Strong  growth  from  Utilities but  lower  contribution  from  marine.  Sembcorp Industries  (SCI)  reported  strong  2Q12  net  profit  of  S$191m  (+8%  QoQ,  +9% YoY) thanks to a good quarter from the Utilities division (+30% YoY). SCI's 1H12 net  profit  of  S$367m  (+10%  YoY)  was  49%  of  our  estimate  and  48%  of consensus'.  We  lower  our  FY12-13  net  profit  estimates  by  2%  and  4% respectively to reflect our downward revision to SMM's estimates. Maintain BUY with  a  revised  TP  of  S$6.28.  We  see  catalysts  from  (1)  potential  IPO  of  its Salalah water and power plant and (2) EPS accretive M&A activities.

Utilities growth mainly driven by higher gas sales in Singapore and Salalah Utilities' 1H12 net profit of S$198m (+44% YoY) was 56% of our FY12 estimate. Key  takeaways:  (1)  2Q12  earnings  from  Singapore  jumped  +36%  YoY  mainly due to additional gas sales. SCI's second  gas  sales  agreement  (started  in  Nov 2011) bumped up its total capacity by 26% to 431Bbtu of natural gas per day. (2) 2Q12  net  profit  from  Middle  East  &  Africa  rose  +64%  YoY  thanks  to  the  new contribution from its 60% owned Salalah IWPP from May 2012. (3) SCI intends to do an IPO for its Salalah plant within the next two years. We think the market will take  the  news  positively.  (4)  Singapore  cogen  plant  will  shut  down  for  six  to seven weeks for a major maintenance in 2H12.

Key projects progressing well. SCI added a new waste water treatment plant in Banyan  in  Aug  2012.  All  the  major  projects  in  the  pipeline  are  progressing  as planned: (1) a 400MW cogen plant and multi-utilities facilities in Banyan on track for  completion  in  4Q13;  and  (2)  a  1,320MW  coal-fired  power  plant  in  India  on track to be ready in 1H14.

Valuation:  Revised  TP  to  S$6.28  (from  S$6.30).  Our  TP  is  based  on  sum-of-the-parts  (SOTP):  (1)  Utilities  using  DCF  at  8%  WACC;  (2)  SMM  at  our  TP  of S$5.70/share; (3) Gallant Venture at market value of S$0.28/share; (4) and adjust for SCI's effective net debt.

Source: OSK