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Dear
Shareholders,
In 2002, the major economies of the world achieved little to modest
growth. Businesses worldwide struggled to cope with excess investment,
general overcapacity compounded by sluggish demand. A third straight
year of decline in equity markets reflected the underlying difficulties
that many businesses continue to face.
The events of 911 continued to cast a shadow on the aviation industry
throughout 2002 and into 2003. Notwithstanding the weak economic
environment, our businesses continued to perform well at the operating
level in 2002, with earnings before interest and tax up by 17 percent
from S$281.5 million to S$330.2 million. We made good progress in
growing our businesses internationally with significant acquisitions
in both the Aerospace and Marine sectors, and strategic investments
by our Electronics business in Hong Kong, Latin America, Korea and
Australia. These acquisitions and investments will enable our Group
to emerge stronger and be better-positioned to capitalise on future
opportunities.
Our market capitalisation stood at S$4.8 billion at the close of
2002 compared to S$6.8 billion at end-2001.
REVIEWING FINANCIAL PERFORMANCE
In spite of the difficult business environment, the Group maintained
a steady operating performance for the financial year ended 31 December
2002. Group turnover for the year increased by six percent to reach
S$2.62 billion, compared to S$2.47 billion in the prior year. However,
lower interest income and a restructuring charge incurred in the
Land Systems sector lowered net profit after tax (NPAT) by three
percent to S$330.7 million. Profit before tax margins for the Group
remained healthy at 16 percent. Economic value added for the year
was S$190.2 million, an increase of 19 percent from S$159.5 million
in the previous year. Overall, at the operating level, ST Engg performed
well as a group with strong growth in earnings before interest income
and tax.
The Aerospace sector registered turnover of S$1,043 million and
NPAT of S$155.6 million in 2002, largely unchanged from 2001, in
spite of adverse aviation market conditions. Aircraft Maintenance
and Modification segment experienced some losses which were mainly
attributable to start-up and learning curve effect of the B757 project
and some union issues in DalFort Aerospace. Both have since been
resolved.
Our Electronics sector reported a healthy 17 percent growth in turnover
to reach S$571 million and achieved a 24 percent growth in NPAT
to S$42.8 million.
Turnover for the Land Systems sector grew by 18 percent to reach
S$710 million while NPAT was comparable to that of the previous
year.
The Marine sector posted a turnover of S$280 million compared to
S$335 million in 2001. (This sector had adopted a percentage of
completion method in 2002 and on a proforma basis, the turnover
for 2001 would have been S$252 million). NPAT fell to S$29.2 million
as a result of weak margins for the shipbuilding segment and the
start-up costs of VT Halter Marine which was acquired in October.
DIVIDEND
The Board is pleased to recommend a total gross dividend of 185
percent consisting of gross ordinary dividend of 30 percent and
gross special dividend of 155 percent. This represents an increase
of 71 percent over the 108 percent declared in 2001.
LOOKING BACK ON THE
YEAR
Acquisitions and Investments
In 2002, we made several important acquisitions and investments
as part of the gradual build-up of our global footprint, bringing
us closer to attaining our vision of being a global defence and
engineering group. Although profits may not be generated immediately,
the acquisitions and investments will help us gain access to new
markets and technologies in the medium term.
In January, the Land Systems sector acquired a 25 percent equity
stake in Timoney Holdings Limited of Ireland, a global leader in
independent suspension systems for heavy vehicles. This investment
will enable us to build our wheeled vehicle capability to complement
our current technology portfolio in vehicle sub-systems.
In April, the Aerospace sector made a successful bid for the assets
of Dee Howard Aircraft Maintenance L.P. in San Antonio, Texas for
US$14.2 million. It is a significant acquisition as it not only
increases our Maintenance, Repair and Overhaul (MRO) capacities
in the US, it also widens our MRO capabilities to include regional
jets. This new facility, renamed San Antonio Aerospace, began operations
in July and successfully clinched maintenance contracts from several
new customers, including UPS and Mesa Airlines.
In July, we made a winning bid for the assets of Halter Marine Inc.
– the shipbuilding arm of US-based Friede Goldman Halter Inc.
– for US$66 million. The acquisition was completed in end October
and the facility, renamed VT Halter Marine, began operations immediately.
