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Equity Bottom-Up

At AUD 15.50, <a href="https://www.smartkarma.com/entities/803" target="_blank" data-smartkarma-citation="entities:803:1">Seven Group Holdings (SVW AU)</a> shares screen as somewhat overvalued, though our quibble is with the price not the business. The company has a strong track record of management and is now easier for the average person to understand than in many years and is therefore investable to wider audience. It is somewhat of a pity it is overvalued—on tangible elements—because there are reasons to see in it another <a href="https://www.smartkarma.com/entities/1104" target="_blank" data-smartkarma-citation="entities:1104:1">Wesfarmers Ltd (WES AU)</a> in its infancy, that is, an Australian conglomerate whose diversified and changing portfolio delivered nearly 20-fold share price appreciation excluding dividends over three decades and a market capitalisation of AUD 52.9 billion. But we cannot clutch at such straws. Any fair value estimate for Seven Group must be based on solid fundamentals, not blue sky. Trying to buy what is unquantifiable requires a steady and disciplined hand. And the right price, offering a margin of safety, helps too.<h2>Key Takeaways</h2><ul>
<li>Seven Group has delivered excellent returns for shareholders over the long run. While the past is not necessarily a great predictor of future returns, positive behaviours within a reliably persistent management culture can be. Seven Group's consistent payment of dividends, for example, is a good sign. For the quarter century to fiscal 2018, an ordinary shareholder enjoyed combined dividend and share price appreciation of 10.3% CAGR, well ahead of the S&amp;P/ASX 200 Accumulation's 7.5% CAGR. Average returns on invested capital of 14.5% comfortably exceeded the weighted average cost of capital. We forecast a sharp 29% increase in fiscal 2019 dividend to AUD 54 cents from AUD 42 cents, anticipating recovery in the payout ratio to 50% from 36%, and a 12% increase in underlying EPS to AUD 1.09 from AUD 0.97. At the current AUD 15.50 share price, our fiscal 2019 dividend forecast translates to a useful 3.3% fully franked yield.</li>
<li>Earnings visibility is improving for Seven Group, with asset purchases increasing the proportion of earnings consolidated on book increasing investment appeal. We view this as sufficiently important to soften our fair value uncertainty to high from very high, with a contemporaneous 7.0% lift in fair value estimate to AUD 15.00 per share from AUD 14.00. Key fair value influencers include a reduced 9.0% cost of equity assumption from 11.0% prior, and downgrade in credit risk to moderate from above-average. Examples of recent clarity-improving changes include purchase of the balance of equipment rental business Coates Hire and buyback of the TELYS4 preference shares.</li>
</ul>Analyst: Mark Taylor

At AUD 15.50, Seven Group Holdings (SVW AU) shares screen as somewhat overvalued, though our quibble is with the price not the business. The company has a strong track record of management and is now easier for the average person to understand than in many years and is therefore investable to wider audience. It is somewhat of a pity it is overvalued—on tangible elements—because there are reasons to see in it another Wesfarmers Ltd (WES AU) in its infancy, that is, an Australian conglomerate whose diversified and changing portfolio delivered nearly 20-fold share price appreciation excluding dividends over three decades and a market capitalisation of AUD 52.9 billion. But we cannot clutch at such straws. Any fair value estimate for Seven Group must be based on solid fundamentals, not blue sky. Trying to buy what is unquantifiable requires a steady and disciplined hand. And the right price, offering a margin of safety, helps too.Key Takeaways
Seven Group has delivered excellent returns for shareholders over the long run. While the past is not necessarily a great predictor of future returns, positive behaviours within a reliably persistent management culture can be. Seven Group's consistent payment of dividends, for example, is a good sign. For the quarter century to fiscal 2018, an ordinary shareholder enjoyed combined dividend and share price appreciation of 10.3% CAGR, well ahead of the S&amp;P/ASX 200 Accumulation's 7.5% CAGR. Average returns on invested capital of 14.5% comfortably exceeded the weighted average cost of capital. We forecast a sharp 29% increase in fiscal 2019 dividend to AUD 54 cents from AUD 42 cents, anticipating recovery in the payout ratio to 50% from 36%, and a 12% increase in underlying EPS to AUD 1.09 from AUD 0.97. At the current AUD 15.50 share price, our fiscal 2019 dividend forecast translates to a useful 3.3% fully franked yield.
Earnings visibility is improving for Seven Group, with asset purchases increasing the proportion of earnings consolidated on book increasing investment appeal. We view this as sufficiently important to soften our fair value uncertainty to high from very high, with a contemporaneous 7.0% lift in fair value estimate to AUD 15.00 per share from AUD 14.00. Key fair value influencers include a reduced 9.0% cost of equity assumption from 11.0% prior, and downgrade in credit risk to moderate from above-average. Examples of recent clarity-improving changes include purchase of the balance of equipment rental business Coates Hire and buyback of the TELYS4 preference shares.
Analyst: Mark Taylor

