Infrastructure, Data Centers And Electrification Will Fuel Future Success

Key Takeaways

• Strong growth in infrastructure and data centers, with recurring revenue boosting net margins and financial stability enhancing earnings potential.
  
• Strategic acquisitions and robust cash reserves enable diversification and growth, reducing market dependency and improving operational scalability.
  
• Dependence on infrastructure projects and market expansion through acquisitions pose risks to revenue stability and profitability due to potential delays and integration challenges.

Catalysts

Provides electrical, instrumentation, communications, security, and maintenance services and products to resources, commercial, and infrastructure sectors in Australia.

• Southern Cross Electrical Engineering is capitalizing on growth tailwinds in infrastructure, data centers, and electrification investments, which are expected to significantly drive revenue expansion in the near future due to increasing demand in these sectors.
  
• The company is experiencing strong growth in recurring revenue, which has tripled since FY ‘18, indicating a steady increase in predictable revenue streams that can boost net margins through improved cost efficiencies and stable income.
  
• A robust acquisition strategy is in place, with SCEE actively exploring further acquisition opportunities, which could increase geographic and capability diversification, potentially enhancing earnings growth by adding complementary services and reducing market dependency risk.
  
• The pipeline for data center projects is particularly strong, with $500 million worth of work being tendered over the next two years. This sector's exponential growth is expected to significantly boost revenues and improve margin profiles given the data centers' high electrical demand and construction costs.
  
• The company holds a strong financial position with record cash reserves and no debt, enabling further investment in organic growth and acquisitions without financial strain, which should enhance EPS through operational scalability and financial flexibility.

Southern Cross Electrical Engineering Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Southern Cross Electrical Engineering's revenue will grow by 14.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.1% today to 5.0% in 3 years time.
• Analysts expect earnings to reach A$51.9 million (and earnings per share of A$0.17) by about May 2028, up from A$28.4 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.2x on those 2028 earnings, down from 17.4x today. This future PE is lower than the current PE for the AU Construction industry at 16.2x.
• Analysts expect the number of shares outstanding to grow by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.13%, as per the Simply Wall St company report.

Southern Cross Electrical Engineering Future Earnings Per Share Growth

Risks

• The gross margin percentage decreased by 2% from the previous period, which may indicate pressure on profitability and impact net margins.
  
• Considerable legal costs related to the WestConnex arbitration are included in the financials, which could continue to impact net margins if ongoing.
  
• Dependence on infrastructure projects, which currently make up the majority of revenue, could pose a risk if there are delays or cancellations in these sectors, affecting revenue stability.
  
• Workforce adjustment capabilities could become a limiting factor if large projects are delayed or if scaling up to meet demand introduces inefficiencies, potentially impacting net margins.
  
• Continued market expansion through acquisitions requires careful financial management and integration strategy, carrying the risk of overextension or ineffective incorporation of new entities, which could affect overall earnings.

Valuation

• The analysts have a consensus price target of A$2.407 for Southern Cross Electrical Engineering based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.0 billion, earnings will come to A$51.9 million, and it would be trading on a PE ratio of 15.2x, assuming you use a discount rate of 7.1%.
• Given the current share price of A$1.87, the analyst price target of A$2.41 is 22.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.