Southern Cross Electrical Engineering Ltd (ASX:SXE) is an Australian-based specialist electrical, instrumentation, communication, and maintenance services company, operating across three main sectors: resources, infrastructure and commercial. It earned about half its revenue from resources clients in FY 2022, with the other half split between commercial customers and infrastructure projects.
Overall, the Southern Cross Electrical Engineering (ASX:SXE) FY 2022 results were positive. In the FY 2022 Southern Cross Electrical Engineering results, the company reported record revenue of $553.3 million, up almost 50% on the prior year, net profit up about 11% to $15.3 million, an order book of $565 million, up $31.4, cash of $53.1 million and no debt, as well as a 25% increase to the dividend (5 cents for the full year).
You can see our past coverage of Southern Cross Electrical here.
A brief history of Southern Cross Electrical Engineering
Southern Cross Electrical Engineering was founded in 1978 in Perth, Western Australia. It won its first major contract with BHP in 1981 and its first overseas contract in Ghana in 1987.
Southern Cross Electrical Engineering (ASX:SXE) listed on the ASX in 2007. Recently the company has looked to diversify into other industries, capabilities, and geographies, with organic growth and through acquisitions. Southern Cross Electrical Engineering acquired Datatel in 2016, and this served as a platform to enter the telecommunications sector. In 2017, Southern Cross Electrical Engineering acquired East Coast electrical services company Heyday, giving Southern Cross Electrical Engineering a presence in the commercial and infrastructure markets on the east coast of Australia. In 2020, Southern Cross Electrical Engineering acquired Trivantage, a firm which performs recurring services and maintenance work. This acquisition aimed to enhance the consistency of earnings.
Why I Bought Southern Cross Electrical Engineering Stock (ASX:SXE)
I [Chris Coe] bought Southern Cross Electrical Engineering shares in early 2020, and added to my position recently. What has attracted me to the company is the growing order book, solid balance sheet, low price multiple of historic earnings, and high dividend yield. If the company can keep gaining work, especially in the growing renewables area, then earnings and dividends could continue to trend higher.
At the moment, Southern Cross Electrical Engineering is bidding on work that involves the decarbonisation of resources operations such as battery, solar and wind projects for mining companies. The renewable energy sector is growing, although not all companies in the sector will flourish. One could view SCEE as being comparable to the businesses selling picks and shovels to the miners in the 19th century gold rush. Many of the miners did not strike gold, but many of the businesses selling products and services to the miners did!
SCEE is still small with a market capitalisation of $175 million. It is a capital-intensive industrial company, so unlikely to produce the outsized asymmetric returns I often look for. Nonetheless it is an integral component of my portfolio as it is a steadily growing company with a good dividend yield.
Southern Cross Electrical Engineering (ASX:SXE) Has A Growing Order Book
Southern Cross Electrical Engineering has been winning contracts as evidenced by the record order book in FY22. The company is gaining exposure to the decarbonisation theme. In September 2022, SCEE announced it won work on the Northern Goldfields Solar Project for juwi Renewable Energy and electric vehicle charging infrastructure work for the end of route flash charging facilities required by the all-new battery electric buses on the Brisbane Metro project.
Southern Cross Electrical Engineering also recently secured a contract for the new Australian headquarters of collaboration software company Atlassian Corporation Plc (NASDAQ:TEAM). The building boasts an innovative glass and steel exoskeleton, with an electricity generating facade system with self-shade capabilities, which reduces heat gain within the building.
Atlassian has set impressive sustainability targets for the building. These include a 50% reduction in embodied carbon compared to a conventionally constructed building, a 50% reduction in operational energy compared to a conventional building, and the use of 100% renewable energy to power the building.
Atlassian are a forward-thinking company that are serious about renewable energy. This is evidenced by founder Mike Cannon-Brookes taking a big stake in AGL Energy Ltd (ASX:AGL) with the aim of eventually shutting down high emissions coal plants. The Atlassian contract is important to SCEE as it will raise the profile of the company and provide experience with working on an innovative building which should stand it in good stead for future work.
