The Southern Cross Electrical Engineering Ltd (ASX: SXE) share price has been on a tear in FY 2024, after a profit upgrade in May and securing a large contract with the Collie Battery Project in July. The ASX:SXE share price is now up more than 145% since I disclosed in these pages that I had recently added to my position, back in January 2023.
Back then SXE shares were providing a dividend yield just north of 7%, and AI hype had not yet arrived on the scene.
I originally bought (and still hold) the shares in January 2020 and have watched Southern Cross Electrical Engineering progress from being a mining contractor, to working on renewable-energy projects, to now being associated with data center and battery storage work. That is progress you like to see.
However, With the share price having risen around 106% this year alone and the dividend yield halving, is it still good value and how much Artificial Intelligence (AI) hype around data center growth is baked into the price?
You Can See That Southern Cross Electrical Engineering Share Price Has Performed Strongly, Partly Thanks To Artificial Intelligence Hype
Southern Cross Electrical Engineering (ASX: SXE) Upgrade FY25 Profit Guidance
While the recent acquisition of MDE Group and the Collie Battery Project win will have no material impact on Financial Year 2024 profit (forecast to match FY2023), the profit guidance for FY2025 released mid-May was upgraded later in the month after Southern Cross Electrical Engineering completed the acquisition of MDE Group, which provides communications, data, and electrical services for construction and fit out projects across commercial building developments, data centers, healthcare and transport infrastructure.
Southern Cross Electrical Engineering now anticipates FY25 EBITDA will increase from over $48 million to at least $53 million.
Southern Cross Electrical Engineering (ASX: SXE) Inks its Largest Contract
Southern Cross Electrical Engineering also announced in May that it has been awarded the balance of plant, (which is all the supporting components and auxiliary systems of a power plant needed to deliver the energy, other than the generating unit itself) contract by Synergy for the Collie Battery Energy Storage System (CBESS).
The contract is valued at around $160 million and is scheduled for completion in the final quarter of calendar year 2025.
CEO Graeme Dunn commented that: “Although the CBESS project is the largest initial award by value in SCEE’s history, through a combination of our strong balance sheet and advanced payment mechanisms within the contract we will be able to fund its working capital requirements from our own resources.”
Then, in July, Southern Cross announced they had been awarded more work on the Collie Battery Energy Storage System worth about $50 million. This is a variation to the original contract, which takes the total value of work on the project to circa $210 million.
Artificial Intelligence (AI) and Data Center Growth
The rise in Artificial Intelligence (AI) is but one reason that more data centers will be needed in future. Virtual reality, augmented reality, autonomous vehicles, and cloud computing in general will also add to the demand. ASX investors may have noted software companies like Integrated Research Limited (ASX: IRI) and TechnologyOne Ltd (ASX: TNE) moving software services to the cloud, a trend which I believe will only increase.
It is hard to predict how these new technologies will play out exactly, and which companies selling these products and services will go on to be the next big thing, but I do know plenty of data centers and power will be needed to service all this new online technology. That is why my personal portfolio is invested in companies that can support data centers and electrification, and supply the minerals needed, such as copper.
Australia is the seventh largest data center provider in the world and the outlook for growth is strong. Southern Cross Electrical Engineering states they have a pipeline of over $500 million of data center work on which they are tendering on, or looking at over the next two years. I will be watching to see how much of that they actually secure, and it will be interesting to see if they can obtain the skilled labour needed to service these contracts.
While the Southern Cross Electrical Engineering business has been regarded as a cyclical business I would argue it is less so now with acquisitions bringing new capabilities, counter-cyclical infrastructure work, and data center and renewable energy demand.
While investors are focused on data center growth, there is also a probable tailwind from the resources sectors. I believe the Bloomberg Commodities Index is looking stronger, and we could be seeing the start of a commodities boom as investment in minerals has been lacking over recent years. We should also see demand for minerals used to build batteries and renewable energy.
Does the Southern Cross Electrical Engineering (ASX: SXE) Share Price Still Offer Value?
I think there is a probably a bit of hype around data center and battery work reflected in the current share price, though it is still on a trailing Price to Earnings (PE) ratio of around 23. While the Southern Cross Electrical Engineering P/E ratio is higher than before, the company is growing, and has a solid pipeline of work to tender on. The balance sheet is well positioned to support this growth with no debt and cash on hand of $65 million at 31 December 2024.
Personally, I have decided to hold my shares, as I am bullish on the long-term outlook and the trailing dividend yield of 2.9%, fully franked, is still decent, albeit not as attractive as previously.
If I were to sell some Southern Cross Electrical Engineering shares it would likely be partially motivated by managing the position size. In that scenario I would likely sell down slowly as the share price momentum is looking positive, having received a boost on the recent contract variation to the Collie Battery Project.
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Disclosure: The author Chris Coe owns shares in SXE will not trade shares in 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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