Management Discussion and Analysis:
We expect to improve our performance year-on-year in the next three to four years.

Group operations
Group overview

The Group had another exceptional year. A robust set of results for the full year 2006 was achieved on new benchmarks set for all key performance indicators.

Revenue for the year at $7,601 million was a record surpassing the previous high set in 2001, with Offshore & Marine Division making up more than three-quarter of Group revenue. Group PATMI increased by $187 million or 33% in 2006, which is even higher than the 21% increase achieved a year ago. Offshore & Marine Division contributed significantly to earnings growth. The compounded annual growth rate of PATMI from 2001 to 2006 is 23%.

Earnings per share (EPS) of 95.4 cents were 23.3 cents above 2005, and 35.5 cents above 2004. The EPS growth of 32% and 20% in 2006 and 2005 respectively kept pace with PATMI growth. Return on equity scaled a new high of 19.1% and Economic Value Added of $423 million more than doubled that of the previous year of $199 million.

Free cashflow increased exponentially from $583 million in 2004 to $1.48 billion in 2006 due to robust operating cashflow of $1.85 billion in 2006 and $1.56 billion in 2005 mainly from Offshore & Marine Division’s projects. Cash outflow from investing activities was lower in 2006 as there was less expenditure on infrastructure and property projects compared to 2005.

Shareholders will be rewarded with total distribution of 56 cents per share for 2006. The total payout represents 53% of Group PATMI. The payout ratio has consistently exceeded 50%.

The Group has achieved strong growth in the first five years of this decade. With a higher earnings base, the Group is expected to report improving performances year-on-year in the next three to four years.

Segment operations Group revenue of $7,601 million was $1,913 million or 34% higher than that of the previous year, and nearly doubled the amount achieved in 2004. Compared to 2005, Offshore & Marine Division generated revenue amounting to $5,755 million that was $1,643 million or 40% higher, and accounted for 76% of Group revenue. Twenty-six newbuilds and conversions were completed and delivered in the year, on time or ahead of time and within budget. Revenue from ship and rig repairs was also strong. Property Division achieved revenue of $1,155 million, $308 million or 36% above 2005. The increased revenue was underpinned by higher sales and prices of the Group’s new and existing trading projects both in Singapore and regionally. Infrastructure Division reported lower revenue as no major new network engineering contract was secured. Revenue from electricity trading also declined as non-profitable fixed price contracts were not renewed.

Group PATMI before exceptional items of $751 million was $187 million or 33% above 2005, and $286 million or 62% above 2004. The key contributors to the higher PATMI were Offshore & Marine Division, followed by the Investments Division. In 2006, Offshore & Marine Division, which had an exceptionally busy year contributed significantly to the Group earnings growth, achieving an 87% improvement in PATMI. Property Division registered lower earnings because of lower contribution from Keppel Bay.

Infrastructure Division returned to profitability in the fourth quarter of 2006 with the commercial operation of the power barges in Ecuador. However, the quarter’s profit was not sufficient to reverse the losses in the first nine months, resulting in losses of $35 million in 2006. Earnings from Investments Division were higher at $242 million, with gains from the sale of investments and much better contributions from k1 Ventures which benefitted from the divestment of The Gas Company, LLC. These were more than sufficient to offset the lower contributions from SPC, which was affected by the volatile operating environment, product write-downs and higher taxes.