Seven Group Holdings Limited

Company Overview: Seven Group Holdings Limited (ASX: SVW) is a diversified conglomerate with interests and investments in heavy equipment sales and service, hire of equipment, building products & construction materials. It also has business interests in media & broadcasting and energy assets. In the Industrial services business segment, WesTrac Group is the authorised Caterpillar dealer in major regions in Australia. It also owns Coates, which is an industrial and general equipment hire business. The Group has increased its exposure to the capital goods segment with a stake of ~69.6% shareholding in Boral.

SVW Details

Decent Performance Across Operating Segments: The company is positive on its growth prospects in the Industrial services vertical aided by an increase in activity in mining production and subsequent increase in pipeline of infrastructure activity.

Investments in Strategic Assets:

• During the year, the company has increased its interest in Boral and obtained control in July 2021, with a final stake of 69.6% during the offer close. This development strategically increases SVW’s exposure to the infrastructure and construction segments.
• The Group has also increased its stake in Beach Energy by 1.5% to 30% in April 2021.

FY21 Results Overview:

The company delivered a resilient performance during the year with an improvement in key metrics performance, aided by prudent cost measures and disciplined working capital management.

• Revenue increased by 6.1% to $4.84 billion in FY21, compared to $4.57 billion in FY20. The growth has been aided by a decent performance from WesTrac, reflecting growth in revenue and EBIT, as its customers maintained high levels of mining activity. Coates also posted resilient performance during the period with an expansion in margins and growth in underlying EBIT.
• Underlying EBIT grew by 7.3% to $792.1 million in FY21. Statutory EBIT increased by ~143% to $925.6 million in FY21, compared to FY20.
• The management declared a final dividend of 23 cents per share during the period, reflecting an increase of ~10%, and the total dividends during the year stood at 46 cents per share.

Increasing Trend in Revenue (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 61.45% of the total shareholding, while the top 4 constitute the maximum holding. Stokes (Kerry Matthew) and The Vanguard Group, Inc. are holding a maximum stake in the company at 57.07% and 0.95%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The company reported an improvement in the net margin performance to 13.1% in FY21, compared to 2.6% in FY20. ROE also grew to 18.3% from 4.1% during the same time period. The cash cycle improved to 137.8 days in FY21, compared to 144.5 days in FY20. The net debt reduced to $2.27 billion as of 30 June 2021, compared to $2.43 billion as of 30 June 2020.

Profitability Metrics & Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• COVID-19 Risk: The Group’s operations are exposed to the risks associated with the impact of the COVID-19 pandemic.
• Commodity Price Risk: The company is also prone to commodity price risks given its exposure to oil and gas assets.
• Stiff Competition: Its line of business exposes it to the risk of stiff competition from peers in the same operating space.

Outlook: The company is optimistic about its growth prospects going forward and believes its operating business segments and investments are well placed to leverage the opportunities in its respective markets. It is upbeat on its Industrial services unit with the inclusion of Boral as a subsidiary and expects growth in FY22 aided by an increase in infrastructure & construction activity. It is well-positioned in the energy segment with expected improvement in the LNG and domestic gas markets along with a recovery in the economy. The management also anticipates a positive outlook for Seven West Media with a recovery in advertising markets going forward.  

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: As per ASX, the stock of SVW is trading below its average 52-weeks’ levels of $18.350-$24.550. The stock of SVW gave a negative return of ~12.43% in the past six months and a positive return of ~1.78% in the past three months. The stock has been valued using a P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average, considering the inherent risks involved, lingering impacts of COVID-19 pandemic and decrease in current ratio of the company. For the purpose of valuation, few peers like Monadelphous Group Ltd (ASX: MND), Emeco Holdings Ltd (ASX: EHL), CIMIC Group Ltd (ASX: CIM) have been considered. Considering the expected upside in valuation & current trading levels, impressive financial performance across operating segments, increase in strategic investments, optimistic outlook and rise in dividends, we recommend a ‘Buy’ rating on the stock at the current market price of $20.48, (as on 05 October 2021, 12:59 PM (GMT+10), Sydney, Eastern Australia)

SVW Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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