A metronome of dividend consistency, SGH shares plans for future growth

In this episode of the Executive Series, Tom Piotrowski interviews Ryan Stokes, CEO of SGH Limited (ASX: SGH), to discuss the company's financial performance, key acquisitions, and outlook for the future. 

Stokes highlights SGH’s strong dividend performance, emphasising the company’s commitment to stability and growth. 

"If you look at the history of SGH, [it has recorded] 30 consecutive periods of stable and growing dividends," said Stokes. 

He notes a 30% increase in dividends over the last year, reaching $0.30 per share, underlining the company’s focus on rewarding shareholders.

A major topic of discussion is SGH’s acquisition of Boral, a move Stokes describes as a long-term strategic investment. 

"Boral is a great company that needed that discipline and needed that focus on execution to unlock the value," said Stokes, adding that SGH aims to take Boral from "good to great." 

He emphasises Boral’s core strength in construction materials, particularly in Australia’s infrastructure and construction sectors.

The conversation also covers WesTrac, SGH’s key business supporting the mining and construction sectors. Stokes is optimistic about the mining industry, particularly in iron ore and coal, stating that "customers are still investing, they’re still looking to run the gear that they’ve had for a period of time." He highlights aftermarket services, such as parts and maintenance, as a key revenue driver, with a $2 billion revenue base in this sector.

On market cycles, Stokes believes the mining sector is in a "healthy mid-cycle dynamic," contrasting today’s environment with the boom of 2011-2013. He points out that miners in the Pilbara maintain the lowest cost per tonne globally, ensuring long-term profitability despite market fluctuations.

Watch the full interview for deeper insights into SGH’s strategies and market outlook.

Edited Transcript

Tom Piotrowski: Ryan, the two most sacred things for an investor are to be invested in an organisation that's increasing its dividend, and where the share price, obviously, is moving higher, as well. You've been able to achieve that in spades over the course of the last 12 months. Let's quickly talk about the dividend policy of SGH, because there's a pretty chunky improvement that you've seen over the course of the last six months in terms of what you're returning to your shareholders.

Ryan Stokes: Yeah, absolutely, Tom. In our mind, TSR is an important measure, so the total shareholder return. So both the appreciation in share price, as well as the dividend. We've had a, let's say, a framework around the dividend for a long period of time, to have a stable and growing dividend. If you look at the history of SGH, it's the 30th consecutive period of stable and growing dividend. It may not grow every year, but it's maintaining that stability. This year, for the end of the prior full year, we had a 30% increase to $0.30, and in this half, a similar 30% increase to $0.30. So the dividend has grown substantially, in our view, to reward shareholders. Post the acquisition of Boral, we increased our retail shareholder base. We have approximately 40-odd thousand shareholders now, and we know how important the dividend is. And confidence around the companies that can pay a reasonable dividend.

Tom Piotrowski: Let's talk about Boral, because you can be born good-looking or benefit from good timing. And in the share market, the latter is far more favourable. The acquisition, the moment in time when you got your hands on Boral, how much is that going to figure in terms of the future of SGH?

Ryan Stokes: Absolutely, I agree with that. So our view, we like the opportunities where businesses might seem more challenged. And we had a view, Boral's a great company that needed that discipline and needed that focus on execution to unlock the value. And that's happened over time. And it's still, there's a journey on the way. We have a strategy around going good to great, and we are a long way from that end destination. Boral's a wonderful company when we come back to its core focus on construction materials in Australia, a market-leading presence, certainly across the east coast of Australia that's in the quarry, in cement, and in concrete. And so we feel quite comfortable being exposed to the infrastructure and construction outlook across Australia. And a lot of the improvement in Boral has come just through that focus on execution. How do we make Boral a more efficient, effective company? How do we make sure we improve customer service? All those attributes have supported that journey. So we're pleased with where we've got to so far, but there's a long way to go. But from an SGH context, Boral's a key pillar as we go into the future in how we can continue to grow SGH.

