Should you buy, hold or sell shares in Seven Group?
Caterpillar backhoes and excavators are not the first thing most people think about when they think of the business Seven Group (ASX:SVW).
But Seven Group own Westrac, and Westrac are the sole authorised dealers of Caterpillar equipment in WA, NSW and ACT. Caterpillar make large mining trucks and other mining equipment. Seven's total revenue in 2023 was $9627 million, and 51% came from Westrac.
Seven Group Holdings (SGH) is a diversified operating and investment group. It owns businesses and investments in industrial services, media and energy. Some of these businesses are owned outright. In others they own a controlling interest and a non-controlling interest in some others.
Seven Group and Seven West Media
It is important not to confuse Seven Group Holdings with Seven West Media (ASX:SWM). Seven West Media is a separate listed business that owns media assets including the Seven television network and a newspaper and publishing company. However, SGH also holds a 40% stake in SWM.
In addition to Westrac, SGH also owns the whole of the Coates equipment hire business.
Coates hires out equipment used for construction and engineering projects and are a top tier equipment hire business with approximately 27% market share. Coates accounted for 12% of SGH's total revenue.
The third main pillar of Seven's industrial services portfolio is Boral (ASX:BLD). Boral is an independently listed company on the ASX, however SGH owns 72% of the shares on issue, giving them a controlling stake. Boral supplies building materials, specifically cement, concrete and asphalt and contributed 36% of SGH's total revenue.
These three businesses are the primary contributors to SGH's top line revenue, but not the only contributors to its bottom line profits. This is due to the fact that they control these businesses and therefore they consolidate all of the revenue onto their Income Statement.
For example, with Boral, despite only owning 73% of the business as at June 30, they brought 100% of Boral's revenue into their income statement, as is required by accounting standards when consolidating an entity's subsidiaries. An adjustment is made to the profit line to account for minority interests.
This differs to the treatment of the businesses where they do not have a controlling stake.
For example, the 40% investment in SWM is not consolidated as they do not exercise control over that business. Therefore it is accounted for on the income statement using the equity accounting method. Put simply, this means 40% of SWM's profit is added to SVW's bottom line, but there is no inclusion at the revenue line.
In addition to the Industrial services and media businesses, they also operate in the energy segment, with a focus on gas and LPG. They own some assets directly, and they also have a 30% interest in ASX listed Beach Energy (ASX:BPT). SGH's CEO, Ryan Stokes, is interim chairman of Beach's board of directors.
As described above, not all of the business units contribute to the revenue line, so to get a better understanding of the contribution of each business unit, it is helpful to review their contribution to earnings.
Despite contributing 51% of revenue, Westrac's contribution to Earnings before interest and tax (EBIT) drops to 42%. Coates on the other hand only contributes 12% of revenue, but 25% of EBIT. Boral contributed 20% of EBIT. Energy contributed 8% and media 5%.
At the group level, EBIT grew by 20% in FY23. The Industrial services businesses displayed strong EBIT growth, especially Boral. They accounted for EBIT of $1.1b up 33% for the year. In contrast, energy and media each contracted by more than 20%.
The outlook for earnings is positive and management recently upgraded their guidance for 2024 EBIT from about 8-12% to 10-15%. The first quarter has been strong across the Industrial Services segment.
Westrac has started the year strongly with increasing demand for support and a strong order book and sales pipeline. Strong Infrastructure and construction activity is supporting Coates. Boral has also had a strong start to the year and recently upgraded their EBIT guidance.
Seven Group share price
The share price has been rising strongly over recent months. This means that the valuation metrics are no longer as attractive as they were. The forecast PE ratio is 16.1 and the price to tangible book value ratio is 10.
They carry a large amount of intangible assets on the balance sheet, including over $1 billion in goodwill from the acquisition of Coates in 2017. Dividends have been maintained at 46c for the last three years, fully franked. The historical yield is 1.4%. The forecast DPS for FY24 of 51c would provide a yield of 1.5%.
Seven Group is controlled by billionaire Kerry Stokes with his son Ryan Stokes as the CEO. The Stokes family own 57% of the shares on issue.
Any decision to invest in SVW needs to be made with the understanding that you are aligning yourself with them. That said, they have a pretty strong track record of generating wealth.
The prospects for the industrial services side of the business look strong, although that industry always carries a bit more risk. Energy markets can be volatile and media is still an industry in transition. There is a lot to like about the business, provided you are cognisant of the risks.
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