Southern Cross Electrical Engineering Limited (SXE) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Southern Cross Electrical Engineering Limited FY '25 Results Webcast. [Operator Instructions] I would now like to hand the conference over to Mr. Graeme Dunn, CEO and Managing Director. Please go ahead.

Good morning and afternoon, ladies and gentlemen, and welcome to SCEE's full year results presentation. Turning to Slide 2 for a brief introduction to SCEE. SCEE is a leading and trusted national provider and manufacturer of specialized electrical, instrumentation, communications, security, fire and maintenance services and products that operates across the 3 broad market sectors of infrastructure, commercial and resources. We operate through several company entities as shown that have been acquired through our disciplined M&A strategy. During the year, we have added to our list of operating entities with the acquisition of Force Fire. There is a more detailed slide on Force Fire later in the presentation. With advocate on operational excellence, we have delivered profitable growth over many years that has culminated in SK achieving another record profit this financial year, following on from the record profit achieved in the last 2 years. A key takeaway from today's presentation are the 6 thumbnails at the bottom of the slide that outlined the investment proposition for SCEE. Firstly, we are heavily explains of decarbonization electrification, data centers and overall diversified across markets and operations. We can grow the recurring revenue and deliver earnings growth that has resulted in a financially strong company with strong shareholder returns. And finally, we have a track record of successful acquisitions. Turning to Slide 3. [indiscernible] case diversification and new capabilities and we aim to maximize the synergies and cross-selling opportunities created by the increasing diversification and multidisciplinary nature of the group. Now turning to Slide 5 for a summary of our record FY '25 financial performance. Our record revenue of $81.5 million was up 45.2% on the prior year. Our record EBITDA of $54.8 million was up 36.6% on the record prior year. Our record EBIT of $45.9 million was up 40.4% on the record prior year. Our record NPAT of $31.7 million was up 44.5% on the record prior year. The result included $2.7 million of acquisition amortization. We ended the year with another record cash of $88.6 million, up 5.3% on the prior record year. Our order book was $685 million, slightly down on the previous record year. The Force acquisition contributed in the final quarter, but broadly netted off against acquisition costs. Infrastructure remained our largest sector with 63.8% of total revenue. And we declared a fully franked final dividend of $0.05 per share. Overall, another great result for the group. To take you through the next 4 financial slides, I'll pass you over to our CFO, Chris Douglass.

Thank you, Graham. So turning to Slide 6. So yes, it's a record revenue of $801 million was up 45% on the prior year. The split of those revenues by sector was infrastructure contributed $511 million. Commercial was $152 million and resources $137 million. So infrastructure was again our largest sector, and it more than doubled on the prior year. Particularly driving that was the Collingbattery energy storage system project. Western Sydney International Airport and various data center projects we're doing in New South Wales, in particular. And then supporting other sectors was BHP, Rio Tinto, Woolworths and Coles sustaining capital and maintenance style works. So all of that resulted in a record gross profit of $105.9 million, which was up 28.1% on FY '24. And Pleasingly, whilst the gross margin percentage for the year was only 13.2% down on the prior year's 15%, but margins did recover in the second half. So the first half of the year, margins were 12.7%. We're back up to 13.7%. And we're now getting closer to our sort of general guideline of being in the 14% to 15% range going forward. So included in those gross margins in the first half, in particular, was the bulk of the $4 million of legal costs we incurred in the year relating to the WestConnex arbitration. And that first half was also impacted by a less profitable commercial buildings mix in Sydney as well. So overall, overheads as a percentage of revenue 6.6% compared with 7.8% in the prior year. And we do note that the second half overheads did include $2.5 million of acquisition costs for Force Fire. This all resulted in a record EBITDA of $54.8 million, up 36.6% on the prior year, and that surpassed the guidance of at least $53 million. Again, record EBIT and NPAT, up 40.4% and 44.5% on the prior year and noting that in EBIT and NPAT, there was $2.7 million of acquisition amortization, mostly relating to the MDE and Force Fire acquisitions. Turning to the next slide about the balance sheet. So again, pleasingly, we had a year-end record cash balance of $88.6 million, and that was despite having to pay $32 million for the Force Fire acquisition in the second half. So we're very pleased with the cash result. The business remains debt-free. We had a record amount of bonding on issue at 30 June, $115.2 million out of our capacity of $150 million However, that bonding headroom will probably increase coming into the half we're in now because we do have a significant amount of bonding out securing the Holy best advance payments, and that should be returned in the half we are in now. The franking account balance was $61.5 million, and we've maintained our final dividend -- fully franked dividend of $0.05 per share, which will be paid on the eighth of October. Record year-end cash on Slide 8 and a record payout of dividends in the year of $19.1 million of fully franked dividends. We had some big tax payments out in the year as well. and of course, the $33 million of acquisition payments relating to MDE and mostly before fire, which is the reason why we're very pleased with the cash results because those are significant outflows that had to go out in the year as well. Included in the $88.6 million is there's still $12 million of advanced payments on the Collie BESS project that will effectively be repaid in the first half of FY '26. Turning to Slide 9 and the order book. Again, the order book was $685 million, only slightly down on FY '24's record order book of $720 million. So we're very pleased again with the -- how we've managed to hold up the work activity of the group, noting that infrastructure is overwhelmingly the largest component of the order book with almost 2/3 of the $685 million. The order book is, again, very much on the East Coast, 75% of it. And one thing we do want to highlight people going forward is really the breakdown of our order book by the different disciplines now, particularly driven by the acquisition of Force Fire. We have now 25% of our order book is in the nonelectrical disciplines. And I'll turn back to you at that point, Graham.

