Seven has resources to counter asset loss

SEVEN GROUP HOLDINGS' results are a mess not because they are bad, but because the structure of Kerry Stokes's controlled investments in media and in earthmoving have changed so much twice in two years that comparisons are hard.

By InvestSMART · 26 Aug 2011

By InvestSMART ·
26 Aug 2011

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On numbers Seven has to provide to the market, trading revenue was up 488 per cent to $3.16 billion, yet trading profit after tax was down 90 per cent to $80 million. Neither figure properly indicates the performance of two wildly different businesses.

The good news: WesTrac, its Caterpillar earthmoving business in NSW, Western Australia and China, is riding the mining boom well - particularly in coal and iron ore. Revenue in Australia was up 38 per cent and, in China, 12 per cent, the latter a result affected by the strong dollar.

Overall, earnings for WesTrac before interest and tax were up 52 per cent to $233 million.

Seven Group expects things to continue that way, and is spending big on new service centres and inventory to meet demand this financial year. It is in talks with Caterpillar to distribute heavy equipment made by its newly-bought Bucyrus.

The bad news: the slump in media share prices has forced it to write down the value of its stake in Seven West Media - the old West Australian Newspapers entity that bought the Seven Network earlier this year - by about $239 million. It has also written down its quarter-stake in Consolidated Media - the James Packer-controlled owner of a half stake in Fox Sports and a quarter of Foxtel - by $67 million.

Since the end of the financial year, media stocks have dropped further, and the chief executive, Peter Gammell, warned of further write-downs should share prices still be bad in December. But he expected things to improve and the company "remained confident" in its media business.

It is carrying a lot more debt than it did a year ago - $837 million without derivatives - due to its purchase of stakes in the Agricultural Bank of China and the Seven West Media transaction and after increasing its working capital in WesTrac. But Mr Gammell said that did not constitute a problem for Seven Group.

If significant one-off items were excluded, net profit after tax would be $248 million. To get an idea of the performance of its businesses without the turmoil of restructures, Seven Group compared its first full results with what the numbers would have looked like had the deal been done a year earlier.

On this measure, revenue including other income was up 35 per cent across the group to $3.37 billion and earnings up 95 per cent to $353 million before interest and tax, although profit before tax was down by 78 per cent to $32 million, due largely to those write-downs of media assets.

Seven Group shares closed at $8.56, up 6 per cent, still down from about $8.70 at the start of the year but well up from about $6.10 a year ago.

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Frequently Asked Questions about this Article…

Why are Seven Group Holdings' results described as a 'mess' and what does that mean for investors?

The article says results look messy not because underlying businesses are failing but because the group's structure changed a lot twice in two years, making year‑on‑year comparisons difficult. For investors, that means headline figures may be distorted by restructures and asset transactions, so it's important to look through one‑off items to judge ongoing performance.

How did Seven Group Holdings perform on revenue and trading profit?

On the numbers it reported, trading revenue rose strongly — up 488% to $3.16 billion — while trading profit after tax fell about 90% to $80 million. Those headline swings reflect the mix of very different businesses and significant one‑off items, rather than uniform business weakness across the group.

How is WesTrac (Seven Group's Caterpillar dealer) performing and why does it matter?

WesTrac is benefiting from the mining boom: Australian revenue was up 38% and China revenue rose 12% (the China figure was affected by a strong dollar). Earnings before interest and tax for WesTrac were up 52% to $233 million. That stronger industrial performance is a key driver of Seven Group's overall operating strength and is prompting investment in new service centres and inventory.

What media asset write‑downs did Seven Group take and what caused them?

Seven Group wrote down its stake in Seven West Media by about $239 million and took a $67 million write‑down on a quarter‑stake in Consolidated Media. Those write‑downs were driven by a slump in media share prices, and management warned further write‑downs were possible if share prices remained weak.

Is Seven Group carrying more debt now, and should investors be worried?

Yes, Seven Group is carrying more debt — about $837 million without derivatives — largely due to purchases related to the Seven West Media transaction and a stake in the Agricultural Bank of China, plus higher working capital in WesTrac. Management said this higher debt level did not constitute a problem for the company.

What would Seven Group's profit look like excluding significant one‑off items?

Excluding significant one‑off items, the company said net profit after tax would be $248 million. On a pro‑forma basis (as if deals had been done a year earlier), group revenue including other income was up 35% to $3.37 billion and earnings before interest and tax were up 95% to $353 million, though profit before tax was still down 78% to $32 million due largely to media asset write‑downs.

What is management's outlook for the media business and overall confidence?

Management said it 'remained confident' in the media business and expected conditions to improve, but the chief executive also warned that further write‑downs could be needed if media share prices stayed weak through December. So the outlook is cautiously optimistic but dependent on media market prices.

How have Seven Group shares been trading recently and what should investors note?

Shares closed at $8.56, up 6% on the day. That is slightly below the roughly $8.70 level at the start of the year but well above about $6.10 a year ago. Investors should note short‑term volatility in media valuations can affect reported profits, while the industrial side (WesTrac) has been performing strongly.