Tom Piotrowski: WesTrac, obviously, such an important part of the earnings foundation for the company. This environment that we see now is a pretty challenging one economically. How significant are the next 18 months for the future of that business?

Ryan Stokes: Yeah. So WesTrac, our territory, we operate across Western Australia and New South Wales, where we're the Caterpillar dealer. We sell, serve and support our customers a lot in the mining sector and in construction. We see the mining sector as a strong position. Certainly, the outlook from production in iron ore and coal, are two key commodities for us. We feel very comfortable to have the exposure. Customers are still investing, they're still looking to run the gear that they've had for a period of time. From our perspective, that supports the aftermarket opportunity. So the parts and service has been a key pillar of our growth over the last decade. Today, in the half, about a $2 billion revenue base in that aftermarket opportunity. So it's quite a sizable opportunity. And our core role, the reason we exist, is to support our customers and that activity. So the more we can do in having the parts, ensuring that the machines continue to operate productively, then we have a really good opportunity.

Tom Piotrowski: I'm interested in your line of sight as to where we are in the cycle for the mining industry, because it's been a really tough couple of years, simply from the vantage point of the underperformance of that sector. Do you have a feel for things turning around or at least bottoming out at the moment in the mining space?

Ryan Stokes: Yeah. We still feel comfortable in where we are in that cycle. A lot of questions around that. And our experience over probably the last, say, four or five years, has been this is what we think is a healthy mid-cycle dynamic. If we roll back to 2011, '12 and '13, that was a really big growth cycle, where you saw a massive step up in production, particularly export tonnage of iron ore. And that was a step change for the sector. And today, we've seen the volume of production and volume of export continue just to eke out small gains. We see the sector today as highly efficient in the way they operate, adopting technologies such as automation in haul trucks, which is allowing further productivity gains, and a much more advanced maintenance dynamic, which is enabling those trucks to run longer, run harder. All of which promotes a pretty healthy industry. So when we look at the customers that we serve in Australia, the big kind of miners in the Pilbara, they have the lowest cost per tonne of anywhere in the world. So we think irrespective of what might shape out in the iron ore sector, they are well positioned to produce a profitable kind of income stream for a long period of time.

Tom Piotrowski: In terms of the Boral acquisition, the obvious question is, are you going to continue down that acquisitive path? And capital allocation is always important. How do those things square up for you at this point in time?

Ryan Stokes: We feel well positioned at the moment. Our focus through FY25 has been on this deleveraging aspect for us. We had a desire—We took on leverage through the acquisition of 100% of Boral. We're very comfortable with our leverage, which is just under 2.2 times net debt to EBITDA. So very healthy for a high cash flow business like ours. We expect that to get down to about two times. That gives us capacity to look at something else. So I'd say over the next six months, the focus is on executing that. We'll look at opportunities. We like the industrial space. We like businesses that have privileged assets, good cash flows, and usually opportunities for us to improve. And a company like us, we pay a reasonable premium, but not too much. And ultimately, we need to see a value that we can create through how we can apply an operating model and really execute to add value. That's a dilemma. So finding the opportunities where you see a value disconnect, that's what we tend to get excited about.

Tom Piotrowski: Are they getting easier or harder to find those sorts of opportunities?

Ryan Stokes: Well, there's always a challenge. So some opportunities might seem really compelling, but they're difficult to execute. For us, we also like investing in Australia. This is a unique aspect of our model within SGH is, we're not constrained by growth within a business. We can grow and invest alongside our existing operations in Australia. We believe in home court advantage. We like the Australian economy. We like the ability to create value here. And we feel we've got a long opportunity to grow. So we're not constrained in that context, but finding the right opportunity, yes. I mean, things might look compelling because of a value disconnect, but they may not be easy in our view to unlock. So, yes, we need to be very disciplined in how we buy.

