RBC Capital Markets has initiated coverage of SGH Ltd (ASX: SGH), which is a diversified industrial company that owns Boral, Coates, Westrac, and various gas-producing investments.
The broker is bullish on the company's shares and has an outperform rating on them. We'll get to the specifics of their share price target later.
Firstly, let's look at why they're keen on the company's prospects.
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Sum of the parts more valuable
RBC says the company is well diversified across infrastructure, building, resources, energy (including through part-ownership of Beach Energy Ltd (ASX: BPT)), and media.
Key to a re-rating in the stock, however, is the company's interest in the Crux project in Western Australia, which is a joint venture with global giant Shell.
As RBC says in a report published this week:
We believe SGH is likely to make an announcement on Crux, a gas project that it has a 15.5% stake in (Shell owns the balance) that will begin backfilling volumes in the Prelude Floating LNG terminal, which we believe will act as a positive catalyst for the stock. We conservatively expect the project to start producing gas in late (2H28), and have taken the view that it will hit full production in FY30.
RBC estimates that Crux would generate $350 to $375 million in EBITDA to SGH each year, "yet consensus forecasts show no step-change in group earnings through the ramp period''.
RBC has valued the Crux stake at $1.2 billion, or $3.20 per share.
The broker also says the company's exposure to infrastructure nationally remains well-positioned.
RBC said:
Concern around an East Coast infrastructure slowdown is reasonable, however overdone in our view. Whilst VIC is particularly weak and unlikely to change in the short to medium term, NSW infrastructure is expected to be stable whilst QLD is growing. Whilst the infrastructure sector may be in an Airpocket, we do not think the business will suffer from debilitating indigestion, such that 15.6 PE presents an attractive entry point.
SGH also owns Westrac, which is the exclusive Caterpillar dealer in Western Australia and New South Wales.
RBC said SGH is currently trading at a discount to its peer group, indicating there should be some upside in the stock.
RBC said:
We have valued SGH through both a short- and long-term lens. The construction market that SGH is exposed to through Boral and Coates is inherently cyclical, as is the resources sector that WesTrac is exposed to. On top of that, SGH's energy exposures through Beach and Crux also introduce year-to-year volatility that must be captured through a short term, Sum of the Parts valuation. Separately, the business has longevity whose assets must be recognized via a net present value valuation – Boral's quarries, WesTrac's highly sought after exclusive contract with Caterpillar, Coates' dominant market position with key customers and in key geographies.
RBC has calculated a price target of $47 for SGH shares, compared with $40.82 currently. The company also pays a 1.6% dividend yield.
SGH is valued at $16.36 billion.
