Markets: A Seven in two minds

Seven Group’s unusual structure leaves it heavily exposed to two industries with difficult outlooks: mining services and media.

Seven Group Holdings has a finger in more than one pie.

And shareholders find themselves with exposure to two industries – mining services and media – that have rather challenging outlooks.

Being a conglomerate – like Seven Group – comes with an extra set of issues to navigate. While it does offer investors instant diversification to an extent, it is time to assess whether the board has the ability to oversee entirely different business segments and manage each in the best interest of shareholders.

If investors want diversification, they are more than capable of doing it themselves. In this case, they could buy shares in a company leveraged to mining services and buy shares in a media company. Ideally, each company would have a board of specialists in the area of business operation.

Management’s dim outlook for Seven Group sent the stock tumbling as much as 12 per cent. Neither segment of the business was singled out for a slump of 30 to 40 per cent in earnings before interest and tax this financial year. The decline was across the board.

Earnings are expected to trend closer to financial year 2011 levels. Investors can take little comfort in this. Recent years have seen Seven Group’s share price jump around and not build on the improving profits. 

The three-year performance of Seven Group (white line) is graphed against the ASX 200 below (green line). 

Graph for Markets: A Seven in two mindsThe diversified exposure that shareholders have through Seven Group hasn’t actually delivered any benefits. The broader ASX 200 has delivered a staggering 40 per cent more in just three years.

The issue is not with the underlying industry exposures. In the general course of the business cycle, some sectors will do better than others. It happens. With global growth slowing and mining-related and media businesses forced to be more operationally efficient to remain profitable, perhaps it is time for Seven Group to pick one business and stick to it.

The lion’s share of earnings comes from WesTrac, the authorised Caterpillar dealer. The other businesses, including WesTrac China, Coates Hire, Seven West Media and a listed portfolio of investments, only contributed 30 per cent to earnings before interest and tax.

WesTrac Australia posted a 16 per cent increase in revenue, something no other business segment could manage. Earnings season has highlighted the struggles other companies, such as Boart Longyear leveraged to the mining sector, are experiencing but the numbers posted by WesTrac are strong in comparison.

Seven Group has a listed portfolio worth $809 million, in addition to the $1.14 billion held in Seven West Media (ordinary shares and preference shares). With a market capitalisation of $2.19 billion, the listed portfolio accounts for over one third of the market value of the company. What value is this to shareholders?

With the cost to investors to buy and sell shares so low, there seems little reason for Seven Group to insist on holding the exposure to Seven West Media and the listed portfolio. This surely comes at a cost to investors.

Maybe it’s time for Seven Group to decide whether it is a business manager or a fund manager.

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