Small Caps | 10:00 AM
With over a fifty-year track record and a successful history of strategic M&A-led growth, Southern Cross Electrical continues to position itself with a diverse yet complementary services offering.
- Historical capex investment cycle a major tailwind for electrical contractors
- Strategic, self-reinforcing M&A activity boosts growth and diversifies earnings
- Higher EPS growth likely to support an improved valuation for Southern Cross Electrical
By Danielle Ecuyer
Electrical contractors are riding a capex boom
Have you tried to secure an electrician lately?
It seems they are quite a rare species in 2026. Ours vanished into a major commercial warehouse project, in reflection of a broader trend that is emerging throughout Australia this year.
Macquarie couldn’t articulate the strength of demand for electrical workers more appositely than by exclaiming that not since the “purple patch” of the iron ore boom in the early 2010s have measures of capex been this robust.
In other words, the capex boom underway is considered an “historic investment cycle” for Australia, driven by data centres and everything AI-related, renewable energy generation and electricity transmission infrastructure.
Macquarie acknowledges uncertainty over the pace of AI frontier model developments and possible regulatory changes, but existing adoption trends are viewed as unlikely to disrupt growth in inference volumes, which continue an “upward trajectory”.
Interestingly, Macquarie highlights that data centre developments are likely to become increasingly complex infrastructure projects spanning electrics, generation, storage and grid content if regulatory policies curb incremental power supply.
All this macro background sets the stage for this broker's initiation of coverage of Southern Cross Electrical ((SXE)), considered a high-quality contractor well positioned to capitalise on the data centre capital cycle.
With over a 50-year track record, Southern Cross did not come down in the last shower and has experienced multiple capex investment cycles, with a track record across resources, commercial projects and infrastructure.
Data centres are now underpinning the next growth phase, albeit, from a macro top-down view, Macquarie believes the contractor has “downside protection” from a slowing in data centre demand due to its historical experience in other sectors, such as mining, office fit-outs and retail warehouses, as well as the further electrification of the economy and the energy transition.
The flexibility of the workforce allows it to either transition to where the demand is or be downsized if demand eases.
As recently articulated by Morgan Stanley, AI infrastructure demand is considered structural rather than cyclical, with global demand for AI compute expected to substantially exceed supply for years to come.
Australia is well positioned to capitalise on the investment spend because of multiple strategic advantages, including membership of the Five Eyes alliance, data sovereignty requirements, a stable regulatory backdrop, as well as relatively easy access to advanced AI chips.
Morgan Stanley envisages domestic data centre capacity could grow to around 6GW by 2030 from 1.5GW currently. In the first quarter of 2026, data centre construction and server purchases equalled already around 17% of all private investment in Australia, the highest share on record.
Australia has scope to grow its data centres industry at an 18% compound average growth rate to 2030 and up to 27% under Morgan Stanley’s “bull case”, particularly against a projected -57GW shortfall in US data centre capacity over 2026-2028.
For more details see https://fnarena.com/2026/10/01/historys-blue-print-for-the-ai-investment-cycle/
A capital-light business model
For Southern Cross, the implications of this structural investment cycle extend beyond the immediate data centre construction pipeline to the increasing complexity of electrical and associated infrastructure requirements.
Across exposure to the data centre build-out, Macquarie is attracted to Southern Cross's capital-light business model, where high returns on capital can be achieved. Forecast FY27 return on funds employed is 43%.
Turning the clock back to the latest results in August, Bell Potter views the recent $150m equity raising in June as a robust positive indicator for the short-to-medium-term outlook.
Higher levels of liquidity will support working capital requirements for a record order book in FY27, as well as expected new contract wins and possible M&A targets when they arise.
Shaw and Partners saw the FY26 results as “solid”, with underlying earnings (EBITDA) rising 40% y/y and recurring revenue moving to 31% of total revenue, up from 26% in FY25, supported by the Force Fire acquisition in April 2025.
Force Fire, at the time of purchase, was generating some 30% of revenue from maintenance and minor works. Fire protection, also part of the business, has facilitated diversification into a critical component of data centre infrastructure.
Positively, gross margins advanced to what Shaw described as a “very healthy” 19%, accelerating from 13% in FY25 and exceeding the 16% target.
Looking across the segments, Infrastructure was by far the largest contributor to total revenue at $360m, up 30% and representing some 50% of the group total.
Commercial rose 62% to $247m, at 34% of total revenue, and Resources went up 19% to $112m.
Macquarie explains Southern Cross has grown from predominantly a WA resources contractor into a national, “multidisciplinary” operator, with much of the company’s growth post-2017 achieved through M&A.
Management has focused on acquiring established, profitable businesses which add adjacent skill sets across different geographies and sectors, as well as recurring and maintenance revenue streams.
Some 85% of the order book is East Coast, and 40% of FY26 revenue was generated outside of the company’s traditional electrical services.
Macquarie notes the acquisition record has supported both diversification and earnings growth and has been a favourable strategic pathway.
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