Seven Group’s exposure to mining services, infrastructure, and construction support earnings growth

About Seven Group Holdings Limited

Seven Group Holdings Limited (Seven, the Group, ASX: ‘SVW’) is a leading Australian diversified operating and investment Group with businesses in the Industrial Services, Energy and Media sectors. These businesses and investments include WesTrac, the 100 percent owned sole authorised Caterpillar dealer in WA, NSW and ACT; Coates which is also 100 percent owned and is the largest provider of equipment solutions in Australia and 72 percent of Boral which is Australia’s largest, integrated construction materials supplier. The Group also owns 30 percent of Beach Energy, a mid-tier energy exploration and production company; and 40 percent of Seven West Media, one of Australia’s largest multi-platform media companies, including Seven Network and The West Australian newspaper.Australian automotive market sets all-time sales record in 2023

The Australian automotive market achieved 1,216,780 new vehicle sales in 2023, an all-time record. The previous highest sales result was 1,189,116 new vehicles in 2017. The 2023 sales volume was about 12 percent up on 2022 and reflects a significant recovery since the arrival of Covid-19 in 2020 when new vehicle sales declined to 880,000. Prior to Covid-19 new vehicle sales were remarkably consistent at about 1,137,000 sales on average per annum between 2012 and 2019.

Mining services, infrastructure, and construction exposure support earnings growth

Seven Group’s diversified exposure to sectors that are performing solidly is supportive of the approximate ten percent FY2024 EBIT growth guidance provided by management when releasing the FY2023 financial results.

Seven’s business segment analysis set out in the 2023 annual report quantifies the following sector exposures:

• WesTrac is exposed to mining production through the volume of earth moved rather than cyclical commodity prices and at $500 million EBIT accounts for 41 percent of Group EBIT.

• Coates and Boral are primarily exposed to domestic infrastructure and construction investment and with $300 million and $232 million EBIT respectively, account for 25 percent and 19 percent of Group EBIT.

• Energy at $114 million EBIT and Media investments delivering $61 million EBIT, represent 9 percent and 5 percent of total Group EBIT of $1215 million.

The Future

Looking at Seven Group’s reporting segments there are clear signs that the primary exposure to mineral production, infrastructure development, construction activity, and energy are set to deliver considerable shareholder value accretion, at least over the medium-term.

Mineral production: WesTrac owns one of the largest dealers of Caterpillar equipment in the world and is the largest contributor to Seven Group’s earnings. The production outlook for commodities like iron ore and coal is positive and likely to remain that way for the remainder of the current decade. Furthermore, WesTrac is well positioned to capitalise on the expansion in lithium and other battery minerals production in Western Australia. About 40 percent WesTrac’s revenue comes from parts and servicing and this recurrent revenue source is consistent and predictable and offsets the more cyclical equipment sales revenue.

Infrastructure development: Coates is the largest equipment hire business in Australia, while Boral is a leading construction materials business. Infrastructure Investment is estimated at over $1.2 trillion for the next five years, based on the current Infrastructure Australia report. This is important for Australia’s future given current rates of population growth and because infrastructure enhances productivity and ultimately serves to reduce inflationary pressures.

Energy: Beach Energy is well positioned to ramp up production of gas into the East and West Coast markets which are expected to experience shortages mid and late this decade respectively. This positive demand thematic is consistent with firming variable renewable generation as part of the energy transition.

Media: Seven West media is 40 percent owned by Seven Group and has acquired a stake in ARN media providing it with a meaningful position in Australia’s leading radio company.  This investment sits beside a TV station, regional networks, and The West Australian newspaper. Seven West has identified $60 million in cost-out initiatives to FY2025, of which $25 million are targeted for FY2024.

Ownership mentality

One of Seven Group’s foundational pillars is its Owner’s Mindset which promotes the idea that capital should be allocated and the business managed as if it belonged to the decision-maker. This supports a strong respect for equity and is why many of the key decision-makers at Seven Group are heavily incentivised with equity to make the right decisions. The Stokes family own 57 percent of Seven Group and Ryan Stokes is the managing director and CEO. The Seven Group board of directors avoid the mistake of some businesses that employ a dangerous way of making decisions, which is to employ decision-makers who pay no price for getting it wrong. This explains to a large extent why Seven Group has outperformed the ASX100 over the past 1, 3 and 10 years by 750, 105, and 320 percent respectively. Shareholders can reasonably expect the Seven Group to continue to perform strongly over the medium-term.