Written by David Walker, Senior Analyst, StocksInValue
The market is overly pessimistic about SVW’s value. The share price assumes ROE and required return respectively well below and above our assumptions.
Over the longer term demand for WesTrac earthmoving equipment should normalise as customers replace ageing fleet with more efficient autonomous equipment. There is some leverage to rising iron ore production volumes.
Over FY16-17, maintenance revenue should grow to reflect the surge in equipment sales over 2011 – 12.
SVW owns 35% of Seven West Media. The advertising market should continue to trend sideways and we do not envision a substantial downturn.
The emerging portfolio of oil and gas interests with a mix of development and production assets should become a third earnings pillar and a platform for higher returns. SVW’s size and balance sheet enable it to invest through the cycle.
Coates Hire results should improve slightly as project expenditure transitions from mining engineering to civil construction infrastructure. We assume no major slowdown in China’s demand for Australian mining output.
Despite difficult operating conditions, Seven Group Holdings’ (SVW) recent 1H15 result was slightly above expectations with additional surprises from the 20-cent dividend and the extension of the buyback. The market quickly factored in a 40-cent FY dividend for FY15 and FY16, which compares with pre-result expectations for a mid-30s payout. Only 30% of the shares on issue are free float, the remaining 70% being owned by chair Kerry Stokes, and we estimate 9% of the free float was shorted ahead of the result. The resulting short squeeze on the surprise explains the subsequent strong share price rally. With the good news now in the share price and the stock trading broadly in line with our $7.28 valuation, subscribers could consider taking profits on what is a cyclical trading stock. SVW maintained its AGM guidance for a 10-15% decline in FY EBIT, assuming no further deterioration in trading conditions, indicating the tough environment for this mining capital equipment provider and media investor. Presumably Kerry Stokes will keep holding to let his proportionate control increase by default with the buyback!
The 1H15 underlying result of $119m was down 10% on the pcp, mainly reflecting depressed new equipment sales by Westrac Australia as mining customers opt to use their existing fleets more intensively rather than buy new earthmoving equipment. Aggressive cost savings and 16% growth in product support (maintenance) revenue partly offset this effect. The upside from maintenance revenue has been one of our themes since we initiated coverage of SVW.
SVW acquired 13.79% of Beach Energy in late January as part of its strategy to build an energy earnings stream. The buyback signals SVW’s surplus capital position, which reflects the $110m decline in gearing (net debt to equity) to 37% on 31 December as well as a $793m share portfolio (excluding Seven West Media) and $975m of undrawn debt funding.
SVW Value & Price
Figure 1. Price & Value Chart
Source. StocksInValue
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Disclosure: Clime Asset Management (Clime) owns SVW.AX on behalf of various mandates where it acts as an investment manager.