THE economic slowdown in China has forced industrial and media conglomerate Seven Group Holdings into a review of its Caterpillar business in the region that is expected to lead to extensive cost cutting to realign expenses with declining revenue.
The news was announced at Seven's shareholders meeting in Sydney on Thursday, along with a review of the Coates Hire business it co-owns with private equity firm The Carlyle Group to explore "ownership alternatives".
Seven's executive chairman, Kerry Stokes, told investors it had been a challenging 12 months for the Westrac business in China and "we are currently working to ensure that our cost base there reflects this lower level of demand".
The Seven managing director, Peter Gammell, said the company remained cautious about Westrac China and noted that trading conditions continued to decline.
"As a result, sales and earnings before interest, tax, depreciation and amortisation [EBITDA] for the region will be significantly down on the prior corresponding period," he said.
"This is not China falling off a cliff, it's just about making sure you don't size up your business for a level that's not there."
Seven confirmed there were no such problems with its Australian Westrac business, which reported a record result last year and accounted for more than 66 per cent of the company's earnings.
Mr Gammell said that while the absence of new mining projects would mean equipment sales would return to more normal levels, this would partly be offset by a growing and recurring earnings stream from product support.
Seven and Carlyle have appointed Goldman Sachs to conduct the review of Coates Hire. It is understood the investment bank has a mandate to sell 100 per cent of the business, which reported a 22 per cent jump in revenue last year to $1.3 billion and a 40 per cent rise in net profit to $318 million.
The two partners attempted to float the business with a $3 billion valuation earlier this year.
"Clearly there is not an IPO [initial public offering] market available at the moment but we have had some inbound inquiries as a result of that process," Mr Gammell said.
Mr Stokes said the overall outlook for Seven was strong with the company expecting first half underlying profit in the range of $200 million to $220 million.
The impending sale of Seven Group's $491 million stake in Consolidated Media Holdings to News Corp would further skew the company's earnings towards industrial services, which now provide 80 per cent of its earnings before interest and tax.
The company said it remained committed to its media investment - a 33 per cent stake in Seven West Media. "We see good long-term value in the company," Mr Stokes said.
Frequently Asked Questions about this Article…
What parts of its business is Seven Group Holdings reviewing?
Seven Group Holdings is reviewing its Westrac Caterpillar operations in China and conducting a review of Coates Hire (which it co-owns with The Carlyle Group) to explore ownership alternatives.
Why is Seven reviewing the Westrac business in China?
The company said an economic slowdown in China has hurt demand, forcing a review of Westrac China so it can realign costs with lower revenue. Seven described trading conditions in the region as declining and expects sales and EBITDA to be significantly down versus the prior period.
How is Westrac in Australia performing compared with Westrac China?
Seven confirmed there are no problems with its Australian Westrac business — it reported a record result last year and accounted for more than 66% of the company’s earnings.
What cost or earnings impact did Seven warn investors about for Westrac China?
Seven said it is working to ensure the China cost base reflects the lower level of demand. Management expects sales and EBITDA for the region to be significantly down on the prior corresponding period.
What is happening with Coates Hire and who is running the sale review?
Seven and Carlyle appointed Goldman Sachs to conduct the Coates Hire review. The investment bank is understood to have a mandate to sell 100% of the business after an earlier attempt to float Coates at a $3 billion valuation.
How did Coates Hire perform financially in the past year?
Coates Hire reported a 22% jump in revenue last year to $1.3 billion and a 40% rise in net profit to $318 million, according to the article.
How would the sale of Seven’s media stake affect its business mix?
Seven is selling a $491 million stake in Consolidated Media Holdings to News Corp. That sale would further skew Seven’s earnings toward industrial services — which already provide about 80% of its EBIT.
What profit guidance and long-term stance did Seven’s management give investors?
Management said the overall outlook for Seven is strong and guided first-half underlying profit of $200 million to $220 million. They also remain committed to their media investment, holding a 33% stake in Seven West Media and seeing long-term value in it.
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