We have revised down our FY10 net-profit forecast for SCI by 5.2%, following a downward adjustment to our assumption for the Utilities segment’s UK revenue and upward revisions to our revenue forecasts for key subsidiary, SembMarine.

While SCI is a conglomerate, we believe that the company’s fundamentals are driven primarily by its rig-building operations, by virtue of that segment being the largest contributor to net profit (64.8% of our FY09 net-profit forecast), and given that its more earnings are more volatile than those of the Utilities segment.

We maintain our 4 (Underperform) rating and SOTP-based sixmonth target-price of S$2.69. We believe that the company is vulnerable to disappointing the market with respect to its FY11 net profit. We see the key share-price catalysts as: 1) the Petrobras contract tender and award in respect of its next round of deep-water drilling rigs and offshore storage vessels, and 2) announcements (or lack thereof) of new rig-building contracts. We predict the market could be disappointed by the volume of new contracts SembMarine wins over the next six months, despite the price of crude oil more than doubling from its cyclical low of US$33/bbl.

Downward revision to our 2010 revenue forecast for the Utilities segment. We visited SCI on 31 August 2009. During this meeting, we got more details on the company’s UK utilities operations. At the company’s 2Q09 analyst briefing, the company disclosed that its UK utilities operations had lost three of their biggest customers. During our recent company visit, we heard that these three customers have yet to wind down their operations. As a result, we believe that the Utilities segment’s revenue will decline on a year-on-year basis in 2010.

Adjustments to timing of semi-submersible orders. We now assume that new rig orders in 2010 will not arrive all at the same time. The timing difference causes ‘gaps’ in our estimates for 2011 rig-building utilisation, which in turn would affect the timing of SembMarine’s 2011 revenue recognition, in our view.

More non-rig revenue. We have made some adjustments to our assumptions for SembMarine’s non-rig business. This business includes ship maintenance, repair, and overhaul services. These types of contracts are usually not announced publicly in press releases, but are part of SembMarine’s normal ‘base-line’ recurring revenue. We have assumed a fairly steady stream of business, albeit with slightly lower volume in 2011 compared with 2009, on the assumption that major overhaul projects in 2011 (eg, the five-year overhaul) are lower than 2009 levels to coincide with lower utilisation rates on dry-bulk and container ships in 2009, and the phasing out of single-hull oil tankers under International Maritime Organization regulations by the end of 2010.