In the following two months, it successfully novated two existing
contracts from the National Oceanic and Atmospheric Administration
and the US Army which subsequently exercised an option for an additional
vessel. It also secured a contract to build an Offshore Supply Vessel
(OSV) for a commercial customer. We are excited about the prospects
of VT Halter Marine as it provides the platform to grow both our
naval and commercial shipbuilding business in the US. It also provides
an entry into defence-related work in the US.
Within the Electronics sector, several strategic investments were
made during the year in several companies including Sino Stride
Technology (Holdings) Limited in China, Ripple Systems in Australia
and RF Korea Inc. in South Korea to drive its international growth,
especially in Greater China, Latin America and Australia. These
investments have resulted in recent successes in securing overseas
contracts, notably in Greater China and Mexico.
Organisational Change
Defence Business: The defence industry is undergoing a major
transformation, accelerated by the events of 911. With a major trend
towards network and system-centric systems, we saw a need to transform
the Group’s Defence activities towards a more integrated approach.
The year saw the restructuring of ST Engg to integrate its Defence
Business which accounts for about 60 percent of the Group’s
revenue. With the introduction of a matrix structure, this facilitates
an integrated and more cohesive approach in dealing with defence
customers while at the same time allowing for synergistic benefits
to be harnessed at the sector level between our defence and commercial
businesses.
Technology: The defence business arena has always been very
demanding, and increasingly more so as modern military forces seek
technologies that will provide greater effectiveness, lethality,
mobility and precision in the future battlefield. Soldiers and commanders
expect advanced technologies to increase their operational capabilities,
enhanced information systems to provide dominant situational awareness
and the ability to command and control combined arms units to conduct
integrated operations. Network-centricity will be key to enhanced
effectiveness.
On the commercial front, the advent of exciting advanced technologies,
in particular, nanotechnologies, wireless communications, data fusion,
infotech and computers have spurred new products and markets that
can be disruptive to existing business paradigms. Such technologies,
particularly those that are dual-use in nature, fit well with ST
Engg’s overall strategy and core businesses.
As an engineering group, there is a need for ST Engg to have a strong
advanced engineering and development capability for both our defence
and commercial businesses. To propel us into our next phase of growth,
ST Dynamics was restructured into an Advanced Engineering Centre
(AEC) to spearhead the development and nurturing of a broader portfolio
of future technologies and capabilities. The AEC will acquire technologies,
oversee in-house development as well as leverage on technologies
from research institutions and universities.
As part of the reorganisation to provide greater technological thrust,
it is vital that there is a business entity to focus on the new
generation of guided weapon systems, smart and enhanced munitions.
Towards this end, the Guided Weapons division of ST Dynamics was
merged with the Chartered Ammunition Industries to form a dedicated
arm for the development and production of guided weapons and advanced
ordnance.
Transformation: With reduced emphasis on lower-end conventional
products, some existing capacities needed to be downsized. The Land
Systems sector thus underwent a restructuring exercise in October
after a thorough review of its existing capabilities and capacities
which resulted in the laying off of 460 of our colleagues. Whilst
it was a painful exercise, it was an essential step in the transformation
of the Group as we reshaped our Land Systems sector to prepare for
its next phase of growth. A one-time restructuring cost of S$21.4
million was taken for this exercise.
Separately, other non-core businesses such as Opel and Siamant were
also divested so that the Land Systems sector could focus on more
strategic businesses.
Key Operational Highlights
Aerospace Sector: The Aerospace sector grappled with operational
challenges in what was a difficult year for the aviation industry.
It made a loss in the B757 Passenger-to-Freighter conversion programme
in the first half of 2002 due to several factors, including a longer-than-expected
learning curve effect. However, the programme managed to turn profitable
from the second half of the year.
Union negotiations in the first half of the year also resulted in
a slowdown of its operations in DalFort Aerospace. An agreement
with the union was eventually reached and ramp-up activities progressed
gradually.
On 9 December, one of our biggest MRO customers, United Airlines,
filed for Chapter 11 Bankruptcy Protection. While there was no material
impact on the Group’s financial performance for the year, it
signalled that the aviation industry was still some way from recovery.
On a more positive note, San Antonio Aerospace in Texas and Bournemouth
Aviation Services Company, our majority-owned European joint venture
with FR Aviation Ltd, commenced operations in July and successfully
secured initial contracts. San Antonio Aerospace has also continued
to perform well and its prospects are encouraging.
