Why Seven Group Holdings has buyer appeal

Fairfax Media (ASX:FXJ) and Nine Entertainment (ASX:NEC) have announced a proposed merger. Whilst Seven West Media (ASX:SWM) might now be gaining some attention, we mustn’t forget that Seven Group Holdings (ASX:SVW) is a substantial shareholder in SWM. Does this mean that SVW is a stock worth considering?

About Seven Group Holdings

SVW have operations and investments in industrial services, media and energy. The main operating businesses are:

  1. WesTrac, which is the sole authorised Caterpillar (CAT) dealer in WA, NSW and the ACT in Australia. WesTrac is one of Caterpillar’s top dealers globally (by sales value). They have a strong after-market business providing CAT parts and services to the WA mining industry.
  2. Coates Hire, Australia’s largest equipment hire business. In 1H18, SVW acquired the remaining 53.3%, which now makes the business the largest contributor to EBITDA. Coates Hire is the largest operator in its categories and has an estimated market share of 19%.

In addition to these operating businesses, the Company has a 40.9% shareholding in ASX-listed companies Seven West Media, as well as a 25.6% shareholding in Beach Energy. SVW’s major shareholder is Mr Kerry Stokes, with a 68% shareholding.

Fundamental View of Seven Group Holdings

The key factor underpinning our favourable view on SVW is that the two key operational businesses (and value drivers), WesTrac and Coates Hire, are expected to deliver double-digit earnings growth. WesTrac remains strongly leveraged to the mining maintenance cycle. It is also poised to benefit from higher product support sales (parts & service). Further, while Coates Hire, which is benefitting from an increase in infrastructure spending, is expected to generate significant earnings growth. This is on the back of a strengthening infrastructure CAPEX cycle, increased investment, and improved asset utilisation rates.

Whilst SVW shares have rerated since our recent research report (to claim an 8 week free trial to our comprehensive reports and to be the first to find out about our best ideas, sign up here), SVW is an investment still worth considering. The shares are trading on a 1-year forward P/E multiple of ~16x, which we consider attractive in light of consensus EBIT growth expectations of +20% and ~15% in FY19 and FY20, respectively. There is also the potential for further earnings upgrades. These are likely to be driven by continued strength in the key operating businesses and/or earnings upgrades for its ASX-listed investments.

There have already been upgrades to guidance, driven by the continued recovery in WA/NSW mining production activity as well as sustained strength in east coast infrastructure project development activity. In mid-May, SVW upgraded EBIT growth guidance for FY18 to be approximately 20-25%. This was after the Company had provided EBIT growth guidance of 15% at the interim results in February.

Concerns about Debt

In addition, a misplaced concern that the market has about SVW is the recent increase in net debt. This resulted from the completion of a number of transactions, namely the remaining the 53.3% in Coates Hire. This included the acquisition of Coates Hire’s debt, as well as the increase investment in Beach Energy outweighed proceeds from a capital raising as well as the sale of WesTrac China. This has lifted the gearing level (on a net debt to EBITDA basis) to ~3x. Whilst this is elevated, the gearing level is actually much lower when listed (i.e. liquid) assets, including SWM, BPT and equity portfolio, are taken into consideration.

Chart View of Seven Group Holdings

SVW peaked in May and was quickly sold down. However as time goes by, it is still holding up within this trading range between about $18.90 and $20.50. As it does so, the overall picture is starting to look more positive. The bounce in the last couple of weeks off the lower level of the range has been on strong volume and we are confident that the stock would resume the uptrend soon. More conservative investors would wait for a clear break of resistance near $20.50. We would be concerned if SVW moved back towards $18.

Weekly chart of Seven Group Holdings  (ASX:SVW)
Weekly chart of Seven Group Holdings (ASX:SVW)


Current share prices available here.

You can learn more about technical analysis in this article.


Michael Gable is managing director of Fairmont Equities.

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