Company Overview: Seven Group Holdings Limited (ASX: SVW) is a diversified operating and investment group that has interests in heavy equipment sales and service, equipment hire, media, broadcasting, etc., to name a few. The Group operates under the following business verticals – WesTrac: It is the authorised Caterpillar dealer in Western Australia and New South Wales; Coates Hire: It provides a range of general and specialist equipment hire to a wide variety of markets; AllightSykes: It is engaged in the manufacture, assembly, sales and support of lighting towers, power generation and dewatering equipment; Energy; Media Investments.

SVW Details

Decent Performance from the Industrials Segment Underpinned by Disciplined Cost Approach: Seven Group Holdings Limited (ASX: SVW) is a diversified operating and investment group. The market capitalisation of the company as on 17 May 2021, stood at ~$7.18 billion. During H1FY21, the company delivered resilient financial performance and reported revenue growth of ~4% to $2.4 billion when compared to the previous corresponding period. The growth has been aided by decent performance in the WesTrac business vertical. EBIT from the industrial segment grew by ~14% to ~$331 million, with WesTrac and Coates both delivering improved contribution and margins. The increase in product sales from WesTrac can be attributed to major projects entering the commissioning phase along with the continued product support activities. The statutory EBIT was up by ~155% during the period, and the statutory NPAT grew by ~855% owing to the reversal of impairments in H1FY21. As per a recent update, the company has extended the closing of Share Purchase Plan announced on 19 April 2021, to 17 May 2021. Under the SPP eligible shareholders in Australia and New Zealand have the opportunity to apply for ~$30,000 each of new shares in the company, as it plans to raise up to $50 million in total.

The company has delivered shareholder return of ~19% per annum over the past three years. It is positive on its future prospects with growth aided through mining production, infrastructure investment and East Coast gas demand.

H1FY21 Financial Performance (Source: Company Reports)

Decent Uplift in Performance from Key Segments: There has been continued momentum in the WesTrac vertical with revenue up by ~8% in H1FY21 on pcp, aided by an increase in product sales and product support. The sales have also been supported by write-off stimulus measures announced in the Federal Budget. This has resulted in EBIT growth of ~14% coupled with margin improvement of 0.6% during the period, in the WesTrac business vertical.

H1FY21 WesTrac Performance (Source: Company Reports)

EBIT grew by ~6% to ~$105 million in H1FY21 in the Coates business vertical when compared to the preceding half. There was a decline in sales by ~7% on pcp during the period, however, the Group was able to maintain decent margins through a ~15% reduction in the cost of sales and ~12% reduction in other expenses. SVW will look for increased engagement with mid-tier and trade customers going forward and focus on efficiency and capturing scale.

H1FY21 Coates Performance (Source: Company Reports)

Successful Completion of Equity Raising: On 20 April 2021, the company has announced that it has successfully completed a $500 million equity raising through a fully underwritten institutional placement. It consisted of 22.2 million new fully paid ordinary shares to the investors. The placement was oversubscribed with interest from both domestic and international institutional investors and was issued at a price of $22.50 per share. The placement was undertaken with a view to reduce the overall debt of the Group and improve the liquidity position of the company.

Proposal to acquire Boral Ltd: As per a recent announcement on 10 May 2021, the company has announced an off-market takeover bid for Boral Limited at a price of $6.50 cash per share for all the shares of Boral in which it doesn't have a stake. The offer will be through a wholly-owned subsidiary of SVW, Network Investment Holdings Pty Limited. At present, the company has an interest of ~23.18% in Boral.  However, Boral has recommended its shareholders to reject the offer when it opens by TAKING NO ACTION. The Board of Boral is of the view that the offer is opportunistic and undervalues the company.

Top 10 Shareholders: The top 10 shareholders together form around 61.81% 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 57.33% and 0.95%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: The company reported a significant uptick in the net margin performance to 15.4% in H1FY21, from a level of 1.7% in H1FY20.  ROE of the company improved to 11.8% compared to 1.3% during the same period under consideration. The cash cycle stood at 179.2 days during the period.

Growth Profile and Profitability Metrics (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Risks: The onset of the COVID-19 pandemic has brought disruptions in the economic environment, and there is a possibility of further volatility in business conditions with the possible impact of the COVID-19 second wave. SVW is also prone to the adverse impacts of the pandemic on its operations.  The Group is exposed to fluctuations in foreign currency, mostly in USD, as under some circumstances, the Group invoices its customers in USD. It is also exposed to interest rate risk, as it has a considerable amount of cash and borrowings on its balance sheet. It is also prone to equity price risk through its holdings of listed investments in various companies. The Group’s interest in oil and gas assets also expose it to the risk of fluctuation in commodity prices.

Outlook: The company expects an improvement in the industrials segment in major key markets going forward. It anticipates WesTrac to deliver full year FY21 high single-digit EBIT growth when compared to FY20. It also expects performance in Coates to rebound in the second half of FY21 from H2FY20 levels. It has provided Beach production guidance to be between 26.5 – 27.5 MMboe and expects underlying EBITDA to be between $900 - $950 million. The Group’s continued focus on cost discipline as part of its transformation strategy, will help to strengthen the business further. The company anticipates industrial demand to be robust in H2FY21 and expects EBIT growth in FY21.

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

Data Source: Refinitiv, Thomson Reuters, 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:  The company has declared an interim dividend of 23 cents per share during H1FY21 period, reflecting an increase of ~10% ion pcp. As per ASX, the stock of SVW is trading above its average 52-weeks’ levels of $13.920-$24.250. The stock of SVW gave a positive return of ~13.89% in the past nine months and a negative return of ~5.81% in the past one week. We have valued the stock using a P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight premium to its peer average P/E (NTM trading multiple), considering the resilient growth in top-line, prudent cost management and positive outlook. For the purpose, we have taken peers such as Monadelphous Group Ltd (ASX: MND), Acrow Formwork and Construction Services Ltd (ASX: ACF), to name a few. Considering the expected upside in valuation, resilient financial performance, increase in top-line, significant improvement in net margin, disciplined cost approach and optimistic outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $19.920, up by 0.201% as on May 17, 2021.

SVW Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

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