|  WE VALUE ALLIANCES; DEVELOP OUR TEAM; STRIVE FOR EXCELLENCE
2009 was a year of strategic divestments and financial
consolidation as the Group sought to strengthen its balance
sheet and improve working capital.
After having made a strategic review of all our investments
in our portfolio of Build-Operate-Own (“BOO”) and Build-
Operate-Transfer (“BOT”) projects, the Group made a
deliberate decision to divest our stakes in selected projects
and subsidiaries which were deemed to be non-core
investments.
Initiatives were also made to raise funds amidst a tight credit
environment caused by the difficult market conditions due to
the global economic downturn. Although the world economy
improved after the first half of 2009, business recovery was
still weak and uncertain.
It was against this macro economic scenario that the
Group delivered a lack-lustre performance in 2009. Group
revenue rose slightly by 3.1% to $206.7 million in 2009.
This increase was attributable to a substantial contribution
from the Integrated Project Management (“IPM”) project and
the supply of Oil Country Tubular Goods in Indonesia and
increased business activities in the Marine Logistics segment.
This improvement was offset by lower sales from the Trading
segment in the fourth quarter of 2009 due to stringent credit
extension to customers, as well as a huge decrease in sales
from the Energy & Utilities segment, owing to a customer
which was affected by its parent company’s financial difficulty.
In addition, gross margins were lower due to the IPM project
and trading activities in China.
Apart from the lower profit margins, the Group also bit the
bullet by making allowances for doubtful debts, and impairment
losses, and writing off project acquisition and exploration costs
arising from various projects being undertaken. As a result, the
Group went into the red with a loss of $18.0 million in 2009.
We view the loss as primarily accounting-driven and that the
Group is fundamentally strong with a sound business model
and focused growth strategies. In addition, our balance sheet
is now spruced up and all set for future growth.
Highlights of the Year
One of the key highlights of 2009 was our successful foray into
the Algerian market with a major contract of US$ 73.3 million
to supply a 428-kilometre line pipe for the development of
the oil and gas reserve at Menzel Ledjmet East field, Algeria.
This was a milestone achievement for Federal; firstly, Algeria
is a new market for the Group; secondly, winning this contract
despite stiff competition from established international
players testifies to the Group’s value-added proposition to its
customers in terms of technical expertise, competitive pricing,
commitment to quality and timely delivery.
The other market penetration success was by our subsidiary,
Alton International (S) Pte Ltd (“Alton”), which clinched a
contract of US$6.0 million for project management & control,
Engineering, Procurement and Construction support services
in respect of the installation of Compact Manifold Skids on an
offshore platform project in Vietnam. Although the contract
value was relatively small, we believe the successful execution
of this project will open up a huge vista of opportunities for
Alton in Vietnam, an emerging market with lots of growth
potential.
To beef up the Group’s working capital position, we have been
undertaking fund-raising exercises in 2009, as well as, in 2010.
The first initiative was Federal’s renounceable underwritten
rights issue of 158.6 million rights shares which was fully
subscribed, and has raised net proceeds of $15.1 million.
The second effort is a placement of 62,964,665 new ordinary
shares in March 2010 which would result in a cash injection of
approximately S$9.0 million by a strategic long-term investor
for working capital and investment purposes.
During the year under review, we made two key strategic
divestments in non-core projects. We disposed of our 65.0%
stake in Geo Link Nusantara Pte Ltd together with the land
rig, as well as our 60.0% shareholding in PT Gasuma Federal
Indonesia. On the other hand, we continued with selective
business expansion as evidenced in the incorporation of new
subsidiaries and increase in paid-up capital for some existing
investments in China and Singapore.
Clear Horizon Ahead
The progressive recovery in the world economy, and especially
the robust Asian markets such as China and India, looks set to
fuel business growth across all industries including the global
oil and gas and marine sectors. Since the second half of 2009,
we have already seen a gradual firming of oil prices around
the US$70 - US$80 per barrel range. This has brought about
an increase in both onshore and offshore oil & gas exploration
and production activities, leading to an active offshore and
marine sector. We believe the increased level of activities
in these sectors will benefit Federal owing to the increased
demand for products and services provided by the Group.
Going forward, the Federal group will continue to strengthen
its balance sheet and working capital position. With a strong
balance sheet, we will be in a better position to take on good
projects or business opportunities as and when they arise.
Focus on Core Businesses
A key pillar of our growth strategy has always been to continue
our focus on our core businesses, especially our mainstay –
the Trading segment - and the Marine Logistics segment which
provides a stable, recurring income stream for the Group.
On the Trading segment front, we will continue to penetrate
into emerging, high-growth markets such as Africa and Middle
East. Our Algerian line pipe contract was a good launch pad
for us to expand our market presence in Africa. We are also
penetrating into markets such as Vietnam, as the regional
countries regain their economic health. With the regional
offshore marine sector becoming vibrant again, our Marine
Logistics segment team will continue to search in the region
for a second Floating Storage and Offloading project for our
vessel Federal II.
Prudent Stance on BOO/BOT projects
Involvement in BOO/BOT projects is not a key business
focus, but we are adopting a prudent stance by selecting
good projects that can deliver decent returns to the Group.
For instance, in China, we are very selective in bidding for
environmental management projects in wastewater treatment
and supply of tap water. Our first BOO waste water treatment
plant for the Sichuan Panzhihua Vanadium-Titanium Industrial
Park has kicked off operations for the first phase in January
2010. We are in anticipation of the forthcoming contribution
from Federal Water (Chengdu) Co Ltd in Chengdu, China for
the raw water and tap water supply services in Chengdu.
Given the huge and growing demand potential for such
services in a country which is environment-conscious, we
believe that we are well-positioned to target similar projects
in the growing second & third-tier cities in China.
Unlocking Potential
In 2010, we will also continue with our corporate initiatives of
making selective divestments and fund-raising, so as to further
fortify our financial standing. This, coupled with our long-term
business growth strategy, will position us strongly for growth.
We believe that all these measures and strategies will enable
the Group to ‘unlock its potential’ in FY2010 and beyond.
Barring unforeseen circumstances, we expect to return to
profitability in the current financial year.
Acknowledgements
I would like to thank my Board of Directors for their strategic
counsel offered during this difficult period. I would like to
mention the appointment of Mr Heng Lee Seng, who has
been a member of the Board since 2000, as lead independent
director.
Mr Hoon Tai Meng, who has been an independent director
since the Company was listed in 2000, has indicated that he
does not wish to seek re-election at the forthcoming Annual
General Meeting. On behalf of the Board, we wish to record
our appreciation to him for his wise counsel and contributions.
We are also pleased to welcome Mr Leon Yee, who was
appointed an independent director on 23 March 2010.
Federal’s growth over the years, and including 2009, has
been possible, thanks to all business partners, customers
and suppliers worldwide for their continued support. My
appreciation also goes to our loyal shareholders for their faith
and patience. Most importantly, I wish to thank all my staff for
their hard work, dedication and passion in clinching projects
in the face of great odds. Your concerted efforts and esprit
de corps are vital to our success during these challenging
times!
Koh Kian Kiong
Executive Chairman and Chief Executive Officer
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