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Date : 23/09/2021

Seven Group Holdings

ASX :

SVW

Market Cap : $7.45 Billion

Dividend Per Share : $0.46

Dividend Yield : 2.24 %

Buy

52 Week Range : $17.56 - $24.55

Share Price : $20.60

Seven Group is a diversified conglomerate that is managed astutely and delivers consistent shareholder value. We recommend a "Buy"

Company Analysis

Seven Group Holdings (ASX: SVW) engages in the heavy equipment sales and service, equipment hire, building products and construction materials, media, broadcasting, and energy assets businesses. It operates through WesTrac, Coates, Boral, Energy, Media Investments, and Other Investments segments. The company operates as a Caterpillar dealer providing heavy equipment sales and support services. It also provides a range of general and specialist equipment on hire to various markets, including engineering, building construction and maintenance, mining and resources, manufacturing, government, and events.

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Source: Seven Group

Additionally, Seven Group is involved in the designing, manufacturing, assembly, distribution, and support of mobile lighting towers and Sykes pumps, as well as distribution of FG Wilson generators and dewatering equipment, and Perkins engines. Further, it invests in listed and unlisted media organizations, which include Seven West Media Limited, as well as private equity investments; and holds oil and gas interests; other investments in properties; and produces, supplies, and sells construction materials comprising quarry products, cement, fly ash, concrete, asphalt, and recycled materials, as well as timber, roofing, and masonry products. Seven Group operates in Australia, the United Arab Emirates, Indonesia, the United States, and New Zealand.

Seven Group is thus a conglomerate here in Australia and a well oiled machine when it comes to churning out cash flows from its assets and delivering shareholder value.

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Source: Tradingview.com

Over 75% of the revenue that Seven Group generates comes from the WesTrac segments, one of the largest Caterpillar equipment dealers, and close to 19% is generated from Coates, Seven Group’s equipment hire and solutions provider. Newer investments such as Boral will begin to make its way into Seven Group’s financials from FY22.

When we look at the earnings, or EBITDA segments, WesTrac accounts for 43% and Coates accounts for over 37%. Seven Group’s Energy segment, which consists of a 30% interest in Beach Energy and SGH Energy generated over $100 million in FY21 – representing 9.5% of the group’s EBITDA. It’s worth noting here that Beach Energy had a year to forget in terms of both production, and profitability, falling in FY21.

The Media Investments is made up of its 40% holding of Seven West Media and it brought in $57 million in EBITDA, 22% higher than FY20.

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FY21 was another strong year, but overshadowed by the Boral Takeover

Seven Group is a conglomerate and they have seen their revenue growth decrease in the past 3 to 4 years. However, the company still grew by 6% in FY21 and with the 70% acquisition of Boral, we forecast revenues to be significantly boosted in onward FY22.

The firm’s full-year revenue jumped in FY21, boosted by WesTrac and Coates, with CEO Ryan Stokes forecasting those businesses to deliver further growth well into fiscal 22. It comes as Chair Kerry Stokes says he will step down at the company AGM with board member and ex Coca-Cola Amatil boss Terry Davis named as his replacement. The highlights from the FY21 earnings were:

  • Trading revenue of $4.8 billion, up 6.1% on FY20
  • Underlying earnings before interest and tax (EBIT) of $792.1 million, up 7.3% on FY20
  • WesTrac EBIT growth of 7.9% on pcp
  • Coates EBIT growth of 3.8% on pcp
  • Operating cash flow of $622.4 million, up 15.6% on pcp
  • Underlying earnings per share (EPS) of 146 cents, up 3.9% on pcp
  • Fully franked final dividend of 23 cents per share (increased 10%), full year dividend of 46 cents
  • Statutory EBIT of $925.6 million inclusive of SWM impairment reversal of $92.9 million
  • Commitment to net zero GHG emissions by 2040 for WesTrac and Coates

The result reflects the strong performance of Seven Group’s key operating businesses. WesTrac delivered
growth in revenue and EBIT as its customers maintained high levels of mining production and construction
activity and Coates demonstrated its ability to manage through the varying market conditions by expanding
margins and delivering underlying growth in EBIT.

As a result of the increased performance, Operating cash flow increased by 16% to $622.4 million driven by solid performance of the operating businesses and underlying operating cash flow rose 7.4% to $885.4 million. EBITDA cash conversion improved to 84%.

