Stokes hails WesTrac for driving growth at Seven Group

Seven Group boss Ryan Stokes has hailed the group’s Wes­Trac Caterpillar dealership as the oft-overlooked engine room for growth.

Seven Group chief executive Ryan Stokes has hailed the group’s Wes­Trac Caterpillar dealership as the oft-overlooked engine room for growth, after announcing a second upgrade to full-year profit expectations.

The billionaire family’s listed vehicle topped market expectations for its interim earnings on Wednesday and forecast “mid to high-teen EBIT growth” for the full year, even though the company is not factoring in an interest rate cut in its financial modelling.

Mr Stokes said he expected the Reserve Bank would not cut rates until near the end of the calendar year.

“Probably later, towards the end of the third quarter,” Mr Stokes said of his expected timing of rate cuts.

“The rapid rate rises will have an impact as we start to see the roll-off of fixed (rates) for recent mortgages and hence they might reduce it.”

Seven Group has a solid barometer on interest rates and the economy because its operations span from mining and farming at WesTrac, to building construction at Boral and hiring unit Coates, advertising at its Seven West Media unit, and oil and gas at Beach Energy.

Any concerns on rates were far outweighed by the outperformance for the half year of WesTrac, the biggest earner for Seven Group, and at Boral, which moved up to become the firm’s second-biggest earner in the first half. The two divisions drove a 31 per cent jump in underlying half-year earnings at Seven Group to a $474m profit.

The group’s statutory net profit after tax fell 36 per cent in the first half to $225m, largely relating to impairments at its Beach ­Energy Cooper basin and exploration project.

Fund manager Jun Bei Liu from Tribeca said it was a “great result”. The company’s shares rose 6.16 per cent to close at $38.59.

“We expected it to be strong but it was much more than expected,” Ms Liu said. It was a “great company … showing strong management … WesTrac is a great business.”

WesTrac is the sole Caterpillar dealer in the key mining state of Western Australia, as well as in NSW. WesTrac EBIT rose 31 per cent from the previous corresponding half year, to $333m.

The WesTrac business saw strong growth in both new sales and maintenance support for the nation’s ageing fleet of mining machines, with the average age up 40 per cent since the 2016 full year, leading to greater servicing requirements.

Mr Stokes praised the consistent performance of WesTrac, which his father Kerry built from scratch, saying its compound ­annual growth rate of 10 per cent was “going to be hard to beat”, and provided the cash flow to fund takeovers such as Boral, Beach and Coates.

“If you think about the group and our capacity to support leverage and our ability to actually grow the portfolio, not only is the performance of WesTrac on a stand-alone basis exemplary over that decade, but I then think about the capacity of it to allow the broader group to pivot and grow,” Mr Stokes said. “So WesTrac has also been the enabler.”

Boral is increasing its star status within the conglomerate, having overtaken Coates to be the second-biggest contributor to EBIT, producing a 111 per cent increase on the previous corresponding six months to $201m. That figure is almost as much as it contributed to the entire 2023 earnings.

Seven Group had a market capitalisation of about $7.8bn when it finished its slow-creep takeover of 70 per cent of Boral in 2021. Boral was valued then at $6.9bn.

Steve Johnson from Forager Funds said the takeover in hindsight was “a stroke of genius”.

The company’s majority takeover of Beach Energy is still yet to bear fruit, with the unit posting a 10 per cent drop in EBIT contribution to $52m.

Mr Stokes said Beach could restore market confidence “relatively quickly” if new chief executive Brett Woods, who started only a few weeks ago, was disciplined on costs and capital, as Vik Bansal had been since he started at Boral at the end of 2022.

“I think in 12 months how Beach is perceived will be very different,” Mr Stokes said.

“It’s not that different to what Vik was able to execute within Boral.”

Mr Woods made an immediate decision for Beach to suspend some new drilling and dump a carbon capture project, and Mr Stokes said the company was well placed to benefit from an energy shortage.

This confidence was supported by Ms Liu, who predicted Beach’s disappointing half-year result should be the last one.

“This is the last bad result by Beach, and new management has restored confidence in a future path,” Ms Liu said.

The other underperformer in the Seven Group stable was Seven West Media, which owns businesses such as free-to-air television network Seven and The West Australian newspaper. Its EBIT fell 47 per cent to $25m.

Cash flow for the group rose 25 per cent, and net debt fell 8 per cent.

The third-largest contributor to earnings was industrial and general hire business Coates, which posted a 10 per cent increase in EBIT to $164m.

Seven Group’s interim dividend was unchanged, at 23c a share, fully franked.

UBS described the above-forecast result as “solid”, with analyst Nathan Reilly, in a flashnote to clients, pointing to “margin improvement at Coates, WesTrac and Boral” as the “key highlights, alongside solid operating cash flows and de-leveraging”.