With the downward earnings revision, our price target for SCI is now S$3.38 (S$3.65 previously), still based on a 5% discount to our SOTP valuation (method unchanged). For the other listed entities, we use Gallant Venture’s market price. We value the utilities business on DCF (WACC of 6.5%, growth of 2%), and its industrial parks and environmental engineering on an FY09F P/E of 8x, in line with peers.
SCI now trades at FY10/11F P/E of 10.5x and 10.6x, which remains at the lower end of its historical trading band of 6-21x, and compares with its eight-year average P/E of 14.6x. The dividend yield at 3.6% is relatively attractive, in our view. Given the less than 15% potential upside to our price target, our stock rating is now a NEUTRAL. SCI share price has performed well in the past three to six months. Our concerns are that weaker-than-expected UK utilities’ performance could pose an earnings drag in the short to medium term. We would recommend a switch to Keppel for higher potential upside.
With the extensive restructuring and timely asset divestments over the previous years, SCI as a group, as of 1Q09, held a net cash position of S$1.54bn. Excluding project finance loans of S$346mn, the group’s net cash stood at S$1.71bn. While the bulk of the cash is held at its marine subsidiary (S$1.8bn, or S$1bn excluding advance payments), the utilities and other divisions have a low net debt of just S$244mn.
According to management, the group’s non-recourse project finance loans continue to be funded by project cashflows, with an outstanding S$332mn in corporate debt to be paid within one year. The group also recently raised S$200mn of five-year notes under an existing MTN programme.
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