The Small Cap Energy Transition Playbook – Part 1

23 Apr 2025 | Energy, Stock Insight

Investing in Australia’s Energy Infrastructure Backbone

In this three-part series, we outline the Tamim investment framework for identifying ASX-listed companies that provide the critical infrastructure, software, and services enabling the global energy transition. This thematic investment approach focuses on businesses that support the structural shift from fossil fuels to renewable energy sources, energy storage, and grid modernisation.

Part 1 highlights Southern Cross Electrical Engineering Ltd (ASX: SXE), a leading player in Australia’s energy and infrastructure sectors. As the world mobilises capital towards net-zero emissions targets, SXE stands out as a profitable, well-capitalised business poised to benefit from Australia’s growing infrastructure and electrification spend.

Business Overview: A Strategic Operator in Energy and Infrastructure

Southern Cross Electrical (SXE) has delivered record financial results, validating its position as a key contractor in the infrastructure and energy transition markets. The company’s first-half FY25 performance demonstrated exceptional operating momentum:

Revenue grew by 55.5% to $397.4 million
EBITDA increased by 58.5% to $27.1 million
Net profit rose by 67.8% to $16.2 million

Sources: Company

Infrastructure remains the company’s core revenue driver, accounting for 63.3% of total revenue. Key projects include the Collier Battery Energy Storage System, significant works at Western Sydney Airport, and the Shellharbour Hospital development—the largest healthcare project in SXE’s history.

Sources: Company

Capitalising on Data Centre Expansion

One of the company’s most compelling growth vectors is its rapid expansion into data centres, driven by the proliferation of cloud computing and artificial intelligence workloads.

SXE has increased its data centre revenue from approximately $20 million annually (FY19–FY23) to $50 million in FY24, with a projected rise to $120 million in FY25. The company is currently tendering for more than $500 million in future data centre projects.

Electrification and Energy Transition Exposure

SXE is directly aligned with Australia’s decarbonisation and infrastructure modernisation agenda. The company provides:

Engineering services for solar and wind farms
Battery storage installations
Electrical upgrades for industrial customers
Modernisation of grid and electrical infrastructure

This makes SXE a direct beneficiary of the electrification megatrend underpinning the global push towards net-zero emissions. Unlike many companies in the space, SXE is already generating strong earnings, has no debt, and pays a fully franked dividend.

Balance Sheet Strength and Strategic M&A

SXE’s robust financial position underpins its capacity for future growth:

$114.8 million in cash
No debt
Record $670 million order book

The company recently acquired Force Fire Holdings, a NSW and QLD-based fire safety services provider. The transaction was funded entirely from existing cash reserves:

Initial consideration: $36.3 million; total up to $53.5 million with performance-based earnouts
EBIT contribution forecast: $10 million in FY26
EPS accretive from day one

The acquisition provides strategic synergies by expanding SXE’s capabilities and footprint while increasing exposure to recurring revenue through maintenance contracts.

Valuation and Market Opportunity

SXE currently trades at:

~10x forward PE
A fully franked dividend yield of 5%

Source: Company

Comparable infrastructure and services companies on the ASX typically trade at mid-teens earnings multiples. Given SXE’s growth profile, strong cash position, and strategic alignment with key infrastructure trends, a market re-rating is possible.

We assess the company’s intrinsic value to be in excess of $2.00 per share, supported by earnings momentum and the scalability of recent acquisitions.

Investment Relevance

The structural transition in energy systems globally and in Australia necessitates significant capital deployment. Investors seeking exposure to this trend should look beyond pure-play renewables or speculative technologies and consider enabling businesses such as SXE.

Southern Cross Electrical offers:

Tangible exposure to data centre growth, renewable energy buildout, and electrification
A well-diversified client base and project pipeline
A disciplined M&A strategy funded by internal resources
Operational and financial resilience

SXE is not reliant on regulatory subsidies or unproven technologies. Instead, it generates consistent, growing profits from real-world projects.

Tamim Takeaway

Southern Cross Electrical is a compelling example of a high-quality, small-cap company delivering on Australia’s energy transition objectives. The company offers investors:

Leverage to infrastructure and decarbonisation trends
Strong financial discipline and capital allocation
A well-supported dividend yield with upside from valuation normalisation

For investors seeking reliable exposure to Australia’s net-zero infrastructure buildout, SXE deserves serious consideration as a core small-cap holding.

Stay tuned for Part 2 of The Small Cap Energy Transition Playbook, where we examine a software-driven billing and customer engagement company facilitating the shift to distributed energy systems and smart metering.

____________________________________________________________________________

Disclaimer: Southern Cross Electrical Engineering Ltd (ASX: SXE) is held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.