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Date : 17/02/2023

Seven Group Holdings

ASX :

SVW

Market Cap : $8.71 Billion

Dividend Per Share : $0.46

Dividend Yield : 1.91 %

Buy

52 Week Range : $15.82 - $24.53

Share Price : $24.34

SVW delivered a robust 1H23 result and upgraded guidance as business momentum returns. We maintain a 'Buy.'

Company Analysis

Conglomerates pride themselves on delivering a smooth stream of earnings and dividends to investors over the long term. However, due to their defensive nature, Investing in conglomerates had been out of fashion during the bull run from 2009 to 2022.

As the tide turned in the markets and investors switched from growth to value stocks, conglomerates such as Seven Group Holdings (ASX: SVW) are back in fashion. Founded by billionaire Kerry Stokes and now led by his son Ryan Stokes who has proved himself to be very capable, SVW is an old-school company that is now once again delivering market-beating returns – up 13% in 2023 and over 30% in the past 6 months.

Our earlier coverage was at $17.75 a share in September 2022. So far, it has returned 34%, and we think there is still room for growth, particularly as directors are also topping up holdings. Director Rachel Argaman just added 6,500 shares at $24.15 earlier this week.

Seven Group is only as good as the sum of its parts, and the parts are exceptionally well-oiled machines. SVW gives you diversified exposure to WesTrac, Coates, Boral, Beach Energy, and Seven West Media – all of which hold market-leading positions in their industries.

Seven Group reported a strong financial result for the six months ended 31 December 2022, with revenue of $4.6 billion, up 16%, and EBIT of $595 million, up 16%. Supported by robust activity in the resources, infrastructure, and construction sectors, the SVW’s Industrial Services businesses delivered material growth. Earnings per share from continuing operations for the period was $0.94, up 18%.

Seven Group’s operating cash flow of $574 million was up 23%, supported by a $202 million cash flow increase at WesTrac, on increased earnings and favourable movement in new machines and parts. Group EBITDA cash conversion of 68% was up 9% (relative). In line with SVW’s policy of stable and growing dividends over time, the company retained its interim dividend at 23 cents per share, fully franked.


Source: SVW

This was a market-beating result, and the share price shows just that. Since buying SVW is like owning a slice of each of its businesses, we need to look deeper into each of them to paint the full picture.

WesTrac

WesTrac delivered 1H23 revenue of $2.3 billion, up 20% on growth across product support and machine sales. Machine sales grew 33%, supported by strong customer demand and deliveries, while increased volume and price drove product support growth of 13%.

WesTrac has a stunning business model. As it sells more machines, it also generates steady, predictable recurring revenue for support.

EBIT of $254 million was up 21%, benefitting from stronger sales, pricing traction, and disciplined execution that helped support increasing operational leverage to deliver EBIT margin expansion of 14bp to 11.1%.

While supply chain constraints moderated over the half, elevated customer activity and demand made it necessary to maintain working capital at higher than historic levels to support customer deliveries. Though the business will continue to invest to support growth, we expect working capital and operating cash conversion to normalise over the medium term.

Coates

Coates 1H23 revenue of $575 million, up 16%, was driven by growth across key geographies and strong customer activity, particularly in infrastructure. EBIT of $149 million was up 25%, benefitting from effective pricing traction, increasing utilisation of fleet, cost focus, and technology improvements that supported increasing operational leverage.

Coates delivered improvement across all major operating metrics, including fleet time utilisation (TU) at 61.7%, ROCE increased 264bp to 15.7%, and EBIT margin expansion of 183bp to 25.9%.

To ensure the business effectively captures the infrastructure opportunity, Coates continued to roll out its Hub & Spoke branch model, driving efficiency and scalability while executing a disciplined expansion of its hire fleet. The original cost of fleet exited 1H FY23 at $1.83 billion, up 2.7%, and is expected to increase to ~$1.90 billion in 2H23.

Boral

Strong customer activity and demand for Boral’s products saw 1H FY23 sales volumes increase by 4% and revenue increase by 12% to $1,681 million. Combined with pricing actions and ongoing cost-out, EBIT margins rose 50bp to 5.7%, resulting in EBIT of $95 million, up 23%.

With the executive management team now in place, in 2H23, the business will focus on embedding the revised operating model and cost control, driving operating leverage and ultimately improving the returns from the quality assets that exist within Boral.

Reflecting the confidence in Boral, Seven Group increased its shareholding in the business by 3% to 72.6% in 1H23 at $2.90 per share.

Energy

Beach Energy (30% owned) saw underlying NPAT decline 10% on lower production coupled with margin compression. However, production from the Otway basin continues to ramp up, increasing 36% compared to pcp, as the connection of recently drilled production wells continues on schedule.

