We recently researched SGH Ltd (ASX:SGH) in The Dynamic Investor. The shares have enjoyed a steady re-rating since the full year results in August. This is mainly due to the successful integration of the Boral acquisition since fully acquiring this business in July 2024. Market confidence in SGH was reinforced after the Company reported earnings for the six months to 31 December 2024 (1H25) that were ahead of market expectations. In addition, SGH repeated prior guidance for high-single-digit growth in EBIT in FY25.

Although the shares have re-rated following the interim results release, we assess whether current levels are attractive.

About SGH Ltd

Formerly Seven Group Holdings, SGH Ltd is a diversified operating and investment group with interests in the industrial services, media and energy sectors. The Company’s industrial services division (all of which are 100% owned by SGH) includes:

i. WesTrac, the sole authorised dealer of Caterpillar products in NSW, Western Australia and ACT. WesTrac is one of the largest global Caterpillar dealers (by sales) and is exposed to mining investment/production and infrastructure construction.

ii. Coates Hire, which is the largest nationwide industrial and general equipment hire company with a national footprint. Coates Hire services a diverse range of end markets including engineering, mining and resources, infrastructure and manufacturing.

iii. Boral is Australia’s largest construction materials and building products supplier.

Key Fundamental Drivers

WesTrac Earnings growth to Accelerate

WesTrac reported +5% EBIT growth despite the pass through of a low single-digit price cut for Caterpillar equipment. EBIT margin declined by 28 basis points primarily as a result of the price reduction.

EBIT growth for FY25 is expected to around high single-digit. This expectation is underpinned by strong demand for services (due to increasing rebuild activity) and the impact of a further Caterpillar price cut in 2H25. Inventory shifts are pointing towards accelerating rebuild activity into FY26. This should support continued growth, even as the US$ strength reverses parts deflation.

The medium-term outlook for capital sales & services remains strong, supported by: i) Major rebuild activity and ageing installed base, ii) Production of key commodity exposures expected to grow beyond 2030, iii) Mining strip ratios increasing, supporting customer activity through haulage volumes and iv) A growing installed base, which supports services and rebuilds.

Improvement in Trading Conditions Expected for Coates Hire

Revenue at Coates Hire suffered from a weak Victorian economy. In particular, weaker infrastructure activity from project deferrals offset buoyant activity in the East, West & North markets.

Operating conditions in Victoria are expected to remain challenging. However, infrastructure activity is improving in other regions (Queensland and WA). In addition, management aims to deliver further cost-out, improve service levels and network rationalisation.

Boral Well Leveraged to Recovery in Residential Construction Activity

The full takeover of Boral has delivered margin expansion from synergies and greater efficiencies under SGH’s control. Boral’s EBIT margin expanded to 14.3%, compared to 10.9% in the prior corresponding period (pcp). This was driven by further Selling, General & Administration (SG&A) rationalisation and strong price growth across the product suite. Margin expanded despite revenue declining by 2%, reflecting weaker residential construction activity, Further upside to margins was flagged through operating leverage as volumes recover.

Residential markets appear near the bottom, with the Company expecting an improvement in volumes this calendar year. The prospect of further interest rate cuts by the RBA should support early signs of recovery in new home sales.

Gearing Expected to Progressively Decline

Gearing (on a net debt/EBITDA basis) increased to 2.2x from 1.9x in the pcp due to the acquisition of the remaining Boral interest). Gearing is expected to decline to 2.0x by the end of FY25 and progressively decline over FY26/27. The key reason is that group free cashflow is expected to continue expanding despite continued CAPEX commitments over this timeframe.

Fundamental View

At current levels, SGH shares are trading on a 1-year forward P/E multiple of ~21x. We consider the multiple to be elevated relative to the EPS growth profile of ~9.5% over FY24-27 on a CAGR basis. Understandably, the premium multiple reflects the strong outlook and improved fundamentals across the WesTrac and Boral divisions.

Consensus estimates for EBIT growth in FY25 are ~14%, compared to Company guidance of high-single-digit growth. Notwithstanding that the Company has a history of beating initial guidance, market expectations are elevated and leave little room for error.

Charting View

SGH remains in a long-term uptrend. However, the recent upside break above $50 has seen it rally hard and the share price is now easing back in the short-term. As it finds support closer to $50, it provides investors with a cheaper entry point before it resumes its uptrend.

 

Michael Gable is managing director of Fairmont Equities.

 

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