Industrial & Construction Industries are positioned exceptionally well from a Macro standpoint

The Industrial Services portfolio is benefitting from growth of mining production and the substantial pipeline of infrastructure activity. Therefore, WesTrac’s performance was driven by the same strength across both the WA and NSW dealerships. The outlook remains positive given the strong activity levels and customer requirements for parts and components to support the installed base. WesTrac is focused on supporting its customers and capturing the growing activity demand, including its selection by Northern Star for the KCGM fleet replacement program and a decision by Newmont to deploy autonomous haulage at Boddington, the first use of AHS in gold mining anywhere in the world. Investment in capacity expansion occurred in both Perth and Tomago.

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Source: Seven Group

Coates’ focus on productivity in FY21 improved margins and allowed it to increase EBIT by 4% off a slightly lower revenue base. Activity levels were impacted in the first half of the year due to delayed starts to many new projects, cancellation of events, and lockdowns variously reducing demand in some regions. Activity improved in the second half and outside of lockdowns, this momentum carried into FY22. Coates management responded proactively by reducing costs and capital expenditure and using data analytics to enhance customer focus. The restructured cost base and its large equipment fleet provides Coates with flexibility and leverage for growth in activity.

During the year, the Group increased its investment in Boral, culminating in a takeover offer that resulted in Seven Group achieving control via its 69.6% shareholding of Boral. Seven Group recognised an equity account contribution of $38.0 million for the year but will consolidate Boral as a subsidiary in FY22. The Group will support Boral through its transformation program, refocus in Australia, and disciplined execution to ensure Boral can deliver on its full potential with revenue, earnings, and margin improvements, resulting in enhanced return on funds employed. Boral increases Seven Group’s exposure to infrastructure and construction. The addition of Boral to Seven Group creates an Industrial portfolio second to none in Australia.

The Group’s operating businesses and investments are well-placed to capture the available opportunities in their respective markets. Mining production and infrastructure and construction activity are strong and expected to underpin further growth for the firm’s industrial businesses in FY22, which will be expanded by the inclusion of Boral as a subsidiary.

Also worth noting, During the year, Seven Group announced their commitment to achieving net zero greenhouse gas emissions by 2040 within operating businesses, WesTrac and Coates.

The love-hate relationship with Beach Energy

In FY21, Beach Energy (30% owned) production was 25.6 MMboe, down on FY20. Sales revenue was down 8%, impacted by lower oil production. Beach has taken FID with Mitsui on the Waitsia Stage 2 development, with the first LNG sales expected in H2 CY23. Beach acquired Cooper Basin assets from Senex Energy and experienced drilling success at Enterprise-1 and Artisan-1 in the Otway Basin. The Western Flank reserves downgrade was a disappointing outcome. Beach has 339 MMboe in 2P reserves.

While Beach Energy’s underwhelming performance during the year is a topic of discussion for another day, the takeaway from this is that the performance did affect the earnings and cash flows that Seven Group generates. Beach Energy has been heavily sold-off recently and the stock is not loved in the markets. Given Seven Group’s 30% ownership and the underperformance, it has also partially transpired into SVW shares dipping in late August.

The Media Segment

Seven West Media (SWM, 40% owned) achieved significant further progress in its transformation strategy and delivered underlying EBIT growth of 141% to $229 million from revenue of $1.27 billion, up 4%. Seven Group’s net debt was reduced by 40% during the year, to $240 million, with a leverage ratio of 0.95x, a significant improvement on the 3.0x at FY20.

Metro TV advertising markets rebounded strongly, FTA (Free to air) up 25.8% in the second half and 11.5% for the year. 7plus again performed strongly, growing revenue 78% against BVOD (Broadcaster Video on Demand) market growth of 55% in FY21. Seven’s digital earnings grew 131% to $60 million and are expected to double again in FY22.

Resilient Balance Sheet

If there is anything that the losers of the pandemic and the current Evergrande situation has taught us retail investors, it is the importance of a healthy balance sheet, especially when considering long-term investments. Seven Group’s balance sheet was strengthened in the 2nd half of FY21 with a $500 million underwritten placement and a well supported $33 million retail share purchase plan. The Group extended and expanded the $400 million tranche of its corporate syndicated facility by three years from 2021 to 2024. Additional commitments from current lenders and the introduction of a new lender have increased the commitment within this tranche to $558 million. The firm retains strong credit support. The Group introduced or refinanced more than $1 billion in facility limits during FY21 and introduced a $6.2 billion Boral acquisition facility while retaining significant headroom within covenants.

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Source: Seven Group

FY22 – All about Growth

You’re probably wondering why Seven Group’s stock price dipped in late August despite the company having a fantastic year. Shortly after the Boral acquisition of up to 69%, Boral reported an underwhelming performance on the 24th of August – resulting in investors and traders overselling Seven Group as well.

