Forum Topics SXE SXE SXE valuation

Pinned valuation:

Added a month ago
Justification

11-Apr-2024: I reckon that Southern Cross Electrical Engineering (SCEE, SXE.asx) will likely head on up to around $1.40 or higher based on the strong momentum their SP is demonstrating currently.

Mining Services has been an "on-the-nose" sector (unloved) for a couple of years now but that seems to be changing - have a look at this:

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That's from the 13th March investor presentation by Macmahon Holdings (MAH) at the recent Euroz Hartleys Conference on Rottnest Island (just off the coast from Perth in WA) (see here: MAH-Investor-Presentation---Euroz-Hartleys-Rottnest-Conference.PDF) where they are highlighting the large variance in valuations attributed by the market to both capital light mining and engineering services companies and to capital intensive mining and engineering services companies, and as well as within those two groups, as they say below the table, the materially higher multiples that the capital light group on the left are trading on compared to the capital intensive group on the right.

On the right, there are mining contractors who do the actual mining (contract miners) like MAH and NWH (NRW Holdings), there are mining equipment suppliers like Austin Engineering (ANG) and Emeco (EHL), and drilling contractors like Perenti (PRN, formerly Ausdrill) and Mitchell Services (MSV). NRW also have an engineering and construction arm, but that's not important for this discussion.

On the left side of that slide we have various capital light contractors, many of whom are essentially labour hire companies who specialise in particular areas, so SXE provide electricians and electrical services, Mader (MAD) provide fitters and mechanics for heavy duty earthmoving equipment like Cat, Komatsu and Liebherr gear in earthmoving and mining, Service Stream (SSM) mostly provide trained telecommunications technicians or people from other professional disciplines, and Monadelphous provide labour hire (my brother has worked for them) and also provide engineering and construction services to the mining, infrastructure, energy and other sectors. There are also engineering and construction firms that mostly derive income from engineering, design and project management (GNG, SRG) and facilities management firms that provide services to keep various facilities and assets operational and maintained like Ventia (VNT) and Downer (DOW). GNG's (GR Engineering's) Upstream PS division also provide similar services to the energy sector. The common thing about this group is that they are all companies that are heavy on people and light on equipment, so "capital light".

By contrast, the group on the right side are reliant on a lot of heavy equipment such as earthmoving gear, mining equipment and drilling rigs.

However, the thing to note is the range of PEs from the more fully priced companies towards the top of the left side list down to the low PE companies on the bottom left and pretty much all of the companies on the right list (the Capital Intensive companies) who are all on single digit PEs.

What they (Macmahon) are clearly suggesting is that the mining and engineering services companies classed as Capital Intensive are CHEAP at this point in time.

And I think they were right.

And the ones on the bottom of the left side were cheap also, particularly GNG, SRG, DOW and SXE, although I have issues with Downer based mostly on their management so won't be holding DOW shares any time soon.

Have a look at the recent share price movement with MAH and SXE:

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The charts go up to today's closing price, and I've also highlighted the share prices they were at on 13-Mar-2024, being the day that MAH presented that slide at the Rottnest Island Conference. Could be coincidence, but they've risen nicely in the 4 weeks since then. Not everyone listed on that slide has done that, but those two have.

There were other factors at play clearly, some of which I'll discuss below.

I have held both MAH and SXE previously, both here and in real money portfolios, and I don't currently hold either of them, except here where I added a small SXE position today - which I will probably add to.

Another thing worth noting is that SXE were added to the Aussie All Ords Index on March 18th; MAH were already in it and did not get added to or removed from any index in March.

Latest Announcement from SXE: Data-Centre-and-Resources-awards-over-$70m.PDF [20-March-2024]

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Source: (25) SCEE Electrical: Posts | LinkedIn

Latest presentation from SXE: SCEE-(SXE)-Investor-Roadshow-Presentation-March-2024.PDF [18-March-2024]

Both of those (the announcement and the roadshow presentation) would have contributed to SXE's positive SP movement in recent weeks.

