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Seven Group On Track Amid Robust Outlook

Australia | May 22 2018

This story features SEVEN GROUP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: SVW

Seven Group Holdings has reiterated upgraded FY18 guidance and briefed investors on its WesTrac and Coates Hire operations.

-Strong demand backdrop for both WesTrac WA and Coates Hire
-Cyclical upswing in capital expenditure at early stage, so leverage is substantial
-FY19 expected to be a much less ambiguous year

 

By Eva Brocklehurst

In Perth, Seven Group Holdings ((SVW)) has showcased its WesTrac WA facilities and briefed investors on the Coates Hire operations. Recently upgraded FY18 guidance has also been reiterated, which signals pro forma operating earnings (EBIT) growth of 22-25%.

The company pointed to 15% growth in earnings back at the February results, so the latest upgrade is considered substantial. The main outcome from the investor briefing suggests demand at the WesTrac WA facility is strong and record monthly volumes are being achieved.

New lead times on large mining equipment are lengthening and are now well over 12 months for certain classes, brokers note. Meanwhile, Coates Hire is envisaging a favourable demand backdrop for east coast infrastructure investment.

The last two issues are good problems to have, Credit Suisse suggests. Coates Hire is undertaking internal initiatives to lift its fleet utilisation that includes reducing the turnaround times while centralising fleet and customer service.

UBS is attracted to these drivers of value and expects both WesTrac and Coates Hire to provide double-digit earnings growth, as mining maintenance and infrastructure capital expenditure cycles strengthen.

Market expectations may have raced ahead, Credit Suisse suspects, as WesTrac product sales are yet to meaningfully impact on results, being around -75% below their peak. Meanwhile, Coates is being held back by a sluggish WA market.

The upgraded guidance highlights a stronger cyclical recovery is underway, in Deutsche Bank's view, and the efficiencies that have been achieved through the downturn are evident in the strong margin momentum in WesTrac and Coates.

The company is building a sustainable revenue base in product support and this is improving earnings quality, the broker believes. As the cyclical upswing in capital expenditure on equipment and rental demand is in its early stages, Deutsche Bank suggests the operating leverage is strong.

Valuation

For Credit Suisse the perennial question pertains to valuation, which is not considered stretched at this point on a mid-cycle view. The broker notes a muted reaction in the share price to the upgraded FY18 forecasts, and suggests some confusion about what constitutes the underlying EBIT is the likely reason.

The broker explains that confusion arises from FY18 being a transition year for the company, as it incorporates the divestment of the WesTrac China business, the purchase of the remaining share of Coates and a slightly increased stake in Beach Energy ((BPT)).

The company has presented a pro forma FY17 operating earnings estimate based on assumptions that Coates was fully owned over the year and WesTrac China was fully divested. On this basis, Credit Suisse models its FY18 estimates and this implies 24% growth on the FY17 base.

WesTrac Australia and Coates represent 33% and 45% of operating earnings respectively, while, in assessing the valuation for each of the shareholdings in Seven West Media ((SWM)) and Beach Energy as well as the listed asset portfolio Credit Suisse takes a -5% discount.

This may appear onerous but the broker prefers to be conservative, given the size of each relative stake in the overall market capitalisation. With relief, the broker suggests FY19 will present a much cleaner year, with no ambiguity from M&A.

FNArena's database shows five Buy ratings. The consensus target is $20.91, suggesting 4.4% upside to the last share price. Targets range from $18.80 (Macquarie, yet to update on the upgraded forecast) to $22.55 (UBS).

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