Attractive yield with a comfortable 50% payout ratio. Since 2002, SCI has paid out 35-55% of its earnings as dividends. Management has guided for payout ratio in line with 2007 (50%), translating into DPS of 14.6cps for 2008. Supported by stable earnings, dividend yield for 2009E is at an attractive level of 5%.
Opportunities created via strong balance sheet. SCI was able to take advantage of market opportunities to grow its existing business in previous downcycles, for example, when it purchased its UK operations from Enron in 2003. We believe SCI is well positioned to take advantage of distressed assets and/or companies that are likely to emerge over the course of the next two years given its net cash position.
Risks from O&M sector underperformance. With depressed oil price, E&P capex and constrained yard capacity, we expect limited positive news on order wins in the next two years. Heightened concerns over potential order cancellations and/or deferment of payment for existing orders will also continue to overhang the O&M sector.
Foreign currency risks. SCI has operations across various countries, in particular the UK and China. Depreciation of the sterling pound or Renminbi could negatively impact profit from its overseas operations.
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