Southern Cross Electrical Engineering is diversifying and partnering up to future-proof the business.
Southern Cross Electrical Engineering is diversifying and partnering up to future-proof the business.
WHEN Southern Cross Electrical Engineering listed on the ASX in 2007 the future looked bright; it had a healthy order book and was turning over a similarly healthy $80 million a year in revenue.
Four years later, the pain from the GFC, which struck other resources-aligned companies earlier, became evident.
While revenue had grown to around $100 million, profit margins became tighter and the company recorded a $1.7 million loss in the 2010-11 financial year.
Former Clough executive vice-president Simon High had joined the family-run business as managing director in June 2010 in time to witness the difficult period.
“I always saw Southern Cross as having a really good culture, a really good safety record, really good people and as being generally well respected in the marketplace,” Mr High said.
However it became immediately apparent to Mr High that the company founded by Frank Tomasi in 1978 was in trouble.
“The company just hadn’t seen the GFC coming. The order book at the time looked quite good but it didn’t see that the market was going to drop off,” Mr High said.
“When I joined we had something like $70 million worth of work in hand, but our overheads were running at something like 80 per cent because the business just wasn’t correctly sized.
“I had two options. One was sacking half the people, but I was convinced the market was going to turn, so we ended up bidding for work in a much more competitive manner and taking work just breaking even to essentially keep the order book going and the employees.”
Now, almost three years after Mr High joined the company, the turnaround is clear. During the past year, Southern Cross has won a $100 million contract with Rio Tinto to work on its Cape Lambert port expansion, a $40 million contract for AngloGold Ashanti’s Tropicana gold mine, and is looking at turnover of about $270 million for the current financial year.
Part of the company’s success in mitigating the effects of the economic crisis has been a cultural shift from a privately owned and family run business to one with processes and procedures fundamental for a listed company.
It’s been a shift Mr High said had been well received by Mr Tomasi.
“One of Frank’s greatest assets is he knows what he doesn’t know; he could see what needed to be done but he just couldn’t do it, it wasn’t in his DNA,” Mr High said.
“He says in his day the company was like riding a donkey, but now it’s like riding a thoroughbred; he could ride the donkey but he knows he needed a jockey to ride the thoroughbred.”
Mr High has also taken charge of diversifying the business away from its core focus on resources construction projects.
The same year Mr High joined the company, it bought a number of smaller businesses that broadened Southern Cross’ scope to include early stage infrastructure works and operational and maintenance work.
The latter has now become a core focus for the company’s future growth, with its services division expected to account for half of total revenue within five years (it now accounts for about 13 per cent).
“When you look at what the market’s going to be like in five or 10 years’ time in Australia, we’ve got this massive wave of projects, particularly iron ore and then LNG, that will come along,” Mr High said.
“But you’ve got to plan on the basis that there won’t be projects forever. Once the plants are built - Gorgon for example - that will be there for 65 years, so we really want to position the company to get more of the sustainable work in servicing.”
To facilitate that repositioning the company is rebranding to simply become SCEE and appear more of a “competent and dominant Tier 1 electrical and instrumentation player (E&I)”, to use Mr High’s words.
The company’s joint venture arrangement to work with global E&I company Kentech on the Cape Lambert job is also expected to open doors, specifically into the oil and gas field.
“We needed somebody that was going to complement us. While we’ve got really good skills and labour we haven’t done [these big projects],” Mr High said.
“They’re doing five or six million-hour projects, the biggest we’ve done in terms of oil and gas was when we worked on Pluto, and that peaked at half a million hours.”
SCEE is also pulling back on international jobs to focus on the opportunities on home soil, which market analysts predict bode well for the company.
Euroz Securities analyst Gavin Allen has tipped the company for 2013-14 revenue in the range of $327 million and a doubling of its approximately $1.22 share price in the next two years.
It’s a prediction based on the company’s recent Tropicana and Rio wins, which have the potential to be extended, but excludes potential work on Roy Hill, Wheatstone, Inpex’s Ichthys, or the Sino Iron project.