Seven Group: Potentially a New Wesfarmers in the Making

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

Concurrent with the <a href="https://www.asx.com.au/asxpdf/20180822/pdf/43xkj5sskd97hw." target="_blank">announcement</a> of its FY18 results, <a href="https://www.smartkarma.com/entities/803" target="_blank" data-smartkarma-citation="entities:803:1">Seven Group Holdings (SVW AU)</a> said it will unify its capital structure via an offer for its preference shares <a href="https://www.smartkarma.com/entities/27420" target="_blank" data-smartkarma-citation="entities:27420:1">Seven Group Holdings Ltd (SVWPA AU)</a>, more commonly known as TELYS4.
If the resolution is approved, TELYS4 holders have the option to receive either:
<ul>
<li>4.60645 SVW shares for every TELYS4 share; or</li>
<li>a partial exit option, by having 50% of their TELYS4 shares converted into SVW shares (also on a 4.60645 basis), and the option to sell the balance for at least $88.</li>
<li>If the resolution does not pass, TELYS4 holders will still have the option to voluntarily convert into ordinary shares (4.60645); but the cash/scrip option will not apply to this scenario.</li>
</ul>
As a perpetual non-cumulative share with limited rights, TELYS4 has not been afforded the same valuation principles as SVH, especially post GFC. Prior to yesterday's move for both stocks, the ords had outperformed TELYS4 over the past 6 months by ~12%. TELYS4 last traded above its $100 par-value in Jan 2008 and over the past five years has averaged a 22% discount to its par value with a discount range of 7-50%. The conversion price equates to $92.50/share (based on the 30 day VWAP), a level last achieved in November 2013, and a 15% premium to last close.
A proposed amendment to the franking system in March this year would, if enacted, result in investors no longer able to claim a cash refund on their excess franking credits, potentially reducing the cash yield for some TELYS4 investors by up to 30%. With TELYS4 having traded down as much as 8% since March, SVH's board was subsequently approached by TELYS4 holders to provide a solution. With 4.963mn TELYS4 shares outstanding, redeeming at par value (~A$0.5bn) wasn't a viable option for the board.
The "unifying" resolution is subject to a TELYS4 (75%) vote which will take place on the 24 September.

Concurrent with the announcement of its FY18 results, Seven Group Holdings (SVW AU) said it will unify its capital structure via an offer for its preference shares Seven Group Holdings Ltd (SVWPA AU), more commonly known as TELYS4.
If the resolution is approved, TELYS4 holders have the option to receive either:

4.60645 SVW shares for every TELYS4 share; or
a partial exit option, by having 50% of their TELYS4 shares converted into SVW shares (also on a 4.60645 basis), and the option to sell the balance for at least $88.
If the resolution does not pass, TELYS4 holders will still have the option to voluntarily convert into ordinary shares (4.60645); but the cash/scrip option will not apply to this scenario.

As a perpetual non-cumulative share with limited rights, TELYS4 has not been afforded the same valuation principles as SVH, especially post GFC. Prior to yesterday's move for both stocks, the ords had outperformed TELYS4 over the past 6 months by ~12%. TELYS4 last traded above its $100 par-value in Jan 2008 and over the past five years has averaged a 22% discount to its par value with a discount range of 7-50%. The conversion price equates to $92.50/share (based on the 30 day VWAP), a level last achieved in November 2013, and a 15% premium to last close.
A proposed amendment to the franking system in March this year would, if enacted, result in investors no longer able to claim a cash refund on their excess franking credits, potentially reducing the cash yield for some TELYS4 investors by up to 30%. With TELYS4 having traded down as much as 8% since March, SVH's board was subsequently approached by TELYS4 holders to provide a solution. With 4.963mn TELYS4 shares outstanding, redeeming at par value (~A$0.5bn) wasn't a viable option for the board.
The "unifying" resolution is subject to a TELYS4 (75%) vote which will take place on the 24 September.

Australia

Seven Group Holdings Ltd. is a diversified operating and investment group. The Groups interests include media holdings that include Seven Network, a commercial television network and publishing company, a telecommunications company, and a heavy equipment dealer that operates Caterpillar dealerships in Australia and North Eastern China.

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Seven Group: Potentially a New Wesfarmers in the Making

At AUD 15.50, Seven Group Holdings (SVW AU) shares screen as somewhat overvalued, though our quibble is with the price not the business. The...

Morningstar, Inc.

Seven's Elegant Pref Share Solution

Concurrent with the announcement of its FY18 results, Seven Group Holdings (SVW AU) said it will unify its capital structure via an offer for its...

David Blennerhassett