Annual Reports & Accounts 2011

3 Financial risk management

3.1 Financial risk factors

The Group’s activities expose it to a variety of financial risks: market risk (including foreign exchange and cash flow interest rate risk), credit risk and liquidity risk. These risks are evaluated by management on an ongoing basis to assess and manage critical exposures. The Group’s liquidity and market risks are managed as part of the Group’s treasury activities. Treasury operations are conducted within a framework of established policies and procedures.

(a) Market risk – foreign exchange risk
The Group has foreign exchange risk primarily with respect to commitments in Euro with certain suppliers. To manage the foreign exchange risk exposure arising from future commercial transactions and recognised liabilities, the Group uses forward exchange contracts (Note 32).

(b) Market risk – cash flow interest rate risk
The Group holds its surplus funds in short-term bank deposits. During the year ended 31 December 2011, if interest rates on deposits had been 0.5% higher/lower, the interest income would have been higher/lower by USD 483,000 (2010: USD 527,000).

The Group’s interest rate risk arises from long term borrowings. Borrowings at variable rates expose the Group to cash flow interest rate risk which is partially offset by cash held at variable rates. During the year ended 31 December 2011, if interest rates on borrowings had been 0.5% higher/lower, the interest expense would have been higher/lower by USD 668,000 (2010: USD Nil).

(c) Credit risk
The Group’s exposure to credit risk is detailed in Notes 16, 21, 23, 24, 26 and 32. The Group has a policy for dealing with customers with an appropriate credit history. The Group has policies that limit the amount of credit exposure to any financial institution.

Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, deposits with banks, held-to-maturity investment, financial asset carried at fair value through profit or loss, trade and other receivables and derivative financial instruments. The Group has a formal procedure of monitoring and follow up of customers for outstanding receivables. For banks and financial institutions, only independently rated parties with a minimum rating of ‘B’ are accepted. The Group assesses internally the credit quality of each customer, taking into account its financial position, past experience and other factors.

At 31 December 2011, the Group had a significant concentration of credit risk with nine of its largest customer balances accounting for 58% (2010: 72%) of trade receivables outstanding at that date. Management believes that this concentration of credit risk is mitigated as the Group has long-standing relationships with these customers.

The table below shows the rating and balance of the 13 major counterparties at the balance sheet date:

Counterparty	2011				2010
	External rating+	USD’000			External rating+		USD’000
Bank A*	AA-	76,060			AA		71,848
Bank B	AA-	7,839			A	+	65,813
Bank C	AA-	1,065			A	+	43,213
Bank D	AA-	34			A	+	34,847
		84,998					215,721

*Includes USD 6.9m (2010: USD 6.9m) with respect to held-to-maturity investment (Note 21).

+Based on Standard & Poor’s/Fitch long-term ratings.

Counterparty	2011				2010
	Internal rating++	USD’000			Internal rating++	USD’000
Customer 1	Group C	26,909			Group B	11,455
Customer 2	Group C	12,381			Group A	6,669
Customer 3	Group A	9,772			Group B	5,803
Customer 4	Group C	5,665			Group B	3,354
Customer 5	Group C	3,462			Group C	4,340
Customer 6	Group C	3,271			Group A	2,376
Customer 7	Group A	3,244			Group C	1,973
Customer 8	Group C	3,203			Group B	1,755
Customer 9	Group B	3,137			Group C	1,713
		71,044				39,438

++Refer to Note 16 for the description of internal ratings.

The counterparties in 2011 are not necessarily the same counterparties in 2010.

Management does not expect any losses from non-performance by these counterparties.

(d) Liquidity risk
Prudent liquidity risk management implies maintaining sufficient cash and the availability of funding through an adequate amount of committed credit facilities. Due to the nature of the underlying business and through progress billings, the Group maintains adequate bank balances to fund its operations.

Management monitors the forecast of the Group’s liquidity position on the basis of expected cash flow.

The Group’s liquidity risk on derivative financial instruments is disclosed in Note 32.

The Group is currently financed from shareholders’ equity and borrowings. The table below analyses the Group’s other financial liabilities into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.

	Carrying amount USD’000	Contractual cash flows USD’000	Less than 1 year USD’000	1 to 2 years USD’000
31 December 2011
Trade and other payables (excluding due to customers on contracts, advances received for contract work and dividend payable) (Note 33)	318,198	318,198	318,198	–
Borrowings (Note 34)	251,125	254,635	254,599	36
	569,323	572,833	572,797	36
31 December 2010
Trade and other payables (excluding due to customers on contracts, advances received for contract work and dividend payable) (Note 33)	149,677	149,677	149,677	–

3.2 Capital risk management

As a result of the borrowings during the year, the Group’s objectives when managing capital are to safeguard the Group’s ability to continue as a going concern in order to provide returns for shareholders and to maintain an optimal capital structure to reduce the cost of capital.

In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, or issue new shares to reduce debt.

The Group monitors capital on the basis of the gearing ratio. This ratio is calculated as net debt divided by total capital. Net debt is calculated as total borrowings (including current and non-current borrowings as shown in the balance sheet) less cash and bank balances. Total capital is calculated as “equity” as shown in the balance sheet plus net debt. The net debt to total capital at the balance sheet date was as follows:

	2011 USD’000		2010 USD’000
Total borrowings	251,125		–
Less: cash and bank balances (Note 26)	(149,377	)	(210,223	)
Net debt	101,748		n/a
Total equity	534,213		283,968
Total capital	635,961		n/a
Gearing ratio	16%		n/a

3.3 Fair value estimation

The table below analyses financial instruments carried at fair value, by valuation method. The different levels have been defined as follows:

a. Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1);

b. Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly
(that is, as prices) or indirectly (that is, derived from prices) (Level 2); and

c. Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

The following table presents the Group’s assets and liabilities that are measured at fair value at 31 December 2011:

	Level 1 USD’000	Level 2 USD’000	Level 3 USD’000	Total USD’000
Assets
Financial assets at fair value through profit or loss (Note 24)	–	–	8,172	8,172
Derivative financial instruments (Note 32)	–	699	–	699
Total assets	–	699	8,172	8,871
Liabilities
Derivative financial instruments (Note 32)	–	1,449	–	1,449
Total liabilities	–	1,449	–	1,449

The following table presents the Group’s assets and liabilities that are measured at fair value at 31 December 2010:

	Level 1 USD’000	Level 2 USD’000	Level 3 USD’000	Total USD’000
Assets
Financial assets at fair value through profit or loss (Note 24)	–	–	2,500	2,500
Derivative financial instruments (Note 32)	–	2,517	–	2,517
	–	2,517	2,500	5,017
Liability
Derivative financial instruments (Note 32)	–	2,651	–	2,651

The fair value of financial instruments that are not traded in an active market is determined by using valuation techniques. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. If all significant inputs required to fair value an instrument are observable, the instrument is included in level 2. If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3.

Specific valuation techniques used to value financial instruments include:

a. Quoted market prices or dealer quotes for similar instruments; and

b. Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining financial
instruments.