Buy: Weakness in UK Offset by Strength in Asia & Mid East
Maintain Buy —We still like SCI, given its expansion pipeline in the Utilities division,
and more aggressive acquisition roadmap. The possibility of its Marine division
securing a substantial contract from Petrobras could also be a stock catalyst.
Despite the rise in the share price, Utilities stub valuation is inexpensive at 10.3x
2011PE (vs.15x for regional peers). We maintain our Buy call.
2Q10 Results — PATMI of S$161m (+2% QoQ; +14% YoY) was in-line with mkt
expectations, bringing 1H10 profit to S$320m (48% of our FY10 est). Earnings
growth YoY was largely driven by the grp’s marine business (+18% QoQ; +26%
YoY; 67% of PATMI), which achieved higher gross profitability through i) executing
projects ahead of schedule; and ii) productivity gains. Utilities delivered S$52m
profit (+8%YoY), underpinned by growth from Singapore (+11%) and China,
Vietnam and UAE (+23%). 1H10 (annualized) ROE stood at 18.4%.
Utilities Operations in UK remain challenging.. — 2Q10 PATMI from the group’s
UK operations fell 39% YoY to S$8m due to closure of customer facilities and lower
mkt spreads. Mgmt is in the process of right-sizing operations and expects current
mkt spreads for power to improve in the longer term. New condensing turbines are
being installed to provide flexibility between steam and power production by 3Q11.
The UK enjoyed a S$7.5m one-off gain due to closure of defined benefit pension
scheme to future accrual
.. But experiencing robust growth in other regions— i) Utilities operations in China
grew in 1H10 and poised to continue in 2H10; ii) Capacity expanding in ME, with
Salalah IWPP project to complete in 1H12 and 30% desalination capacity increase
in Fujairah scheduled for completion by end 2013; iii) Establishing wastewater
facility (9,600m3/day) in Tembusu (Jurong Island) by 2Q12 (with key customer,
LANXESS, secured); iv) Acquisition % of Cascal incurred ~S$9m in related cost.
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