Abu Dhabi Ship Building Co. — Management Reports 2015

Nov 9, 2015

Management Discussion And Analysis

For the Period Ended 30 September 2015

November 8, 2015

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I. FINANCIAL HIGHLIGHTS

Abu Dhabi Ship Building PJSC (“ADSB”) and its subsidiaries (together referred to as “the Group”) recorded a consolidated revenue and net profit before foreign exchange of AED 621 million and AED 87.2 million for the 9 months period ended 30 September 2015, respectively, as compared to a consolidated revenue and net loss before foreign exchange of AED 502 million and AED (17.1) million, respectively, during the corresponding period in 2014. The increase in net profit is mainly driven by the good performance in Naval Ship Building (NSB) segment, particularly the Arialah project, and Services segment, particularly Naval repairs and Naval Support Services (NSS), the impact of the realisation of savings on major projects which were completed during the period and the increase in the profit recognised for NSS in the light of more reliable estimates. Support costs remain under tight control with a 19% reduction for the first nine (9) months of 2015 as compared to the corresponding period in 2014.

Revenue

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The overall growth in revenue is mainly from Arialah project, NSS and Naval repairs, net of the decline in progress of major existing projects which were completed during the period or are approaching completion stage most notably in the NSB segment.

Considering the delay in awarding major new build projects, ADSB has further strengthened its efforts towards provision of Services to GHQ through various short term and long term contracts coupled with the continuous efforts that are being done to deliver the existing projects on time. Whilst ADSB continues to explore more Service oriented opportunities within UAE and GCC, ADSB remains committed in its efforts towards tendering for major new build projects.

Gross Profit

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The increase in gross profit margin (%) in Q1 2015 is a result of the realization of savings on major projects which were completed during the period from NSB and SBC segments coupled with additional profit recognized on Services contracts in the light of more reliable estimates.

Liquidity

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The 128% turn around in net bank position from Q3 2014 to Q3 2015 is attributed to significant receipts from customers as a result of the Company’s more robust financial planning. Total overdraft facility with various commercial banks is AED 610 million with AED 597million available for drawdown as on 30 September 2015.

Share Performance

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Closing share price as on 30 September 2015 is the highest since end of Q3 2014.

Market Capitalization

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II. OPERATIONAL HIGHLIGHTS

1. Naval Ship Building (NSB) :

Includes construction of vessels above thirty meter in length or vessels fitted with combat management system.

ADSB is proud to demonstrate local ship building capability for complex naval warships and it has maintained its eminence as the region’s largest naval ship building company in collaboration with strategic partnerships with design partners, who will also assist in the future services support for these and other vessels.

Baynunah Program

ADSB’s flagship ‘Baynunah program’ to construct six (6) modern 72m corvette class vessels for the UAE Navy continued to progress in 2015 with successful delivery of Vessel 4 to the UAE Navy and completion of the Integrated Harbor Acceptance Trials (I-HATs) on Vessel 5 during the first half of 2015. During the third quarter, ADSB completed the Sea Acceptance Trials (SATs) for combat equipment on Vessel 5 and achieved significant progress on the HATs for platform and combat systems on vessel 6.

With respect to the GHQ contract for installation of ‘advanced satellite communication capability’ on all Baynunah vessels, the overall project design phase and first vessel equipment’s Factory Acceptance Tests (FATs) were completed in the second quarter. During the third quarter, the FATs on second vessel’s equipment were completed at facilities abroad. ADSB will begin simultaneous installation works on two vessels following the delivery of equipment in the next quarter.

Ghannatha Program

The Ghannatha Phase II program consists of design and construction of twelve (12) new 26.5m missile patrol vessels and retrofit of twelve (12) existing Ghannatha vessels for the UAE Navy.

Second quarter of 2015 marked the successful completion of the Ghannatha New Build program after the delivery of the last missile boat, fully constructed in ADSB, which brought the total deliveries to twelve (12) missile boats.

In the retrofit program for gunboats, ADSB has already delivered to the UAE Navy all six (6) gunboats and in the retrofit program for the mortar boats, the last boat (6[th] ) has been delivered to the UAE Navy in first quarter of 2015, which marked the successful completion of the Ghannatha Retrofit program.

