Economic uncertainty still a ‘challenge’ for surging SGH

Ryan Stokes warns economic conditions in Australia are more “constrained” than a year ago, even as his billionaire-backed SGH smashed earnings expectations.

Kerry Stokes (fourth from left) attends a Donald Trump press conference during his first presidency. Picture: Nathan Edwards

The Australian economy is “more challenged” than it was a year ago according to Ryan Stokes, the chief executive of SGH, one of the nation’s top industrials conglomerates.

Speaking after SGH, controlled by the billionaire Stokes family, gave a cautious outlook of “high single-digit” earnings growth for the year after posting a higher-than-expected first half profit, Mr Stokes suggested it might be time for a policy shift at the Reserve Bank of Australia, which is increasingly expected to cut rates at its next meeting.

“The economy is in a reasonably good position but it feels more constrained and more challenged than it did twelve months ago and we need some catalyst to stimulate activity,” said Mr Stokes.

“If we look at employment growth and back out public sector employment, it doesn’t highlight a very strong underlying economy.”

In seasonally adjusted terms, the unemployment rate increased in December 2024 to 4 per cent. September quarter data suggests 91 per cent of the additional people hired over those four months were in non-market sectors such as public service, healthcare and education according to the Australian Bureau of Statistics.

“There’s still a concern around the risk/return equation of whether there’s confidence to invest, which I think is something that requires a change in central bank policy,” said Mr Stokes.

The 48-year old’s caution around the economy and similarly cautious approach to his company’s full year earnings did not stop SGH shares surging more than 6 per cent during trade on Tuesday, as investors factored in the company’s strong cost discipline in the face of tougher economic conditions.

The industrials conglomerate, previously known as Seven Group Holdings, on Tuesday reported a 7 per cent rise in underlying net profit after tax to $508m for the six months to December 31 from a year earlier.

Ryan Stokes. Picture: John Feder

It was “an incredible result,” according to investor Jun Bei Liu, who is a long time supporter of SGH and has been buying shares in the company over the past few weeks.

Ms Liu, who recently founded new fund manager TenCap, said the highlight of the company’s result was the performance of Boral, which was the company’s second-biggest earner with EBIT of $259m, a 29 per cent jump on the previous year.

SGH snapped up the shares it didn’t already own in the cement and asphalt maker last year in a semi-aggressive takeover; about two years after first taking a significant shareholding, booting out existing management, forcing a shift in strategy away from the US to domestic, and installing new CEO Vik Bansal.

“When Vik joined 18 months ago, they were talking about targeting a ‘teens margin’ and they are already there,” said Ms Liu.

“The Boral borrow result was a clear standout. And if we extrapolate that projection for Boral at its current run rate there is quite a lot of upgrades to come.”

Boral notched up margins of 14 per cent for the first half, though Mr Stokes warned the figure might not be matched in the second half.

Ms Liu pointed at SGH having a strong history of under-promising and over-delivering.

“Management are incredibly conservative, hence they didn’t upgrade the guidance,” she said. “Remember, last financial year was the same. They didn’t upgrade their guidance, and at the end almost doubled what they have promised to do.”

SGH’s biggest earning unit for the first half was once more WesTrac, which owns the franchise to sell and maintain Caterpillar machines in Australia’s key mining states. The division posted EBIT of $$352m, a smaller-than-usual 5 per cent increase, following the New York-listed Caterpillar’s decision to lower the prices of spare parts by 3 per cent.

WesTrac is normally the workhorse of the Stokes family fortune and Mr Stokes said he thought there was “more noise” around the spare parts price cut than warranted.

“We still delivered growth in capital sales, growth in product support, and growth in profit, even though we had that headwind.”

A bigger problem is the economic slump in Victoria, which Mr Stokes described as a “challenge”, adding it had some impact on Boral and weighed heavily on its industrial equipment hiring unit Coates.

The Coates unit saw a 2 per cent fall in EBIT to $156m even though the division responded by moving resources to better performing states.

“The overall activity has stepped down in Victoria the last six months … and we don’t see a change over this financial year,” said Mr Stokes.

“Hopefully if there’s a change in (interest) rates, that and a step up in residential activity, we’ll start to see that come back, but we do not envisage that change in FY25.”

Seven West Media, its struggling media division, posted an 18 per cent drop in EBIT to $23m.

Meantime, oil and gas company Beach — which remains a separate, publicly traded company — disappointed the market last week with a softer dividend and production outlook than expected.

However, its result was still a significant improvement on the previous corresponding period, equating a 39 per cent rise in EBIT to $70m.

The company said it is looking to reduce its leverage by year-end. Adjusted net debt to earnings before interest, tax, depreciation and amortisation was 2.18x and SGH said it is targeting a reduction in year-end leverage to 2x to support financial flexibility and growth.

Originally published as Economic uncertainty still a ‘challenge’ for surging SGH