for the year ended 31 December 2002. The recommended
dividends consist of a gross Ordinary Dividend of 30 percent (i.e.
S$0.03) and a gross Special Dividend of 155 percent (i.e. S$0.155).
Included in the Special Dividend is a "Tax Exempt (one-tier)"
dividend of S$100 million, which is a one-off distribution of the
capital profits arising from capital reduction in a subsidiary in
2000. The recommended dividends took into consideration the Group's
present cash position, positive cashflow generated from operations,
tax credit balances, the recent introduction of one-tier corporate
tax system, and projected capital requirements. Payment of the dividends
is subject to the approval of the shareholders of the Company at
the forthcoming Annual General Meeting.
1.8 Economic Value Added (EVA)
EVA for FY2002 was S$190.2 million, an increase of S$30.7 million
or 19 percent over FY2001. The weighted average cost of capital
was 9.3 percent for 2002 (2001: 9.4 percent).
2. RISK MANAGEMENT AND
SENSITIVITY ANALYSIS
2.1 Risk Management
Operational Risk
The Group operates in 11 countries with assets and activities spreading
across the Asia Pacific, the US, and Europe. As part of the Group’s
plan to grow its business internationally, the Group will continue
to focus on increasing its operating activities and presence in
the US, Greater China, and Europe. As at December 2002, 15 percent
of the Group’s assets were located in the US compared to seven
percent in the previous year. Revenue from customers located outside
Asia has increased from 26 percent in 2001 to 28 percent in 2002.
The Group expects that as part of its business strategy, the percentage
of its overseas-sourced assets and customers will increase moving
forward, thereby achieving the effect of greater geographical diversification.
A broader base of significant customers will reduce the risk of
customer concentration.
Investment Risk
The Group seeks to grow its businesses via three fronts, through
organic growth of its existing capabilities and capacities, development
of new capabilities as well as acquisition of business entities
or operating assets. Investment activities, ranging from identification
of targets to the conduct of due diligence exercise, are supported
by a dedicated team of investment professionals and augmented by
external professionals for specialised services. The business proposals
are guided by a given set of internal investment criteria, evaluated
by senior management and endorsed by an Investment / Divestment
Board Committee before seeking final Board approval.
Interest Rate Risk
The Group's cash balances are placed with reputable banks, financial
institutions, and a related corporation. Cash resources are also
invested in bonds and government-related securities. The Group manages
its interest rate risk on its interest income by placing the cash
balances on varying maturities and interest rate terms.
Foreign Exchange Risk
The foreign exchange risk of the Group arises from subsidiaries
operating in foreign countries, which generate revenue and incur
costs denominated in foreign currencies. The Group's local subsidiaries
also generate revenue and incur costs in foreign currencies, which
give rise to foreign exchange risk.
The Group's major foreign exchange risk exposures result from anticipated
sale and purchase transactions denominated in foreign currencies,
primarily in US dollars and Euro. To hedge the impact of foreign
exchange fluctuations on the profit and loss accounts, the Group
matches its liabilities against assets of the same currencies within
the Group, through the adoption of a netting policy across different
entities with opposing exposures in the same currencies. Both spot
and forward foreign exchange contracts are transacted within the
Group which then hedges its net foreign exchange exposure with external
counterparties.
Derivative Financial Instrument Risk
The Group entered into forward foreign exchange and/or options to
hedge its net foreign currency exposures in the management of foreign
exchange risk, not for speculative gains from currency movements.
Derivative financial instruments are merely tools employed for the
purpose of hedging.
Market Risk
The Group's investments in quoted equity shares and bonds, government-related
securities and amounts under fund management are subject to market
risk as the market values of these investments are affected by changes
in market conditions. The Group manages its exposure to market risk
by maintaining a portfolio of equities with different risk profiles.
For amounts under fund management, the Group is guaranteed 95 percent
to 100 percent of the principal values invested by the fund managers
at the end of the relevant fund management period, hence mitigating
the effects of market risk.
Liquidity Risk
To manage liquidity risk, the Group monitors its net operating cash
flow, maintains a level of cash and cash equivalents and secured
committed funding facilities from financial institutions. In assessing
the adequacy of these facilities, Management reviews working capital
requirements so as to mitigate the effects of fluctuations in cash
flows.
Credit Risk
Credit risk, or the risk of counterparties defaulting, is managed
through the application of credit approvals, credit limits and monitoring
procedures. Where appropriate, the Company or its subsidiaries obtain
collaterals from customer or arrange master netting agreements.
Cash terms, advance payments, and letters of credit or bank guarantees
are required for customers of lower credit standing.
2.2 Sensitivity Analysis
Interest Rate
The Group's cash and cash equivalents as well as funds under management
are largely invested in fixed deposits and fixed income securities.
Movement in interest rates will have significant impacts on the
interest and investment income for the Group. Based on the Group's
cash and cash equivalents of S$2 billion as at year-end 2002, a
one percentage point movement in effective fixed deposit rate is
estimated to result in an annual S$20 million change in interest
income for the Group.
Gross Profit Margin
At FY2002 turnover of S$2.6 billion, a one percentage point movement
in the gross profit margin of the Group will lead to a S$26 million
change in gross profit for the Group.
Others
Other risk factors that will have an impact on turnover and net
profits tend to be sector or project specific, hence, it is not
practical to perform sensitivity analysis in such instances.
3. REVIEW OF BUSINESS
ENVIRONMENT
Aerospace
2003 continues to be a challenging year for the aviation industry.
The possibility of conflict in the Middle East compounds the uncertainty.
