Ord Minnett has updated its forecasts for Seven Group Holdings to account for the following factors:
The Kerry Stokes-controlled Seven Group holds stakes in Beach Energy (BPT, Hold) and Seven West Media (SWM, not covered), of around 25% and 35%, respectively. The share prices of both companies have enjoyed stellar runs in 2018 so far, with the former spiking 47% and the latter soaring 42% as at 6 July.
Our energy team has also raised its earnings forecasts for Beach Energy significantly following its recent material increase in proven and probable reserves to 313 million barrels of oil equivalent (mmboe) from 75mmboe in June 2017 reserves.
For Seven Group, these factors have led us to increase our earnings before interest and tax (EBIT) estimates by 2% for FY18 and 12% for FY19, as the company consolidates the profits from the two companies. We maintain our Accumulate recommendation and have raised our target price to $20.58 from $20.08.
With respect to the key WesTrac business, we believe the general outlook for iron ore capital expenditure looks positive. Our FY19 iron ore capital expenditure indicator has increased to its highest level since January and is projecting 14% growth in FY19 on FY18. In the past, this measure has been correlated with WesTrac’s new equipment sales. Meanwhile, Caterpillar distributors globally seem to be reporting increased activity in the resources industries.
We are aware the market likely values the earnings from Beach Energy and Seven West Media investments less than they do the earnings from WesTrac business and the Coates equipment hire operations, but we believe the positive outlook for both Beach Energy and Seven West Media is unchanged. In any case, with our $693m EBIT estimate for FY19, we see scope for significant consensus upgrades of around 8% this year and 21% next year.