Seven Group

Seven Group is an investment company, meaning the overall profit figure is rarely enlightening. Such vehicles are best considered via a sum-of-the-parts approach. For the sake of brevity, we won’t update our sum-of-the-parts valuation here but point you back to Seven Group: media or mining? of 18 Oct 11 (Sell – $8.33). That review showed how WesTrac is the most valuable part of the group, and is our focus here.

WesTrac, the sole authorised dealer of Caterpillar heavy earthmoving equipment in Western Australia, NSW, ACT and northeast China, had a bumper half-year to 31 December 2011, thanks particularly to the mining boom. Total revenue increased 27% to $1.8bn, leading to earnings before interest and tax (EBIT) of $181m, up 67%. The Seven Group stock price has responded, rising 14% since 18 Oct 11 (Sell – $8.33). That’s partly the result of a recent recovery in the price of Seven West Media shares but also means an increase in the implied valuation for WesTrac.

Directors declared a fully franked interim dividend of 18 cents (ex date 26 Mar), unchanged from the same period last year. If the mining boom continues, Seven Group shares may well be cheap. But it’s something of a ‘this time it’s different’ bet. Those with a strong belief in the longevity of the mining boom might choose to ignore our advice, but we can’t see a margin of safety here. AVOID.