Electronics Sector: The whole Electronics sector continued
to do well with steady achievement of project milestones for its
various contracts. It also clinched several new domestic and international
contracts. To boost its business in key areas such as infocommunications,
mobile payment, e-learning and simulation, intelligent building
management systems, intelligent transportation and communications
systems, the Electronics sector made several strategic investments
and formed joint ventures to jumpstart its expertise.
Land Systems Sector: After a year of successful product launches
in 2001, the Land Systems sector continued to enhance its product
portfolio to meet the rapid deployment needs of the army of the
future. The Terrex AV81 8x8 wheeled vehicle successfully underwent
rigorous trials at home and in the UK. An MOU was also signed with
a European partner to jointly develop an 8x8 vehicle based on the
Terrex AV81 prototype.
Delivery of the Bronco All Terrain Tracked Carrier to the Singapore
Armed Forces remained on track. Bronco’s versatility was enhanced
with the development of a quick “coupling/decoupling”
capability to improve its operational effectiveness.
Marine Sector: The completion of the 12.4-hectare Benoi Yard
upgrading programme vastly enhanced our shipbuilding capabilities.
The newbuilding programme for the Republic of Singapore Navy kicked
off at the yard with a plate-cutting ceremony for the second and
third frigates. During the year, the Marine sector delivered two
of three Platform Supply Vessels for Tidewater Inc.
Recognition
We are extremely proud to be the first public-listed company in
Singapore to receive the coveted Singapore Quality Award (SQA) in
July. The SQA is widely recognised as one of the premier business
excellence awards in the world, on par with the US Malcolm Baldrige
National Quality Award, the European Quality Award and the Australian
Business Excellence Award. The award, conferred on organisations
that have attained world-class standards in business excellence,
attests to the commitment, hard work and "can-do" spirit
of all our people. It also signals our ability to compete internationally
with the best global players in the business.
For the third year running, the Securities Investors Association
(Singapore) presented ST Engg with the Golden Circle Award and Most
Transparent Company (Multi-Industry) Award in recognition of our
outstanding efforts to meet shareholders’ needs. Several other
awards ranging from corporate governance, financial report and technology
awards were achieved at the Group and sector levels. These awards
represent our collective efforts to excel at every level of our
work.
GOING FORWARD
The Group remains committed to growing its core businesses. We will
pursue overseas opportunities in a prudent manner. In this regard,
the acquisition of Halter Marine and San Antonio Aerospace represent
new sources of business growth in the US. Elsewhere, our Electronics
sector has capitalised on dual-use technologies and achieved good
growth in international sales, an approach which will also be emphasised
by the Land Systems sector. At the same time, we remain fully committed
to working closely with our key customers to address their current
and future requirements, recognising that we will need to invest
more in some of the newer areas of focus.
Within the Group's businesses, we are concerned about the state
of the aviation industry and the risks that could ensue from any
prolonged conflict in the Middle East. In this period of uncertainty,
we continue to focus on implementing our business strategies. With
constant improvement and innovation, we are confident that ST Engg
will be a nimble, highly focused and leading technology-centred
organisation over time. We move into 2003 with excitement and confidence
that we have in place the right strategy, the right organisation
culture and the right leadership teams to achieve our goals.
APPRECIATION
We would like to thank Mr Lim Neo Chian, ST Engg’s former Deputy
Chairman and CEO, for his invaluable contribution during his tenure.
Ms Ho Ching, who stepped down as Chairman and Board member, deserves
special mention for her role in the formation of ST Engg in 1997
and her years of association thereafter. Her deep sense of commitment,
mission and visionary leadership have left an indelible mark in
the ST Engg Group. We would also like to express our appreciation
to Mr Eddie Teo and Mr Peter Ong who stepped down from the Board
during the course of the year.
We thank all our shareholders, customers, employees, business partners
and suppliers for believing in us and for their continuing support.
7 February 2003
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REVIEWING FINANCIAL PERFORMANCE
DIVIDEND
LOOKING
BACK ON THE YEAR
• Acquisitions And Investments
• Organisational
Change
• Key Operational
Highlights
• Recognition
GOING FORWARD
APPRECIATION
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