Thank you, Chris. Turning to Slide 11 and the operational highlights and outlook slide. Very pleasingly, we were lost time injury-free across the group for the third consecutive year, having undertaken 3.5 million man-hours in the period. Our workforce stood at circa 1,900 direct employees. We've just recently announced the appointment of Louis Door as an independent Nonexecutive Director effective from the first of September 2025. The Collie BESS project is passing peak activity and is performing well with practical completion on schedule for the first half of FY '20. And I was down there last Friday, and it's an outstanding project coming nearing completion. The Western Sydney Airport terminal project has been successfully completed and further airport works have been awarded. In the period, we were awarded the Shell Harbour hospital project, our largest ever hospital contract. There were further awards at the next DC Taman project. as well as other data center contract awards across the group. The Trivantage manufacturing order book reached record levels in the period. We remain confident in the pipeline of projects with growth in data center, battery storage and industrial warehousing projects across Australia. The Force Fire acquisition was completed on the first of April, and they had a strong final quarter in FY '25. We are excited by the wider capabilities and disciplines that we have developed and in the group, providing increasing cross-group opportunities within our markets. There are currently multiple further acquisition targets being explored that we have the financial capacity to execute. The WestConnex expedited arbitration was commenced in the period with resolution expected in the first half of FY '26. Looking forward, we are anticipating an FY '26 EBITDA guidance in the range of $65 million to $68 million. This represents a growth of 18% to 24% on the FY '25 EBITDA. Continuing our record run over the last couple of years. Overall, a very successful operational year for the group. The next 4 slides look at the widening capabilities and the emerging cross-selling synergies across the group. Turning to Slide 13. Over the past 10 years, SCEE has diligently implemented its strategy to transform itself from a pure-play electrical contractor in the resources sector into a multidisciplinary industrial service group across a wide range of markets. In doing so, we have grown our revenues over the past 10 years from $208 million at the end of the resources CapEx boom in FY '16 to over $800 million across multiple markets, offering a range of multidisciplinary services in FY '26. Our most recent acquisition of Force Fire has introduced new surfaces being wet to dry fire capabilities. It has also introduced the new market sector of industrial warehousing and expanded our capabilities in our existing markets of commercial buildings, data centers and renewables. To build on that, we'll turn to Slide 14 for additional background on Force Fire. As stated previously, the acquisition of Force Fire on the first of April 2025 is consistent with SCEE's strategy to add adjacent and complementary capabilities and increase our exposure to services and maintenance style works and recurring revenues. The key highlights of the transaction are, the fire market is attractive due to the nature of its nondiscretionary and critical technical services requirements. It has a highly recurring revenue base with repeat clients, many of whom are long-term blue-chip clients. It has a capital-light operating model, and it is -- it has industry-leading expertise in industrial and data center end markets. With our widening capabilities, we continue to expand and maximize our group synergies as outlined on Slide 16. As we aim to maximize the synergies and the cross-selling opportunities created by the increasing diversification and multidisciplinary nature of the group, there are several key opportunities to pursue. There is an overlapping of client bases that we can develop can lead to deeper relationships and business development coordination. We have the ability to propose combined service offerings that our competitors cannot match. This was clearly displayed in our resources camp upgrade projects in recent years. where we combine the capabilities of SCEE Electrical, data tell and seem to provide a seamless delivery of electrical, communications and security services. We are leveraging the group's overall economies of scale, buying power and established processes to drive efficiencies in each business. And in general, we are showing the expertise best practice, market insight and skill sets across the group to improve our project outcomes. In summary, over the last 10 years, the group has grown tremendously in terms of markets, capabilities and financial results. [indiscernible]. We look forward to continuing to grow and leverage our capabilities across our market sectors in the coming years. Now turning to a brief update on our diversified sectors on Slide 18. As Chris said, the infrastructure sector is clearly our largest sector now with 64% of revenue. The next slide after this phone will provide additional information on this sector. In the commercial sector, we can see that commercial buildings have now stabilized at lower post covert activity levels with the Atlassian building and Citi tax redevelopment to contribute in FY '26. The supermarket spend is steady. Overall, the sector will grow in FY '26 with contribution from Force fire's commercial and industrial warehousing work. We are currently tendering for the airport line and Sydney Metro West station developments. Pleasingly, Trivantage manufacturing has already been awarded the switchboard supply for the airport line. Additionally, Trivantage manufacturing are supplying products for multiple further transport developments in New South Wales and Victoria, and we are performing the early works of the Alkimos desalination plant in Western Australia. Now