Website: https://www.scee.com.au/

SCEE: Leaders in Electrical, Instrumentation, Communications and Maintenance Services

About SXE: https://www.scee.com.au/who-we-are/#about

Investor Page: https://www.scee.com.au/investors/investor-centre/

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Past Project examples:

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SCEE Group | RUDATA SYD053 DATA CENTRE


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SCEE Group | BROOKFIELD PLACE SYDNEY


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SCEE Group | WESTERN SYDNEY AIRPORT


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SCEE Group | NATIONAL SERVICE AND MAINTENANCE CONTRACT


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SCEE Group | ATLASSIAN HQ


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SCEE Group | BRISBANE METRO FLASH CHARGING FACILITIES


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SCEE Group | EDL AGNEW GOLD MINE RENEWABLE HYBRID POWER STATION


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SCEE Group | WESTCONNEX M4 EAST PROJECT


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SCEE Group | KEMERTON LITHIUM PROCESSING PLANT


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SCEE Group | GUDAI DARRI MINE [Rio Tinto]


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SCEE Group | CHEVRON WHEATSTONE LNG


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SCEE Group | RAAF BASE TINDAL


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SCEE Group | WESTMEAD HOSPITAL CASB


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SCEE Group | NORTHLINK STAGE II


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SCEE Group | PITT ST METRO


Yeah, hopefully you get the idea. They've been around for a while. They've done a lot in that time. They're a decent company that appears to be getting an overdue positive re-rating by the market currently. And most people have probably never heard of them.

Rick
a month ago

@Bear77 thanks for the straw on SXE. It’s one I have owned previously IRL. It looks like the business has been steadily increasing ROE over several years, although it’s only just managed to achieve double digit ROE (11%). ROC is also 11% (they are debt free).

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I don’t understand the chart MAH used in their Rottnest Presentation. I went to the presentation to see if they provided any more context. They don’t define what they mean by “capital heavy” and “capital light”. My definition would be “capital heavy” has low ROC, and “capital light” has high ROC. When you look at the chart below, this does not align with my definitions.

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For instance I wouldn’t have Worley or Downer as “capital light” businesses. Neither has achieved ROC above 10% in the last 10 years, and SRG’s ROC has been less than 10% for seven years.

On the other hand NRW’s ROC has been above 10% for several years, and was 12% for FY23.

MAD’s ROC has been above 24% for four years (and trades on a high multiple), and GNG’s ROC has been over 43% for three years (could be undervalued). These are both “capital light” businesses in my view.

Do you have any insight into MAH’s definition for the chart@Bear77?


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Bear77
a month ago

Yes @Rick I think it's really as simple as their sub-headings, so under "Capital Intensive", they say "Large focus on traditional surface mining / heavy mining equipment" and all 6 of those companies fit that description, being reliant on earthmoving machinery or drilling rigs. Some are leasing them from some of the others in that list, but they all are in the business of using or selling or leasing large expensive mobile equipment or parts for that equipment.

Can't explain why they've used the word "Underground" under "Capital Light" because none of those 10 companies are underground specialists (like DVP claim to be for example). I think a better title for the "Capital Light" group would be "NOT owners or operators of traditional surface mining / heavy mining equipment" because MAD are certainly reliant on it, and focused on it, they just do not own it, they instead supply the people who repair and maintain that gear.

Getting back to your point on capital returns (ROC), there is clearly a big difference between companies that go out and buy equipment to enable them to provide services to their clients and those who lease that equipment and then give it back when the contracts end. And there is also a big difference between companies who own and supply that leased equipment and those who lease it, so grouping all of those together on the right doesn't make a lot of sense in those terms. However, I believe the point that MAH were trying to make is that all of the companies on the right looked cheap in PE terms and the one thing that MAH have identified that they all have in common is that their business models all rely on heavy equipment either as operators of it or as manufactuers of it (Austin Engineering make loader buckets, and consumables and parts for graders, dozers, and a lot of other large earthmoving and mining gear) or leasing (supply) of it (Emeco). So perhaps what MAH is saying is that the market hasn't thought this through properly by apparently lumping all of these companies together and regarding them as "capital intensive" (/capital heavy) although IF that's what they are suggesting, they could have done a better job of explaining it.