The new decarbonisation work gained is in addition to Southern Cross Electrical Engineering’s ongoing work for Rio Tinto Ltd (ASX:RIO) on the battery energy storage facility at Rio Tinto’s Tom Price mine.
Large miners looking to decarbonise operations such as the highly publicised decarbonisation project undertaken by billionaire Andrew (Twiggy) Forrest with Fortescue Metals Group Ltd (ASX:FME) for example, bodes well for potential future contracts.
Risks To Southern Cross Electrical Engineering (ASX: SXE)
Southern Cross Electrical Engineering has an increased number of projects at a time when inflation is well above average, and the labour market is tight. This brings with it the possibility of having to pay higher wages, which could eat into margins.
The company is attempting to manage current inflationary pressures. The typically short time between project pricing and project mobilisation helps ensure costings are as accurate as possible. In many sectors, materials are sourced by the client, and in those sectors where this is not the case, prices are generally fixed with suppliers on or before award.
Southern Cross Electrical Engineering has warned that the tight labour market may mean it cannot make the most of some opportunities. A large proportion of the SCEE workforce are employed under Enterprise Bargaining Agreements, so at least wages remain the same over the duration of each project. When I checked for this article, SCEE had only seven openings advertised on its website;five electricians, one civil foreman and a human resources role. That’s not many given a total workforce of around 2,000.
History shows managing large projects successfully is not an easy thing to do, and unexpected delays can cause cost blowouts that can have major impacts on margins. Projects running over time can have a flow on effect as workers on a current job may be needed for the next job.
For example, project delays contributed to the recent dispute with Decmil Group Ltd (ASX:DCG) over subcontracting work. During the project, SCEE carried out additional works beyond the original subcontract scope and experienced significant delay and disruption because of Decmil’s failure to manage their work and other subcontractors efficiently. The dispute was settled in August and SCEE received some of the claim back.
It is worth noting if a recession happens then this may delay current work and lessen future contracts. This recession may be the most telegraphed recession in history and often when the consensus predicts something it does not happen. Regardless, SCEE has a solid balance sheet and plenty of work to see them through. If the economy is sluggish then governments often increase spending in areas such as infrastructure to stimulate the economy, which should be to SCEE’s benefit.
How Are Southern Cross Electrical (ASX: SXE) Shares Priced?
Southern Cross Electrical Engineering is trading under a trailing price to earnings ratio of 11, and on a dividend yield of just over 7%. It has a solid balance sheet with $53 million in cash as of 30 June 2022, so could possibly fund acquisitions without having to dilute shareholders or take on debt.
There have been no director on-market share buys or sells over the past year. Chief executive officer/managing director Graeme Dunne owns 2,021,993 shares, independent chairman and non-executive director Derek Parkin OAM owns 128,679 shares, Independent non-executive director Karl Paganin owns 1,726,694, non-executive director Paul Chisholm owns 2,758,460 and non-executive director Simon Buchhorn owns 800,000 shares.
If Southern Cross Electrical Engineering (ASX:SXE) can keep securing contracts, especially in the growing decarbonisation area, there could be a long pipeline of work and hopefully rising earnings and dividends. The business is low margin and capital intensive so problems on projects can impact profits. Having a solid balance sheet and strong order book puts the company in a good position to ride out any issues or headwinds.
The company has said that it is rolling off some large mining contracts, and at the AGM said it is targeting EBITDA of $36m to $38m in FY 2023, compared to $35.6m in FY 2022. This implies not much growth at all. Having said that, Southern Cross Electrical Engineering isn’t really priced for growth, and I believe it deserves a spot on your watch list, if you are interested in small cap ASX dividend stocks. However, if you are looking for more growth then this list of ASX stocks with positive AGM updates might be of interest.
Disclosure: The author Chris Coe will not trade shares in ASX:SXE for at least 2 business days after the publication of this article. The editor of this article Claude Walker does not own shares in ASX:SXE and also will not trade the stock for at least 2 business days after the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
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