Morningstar | WesTrac Keeps Firing for No-Moat Seven Group in Fiscal 2019. No Change to AUD 15.40 FVE.
Our AUD 15.40 fair value for no-moat Seven Group is unchanged. That’s despite an 8% increase in our fiscal 2019 EPS forecast to AUD 1.31. We don’t believe the drivers are long-term and our fiscal 2020 EPS forecast is little changed at AUD 1.16.Seven Group says WesTrac customer activity has remained resilient into the second half of fiscal 2019, despite original fears of a potential fall in activity in the second half. Those fears reflected a chance that some customers had accelerated activity in the second quarter. The prospect has not eventuated, and the company consequently lifts fiscal 2019 group EBIT guidance by 12% to AUD 695 million. This represents an impressive 40% increase on fiscal 2018 on a continuing operations basis. We were already above-guidance and lift our fiscal 2019 EBIT forecast by 6% from AUD 653 million. WesTrac comprises 37% of our Seven Group fair value.
Further assisting fiscal 2019 earnings is continuing strong performance from the energy segment with commodity prices in support. Energy comprises around one-sixth of our Seven Group fair value, including a 25.6% stake in Beach Energy with a current market value of AUD 1.3 billion. The current USD 71.50 Brent crude price has risen by 40% from USD 50 December 2018 lows. Conversely, Seven Group’s Coates Hire business has proven a surprise detractor from earnings growth in fiscal 2019, with weakness in project starts versus budget, and unseasonably wet weather and flooding in Queensland exacerbating. Coates comprises 30% of our fair value.
Our fair value estimate equates to a fiscal 2023 EV/EBITDA of 7.6 after stripping out AUD 380 million lump sum for Seven Group’s ASX 200 share portfolio and property assets. It also equates to an adjusted fiscal 2023 price/earnings of 12.4 and dividend yield of 4.0%. At today’s fair value, these translate more favourably at 8.5 and 5.8% respectively. We assume five-year group EBITDA CAGR of 8.1% to AUD 940 million at a midcycle EBITDA margin of 20.2%.
Seven Group Holdings has six segments: WesTrac Australia, which provides heavy equipment sales and support to customers in Australia; WesTrac China, also providing heavy equipment sales and support in Hebei, Liaoning, Heilongjiang, Jilin, Shanxi, Inner Mongolia and the municipalities of Beijing and Tianjin; AllightSykes, engaged in the manufacture, assembly, sales and support of lighting, FG Wilson power generation and dewatering equipment as well as distribution of Perkins engines; Coates Hire, which is an equipment hire company; Media Investments, which relates to investments in listed and unlisted media organizations; Energy; and Other investments.
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