Chairman’s Statement

In 2016, the crude oil price recovered from a low of US$30 in January to hover around the US$50 level towards the end of the year.*

Despite a more buoyant mood in the oil and gas sector, uncertainty persists. The oil majors will not increase capital expenditure (capex) until the price rise is sustainable. On 30 November 2016, OPEC (The Organisation of the Petroleum Exporting Countries) members agreed to a six-month cut in production. This may not lead to a sustained price increase as U.S. shale oil producers can resume production and consequently cap any price increases.

Adding to the uncertainty: China’s economic slowdown, Brexit, and tensions in the Middle East and the Asia-Pacific region persist.

These uncertainties slow down decision making related to long-term business investments such as those in long-gestation oil and gas ventures, which need a stable political and economic climate.

In essence, it may take some time for the crude oil price to return to a level that will result in an increase in capex by oil producers. This is necessary to boost the bottom line of the oil and gas ecosystem.

Against such a challenging backdrop in 2016, Rotary Engineering Limited (Rotary) remained nimble and resilient by tapping into our diverse skillsets and experience to market and secure new business.

* World Bank Commodity Markets Report 2016

For the 12 months ended 31 December 2016 (FY2016), the Group recorded net profit attributable to shareholders of S$11.4 million on the back of revenue of S$233.9 million. Revenue declined by 29% as major projects reached completion. Gross profit was S$57.1 million and gross profit margin was maintained at 24%. Earnings per share was 2.0 Singapore cents per ordinary share.

The Singapore market accounted for 70% of revenue up from 56% in FY2015. This is due to a more diverse mix of smaller projects from a wider spectrum of industries. Some of our Singapore projects include: Work for an LNG receiving terminal, a refinery’s power cogeneration system, Changi Airport Terminal 4 fuel hydrant system, and a jetty for a tank farm.

The ASEAN region ranked second in revenue, mainly attributed to Thailand’s contribution of 12%. Our Thai subsidiary continues to do well with its advanced fabrication capabilities that support the regional demand for pressure vessels, heat exchangers, boilers, cooling towers and other ancillaries. It was also involved in the construction of two 160,000m3 LNG tanks.

The Middle East, with its plans for large scale storage, refining and petrochemical complexes, continues to hold good prospects for the Group. We currently have projects in Saudi Arabia, Dubai and Fujairah. Rotary has established a brand name in this region with past projects such as the Fujairah Oil Terminal and SATORP; both serve as a showcase of Rotary’s expertise, and help generate a regular stream of enquiries from project owners and planners in the region.

The Group’s financial position remains healthy despite the prolonged slump in the crude oil price that has significantly impacted its business in FY2016.

The Group’s balance sheet remains strong with cash and cash equivalents of S$86.0 million. Equity attributable to shareholders decreased from S$289.1 million to S$160.6 as at 31 December 2016. Net Asset Value per ordinary share (NAV) was 28.3 Singapore cents as at 31 December 2016.

The Group has a Current Ratio of 1.4 times and a Net Cash position of S$64.8 million as at 31 December 2016.

Despite the difficult conditions, we remain resilient and have performed relatively well for 2016. We have strategies and plans in place to position for the eventual upturn in the oil and gas cycle.

Taking into account our performance, and as a token of appreciation for the continued support from our Shareholders, the Board would like to propose a final dividend of 0.5 Singapore cent per ordinary share for FY2016.

Rotary has stepped up its performance in this difficult environment by encouraging greater innovation and higher productivity.

We are constantly on the lookout for new ways to harness Information Technology that allows us to climb the productivity ladder.

In operations, we often prefabricate and modularise off-site and transport the completed modules with our own barges for on-site installation. For example, in our jetty topside projects, the prefabricated modules including piping and E&I, were done in our Batam yard. These were then transported by barge and installed in Singapore. This results in significant time and cost savings for our clients.

In construction, our workforce is well-trained for the job and work with the best equipment.

One steadfast value of the Rotary brand is “Smart Thinking. Safe Hands”, which expresses our commitment to High Productivity and Work Safety.