It appears as though MAH are making the same mistake in assuming those companies all have lower returns on capital because their business models require so much capital to be deployed to enable them to do what they do and make money. I didn't really examine that side of it in too much detail. I just took the slide at face value in terms of the PE ratios, regardless of whether the companies were on the left or right side and noticed that two of the companies that were towards the bottom of each side (SXE and MAH) have had nice little share price rises since then.

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Bear77
a month ago

Oh and before I forget, it should have been obvious by the past projects I listed there, but for the sake of clarity, SXE do mining services (electrical contracting for miners) but that's certainly not ALL they do. They service a wide variety of clients across infrastructure (particularly transport infrastructure), commercial property, essential services like hospitals, schools, universities etc., the mining sector, the energy sector, retail/consumer staples (see below) and data centres has become a focus of theirs recently (and they are winning work there).

They talk about having locked up a long term framework agreement ("National Services and Maintenance Contract") with a large retail chain (mentioned in my valuation) and I don't know if that is Coles or Woolworths, but they mentioned both of those companies in their H1 FY2023 Presentation:

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Source: Investor Presentation H1 FY23 Results - Southern Cross Electrical Engineering Limited (ASX:SXE) - Listcorp.

So, sure they're a mining services company, and that's how the market likely still sees them, for the most part, but they are clearly a lot more than that now.

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I did hold this stock for 2 years and enjoyed good dividend and then got bored and sold out for 15% profit. After my sell down, it is going up and up -- like usual thing..

One more thing I will add that SXE is doing few of NextDC project for their Datacenters. Interestingly, NextDC just completed capital raise to expedite Melbourne and Sydney DC development. That's a tailwind for SXE.

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PortfolioPlus
a month ago

@Rick my understanding of capital light v capital heavy has more to do with the use of Cash ops and not ROE.

i think it’s possible to have a capital heavy company earning a decent ROE if it was getting a good margin on the capital item.

So maybe the better way of determining the pecking order is to look at EV/FCF or maybe FCF/NPAT

I’m heavily invested in SXE and have always looked at MAH and thought ‘where’s the cash’ - YoY it all got ploughed back in and usually they borrowed to pay the divvy. That said, their recent performance has been impressive.

Caveat: ‘my understanding’ doesn’t necessarily = ‘correct’


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Arizona
2 weeks ago

@Bear77 You were right. The price has just hit $1.47. Up over 20% today. Nice work.

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Bear77
2 weeks ago

Thanks @Arizona - however, to be fair, I only noticed them because MAH highlighted them in their own presentation (as I have discussed in this forum thread) and I could see from their SP graph that someone was buying and that SXE appeared to be getting positively re-rated by the market. So more observation than prediction.

I thought they looked promising, but you can never be sure that something like this is going to happen, or when it's likely to happen.

06-May-2024: Here is what they've said today in their Profit-guidance.PDF update:

6 May 2024

Profit guidance

  • SCEE Group anticipates FY25 EBITDA of at least $48m
  • Strong structural tailwinds support expectations of further earnings growth in FY26 and beyond

Profit guidance

Southern Cross Electrical Engineering Limited (“SCEE Group”) is pleased to announce that it anticipates FY25 EBITDA of at least $48m. SCEE Group also reaffirms its previous guidance that FY24 profitability will match FY23 EBITDA.

Comment

Commenting on the announcement, SCEE Group Managing Director Graeme Dunn said “We have foreshadowed all year that we are expecting growth in FY25 and beyond. With today’s announcement of the Collie Battery Energy Storage System (“CBESS”) project we are now able to give firmer guidance of our expectations going forwards.

