It’s Electric Under The Southern Cross

This story features SOUTHERN CROSS ELECTRICAL ENGINEERING LIMITED, and other companies. For more info SHARE ANALYSIS: SXE

Brokers are effusive over the opportunity the electrification of Australia offers to Southern Cross Electrical’s group of companies servicing diverse sectors of operation.

-Southern Cross Electrical boasts a diverse conglomerate of subsidiaries
-Opportunity abounds in data centres, battery storage, transport and supermarkets
-Strong earnings growth forecast
-Long run opportunities

By Greg Peel

Southern Cross Electrical Engineering ((SXE)) was established in Western Australia in 1978, and during the ensuing decades the group has grown from a resources-focused electrical contractor into a national leader in electrical, instrumentation, communication, security, and maintenance services.

The group has “deep” expertise, Moelis points out, in the diverse core market sectors of resources (28% of first half FY24 revenue), commercial (31%) and infrastructure (41%). Southern Cross’ long-dated track record of strategic acquisitions has contributed to the expansion of its capabilities and geographical reach.

Many Fingers

Infrastructure includes government and private investment in transport (road, rail, airports, ports), defence, data centres, education, agriculture, water, energy, utilities, health and aged care.

Transport includes Western Sydney International Airport, the largest revenue contributor in FY24. Incumbency has led to subsequent awards including for fuel farm and Border Force fit-out packages. The company expects a long-term pipeline of works, with further airport expansion and in surrounding region for logistics, commercial, accommodation, and infrastructure opportunities.

There is little need to expand here on the opportunity data centres provide. Southern Cross’ twenty-first century exposure nevertheless extends to battery energy storage systems (BESS). The recently awarded Collie BESS is a record initial award for the group and energy storage systems are a key segment of growth in Moelis’s view to support energy transition and renewable targets.

Earlier this month, Southern Cross Electrical was awarded a further contract with Collie BESS to deliver the switch-yard package.

There were 27 large scale batteries under construction at end-2023, with further capacity announced and proposed to reach the storage capacity the CSIRO suggests is required by 2030.

Supermarket upgrades are an appealing demand driver in the commercial segment, Moelis believes. Major supermarkets Woolworths Group ((WOW)) and Coles Group ((COL)) are estimated to represent some 2% of Australia’s total power consumption daily across 2,000-plus stores. Given the scope of their consumption, there is a consistent electrical upgrade cycle occurring nationally as small efficiency gains can have a material impact from a financial and ESG perspective.

Southern Cross is now less reliant on the resources sector and large project awards. Activity in the resources sector is expected to be stable in the second half with a number of opportunities emerging beyond FY24, absent major project awards. Recent contract wins highlight ongoing awards with Tier 1 clients such as Newmont Corp ((NEM)), BHP Group ((BHP)) and Rio Tinto ((RIO)).

The New World

Moelis is particularly excited about Southern Cross Electrical’s involvement in electrification and the energy transition. The broker sees significant structural tailwinds from electrification drive, and in particular the growing renewable supply mix in energy sourcing to drive electrical work, especially in battery storage systems.

Significant tailwinds and growth potential over coming years come from storage capacity which is anticipated to grow 30-fold, grid scale wind and solar by 9-fold, distributed solar photo-voltaic by 5-fold, and electricity usage to almost double by 2050. Storage capacity investment is critical, Moelis notes, to an electricity grid system that will have a growing mix of renewable energy supply source to ensure system reliability.

In late June Moelis initiated coverage of Southern Cross Electrical with a Buy rating and $1.94 target.

Moelis joined Shaw and Partners in covering the stock. Shaw suggested earlier this month that despite the recent share price rally, Southern Cross remains attractively priced versus comparable ASX-listed peers. The company was then trading on an FY25 consensus PE of 14.0x (at a trading price $1.69) versus comparable companies trading at around 17.1x, and Southern Cross is forecast by Shaw to deliver materially higher earnings growth in FY25.

Shaw has a Buy rating and $2.00 target.

Upside Risk

Bell Potter expects Southern Cross Electrical will deliver earnings per share growth of 41.3% in FY25, consistent with the company’s guidance. This broker sees upside risk to this outlook if the company can continue to convert strongly on its tender pipeline.

Southern Cross is tendering on or positioning for in excess of $500m of work to be awarded in the next two years for multiple data centre builds and extensions. The company is a leading provider of electrical services to the data centre sector, and Bell Potter expects it to win a significant portion of this tender pipeline.

At the Western Sydney Airport, conversion of tendered work for the cargo handling facilities, command centre and metro stations represent opportunities to expand activity at the site and region.

Echoing Moelis, Bell Potter this week noted Southern Cross brings key small cap exposure to several emerging and structural themes, including the proliferation of data centre construction across Australia, decarbonisation of the Australian economy, electrification of industries, and the build-out of large-scale critical infrastructure.

The company enters FY25 with a record order book and a tender pipeline that could support further growth. Southern Cross’ blue-chip clientele and high proportion of recurring work (37% of FY23 group revenue) provides some stability to operations and financials and reduced counterparty risk, Bell Potter points out.

Bell Potter has initiated coverage of Southern Cross Electrical with a Buy rating and $2.10 target.

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