Construction progressed at Waitsia in the Perth basin. The joint venture has executed agreements with Webuild to complete the development, with the first gas targeted by the end of CY23. Beach remains in a net cash position with a strong free cash flow outlook. The business has announced a new dividend policy, targeting a payout ratio of 40 – 50% of pre-growth free cash flow. This will ultimately also increase dividends to Seven Group investors.

The Crux project (15.5% ownership) is now in the execution phase, with fabrication underway and the first LNG expected in FY27. The divestment consideration is ongoing as discussions continue with parties in Due Diligence.

Media

Seven West Media (39.3% owned) retained its market-leading position, with the #1 national ratings share in CY22. Despite a reduced ad market, Seven West maintained revenue largely flat at $815 million, though it saw a 9% decline in underlying EBIT. The focus on strengthening the balance sheet continued with a 13% reduction in adjusted net debt to $223m, representing less than 1x EBITDA.

The business continues to grow its digital content and earnings, with digital EBITDA up 30%. Seven West signed strategic content deals over the half, including with NBC Universal and marquee sports rights with AFL and Cricket Australia, on enhanced terms that include streaming rights.

Balance Sheet Strength to Further Improve

The Corporate Syndicated Loan Facility Tranche B was amended, extending the maturity to September 2027. The tranche was also increased by $50 million to $950 million whilst maintaining investment-grade pricing. These financings highlight the market support for the Seven Group’s capital structure.

SVW’s adjusted Net Debt to EBITDA (leverage) reduced from 2.8x to 2.7x HoH. The Group targets a further reduction in leverage to 2.5x over the next 12 – 18 months. As of December 31, 46% of the Group’s drawn debt was at fixed rates, and the effective Group borrowing cost was 4.9%.

Outlook & Valuation

Seven Group carries earnings momentum into 2H FY23 and has upgraded FY23 EBIT guidance. All of SVW’s portfolio companies except Seven West Media have a positive outlook. Advertising in the media industry is expected to decline as the economic slowdown directly affects the marketing spending of businesses. However, given the media giant’s competitive position, it will emerge unscathed, rebounding quickly.

WesTrac is expected to benefit from a robust delivery pipeline and customer activity, supporting increased guidance of mid-teen per cent EBIT growth in FY23.

At Coates, continued infrastructure activity and asset utilisation strength support increased guidance of high-teen per cent EBIT growth in FY23.

Boral expects 2H FY23 EBIT to be broadly in line with 1H FY23. Beach has narrowed its full-year production guidance to 19 – 20.5 million barrels of oil equivalent.

SWM expects to grow total TV share in 2H FY23, against a mid to high single-digit advertising market decline, targeting $15-20m of cost-out.

Following this strong first-half financial result, Seven Group has increased its full-year Group earnings guidance to low to mid-teen per cent EBIT growth in FY23.

Seven Group is riding two of Australia’s most important megatrends: the scramble for resources to power the energy transition and the much-delayed $1 trillion infrastructure boom that is finally coming to fruition.

Although the former trend will keep WesTrac humming for years to come, and Coates is finally responding to years of careful investment and tweaking, the infrastructure boom is also good for SVW’s latest project – fixing building materials giant Boral.

Market consensus suggests that SVW will deliver a 12% revenue growth for full-year FY23 and an EPS of $1.84 a share. Based on these figures, we see SVW shares trading at a 13x P/E for FY23, which is fairly priced, in our opinion. Looking beyond FY23, we expect SVW to continue performing well as WestTrac and Coates, the two largest contributors, benefit from structural demand in the infrastructure sector.

Hence, with a long-term view, the 10x P/E for FY25, a period when interest rates would have normalised and the economy stronger, looks fairly cheap. This means that the market is still undershooting the long-term forecast for earnings. As SVW continues to display good momentum, we expect it to change, leading to an upgrade and price catching up to value.

SVW has kept its dividends stable at $0.23 a share. We expect the policy to remain and a similar $0.23 final dividend to be paid out in September.

From a technical analysis standpoint, the share price is trading at an all-time high level (the blue line on the chart), but the price action at this resistance level is not showing any signs of weakness for a possible reversal as of now, which is a sign of strong bullish sentiment on the stock. This is because normally profit-taking activity at these important resistance levels significantly increases, and buyers must be very motivated to hold the price near the resistance level for a few consecutive trading days. This strong bullish sentiment on SVW’s stock is another piece of evidence of the solid fundamentals of the company.

Recommendation

Seven Group is an old-school conglomerate that has come back into fashion as investors began favouring value over growth. This trend is expected to continue, given the macroeconomic challenges that persist. Seven Group’s companies are sitting in sectors with a degree of resilience to interest rates. Ryan Stokes is also demonstrating an ability to drive real operating leverage across the conglomerate, despite inflation. 1H23 performance came in above expectations, and unlike most companies that have reported so far, SVW’s outlook looks promising. We maintain a ‘Buy’ recommendation.

 

Seven Group Holdings, Weekly Chart in Semi-log Scale (Source: Metastock)

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