Whilst the CBESS project will have no material impact on the current financial year it will drive significant activity levels in FY25 and into the first half of FY26. However, this is far from our only lever of growth – we are exposed to strong structural tailwinds in the data centre sector, Australian infrastructure particularly at Western Sydney Airport, and to decarbonisation and electrification works to enable Australia’s energy transition.

Our other markets, particularly including resources, commercial buildings, and our supermarket works are in a stable or steady growth environment too, which gives us confidence that this growth in FY25 is sustainable, and we have expectations of further earnings growth in FY26 and beyond.

I further note 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.”

--- ends ---

Promising.

See also: SCEE-awarded-$160m-Collie-battery-project.PDF [also today: 06-May-2024;  the largest initial award by contract value in the group’s history, surpassing the initial value of the Western Sydney International Airport terminal awarded to Heyday in 2021. And as they say above, they will be funding the required working capital from their own resources due to their strong balance sheet and "advanced payment mechanisms", so no CR required - another plus.

See also: https://colliebattery.com.au/

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I used to work at the Worsley Alumina overland conveyor "transfer point" (where OLC1 meets OLC2 and the bauxite ore on the overland conveyors is transferred from the first 32Km long conveyor onto the second 26Km conveyor - at a point close to Tallanalla (see top left of that map).

It was majority owned by BHP then, now by South32 (S32). Here (map below) is where those conveyors run - the 32Km conveyor was the longest conveyor in the world for a few years until some billionaire in Texas built one that was a few metres longer.

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Image 1 below (see location of image on map above):

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Image 2:

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Image 3:

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They built the refinery so far from the mine because they needed a lot of water, plus coal for power generation, and a rail line down to Bunbury Port for the exporting of the Alumina powder to be smelted overseas. Collie got its name from the collieries (coal mines) in the area, which are all mined out now, and the town has got a lot smaller in population terms than what it once was - they could use something like this battery to give the locals some employment, even if only for a short period (around 1 year for Construction; Operations would likely be contracted to some large company I imagine).


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Bear77
2 weeks ago

Found a few more shots of Worsley Alumina's bauxite mine near Boddington (WA), overland conveyors and their refinery near Collie (WA).

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OLC2 comes in from the left below the lake - on a 45 degree angle and then offloads onto the stacker/reclaimer system that runs the full length of the refinery through the middle of that image above between the refinery and the water - so the conveyor runs most of the time, 24/7, except for breakdowns and maintenance (I was on a maintenance crew, rope splicing, for almost a decade in my early years), and the ore is constantly stacked and reclaimed as needed to feed the refinery. The refinery uses the Bayer system (which relies heavily on caustic soda) to extract the alumina powder from the bauxite ore. Alumina is then smelted (overseas in this case, as Worsley ship all of their alumina overseas) in Aluminium smelters to make aluminium bars and products. Back at the refinery (pictured above), everything that is left after the alumina is extracted from the bauxite ore is pumped out as a slurry into bauxite residue dams (we called them red mud lakes because the ore slurry is reddish-brown and the caustic just makes it redder). Once the dams are full they start pumping into new dams and let the old ones dry out, then once dry enough they raise the walls and fill on top of the dry mud, so they get higher and higher over time. The image above is looking North to North East and behind the refinery (behind the photo) to the West and the South are these massive bauxite residue dams (red mud lakes) which are slowly growing upwards like pyramids. They can be seen from space; from satellite images anyway, and they do contain a lot of caustic soda, more than the company would like to admit, so they are really hoping it doesn't leach down into the Brunswick River which starts reasonably close to the refinery.

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Happy not to be working there any more to be honest. It suited the younger me, but not now so much.

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Arizona
2 weeks ago

@Bear77 Very humble. I enjoy reading your insights. So thank you and keep up the good work please. Cheers

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