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Seven Group could be Australia's next major conglomerate

Emma Rapaport  |  26 Nov 2018Text size  Decrease  Increase  |  
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Cat Seven Group Holdings

A program of more than $800 million in acquisitions ranks among several reasons Seven Group Holdings (ASX: SVW) may become Australia's next major conglomerate, according to Morningstar analyst Mark Taylor.

The group's 25 percent buy-in to the $4.4 billion Beach Energy (ASX: BPT), $535 million sale of WesTrac China, and $488 million purchase of the balance of Coates Hire – all under the watch of Kerry Stokes' son and CEO, Ryan Stokes, potentially position it as "another Wesfarmers in its infancy", Taylor says.

Explaining the comparison with Wesfarmers (ASX: WES) – a multi-billion dollar empire that included the Coles grocery chain until recently – Taylor highlights Wesfarmers' "diversified and changing portfolio, which delivered nearly 20-fold share price appreciation excluding dividends over three decades and a market capitalisation of $52.9 billion".

He has softened his fair value uncertainty for Seven Group to high, from very high, in response to the earnings visibility improvements, and lifted the fair value 7 per cent to $15.00 a share. He cites a reduced 9 per cent cost of equity assumption and reduced credit risk as key contributors here.

The revised fair value means Seven Group remains slightly overvalued, trading around $15.40 today.

"It would be tempting to back Ryan Stokes and to see in Seven Group another Wesfarmers, but we cannot clutch at such straws.

"Any fair value estimate for Seven Group must be based on solid fundamentals, not blue sky. Trying to buy what is unquantifiable requires a steady and disciplined hand. And the right price, offering a margin of safety, helps too," he says.

Seven Group Holdings currently has four key segments, comprising industrial, energy, media and investments.

Westrac Australia and China, Coates Hire and Seven West Media (ASX: SWM) are some of the better-known names within these.

WesTrac makes the largest contribution, comprising around 35 per cent of Taylor's fair value estimate total, followed by Coates Hire at nearly 30 per cent.

Seven Group Holdings structure

Seven Group Holdings

Source: Seven Group Holdings, AGM 2018

Veteran chairman and majority shareholder Kerry Stokes, 78, currently controls almost 70 per cent of the group. His son Ryan Stokes, 40, was appointed CEO in fiscal-2015 after nearly 15 years of Seven board experience and will most likely continue his father's legacy, says Taylor.

"We expect Ryan Stokes will at worst be a successful steward of shareholder capital, and at best a personality with the vision and drive to create Australia's next successful conglomerate."

During his time at the top, the younger Stokes oversaw the group's turnaround in the firm's China operations and made further improvements before the successful sale. He was also responsible for establishing the business case for the profitable oil and gas arm.

Taylor forecasts a sharp 29 per cent increase in Seven Group Holdings' fiscal 2019 dividend to 54c, and a 12 per cent increase in underlying earnings per share to $1.09.

"Seven Group has delivered excellent returns for shareholders over the long run," Taylor says.

"While the past is not necessarily a great predictor of future returns, positive behaviours within a reliably persistent management culture can be. Seven Group's consistent payment of dividends, for example, is a good sign."

Although WesTrac and Coates are both "moaty businesses", Taylor has attributed no moat to Seven Group, largely because of competitive pressures around its Beach Energy and Seven West Media assets.

 

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