The last 18 months have been outstanding for Australian shares, with the S&P/ASX 200 Index (ASX: XJO) gaining more than 53% since the March 2020 COVID-19 trough.
But this also means there are a lot of expensive shares out there. It's not really a buyer's market, one could say.
But one expert reckons it's found a reliable large-cap ASX stock that's going for substantially cheaper than the rest of the market.
"We estimate Seven Group Holdings Ltd (ASX: SVW) is trading on a P/E multiple of sub 14x FY22 earnings, which is about a 25% discount to the S&P/ASX 200, and in our mind an undemanding valuation," said Airlie Funds analyst Joe Wright in a memo to clients.
Seven Group Holdings is a conglomerate that owns multiple industrial businesses, as well as its better-known namesake, free-to-air television channel Seven West Media Ltd (ASX: SWM).
Shares for Seven Group closed down 1.95% on Friday, selling for $21.12. The stock has lost around 9.5% this year so far.
"In listed equities 'conglomerate' is a dirty word," Wright said.
"It can imply complexity, opacity and bloat, where the corporate structure of the company sits at odds with interest of the shareholders, and many investors choose to avoid conglomerates for these reasons."
So why is Airlie Funds bullish on Seven Group shares?
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Two gems floating in a sea of mediocrity
Two of Seven Group's arms are mining services brand WesTrac and equipment rental provider Coates.
According to Wright, these types of business are "often unloved" by investors because of their "volatile returns and capital intensity".
But Airlie Funds sees gems in these two subsidiaries.
"In our mind, WesTrac and Coates are quality businesses sitting within mediocre industries, pushed further out of sight by the conglomerate structure of Seven," said Wright.
"While investors digest the highly publicised on-market takeover of Boral Limited (ASX: BLD) or lament the decline of the namesake free-to-air TV business, WesTrac and Coates quietly demonstrate their quality and form the majority of our valuation of Seven."
Seven's 'sum of parts' are bigger than current share price
Wright reckons the strength of WesTrac and Coates makes the total worth of the Seven conglomerate higher than what the current market capitalisation suggests.
This is provided management successfully implements the promised transformation program and "unlocks additional value in the non-core property portfolio".
"In our 'sum of the parts' analysis of the business, we see upside to the current share price when taking a more mid-cycle view of the earnings of WesTrac and Coates, and before including any material valuation upside to the Boral business."
The other ace up Seven's sleeve is the concentrated ownership.
"Seven remains 60% owned by the Stokes family, with Kerry Stokes in the chairman role and his son Ryan as CEO," said Wright.
"In our view this gives shareholders significant alignment with the board and management, and we have found that through time founder-led businesses tend to consistently outperform the broader index."
