In FY2007, Group revenue increased marginally by 2.8% to $154.5 million from $150.3 million in FY2006. This increase is due to the fact that the significant increase in sales from the core business segments were largely offset by a dip in sales of $25.0 million in the Marine Logistics segment.

Gross profit margin also improved to 27.1% compared to 25.7% in FY2006, due primarily to the Group’s focus on vessel chartering which commands relatively higher margins.

Depreciation and amortisation charges have also increased in FY2007, due mainly to the full year depreciation of Federal I, a Floating, Storage and Offloading (“FSO”) vessel recorded against an eight-month contribution in the preceding financial
year. Also, additional fixed assets such as leasehold property and Federal II, another newly acquired FSO vessel, have contributed to the increase in depreciation and amortisation charges.

Fixed assets increased from $49.5 million in FY2006 to $107.8 million in FY2007. The increase was due to several major capital expenditure items. These include the purchase of a property amounting to $5.3 million by Alton for use as business premises, the purchase of Federal II amounting to US$31.5 million and lastly, construction-in-progress of the co-generation plant by subsidiary Banyan Utilities of $13.5 million.

Performance by Business Segments

TRADING

In FY2007, the Trading segment remained the key contributor to Group revenue, accounting for 83.2% compared to 62.8% in FY2006. Revenue for Trading also crossed the $100.0 million mark, reporting $128.5 million, as against $94.4 million in FY2006. This is due to the improved performance of all subsidiaries, including the newly incorporated 65%-owned subsidiary Geo Link Nusantara Pte Ltd (“GLN”). GLN had successfully completed its first marine offshore pipeline project in East Java, Indonesia as one of the two project management teams for a 16-km, Zone I, East Java Gas Pipeline.

R&D/ DESIGN/ MANUFACTURING

In late October 2007, the Group disposed of its 60% stake in HP & T Products, Inc., a Houstonbased subsidiary which specializes in R&D, design and manufacturing of high-pressure and high-temperature valves and other related oilfield products for deep-sea offshore oil & gas exploration activities. The Group was of the view that it was opportune to divest so that it could realise its intrinsic value, reap the returns on its investment and deploy the funds to other areas at the appropriate time.

This business segment saw a decline in revenue from $17.9 million in FY2006 to $13.5 million in FY2007 due to lower sales in Europe. Revenue contribution also decreased from 11.9% previously to 8.7% in FY2007.

MARINE LOGISTICS

Sales for the Marine Logistics segment, which accounted for 8.1% of Group revenue in FY2007, saw a decline from $37.9 million in FY2006 to $12.5 million in FY2007. Believing in the strong growth potential of this sector, the Group is actively seeking untapped opportunities in the region. The recent acquisition of Federal II demonstrates the Group’s strategic plans in building and managing a portfolio of FSOs for vessel chartering.

Performance by Geographical Segment

In FY2007, Singapore was the top contributor to Group Revenue, accounting for 24.0% or $37.1 million, followed by the United Arab Emirates (UAE) with sales of $29.1 million and Indonesia with sales of $27.2 million.

Going Forward

BOO/BOT POWER UTILITY PROJECTS

To date, the Group has clinched a total of fou r power plant projects , comprising one Bui ld-Own-Transfer (“BOT”) project based in Singapore, and three “Build-Own-Operate” (“BOO”) projects located in Indonesia. The Indonesian-based power plants projects are expected to be revenue-generating in FY2009. Should these power plants be revenue-generating in FY2008, the Group’s top and bottom line will see a positive impact. The local BOT project will be revenue-generating in FY2008.

The Singapore-based BOT project was awarded in June 2007 when our 60%-owned subsidiary Banyan Utilities secured an agreement with Natural Fuel Pte Ltd to provide electricity and steam to its bio-diesel plant on Jurong Island for 12 years, with an option to extend for five plus five years for maintenance works. As part of this project, Banyan Utilities will build a 5 MW co-generation facility. The minimum contract value for this project is S$54 million for the 12-year period, and Banyan Utilities will be able to sell surplus output to third parties.

In August 2007, FHEC’s joint-venture company with PT Tanjung Jabung Power, PT Jabung Gas Plant, was awarded a 10-year contract (with an option to extend for five years) to build, own and operate an integrated gas and power plant, comprising a
6 MW gas power plant and Liquefied Petroleum Gas (“LPG”) refinery plant with a daily capacity of between 40 to 57 tonnes, both located in the West Tanjung area. The LPG and condensate from this plant will also be sold to third parties. The agreement is expected to generate revenue of approximately US$178 million over the contractual period.

In December 2007, FHEC incorporated a subsidiary PT. Gasuma Federal Indonesia, to build, own and operate an integrated gas processing and power plant in Tuban, East Java. The complex comprises a 10-12 MW electricity power plant, a LPG refinery plant and a Condensate refinery plant. The contract for the supply of gas and electricity is for six years with an option to extend for an additional four years. This project is expected to generate annual revenue of approximately US$20 million to US$30 million.

In February 2008, FHEC’s joint-venture company with PT Manna Energy Pratama, PT Mega Federal Energy, secured a US$56 million, 25 year BOO contract to build a 4 MW hydro power plant and supply electricity to PT PLN (Persero) Distribusi in Bengkulu, Indonesia.

EXPANSION INTO COAL MINING BUSINESS

Alton International Resources Pte Ltd (“AIR”), a 51% owned subsidiary of Alton, has also ventured into Indonesia’s coal mining industry. AIR will participate in the coal mining business as a mine operator as well as the exclusive marketer for the end products. The Group recognises the untapped opportunities in the industry and is confident that with its strong network in Indonesia, it is able to reap attractive returns from this coal mining investment.

TARGETING THE ASIA PACIFIC REGION

FHEC had incorporated a joint-venture company with Applied Machinery Co. Ltd (Thailand) in 2007 to tap EPC projects in Thailand as well as trading in valves, pipeline equipment and fittings and explosion-proof lighting fixtures.

During the year under review, Alton had also formed a strategic alliance with CosmoSteel Holdings Limited, a supplier and distributor of piping system components to the energy and marine industries in Southeast Asia. The joint-venture company,
KVA Energy Pte Ltd was established to target energy-related projects in the Asia Pacific region.

TARGETING THE HUGE MIDDLE EAST MARKET

Recognising the huge market potential of the Middle East region, Federal Engineering Middle East was incorporated to set up a trading office in the United Arab Emirates’ Sharjah Airport International Free Zone. Federal Engineering Middle East will market oilfield products, and especially our proprietary KVCTM valves to the burgeoning Middle East market.

FORAY INTO THE ENVIRONMENTAL BUSINESS IN PRC

In January 2008, our subsidiary, Federal Environmental & Energy Pte. Ltd., partnered IESE Water (Asia) Pte Ltd to set up Federal-IESE Environmental Technology (Shanghai) Co., Ltd. to tender for and undertake projects on water, waste, solid waste and biomedical waste treatment and management as well as the supply of specialty chemicals for water and waste treatment plants in China.

BUSINESS OUTLOOK

With crude oil prices still at fairly high levels, we believe that the outlook for the marine as well as the oil and gas sectors will continue to be positive in the next few years. In the light of international concern about global warming and growing environmental consciousness, the environmental industry in rapidly industrialising countries such as China will also present exciting growth potential.

We at Federal are confident that we have the right strategies in place and are advantageously positioned to meet the demand in these fast-growing industry sectors, and consequently take the Group’s business to the next level.