turning to Slide 20 for a discussion on data centers. The SCEE businesses have worked on data centers for over 20 years, and the sector is experiencing exponential growth. Within the sector, SCEE businesses have multiple touch points, including day having a very strong position in general construction in New South Wales and extensive experience in data center construction. Trivantage manufacturing builds and supplies sophisticated electrical equipment required for data centers. Data land MDE offer communications and seam offer security solutions and Force Fire offers wet and dry fire solutions. Clearly, we cover many different activities within data centers. In FY '25, we turned over circa $120 million in data center revenues and are expecting similar or increased levels in future years as we are tendering on or positioning for over $500 million of work to be awarded in the next 2 years for anions at existing or new builds of multiple data centers, clearly, a significant tailwind for the group. Now turning to another strong tailwind, electrification and renewables on Slide 21. SCEE has multiple exposures to Australia's energy transition, which requires electrification of many activities by 2050. This particularly includes transforming the electricity supply to run a non-carbon fuels and the electrification and decarbonization of existing industries, transport networks and the built environment. The transitioning of the electrical supply -- sorry, the electricity supply requires investment in renewables supported by battery storage and grid reconfiguration for SCEE, this provides enormous opportunity. Currently, SCEE participate in this thematic, having constructed multiple solar farms, wind farms and battery energy storage systems. In early 2016, we will successfully complete Synergy's 500-megawatt Collie BESS project, which is over $200 million of work for SCEE. Force Fire is nearing completion of the installation of fire safety solutions on the Mac & Tire wind farm in Queensland for Nordex. And going forward, we are currently tendering for multiple battery and wind farm developments across Australia and expect to announce further battery projects in the near term. Outside the electricity supply transition, SCEE offers services across a huge range of other electrification initiatives, including decarbonizing our client operations by improving the power efficiencies of supermarkets, installing LED lighting in education facilities and refracturing solar security gates. And as buildings become more sustainable, we are seeing a drive to increase the electrification of buildings that presents many opportunities for SCEE. As I say, it's a great time to be an electrical contractor. Building on this, the next 4 slides further develop the investment proposition for SCEE. I'll briefly comment on each of the slides. Turning to Slide 23. This slide presents SCEE's compound annual growth rate over the last 5 years for the EBITDA, EBIT and EPS metrics. Clearly, our strategy has been successful in growing the business with high double-digit growth across these metrics. And looking forward, we are anticipating an FY '26 EBITDA guidance in the range of $65 million to $68 million. This represents a growth of 18% to 24% on the FY '25 EBITDA. Hopefully, this is an attractive investment proposition for our shareholders. Turning to Slide 24. A key plank of our strategy is to grow our recurring revenues. In FY '25, we achieved a 15% growth to $211 million of recurring revenues. As noted in the slide, we operate across both a wide range of recurring works contract types and across a wide range of sectors. Pleasingly, there is a depth and longevity to many of our arrangements that all SCEE group companies contribute to. Turning to Slide 25. As mentioned previously, the company's financial position is very strong. with record cash of $88.6 million and no debt. For FY '25, we declared a fully franked final dividend of $0.05 per share. This added to the interim dividend of $0.025 per share. Turning to Slide 23. Over the past 9 years, we have completed 5 value-accretive acquisitions that have been -- all been consistent with our strategy of growing the SCEE group through deepening our presence in the infrastructure, commercial and resources sectors and broaden our geographic diversity with the expansion of our core competencies by the addition of adjacent and complementary capabilities. This is something that we will continue to do as we explore a range of acquisition targets, offering increased geographic diversification and new capabilities. I also note that we have the financial capacity operational excellence and corporate experience to undertake further acquisitions. In summary, we believe Sky has a compelling investment proposition. Now turning to our final slide and in conclusion. Our revenue was up 45.2% on the prior year to $81.5 million. We had record EBITDA, EBIT and NPAT that were all up on the prior record year. We ended the year with a record cash position of $88.6 million, that was up 5.3% on the prior year, and we continue to have no debt. The order book of $685 million was slightly down on the record prior year. We declared a fully franked fund dividend of $0.05 per share. There is a growing pipeline of data center, battery storage and industrial warehousing projects across Australia. We successfully completed the Force Fire acquisition on the first of April, and they had a strong final quarter in FY '25. Our wider capabilities and disciplines is offering up increasing cross-group opportunities. There are currently multiple further acquisition targets being explored, that we have the financial capacity to execute. And looking forward, we are anticipating an FY '26 EBITDA guidance in the range of $65 million to $68 million. This represents a growth of 18% to 24% on the FY '25 EBITDA. Overall, another very successful year with a very promising outlook. With that, we will now start with the Q&A.