We have an excellent track record in work safety and have won many awards. Some of the recent awards won by the Group and its subsidiaries are:

Overseas Awards

  • Royal Society for the Prevention of Accident (RoSPA) Health and Safety Gold Medal Awards: Rotary Electrical & Instrumentation Pte. Ltd., Rotary IMC Pte Ltd, Rotary Mechanical and Construction Company (Private) Limited
  • Royal Society for the Prevention of Accident (RoSPA) Health and Safety Gold Awards: Rotary-Thai Construction Pte. Ltd., Rotary MEC (M) Sdn. Bhd.
  • Construction Engineering Industry Sector Award for Occupational Health & Safety: Rotary Engineering Limited

Local Awards

  • Workplace Safety and Health (WSH) Performance Gold Awards: Rotary-Thai Construction Pte. Ltd.
  • Workplace Safety and Health (WSH) Performance Silver Awards: Rotary Engineering Limited, Rotary Mechanical and Construction Company (Private) Limited, Rotary Electrical & Instrumentation Pte. Ltd.
  • Workplace Safety and Health (WSH) SHARP Awards: Rotary Electrical & Instrumentation Pte. Ltd. - Afton Project Lion

In FY2016, we implemented a two-pronged business development strategy with short-term and long-term objectives. In the short-term, we intensified our marketing to ensure that Rotary had sufficient projects to utilise its resources efficiently and remain profitable. The average size of projects available in 2016 was smaller, and we had to diversify our efforts to target companies unrelated to the oil and gas sector.

We remain focused on our long-term objective of occupying other parts of the bulk liquid storage value chain. We have established a presence in Vietnam and Indonesia as both countries have rapidly urbanising populations of 90 million and 250 million, respectively, and hold great potential for the oil storage infrastructure business. Both lack the necessary storage and distribution infrastructure to cater to the growing volume of bulk liquid petroleum-based products that are required for energy, transportation and consumer products.

The Middle East is a major hub for oil production. The Middle East countries have ambitious plans to go downstream with higher value-add activities such as refining and petrochemicals. Despite the current low price of crude oil, some of these long-gestation plans that involve tankage and jetties are still on the books and the Middle East cannot be ignored in any business development strategy. Due to the scale of their crude oil production, the projects in the Middle East are also larger and more complex and will remain an important source of revenue and earnings for Rotary.

We have progressed beyond tank storage construction to be a one-stop provider of solutions for bulk liquid storage. From Front End Engineering Design (FEED) to project construction and commissioning, we are able to give our customers a comprehensive range of services.

We are bidding for projects in the Middle-East, Malaysia and Singapore for petrochemical complexes, refineries, specialty chemicals storage and LNG terminals. These projects are more complex and of a higher value and require the integration of different engineering disciplines from structural to mechanical, piping, E&I (electrical and instrumentation) and civil engineering. Such projects may extend beyond tankage to include the construction of jetties, topsides, and the piping, pumps and electrical instrumentation that handle the input and output of production facilities.

Rotary will explore opportunities to expand its presence in new markets and areas of the bulk liquid value chain that are less correlated with crude oil prices.

The oil and gas sector is huge, with many supporting industries that have varying degrees of correlation with crude oil prices. Demand for bulk liquid storage is still robust despite the current slump. Storage is required not only by oil and oil products producers, but refiners, traders as well as manufacturers too.

The development and operation of tank storage infrastructure is a natural progression up the bulk liquid storage value chain. The Group has an established track record in the engineering design and construction of tank storage and its ancillaries, and a deep knowledge base on the operation of storage terminals.

All these position us well for the future. While we diligently seek to ensure our bottom line remains positive during the current slump, we continue to plan for the future.

I would like to thank the Board for its guidance and valuable advice in steering the company through these difficult times. I would also like to express my deepest appreciation to our business associates, suppliers and shareholders for their support and trust in Rotary. Lastly, I would like to thank the management and staff for their dedication and hard work in contributing to the Group’s success.

Mr. Chia Kim Piow, Roger

Chairman & Managing Director