“The big three of Seven Group – Westrac, Coates Hire and Boral – which we see as the beating heart of the Australian mining, infrastructure and building industries just keeps on keeping on,” Anthony Golowenko, portfolio manager at MLC Asset Management, said.
Mining volumes, not commodity prices, are driving Westrac results for Seven. Credit: Erin Jonasson
“In the case of Westrac, the recurring revenues from product support [maintenance] and steady growth in parts demonstrate this resilience. Beyond key commodity prices, it’s ultimately volumes which underpin the revenues of the Westrac business.”
Stokes also highlighted the turnaround of the Boral business under chief executive Vik Bansal, since Seven mopped up minority shareholders in July last year, with profit margins in the mid-teens now being seen as achievable.
“It’s been a fantastic result and credit to the team. I think Vik and his team have driven a huge amount of change and performance in a short period of time,” Stokes said.
And he makes the point that Seven Group is not just reliant on top-line growth to drive strong profit margins, it has also been adept at driving efficiencies within these businesses.
“The other key point I would emphasise is that the work done to drive operating leverage to each of our businesses has delivered margin expansion, and that has come just through operational efficiencies and just a concerted effort to drive that, particularly in Boral and Coates,” he said.
Stokes also said inflation pressures appeared to be moderating, which would be good news for markets nervous about the RBA focus on stubbornly high inflation levels.
“The pressure is abating,” he said.
Stokes also said Seven Group’s efficiency gains meant its workforce was also not increasing across the board. Along with cost-cutting at other companies, it could indicate labour market weakness ahead.
It also feeds through to the fact that the group does not command the same pricing power that it did as inflation surged after the COVID-19 pandemic.
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“We’re not in the same environment we were 18 months, two years, ago where there was strong pricing power … our view is ensuring that we can cover our own inflation dynamic with pricing and continue to push that in a disciplined way,” he told analysts and investors on a conference call last week.
With Seven Group’s share price still below $40, analysts are expecting significant upside with price targets above its previous record high of $42.28.
“We think Seven Group remains well-placed to grow, anchored by a healthy Westrac outlook and a continued Boral turnaround,” Macquarie analysts said in a report that lifted its valuation of the stock to $43.90.