In this week’s video insight, David Buckland and I discuss Seven Group Holdings (ASX: SVW), an Australian operating and investment group in the media, mining and construction industry in which the Montgomery Small Companies Fund holds a substantial stake. We spotlight the remarkable alignment between the Stokes family’s leadership and investors’ interests, emphasizing Seven Group’s astute counter-cyclical investment strategy. Additionally, we explore their recent strategic acquisition of Boral (ASX: BLD), shedding light on their concerted efforts to enhance operational efficiencies and bolster margins. Catch the full discussion here.

Transcript:

David:

Hi, I’m David Buckland and welcome to this week’s video insight.

Today, I’m being accompanied by Dominic Rose. Dominic, as many of you know, is the portfolio manager for the Montgomery Small Companies Fund. Dominic today, I thought we’d talk about a conglomerate which the Montgomery Small Company’s Fund has a serious ownership in, and that’s Seven Group Holdings (ASX: SVW). It’s developed into a very successful conglomerate alongside groups like Wesfarmers (ASX: WES) and Washington H Soul Pattinson (ASX: SOL), Stoke clearly controls close to sixty per cent of it, and it’s had a very exciting run-in recent years.

Dominic:

Yeah. Thanks, David. So, Seven Group Holdings is a really good example of a founder-led company. In small caps we really do love to uncover founded lead businesses because of the strong economic alignment that management has. And with the Stokes family controlling, as you mentioned, just under 60 per cent of this company, there really is that strong alignment. And, we think that, as minority investors, it’s a really important factor to invest alongside.

David:

And one thing that we’ve been able to observe, particularly in the industrial services sector of their portfolio, and also the energy part of their portfolio, they’ve been incredible counter-cyclical investors, haven’t they?

Dominic:

Yeah, absolutely. Look, there’s a lot of “short-termism” that creeps into markets and companies with the alignment, I suppose that chief executive officers (CEO) and management teams have on focussing on delivering short term outcomes, but the nice thing about Seven Group, being that founder led business, this family invests over the very, very long term. And so that gives them the ability to make longer term investment decisions and take us on a counter-cyclical approach often. And a great example of that is Boral (ASX: BLD).

They’ve recently bought just over 70 per cent of Boral, and they bought it at a time when the cycle was against that company, and the shares were trading at quite depressed levels.

But, Seven Group saw an opportunity to improve that business and took a different view from the market and ended up being quite a strategic investment for them.

David:

And I noticed the price increases of some of the Boral commodities and the volume increases in fiscal 2023 have been roughly sort of low double digits in many cases.

Dominic:

Yeah, look that’s right. We are in an inflationary environment, and so I think it’s very important for these industrial companies to be able to pass on some of the cost pressures that are facing their businesses through price. One of the reasons Seven Group invested in Boral was that they had spotted that Boral had a market leading position, but they weren’t being as disciplined on prices as they perhaps could have been.

So, Seven Group bought the stake, and they changed out management in part of the focus to improve the margins of that business is really focused on not racing to the bottom to drive volumes through cutting price but, importantly, showing leadership in price and really utilizing that strong market position that Boral enjoys.

David:

And businesses like Coates Group (ASX: CGW) and more particularly West Track. They seem to be doing superbly well at the moment.

Dominic:

Yeah. Look, both West Track and Coates have very strong fundamentals of market dynamics at the moment. So West Track, just to recap, is the Caterpillar dealership, in Western Australia and New South Wales that Seven Group 100 per cent owns. And that business is really driven by, commodities, but commodity volumes, not commodity prices. And so, their clients, big iron ore miners, increasingly, the lithium miners in Australia, and that is a business that, is really underpinned by volumes of Earth moved not so much commodity prices, which obviously can be a bit more volatile.

And that has very strong tailwinds, particularly as the big mining companies have these replacement time projects, which are just about staying still. And the nice thing about West Track’s business is not just new capital sales, that come through, but also this growing car park, they are leveraged to the parts and services. And that really grows as the fleet of equipment grows, but also as the age of equipment gets older.

And then, of course, Coates is another business that is a leading player in equipment hire. They have about 25 per cent market share. And there’s another example of Seven Group, they recycle capital out of their portfolio to buy the other half of Coates some years ago now. And they’re really focused on, improving the operating disciplines of that business. It has about 25 per cent market share, so it’s a strong market position, but it’s around returns on asset (ROA) and proper pricing.

And, so that is driven by, or the tailwinds for that business, are very much around infrastructure projects. The outlook for that is very robust over the medium term.

David:

And many, viewers may remember, Seven Group Holdings as being a media company, but my understanding now is that media makes up maybe three or four per cent of their earnings before interest and tax (EBIT) and virtually nothing of their valuation. Is that a fair comment?

Dominic:

Yeah. That’s right. Look, it’s not to be confused with Seven West Media, which is a listed company that is the TV station.

And so, the Stokes family have long been involved in that. Seven Group has a 40 per cent share of that. But you’re right. It’s less than one per cent of the valuation and hardly makes its way into the presentations of seven group holdings. It is absolutely not a focus. The focus of the business is on the industrial segments and energy and energy.

David:

So, it would be fair to say that the Stokes family have been incredibly disciplined in allocating capital, and that’s why it’s been a very, very successful conglomerate.

Dominic:

Yeah, look, I think that is key.

The Stokes family behave like owners because they are owners, and they take that longer term view. And importantly, they’ve been attracted to investments where they can exert their influence and drive operating improvements.

So, it’s very much around spotting businesses that have strong market positions that may not be firing. And going away and enacting change and just improving the disciplines of those businesses, and then driving that shareholder value.

The Montgomery Small Companies Fund owns shares in Seven Group Holdings. This video was prepared 30 November 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade in Seven Group Holdings, you should seek financial advice.