Arialah Project

In December 2013, ADSB signed a contract with GHQ Armed Forces for the supply of two (2) 67m offshore patrol vessels to the Critical Infrastructure and Coastal Protection Authority (CICPA), in collaboration with Damen Shipyard, Netherlands, as design partner and the builder of the platforms for both of the vessels. After successful completion of the ‘project design review’ and ‘keel laying’ milestones for the first vessel during the first quarter of 2015, the program has continued to progress as per schedule during the second and third quarters of 2015 and has achieved four (4) major milestones during these periods, including FAT of Main Engines of both vessels, FAT of Generator of the first vessel and the Receipt of Main Engines at Damen’s Romania shipyard for the first vessel.

Kuwait Landing Craft Project

During the third quarter of 2015, ADSB signed a contract with The Ministry of Defense, State of Kuwait, for the construction of two (2) 64M Landing Crafts, one (1) 42M Landing Craft and five (5) 16M Sea Keepers for which the construction activity is likely to commence in the last quarter of 2015.

2. Small Boat Construction (SBC):

Includes construction of vessels less than thirty meter in length and not fitted with combat management system.

Under the DNV-15 project to build and deliver thirty (30) boats to Logistics International SAL, the third quarter of 2015 marked the successful completion of this project whereby ADSB delivered all the remaining boats under this program to the customer. Out of the total nineteen (19) boats delivered through first three quarters of 2015, six (6) boats each were delivered in the first and second quarter and seven (7) boats in the third quarter of 2015, bringing the total number of boats delivered to thirty (30).

3. Services Segment:

Naval Support Services (NSS)

After successful completion of the one year NSS contract with GHQ for the UAE Naval Vessels during the first quarter of 2015, ADSB was able to secure a six month extension of this contract during the second quarter of 2015 and a further six month extension during the third quarter of 2015 on the terms and conditions of the existing contract. Works on the extended contract have continued successfully and ADSB was able to achieve all the target deliverables during the second and third quarters of 2015. Discussions on the proposal for Through Life Capability Management (TLCM), already submitted to the Marine Centre of Excellence (MCOE), are at an advance stage and it is expected that the contract for Phase 1 will be concluded during the first quarter of 2016 before the expiry of the extended contract period.

Naval/Commercial MRO

ADSB continues its focus on further expanding its services for commercial ship repairs, refits and conversion projects, while maintaining the competitive edge on naval ship repairs.

A number of options are being explored to enable ADSB to improve services to naval and commercial fleets, which include internal on-job training. Additionally, ADSB has now extended services to its customers outside ADSB yard.

ADSB is also in the final stages of procurement of a Floating Dock, which will enable ADSB to accept vessels with larger size and resultantly will have a positive impact on the revenues of this segment for the year 2016 onwards.

4. Combat Systems Integration :

Frontiers Industrial Investment L.L.C. (“Frontiers”), a subsidiary established in 2014 with a vision of being a central specialized Combat System Service provider, continues to work closely with ADSB on NSS and other existing projects as well as for potential new projects.

Frontiers is positioning itself as a national market leader in Combat Systems and System Integration. Frontiers offerings include Sensors, Communication suits, Combat Management Systems, C4I, upgrade solutions, and special projects. Frontiers has acquired experience and highly skilled personnel in the area of Combat System Integration (CSI) of complex Naval Vessels. Frontiers provides comprehensive solutions from sensors to effectors and covers the full engineering lifecycle, from specification to execution to after sales services. Frontiers has also become a key player in providing multilevel maintenance solutions to the UAE Navy. In the area of Command and Control Centers, Frontiers is currently engaged in providing advanced solutions for complex Maritime Command and Control at the higher operational level. Frontiers has entered into cooperation agreements with key international system integrators to provide innovative solutions addressing complex and emerging requirements.

III. EMIRITIZATION

ADSB recognizes that its future, and the sustainable future of Abu Dhabi, is dependent upon the successful development of a new generation of Emirati business professionals. It is committed to offering talented UAE nationals access to a blend of challenging projects, inspirational people and world class training that will help them become the business leaders of tomorrow.

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Rizwan Chowdhari
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Chief Financial Officer