Looking back, OpenAI's launch of ChatGPT in November 2022 was a defining moment in the development of artificial intelligence (AI).
As the world rushes to take a piece of AI, some AI-related companies saw their share prices surge. The prime example is Nvidia Corp shares, which have gained 10-fold since October 2022.
In Australia, shares in NextDC Ltd (ASX: NXT) and Macquarie Technology Group Ltd (ASX: MAQ) have soared 93% and 59%, respectively, in less than two years.
Many experts believe that the AI transition is just the beginning. Are you wondering which industries the AI revolution would impact next? Tesla CEO Elon Musk may have already given us a hint.
In a March 2024 interview at the Bosch Connected World conference, he said:
A year ago, the shortage was chips, neural net chips. Then, it was very easy to predict that the next shortage will be voltage step-down transformers. Then, the next shortage will be electricity.
They won't be able to find enough electricity to run all the chips. I think next year, you'll see they just can't find enough electricity to run all the chips.
With this in mind, here are two ASX small-caps in the electricity utility sector.
Southern Cross Electrical Engineer Ltd (ASX: SXE)
Established in 1978, Southern Cross Electrical Engineering (SCEE) provides specialised electrical, instrumentation, maintenance, and communication services in Australia.
The company has three business units: resources, commercial, and infrastructure. It offers its services to some of the largest companies, including Woolworths Group, Coles Group, BHP Group, and Rio Tinto.
Southern Cross Electrical sees exponential growth in data centres as the sector benefits from cloud computing and AI developments. In its 1H FY24 result presentation, the company said:
Data centres are electrically dense, electrical work comprising largest component of construction cost. SCEE has announaced 13 data centre awards totalling over $120 million in last four years.
[The company is] currently tendering on or positioning for over $500 million of work to be warded in next two years for extensions at existing or new builds of 12 separate data centres.
The company anticipates at least $53 million in earnings before interest, tax, depreciation, and amortisation (EBITDA) in FY25.
This is a significant growth from $33 million in the last 12 months to December 2023. The growth is driven by the acquisition of MDE Group and strong organic growth.
Southern Cross Electrical had a net cash position of $54 million as of December 2023, which is equivalent to 12% of its current market capitalisation of $440 million. This means that its enterprise value (EV) — defined as market capitalisation plus net debt — is $390 million.
Based on management's FY25 guidance, the stock is valued at an EV/EBITDA multiple of 7x. In terms of the price-to-earnings (P/E) ratio, Southern Cross Electrical shares are valued at 14x on FY25 earnings estimates by S&P Capital IQ.
The Southern Cross Electrical share price rose 160% over the past year and is currently trading at $1.69.
IPD Group Ltd (ASX: IPG)
Next up is IPD Group, a leading distributor of electrical and automation solutions in Australia. The company boasts a rich history of more than 70 years in this field and provides a comprehensive range of electrical services.
There are some similarities between Southern Cross Electrical and IPD Group. Both are in the electrical utility service industry across the country, have exposure to data centres and other AI-related industry changes, and are proactive in M&A activities.
IPD Group has recently made several strategic acquisitions, including Addelec, EX Engineering, and CMI Operations. Due to these acquisitions, along with strong organic growth, management anticipates FY24 EBITDA to be between $39 million and $39.5 million, marking a 42% increase from the previous year.
IPD Group shares are valued at 16x FY25 earnings estimates by S&P Capital IQ.
The IPD Group share price has traded mostly between $4 and $5 in the past year, and it is at $4.62 at the time of writing.
