Sembcorp

Sembcorp Industries 2Q10 earnings grew 23.8% YoY to $161.2m and were in line with expectations, with 67% of earnings still driven by the marine biz (+26% yoy, +18% qoq) through higher margins. Utilities had a mixed performance (+8% yoy) underpinned by pick-up in Spore (+11%), China, Vietnam & UAE (+23%) ops but UK earnings (-39%) was hit by loss of some customers, weaker £, low spreads & restructuring costs. Mgmt is guiding for 15% decline in UK earnings for 2010.

Moving forward, SCI is in the process of integrating 97.7% owned Cascal into its operations but does not expect any meaningful contribution from the water company until 2011. Meantime, utilities ops in China grew in 1H10 and poised to continue in 2H10; 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. SCI is also eyeing BP’s 1/3 stake in Viet power plant Phu My 3 (it already has a 1/3 stake) and may invest in a 35MW WTE plant in UK.
SCI offers good prospects given its expansion pipeline and more aggressive acquisition roadmap. The possibility of SMM securing a substantial contract from Petrobras could also be a stock catalyst. Its utilities biz is currently trading at an implied stub valuation of 7x PE vs 13-15x for global peers. KE has Hold call with TP of $4.38; DB has $5.65 TP while Citigroup pin TP at $4.73.