Investors reacted positively to the Southern Cross Electrical Engineering (ASX: SXE) half-year results to December 31, 2024, with shares finishing the day up 14.9%.
Back in July 2024 I wrote this article on why I was holding my Southern Cross Electrical Engineering (ASX: SXE) shares after the price rose significantly on a profit upgrade and the company securing a large contract with the Collie Battery Project. Some hype around data centre growth on the back of Artificial Intelligence (AI) also contributed to the share price rise.
As the company grows, logically, the rate of revenue growth should be slower, but my positive view on the company is unchanged, post results.
Southern Cross Electrical Engineering (ASX: SXE) H1 FY2025 Results Pleased Investors
Southern Cross Electrical Engineering is flourishing with the key financial metrics pointing in the right direction, and no major surprises reported over the six months to December 31, 2024.
Record half-year revenue of $397.4 million was up 55.5% on the Prior Corresponding Period (PCP) of $255.5 million. The infrastructure segment contributed the most to revenue by far at $251.7 million, up 142.48% on the PCP of $103.8 million.
The increase was driven by projects such as the Collie Battery Project, which is at peak levels of activity. In July 2024, Southern Cross Electrical Engineering was awarded further work on the project with a contract variation valued at circa $50 million. Other contributors were the Western Sydney International Airport, and work on data centres such as NEXTDC Artarmon.
The Commercial segment was flat with $79.9 million in revenue (PCP: $78.9 million), and management quoted:
‘The commercial building project mix in the half consisted almost entirely of less profitable base-building works rather than a more usual blend with more profitable fit-out works which also suppressed average margins.’
The Resources segment was down 9.61% to $65.8 million (PCP: $72.8 million), as mining sector capital expenditure dropped 0.6% over the December quarter, following a steeper 1.9% quarterly decline in the prior quarter. The recent weakness in this sector seems to be linked to weaker demand for certain commodities as the transition to clean energy continues. There is also resulting uncertainty around energy policies with the transition to cleaner power.
The chart below shows the financial year breakdown over recent years with Infrastructure share increasing since 2021, resources decreasing since FY22, and commercial steady since FY20.
Source: Southern Cross Electrical & Engineering 1H2025 Presentation
Overall, I see Southern Cross Electrical Engineering (ASX: SXE) revenues as being underpinned by Infrastructure that is aging as Australia’s population grows. Infrastructure makes up the largest component of the order book at 70%.
The chart below shows the percentage of total revenue from a selection of blue chip clients that have been with Southern Cross for a long time. Woolworths (since 1973), Coles (1975), BHP (1981), Rio Tinto (1988), Multiplex (2002), CPB (2007) and Built (2012).
Source: Data from Southern Cross Electrical Engineering 1H FY2025 presentation
Free Cash Flow (FCF) has been improving over the last year. FCF over the half was $46.05 million, taking operating cash flow of $49.03 million minus spending on property, plant, and equipment of $2.98 million; this is a capital light, but labour intensive business.
Net profit after tax of $16.2 million was also a record half-year result, up 67.8% on H1 FY2024.
With a decent cash pile of $114.8 million, up 36.5% over the six months, and no debt, Southern Cross Electrical Engineering is in good standing for future growth.
Management has shown with recent acquisitions that they are capable of adding value with proven acquisitions. The high cash balance is also helpful with project work, which can sometimes see cost blowouts.
The Board has declared a fully franked interim dividend of 2.5 cents per share, an increase of 150% on the prior year’s interim dividend.
The outlook for Southern Cross Electrical Engineering (ASX: SXE) Post Results
At the time of the results release, management left the FY2025 EBITDA guidance of over $53 million unchanged. This is up 32.2% on the FY2024 EBITDA of $40.1 million.
Data Centre contracts are a focus for managemen,t and this has helped grow revenues recently – averaging circa $20 million pa in FY19-FY23, growing to $50 million in FY24, and forecasted to be $120 million in FY25.
The results webcast from management did not reveal much, and when asked, management said they were confident they should not have labour shortages for the growing contracts.
They also touched on the company’s attempt to recoup additional costs associates with its Westconnex work, with management saying any resolution will be pushed out, and is now expected in 1H FY26. Southern Cross Electrical Engineering are seeking damages from another contractor whom they claim prevented Southern Cross Electrical Engineering from completing its work on time and on budget. Even if the company wins, it is still a distraction for management.
The dispute highlights the risks of project-style work running into problems and causing time delays and cost blowouts. Disputes of this nature between businesses often take far longer to resolve than first anticipated.
Southern Cross Electrical Engineering completes largely project work. Although recurring revenue has increased over recent years, especially after the acquisition of Trivantage.
Source: Southern Cross Electrical Engineering 1H FY2025 Presentation.
Southern Cross Electrical Engineering Acquires FireForce
Today, Southern Cross Electrical Engineering has just announced it has acquired Force Fire, a fire detection and suppression systems installer and designer. This looks to be another solid acquisition by management that compliments the existing business.
Fire safety is an essential requirement of commercial buildings and critical infrastructure. Inspections, testing, and training need to be done regularly for insurance and safety, driven by increased regulations and compliance. Force Fire maintenance and recurring style work accounts for about 30% of revenue, and this is something Southern Cross management have been vocal about increasing. Fire Force services data centres, which is a growing area Southern Cross management is focusing on.
Force Fire’s financial year 2024 revenue comprised 88% from the Commercial sector and 12% from Infrastructure. Post acquisition, Southern Cross Electrical’s revenue from the commercial sector will increase, and the more cyclical resources sector will decrease as a percentage of overall revenue.
The initial upfront consideration paid was $36.3 million, with a total consideration of up to $53.5 million dependent on Earnings Before Interest and Tax (EBIT) growth targets in FY26 and FY27. The deal is funded through existing cash reserves and still leaves Southern Cross Electrical with a solid balance sheet. The acquisition consideration represents an EBIT multiple of 4.8 times forecasted FY25 Enterprise Value/EBIT.
Force Fire is expected to generate revenue of $106 million and EBIT of $8.3 million in FY25.
My Verdict On Southern Cross Electical Engineering (ASX: SXE) Stock
Post results, my view of Southern Cross Electrical Engineering has not changed, and it will remain in my share portfolio.
With $114 million in cash and no debt as of 31 December 2024, SXE is well positioned to keep growing organically and also through acquisitions. However, I note its cash buffer will now be lower with the upfront payment of $36 million for Fire Force.
Although growth in the future may be lower than we have seen in recent years because Southern Cross Electrical Engineering is now a larger company, profits and dividend growth should be underpinned by a diverse customer base growth in the infrastructure sector and tailwinds from growth in data centres.
Disclosure: The author of this article owns shares in SXE and will not trade shares for at least 2 days following the publication of this article. The editor of this article, Claude Walker, does not own shares in SXE, and will not trade shares for at least 2 days following 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 Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 343937).
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