Our analysis determines this as an overreaction given that Boral’s revenue and earnings will only make a dent from FY22 onwards. Boral noted challenging market conditions in FY21 after reporting a 3% decrease in Roads Highways Subdivisions & Bridges (RHS&B) revenue. There was also a 7% decrease in the company’s other engineering revenue during the year. Additionally, Boral reported 201,000 total housing starts in FY21, up 16% from the prior year. That included double digit percentage growth across NSW, Queensland, South Australia, and Western Australia.

This underperformance is temporary and a lot of the impacts will be mitigated as we recover from the pandemic. Furthermore, Seven Group’s astute management is the biggest reason why we think Boral will be set on the right track. The event is the catalyst that triggered Seven Group shares sliding. The dip, in our opinion, is an opportunity as our analysis indicates that Seven Group’s share price has not fully priced in the benefits that the Boral acquisition will bring in.

We expect Boral to bring in revenues of approximately a little over $2 billion to Seven Group in FY22. This calculation is based on the 69% ownership that Seven Group currently has over Boral. Boral expects mixed underlying market conditions. Lower volumes due to COVID related disruptions to construction are impacting Q1 at this stage by ~$50m. Boral expects infrastructure activity to improve slightly in 2H and but more so moving into FY23, particularly road construction, non-residential activity to be steady, and continued flow through of stimulus-led detached housing activity.

Additionally, Seven Group’s FY22 outlook excluding Boral was already looking rather robust with macroeconomic factors bringing tailwinds to WesTrac and Coates. Mining production and infrastructure and construction activity are robust and expected to underpin further growth for Seven Group’s industrial businesses in FY22, which will be significantly enhanced by the inclusion of Boral as a subsidiary. In FY22, WesTrac is expected to deliver single digit EBIT growth on FY21, reflecting the impact of the July 2021 CAT parts price decrease, and Coates is expected to deliver high single digit EBIT growth on FY21 through its continued focus on costs and supporting delivery of key infrastructure projects.

Beach Energy has a production guidance of 21.0 – 23.0 MMboe and capex of $900m – $1,100m. Increased gas volumes from Perth Basin and Victorian Otway, with uplift in Otway production from mid-FY22, lower oil production. Thus, Seven Group is targeting improved revenue share in FY22 on the back of audience performance and new schedule. Digital earnings expected to double to >$120m in FY22. Crunching the numbers yield the below results:

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As a result of everything we have discussed so far, the revenues are expected to go up significantly. The expectation is a 50% growth in revenues in FY21 as a direct result of the Boral acquisition and organic growth that is expected in Coates and WesTrac. Both Boral and Westrac operate at very similar EBITDA margins, and as a result, we expect EBITDA margins to continue to hover around the 21% mark.

Based on the forecasted revenues and earnings and the enterprise value of 10.6 billion, SVW is trading at a forward FY22 P/E of 12x and EV/EBITDA of 6.74x. The multiples are fairly modest as our analysis shows that the Boral acquisition has been understated in the recent stock price performance.

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Seven Group’s stellar management team, headed by Ryan Stokes, son of the billionaire Kerry Stokes who spent 30 years at the helm and decided to retire earlier this year. Ryan will also have new chairman Terry Davis alongside him, who has been appointed as Kerry’s replacement. The entire executive management of Seven Group comes with a lot of experience and astute management capabilities.

This quality has underpinned the significant shareholder value that Seven Group has delivered to its investors over the years. Be it through acquisitions and organic growth, the disciplined value creation between in the last 10 years can be seen in the below chart. Robust capital management, share buybacks and M&A activity have all played roles and generated consistent returns.

In a bid to structure the Group’s capital base to support long-term shareholder value creation. Over $2.7bn of assets and investments recycled over 10 years, and the recent $4.7 billion investment into Boral is also part of the strategy. An optimal balance provides Seven Group with the ability to pursue growth opportunities, grow the dividend over time, and support investor confidence and appetite.

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Source: Seven Group

In FY21, Seven Group also increased their interim and final dividends by 10% to $0.23 each. The dividend yield comes in at a healthy 2.24%, fully franked – which is on the high side considering that Seven Group continues to grow handsomely and is always on the lookout for a deal to further increase market share.

Recommendation

Seven Group is a diversified conglomerate that is managed astutely and has delivered consistent shareholder value, both – by way of capital gains and dividends. We are expecting immense growth in revenues and earnings in FY22 as a result of organic growth of existing business segments, robust capital management, and by way of acquisitions. With the recent Boral acquisition, we believe the stock has not priced in all the synergies and we recommend long-term investors to “Buy”.

 

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