Tom Piotrowski: Ryan, delivering the sort of results that you've delivered doesn't happen by accident. It comes from asking difficult questions of your business leaders and your unit heads at SGH. What are you asking them or what are you telling them to do at the moment?

Ryan Stokes: Yeah, what we've developed is a kind of an operating model that suits kind of our organisation, and usually finds those leaders who have a very similar kind of operator mentality. Those who like the detail, believe in scrutinising a business, making sure that it's focused on being lean and efficient, very frontline-centric. So how do we empower the frontline workforce, and then make sure they're supported around how we can execute and serve customers. So those key principles are important. Right now, I think it's an important aspect to ensure we can execute sales effectively, support customers in a more competitive environment. Ensure we're focused on costs. We have a continued vigilance on how we can continue to remove process and remove costs, where possible. And they're some of the key principles we keep focused on. So if you look through the result, the growth in EBIT margin is an important benchmark for us. So how are we seeing our business going to continue to drive margin improvement? That's one of the elements we like to push through our operating businesses.

Tom Piotrowski: We are talking on the eve of an interest rate decision from the Reserve Bank, arguably one of the more contentious that we've navigated in recent history. How important do you see an interest rate cut being to business confidence in what you're seeing out in the trenches at the moment?

Ryan Stokes: I think it is an important confidence factor. If we look at what rates do inherently, the hiking of rates or a kind of elevated rate stance does tend to constrict the economy. That is the intended purpose. And we've seen that play through. We think the Australian economy is in a pretty good position, and made comments, apart from various states, overall, it's reasonably well-positioned. However, the economy is slowing.

Tom Piotrowski: Yeah.

Ryan Stokes: So a rate cut now would certainly help support confidence in the economy. I think it's probably the catalyst we need to see that kind of stalemate on the residential construction sector, whether it's some aspect around affordability comes through and more confidence around that as we go forward. So right now, I think it's an important factor to help business, as well as I think that the entire broader community feel more confident about the future. So it's hopefully, going to have an impact like that if there is a rate cut today.

Tom Piotrowski: As a conglomerate, and one that looks through business cycles and looks at the long term, is a rate cut today going to be important to SGH?

Ryan Stokes: You're right. We do have a long-term view about those core thematics. From our perspective, it's about the trend we're seeing at the moment where we think it is going to be an improvement. So we feel very comfortable about what the outlook is for our FY25, so the current financial year. I think the cut is going to be important from our customers' perspective. And I think that the element we need to fuel that confidence and growth. If you look at the figures and the economy, the GDP growth rate has slowed to the point where it is concerning. And so we need some form of catalyst to see some economic recovery. That would help. I don't think it's the only solution out there. I think other policy frameworks are going to be important. But yes, from our perspective, it would potentially be a catalyst for a step up in residential construction, which would suit Boral and Coates to a degree, and overall support I think, the overall growth in the economy.

Tom Piotrowski: We are at the foothills of a political cycle, as well. We're going to be going to the federal polls sometime very soon. How significant is that in your thinking when you look out over the course of the next little while?

Ryan Stokes: Yeah. Look, it's a big factor this year as to the election outcome. When we look at some of the issues right now, we are concerned around the lack of productivity in the economy. That is something where, as we talk about what our priorities, we need to do our own self-help in that context. So how do we look at taking process out to drive productivity and efficiency through our businesses? But overall, you need also a framework across the economy, right? How do we make sure we're looking at wage growth, balanced with productivity growth to ensure the economy remains competitive, and our overall workforce remains competitive. So we think that's going to be an important factor from a broad framework. We'll be watching with interest how the polls play out. But I mean, ultimately, stability in an outcome where we can see a focus on driving productivity through the economy, economic growth, and some of those policy frameworks will be important.

Tom Piotrowski: Ryan, it's always great to talk to you, to get a glimpse of what's happening at the grassroots level of the economy. Thanks for your time.

Ryan Stokes: Tom, thank you very much. Appreciate it.

Tom Piotrowski: And thanks for joining us for the Executive Series.

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