We researched SGH Ltd (ASX:SGH) in The Dynamic Investor earlier this month. Our conclusion was that the weakness in the shares presented an opportunity. With the shares having gained strongly since our report, we consider whether current levels remain an attractive entry point.

About SGH

SGH Ltd (formerly Seven Group Holdings) is a diversified operating and investment group with interests in the industrial services, media and energy sectors. The name change took effect on 22 November 2024. The Company’s industrial services division includes:

i. WesTrac (100% owned by SGH), the sole authorised dealer of Caterpillar products in NSW, Western Australia and ACT.
ii. Coates Hire (100% owned by SGH), which is the largest nationwide industrial and general equipment hire company.
iii. Boral (100% owned by SGH) – Australia’s largest construction materials and building products supplier.

Key Fundamental Drivers

SGH Has a History of Beating Guidance

At an Investor Day held in May, the Company reiterated prior guidance for high-single-digit growth in EBIT in FY25. Maintaining the FY25 outlook appears conservative, given that SGH has a history of beating initial guidance. Having said that, there are several headwinds in the current half (2H25) in the form of a prescribed CAT parts price reduction and more challenging economic conditions in the Victorian market (impacting Coates Hire).

Any change in guidance would either be left until closer to year-end or SGH may deliver a slight beat at the FY25 results release in August.

Macro Conditions Remain Supportive

Importantly, improving macro conditions in the form of lower interest rates underpin the potential for upgrades to consensus estimates for FY26. Further, the medium-to-long-term outlook for SGH’s Industrial Services businesses (i.e. WesTrac, Coates Hire & Boral) remains robust, given positive demand mega-trends including infrastructure and residential construction.

For WesTrac, SGH continues to expect ageing fleets and a growing installed machine base to support increased services demand and rebuild activity. The Company sees solid demand across key mining end markets (coal, iron ore, gold). In addition, it considers that ongoing infrastructure development and an improving residential outlook supports growth.

New Growth Strategy for Coates Hire

In order to reduce Coates Hire’s exposure to weaker infrastructure activity, the Company has outlined plans to increase penetration into several service-based market segments. To this end, SGH outlined a new 5-year plan (Grow30) focused on driving revenue growth in priority industries (renewables, defence, etc) and expanded equipment offerings (engineering, Heating, Ventilation, and Air Conditioning, etc).

The Grow30 strategy also outlines a pathway to improved margins through cost discipline, digital transformation and a focus on maintaining fleet utilisation to the >60% high-performance target (from 59.2% in 1H25).

Boral Takeover Has Underpinned Group Margin Expansion

The full takeover of Boral has delivered margin expansion in 1H25. This has been driven by further Selling, General & Administration (SG&A) rationalisation and strong price growth across the product suite. The strong EBIT margin expansion for Boral was also impressive from the viewpoint that sales declined -2%, reflecting weaker residential construction activity.

Gearing Expected to Progressively Decline

Gearing (on a net debt/EBITDA basis) as at 31 December 2024 increased to 2.2x from 1.9x one year prior, due to the acquisition of the remaining Boral interest. The Company continues to target a further reduction in gearing to 2.0x by the end of FY25. With free cashflow expected to continue expanding over FY26/27 despite continued CAPEX commitments over this timeframe, gearing is expected to decline further beyond FY25.

While the Company has funding capacity to pursue acquisitions, debt reduction appears to be a priority for management.

Fundamental View

Consensus estimates are factoring in EBIT growth that is in line with Company guidance, However, the recent appreciation in the share price indicates that the market is starting to factor in a stronger-than-expected FY25 result.

Charting View

SGH has been trending higher for the past few years and the recent dip in April brought the shares back towards the uptrend line before bouncing again. The shares are now retesting the February highs and are now forming an inverse head and shoulders continuation pattern. This means that if SGH can break to a new high, then we should see another strong rally in the order of several dollars. Otherwise, any dips back towards $50 are a buying opportunity.

 

Michael Gable is managing director of Fairmont Equities.

 

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