Seven Group Holdings Limited (ASX: SVW), the operator and owner of investments in equipment management and media companies, has risen in share price over the past two weeks by 10.4% to $9.09. Investors are showing an interest in this stock that has seen revenue and earnings drop since the mining pullback started. I want to explain the reasons behind this.
Reducing costs and debt
Its first half FY2014 revenue fell 42% to $1.57 billion, and statutory net profit after tax was $264.7 million, up only 3%. The company has focused on improving its financial strength by reducing net debt 15% to $607.7 million. Cost cuts have included reducing work staff by 1,750.
On the lookout for acquisitions
What is attracting investors' interest is that it has about $2.5 billion in liquidity, and has stated it will be looking for acquisitions. Its strong balance sheet will allow it to pick up other equipment and mining services companies doing it tough in this depressed business environment.
The value of its total group investments was up 13% to $2.49 billion.
Full year 2014 guidance is for the result to be below that achieved in FY2013 and FY2012. Likely it will approximate FY2011 levels. Full year underlying EBIT is to be at the low end of 30%-40% below FY2013. Underlying EBIT in 2013 was $622.8 million.
WesTrac equipment sales and service
The company's subsidiary, WesTrac Group, sells and provides maintenance for Caterpilar equipment and vehicles in WA, NSW, ACT and north eastern China. As the unprecedented levels of sales related to the mining boom is normalising, new equipment sales are down.
However, the company expects that the equipment delivered in FY2011-2013 is now entering the maintenance phase. This will drive repair service and replacement business since the mining companies are expanding production and using equipment heavily.
Its other equipment companies, AllightSykes (100% owned) and Coates Hire (45% owned), also are down in revenue from softer demand.
Seven West Media Limited (ASX: SWM), which Seven Group Holdings has a 35.33% interest in, had a 5.5% rise in half-year underlying NPAT to $150 million. Revenue was down 1.1% to $975.8 million.
Foolish takeaway
The company is adjusting to lower levels of revenue and operating cost, but is actively pursuing a path of growth with a big war chest to finance it. As we regularly suggest to investors, when an industry is down, look for the companies with the strongest balance sheets to weather hard times.
Earnings may be less initially, but a quality company will bounce back when the industry picks up again. That is the opportunity that shareholders can see.