Despite the uncertainties, the Aerospace sector will continue to
look for opportunities to expand globally through acquisitions,
joint ventures, strategic alliances and greenfield set-ups. The
Sector will also continue to invest in new capabilities and develop
new products and services to further enhance total support to existing
and new customers.
The Aerospace sector's blue chip customer base continues to provide
a steady workflow. Globally, the direction for both the established
airlines as well as the new low-cost airlines is to increase the
outsourcing of maintenance work so as to be more cost effective
and to focus on their core business of airline operations. This
offers added opportunities for the Aerospace sector to expand its
customer base as well as the services it offers.
Electronics
The generally weak economic outlook has affected public infrastructure
spending in the region, including electronic system projects. This
has put pressures on many participants in the industry. Despite
this competitive environment, the Electronics sector will continue
to focus on growing its business, both in Singapore and internationally,
especially in regions such as Greater China where investment in
public infrastructure remains an area of priority and where proven
track records are an asset in gaining customer confidence.
Land Systems
The fight against terrorism is affecting many armed forces, adding
new responsibilities and increasing the need for new anti-terrorism
solutions. Armed forces around the world are therefore taking steps
to address such threats. In addition, within the military arena,
the Revolution in Military Affairs is driving the transformation
of the armed forces in many parts of the world – calling for
technology-driven, network-centric and multi-functional integrated
systems designed to improve future military planning and battlefield
effectiveness. The industry will have to keep up and transform in
tandem to provide more ingenious solutions to meet these twin demands.
Increasingly, there will be lesser need for conventional platforms
and weapons, and more towards technology-laden systems and solutions.
In 2002, the Land Systems sector began the process to align itself
in preparation for this new phase in the industry's development.
A new business structure – comprising Defence and Commercial
Business Divisions – reflects the two-prong approach in the
Sector's strategy to chart a course for long-term business growth.
The Defence Business Division will focus on accelerating capability
development in areas of strategic importance, including Multi-Role
Land Systems, Guided Weapons, and Operations and Support.
In the International arena, the Defence Division will focus on establishing
a presence in the West through possible acquisitions and alliances
(with ST Kinetics having a subcontractor role, a partnership role
or even a licensing role), as well as increased participation in
international programmes such as the 8x8 wheeled vehicle programmes
in Europe.
The Commercial Business Division will spearhead the Sector's drive
into new commercial businesses and seed growth engines in Heavy
Automotive sub-systems and Alternate Energy products leveraging
on dual-use technology.
Marine
The near term business environment for the Marine sector remains
tied in to general economic conditions and concerns in the Middle
East. The immediate impact is difficult to predict while declines
in demand could lead to fewer newbuilding orders for shipyards.
It is also conceivable that higher oil prices may present growth
in offshore support vessels as well as opportunities for replacement
of ageing vessels.
Closer to home, the Marine sector envisages an increasingly tougher
shiprepair environment. Until the sand issue is resolved, the utilisation
of dredgers will remain low. However, the recent release of several
dredgers by Indonesian authority gives certain optimism that the
issue may be resolved soon. Nevertheless, the Sector is focusing
on the high value added repairs in chemical tankers and gas carrier
vessels while securing inroads into the offshore repair market.
4. PROSPECTS
Based on current outlook, the Group expects its turnover in 1Q2003
to be comparable and PBT to be lower than 4Q2002. For FY2003, the
Group expects higher turnover with higher earnings before interest
and tax (EBIT). However, with projected lower investment and interest
income, PBT is expected to be comparable to FY2002.
Aerospace
Aerospace sector expects its turnover in 1Q2003 to be lower compared
to 4Q2002, whilst PBT is expected to be higher than 4Q2002. Uncertainties
remain within the aviation industry with the possibility of conflict
in the Middle East. Aerospace sector expects its turnover for FY2003
to be maintained while PBT is expected to improve over FY2002 with
the recovery from losses on the B757 PTF conversion programme and
improvement from the start-up companies. However, there remain significant
uncertainties in the aviation market and the outcome on the global
political and economic fronts.
Electronics
The Electronics sector expects turnover and PBT in 1Q2003 to be
lower than that of 4Q2002. The Sector expects milestones completion
in LTA's Circle Line project and the supply of Multi-channel Multipoint
Distribution System (MMDS) product to Mexico, Taiwan's i-Call Taxi
Despatch System project, iDA's Call For Collaboration on mobile
payment solution project and the supply of radio communications
and VSAT equipment as well as the Hong Kong Fire Services project
and an aircraft simulator project.
Overall, the Electronics sector expects the turnover and PBT for
FY2003 to be higher than that of FY2002. For FY2003, Electronics
sector expects revenue recognition from LTA's MRT/LRT projects;
Manila LRT project; supply of MMDS product to Mexico; Hong Kong
Fire Services project; the delivery of ship consoles for defence
applications; aircraft simulator projects; MHA's Communication Network
project; and the delivery of communication and VSAT equipment.
Land Systems
The Land Systems sector's turnover in 1Q2003 is expected to be comparable
while PBT is expected to be lower than 4Q2002.
The Sector's turnover for FY2003 is expected to be higher while
PBT is forecasted to be comparable to FY2002. However, profit after
tax for FY2003 is expected to be lower without the tax write-backs
and other tax benefits accounted for in FY2002.
Land Systems sector will continue to deliver key products such as
Bronco, 155 mm howitzer and SAR 21 in FY2003.
Marine
For 1Q2003, Marine sector expects turnover to be higher than 4Q2002,
but PBT is expected to be lower.
With the inclusion of VT Halter Marine and the frigate programme,
Marine sector expects turnover for FY2003 to be higher than FY2002.
However, the Sector expects PBT in FY2003 to be lower than FY2002.
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