Australia | Jun 15 2020
This story features SEVEN GROUP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: SVW
Mining production has continued uninterrupted in Australia during the pandemic, underpinning a strong position and outlook for the Seven Group companies.
-Uncertainty implied by the share price stemming from subdued construction
-Two new large iron ore haulage contracts with Fortescue Metals
-Boral stake to expand industrials and east coast infrastructure exposure
By Eva Brocklehurst
Seven Group ((SVW)) has been a beneficiary of virtually uninterrupted mining production in Australia during the pandemic, while expenditure on major iron ore projects continues apace. WesTrac and Coates Hire, the two key businesses, have strong positions in the mining and construction sectors, and WesTrac has also benefited from the stockpiling of parts.
The company continues to deliver but Credit Suisse believes the outlook is not reflected in the share price. Moreover, the current multiple suggests some uncertainty around the near-term outlook, which is likely stemming from the impact of subdued construction activity and event cancellations on Coates.
Yet the order book at WesTrac has the highest visibility in more than eight years, the broker argues. The heavy machinery aftermarket has continued to drive the results and there were no lumpy equipment sales to artificially boost revenue over the period.
Goldman Sachs agrees there is an attractive combination of earnings resilience and longer-term cyclical growth, reiterating a Buy rating and $21 target. The broker, not one of the seven monitored daily on the FNArena database, also expects Coates will recover fairly quickly.
More than $700m in new funding has been made available to the group, including a US private placement (pricing yet to be disclosed) over three tranches, a US$175m direct placement warehouse facility and a $200m share base financing facility.
Coates has indicated that cancellation of events, slowing building construction and less productivity because of social distancing affected earnings. However, its biggest exposure, engineering & construction, is still strong and likely to benefit from the acceleration of infrastructure expenditure.
Coates sales were up 2% in the year to May and a successful refinancing program has provided more headroom. Stimulus from the government is also expected to provide support for "shovel ready" projects.
Goldman Sachs assesses pricing risk and competition is always a factor for Coates and margin compression in the second half of FY20 is likely. Still, the broker found the update provided more comfort on the near-term activity levels.
WesTrac has won two major contracts with Fortescue Metals ((FMG)), at Eliwana and Iron Bridge, and sales are up 15% in the year to May. UBS calculates the orders from Fortescue, along with others from Newmont, Rio Tinto ((RIO)) and BHP Group ((BHP)) provide a total revenue pool at over $1bn, to be delivered through FY20-23.
Goldman Sachs considers the two new contracts the most significant news item, as it means Seven Group is now providing haulage fleets for three out of the four major upcoming iron ore projects and ancillary items for all four.
Credit Suisse expects a combined 11% growth from the two businesses, and suspects this is conservative. At this stage, the broker includes the 10% stake in Boral ((BLD)) in the investment portfolio and factors in no dividend income from that source.
UBS expects Seven Group will leverage its position in Boral to influence strategic and value enhancements, particularly with the respect to the shape of the business portfolio in the US.
Goldman Sachs now includes the stake in estimates, although notes Seven Group has not outlined concrete plans for its Boral investment. However, it is considered in line with existing industrials exposure and expands the east coast infrastructure leverage.
FNArena's database has three Buy ratings and one Hold (Ord Minnett). The consensus target is $18.66, suggesting 4.0% upside to the last share price.
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