SCI's 4Q08 core net profit of S$128m (-30% yoy) was in line with our estimate and consensus. Key positive was a strong balance sheet. Key negative was a lower dividend of 11 Scts for a payout of 36% (FY07: 48%). Despite the volatile environment, we still see value in its Utilities business and expect sustainable operating cash flows of about S$200p.a. Our earnings estimates have been trimmed by 1% for FY09 but raised by 6% for FY10 to incorporate earnings adjustments for SembMarine. We also reduce our target price to S$2.46 from S$2.72, still based on sum-of-the- parts valuation. Maintain Outperform for its strong balance sheet.

FY08 results – PATMI of S$534mn (+4% yoy) on recurring basis (excluding tax write-back in FY07) beat our est. of S$516mn (vs Street est. S$522m) on stronger-than-expected SMM earnings. Utilities profit fell 40% yoy largely due to forex loss (due to pound depreciation) and business development expenses amounting to $10m charged in 4Q08. Group net cash position stood at S$1.6bn, coupled with $1.9bn +FCF. Declares $0.11 div (vs our$0.145).

Updates – 1) A UK utilities customer is considering ceasing production on site but the company will try to optimize utilisation levels by targeting other customers; 2) Lower dividend payout unlikely to increase in order to conserve cash; 3) FY09 capex expected to remain fairly constant; 4) No financing risks; S$219mn debt to be repaid within 1 year and S$230mn in 1-3 years’ time.

Utilities – The traction achieved in China (delivered improved yoy profits in2008) should help to offset weaknesses in UK. A key aspect is to execute on the waste water treatment facilities in Zhangjiagang and Tianjin where SCI is due to complete a new treatment plant in each by mid 2009. The growth prospect is also boosted by two additional coal fired boilers (Shanghai) and a high salinity waste water treatment facility in Nanjing.

Maintain Buy – While SMM (60%-owned by SCI) may face rising head winds as rig capex cycle slows down, utilities can help provide steady growth in the long term. The valuation angle on the Utilities remains appealing to us; SCIex-SMM is currently trading at 7.3x FY09 PE vs. industry’s 12.8x.