Maybe I'll answer the first couple of questions, I get the rest back. So first question is, how is workforce availability? As you can see, our workforce is at almost record levels of 1,900 direct employees. We're not struggling to source labor for our work. We keep telling people we're a top player in the industry. People like working for us. We have great safety records and all that sort of thing, we don't struggle to recruit our workforce. Next question is, will the Trivantage manufacturing plant move affect the results. So this is referring to in Brisbane, we're moving into a new facility to which we have now been given the keys and we're doing the fit out a new facility near the airport, which will replace the 2 existing facilities we have in Brisbane. And the answer is no, it won't affect the results. We'll be able to move across the facilities in a sort of staged way, which won't really materially impact the workings of that part of the business. But then going forward, in the longer term, it will affect the results we hope because we've got bigger capacity there. And so we should be able to further grow the revenues of the manufacturing business. The next question is, in our guidance, have we included any effects of not yet materialized acquisitions -- the answer to that is no. Our guidance of the $65 million to $68 million is only from the existing businesses in the group. So any acquisitions that are executed during the course of FY '26 and contribute, that contribution would be on top of the guidance.

Thanks, Chris. There's a question here about potential battery project timing awards. I don't think we can go into specifics of the timing of those projects. we would certainly say within the next 6 months, we will be hopefully awarded some additional battery projects and renewable projects. There's a question also about how competitive that is. general view is everything is competitive in the construction space. I guess it's more different to other areas that we operate. We welcome competition, and we like competing against similar businesses to ourselves. Question here about how we're seeing the commercial spaces activity and tender pipeline, specifically outside Force Fire. We mentioned in the presentation that we see that as sort of stabilized that probably pre-COVID levels. in terms of the commercial space. We have lots of different areas that we are evolved in commercial. We have seen, we have data tell. We have the Haida business. We have Force Fire and we're spread across nearly all states. So it will still be a key component of our activity as we move forward. It certainly will grow this year with force fire and we can continue to see opportunities going forward as there's more electrification of buildings, there's more retrofitting or buildings, et cetera. Those projects we currently have are performing well. I was at the Atlassian building about a month ago, again, another outstanding project that we're working on there in Sydney.

Next question is, should we be expecting any legal costs in FY '26? The answer is yes, there'll always be legal costs until proceedings get resolved. We would -- we do believe we have expensed the great bulk of our costs on this arbitration proceedings. So we think perhaps in -- and it's -- you can never be in control of the number. But for H1 FY '26, it might be at a similar level to what we experienced in H2 of FY '25. Next question, do you see more contract wins from the Department of Defense coming through in FY '26, '27. Well, we do have a few around the group, bids on work in defense. It's not a huge amount. We always do have some work going on in the defense sector, but it isn't a big area for us at the moment. So we don't really call it out as a separate thing at this point in time.

And I think there's a question here on data center, it's about how strong the will potential contract. So the outlook is very strong at the moment. You can just read in the papers consistently about clients that are developing more data centers. I think we're only at the beginning of AI and the impact that it will have on society and the amount of work that that will require data centers will exponentially grow. So for us, we did $120 million worth of data center works last financial year. We can see that sort of number continuing for us. And at different times, it will grow depending on the timing of individual contracts that we pick up. In terms of the complexity of data centers, there is a sort of a level of complexity. The main thing being that data centers are different to other projects that they have usually had multiple. They all have multiple power sources. So sometimes, they will have 2 different parts of the grids feeding them as well as temporary and backup powers within the system. And I guess the complexity comes to separating those different power supplies, so they're not crossing over and you're not affecting the redundancy of it. And that's something that we have a lot of experience at and we do the design, the electrical designs for the projects. So we're in a very good position in that data center work. The next question is how difficult is the market for acquisition opportunities and a subquestion within that is given the tailwinds multiples businesses expecting going to rise. Well, the market is probably the same as always for us. We're also active in looking for targets, and there are not many natural acquirers of the style of businesses we look for. So we don't think the market has changed really in that sense. And multiples, again, the sort of businesses we look at are the ones that are interested in the multiples we are prepared to offer. So it becomes a bit self-fulfilling in that sense. So I think the answer is really, we're expecting acquisitions that we make will be similar in nature to the ones we've done in the past.