THE economic slowdown in China has forced industrial and media conglomerate Seven Group Holdings to review its Caterpillar business in the region, which is expected to lead to extensive cost cutting to realign expenses with declining revenue.
The company also will review the Coates Hire business it co-owns with private equity firm the Carlyle Group to explore "ownership alternatives".
Seven executive chairman Kerry Stokes told the annual meeting in Sydney that it had been a challenging year for WesTrac in China and "we are currently working to ensure that our cost base there reflects this lower level of demand".
Seven managing director Peter Gammell said the company remained cautious about WesTrac China. "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 top-line equipment sales would return to more normal levels, this partly would be offset by a growing and recurring earnings stream from product support.
Seven and Carlyle have appointed Goldman Sachs to review Coates Hire, helped by CICC in China and Nomura in Japan.
It is believed 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 lift 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 market available at the moment, but we have had some inbound inquiries as a result of that whole process," Mr Gammell said after the annual meeting.
Mr Stokes said the overall outlook for Seven was strong and the company was expecting first-half underlying net profit of $200 million to $220 million.
The impending sale of Seven Group's $491 million stake in Consolidated Media Holdings to News Corp will further skew the company's earnings towards industrial services, which now provide 80 per cent of its earnings before interest and tax (EBIT).
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…
Why is Seven Group Holdings reviewing its Caterpillar (WesTrac) business in China?
Seven Group Holdings is reviewing its WesTrac/Caterpillar operations in China because an economic slowdown in China has reduced demand. Company executives say they need to realign the cost base with lower revenue levels and are planning extensive cost cutting so the business isn’t 'sized up' for demand that isn’t there.
What specific actions is Seven considering for its China operations and Coates Hire?
For WesTrac China, Seven plans to cut costs to match the lower level of demand. For Coates Hire — which Seven co-owns with the Carlyle Group — the company is reviewing ownership alternatives and has appointed advisers to explore selling the business or other options.
How is WesTrac China expected to affect Seven’s sales and earnings?
Seven’s managing director said sales and EBITDA for WesTrac China will be significantly down on the prior corresponding period. The headwinds in China are expected to reduce top-line equipment sales there, though product support earnings may partially offset the decline.
Is WesTrac in Australia facing the same problems as WesTrac in China?
No. Seven confirmed its Australian WesTrac business reported a record result last year and showed no such problems. Australian WesTrac accounted for more than 66% of the company’s earnings.
What is happening with Coates Hire and who is advising on the process?
Seven and Carlyle have appointed Goldman Sachs to review Coates Hire, supported by CICC in China and Nomura in Japan. It is believed the advisers have a mandate to sell 100% of the business, following an earlier attempt to list the company with a roughly $3 billion valuation.
How has Coates Hire performed financially recently?
According to the article, Coates Hire reported a 22% jump in revenue last year to $1.3 billion and a 40% lift in net profit to $318 million, figures that underpinned interest from potential buyers and previous listing plans.
What profit guidance has Seven Group Holdings given for the first half?
Seven Group said it expects first-half underlying net profit of $200 million to $220 million.
How will the sale of the Consolidated Media Holdings stake affect Seven’s business mix, and what is the company’s media position?
The impending sale of Seven Group’s $491 million stake in Consolidated Media Holdings to News Corp will further skew the company’s earnings toward industrial services, which already provide about 80% of EBIT. Despite the media sale, Seven remains committed to its 33% stake in Seven West Media, with chairman Kerry Stokes saying he sees good long-term value in that investment.
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