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Seven Group’s profit set to tumble

Industrial services, media and investment conglomerate Seven Group (ASX: SVW), which is controlled by billionaire Kerry Stokes, has announced a 6% rise in revenue to $4.7 billion and a 16% rise in underlying profit after tax to $399 million. Growth in underlying earnings per share was even more impressive, increasing 22% to $1.20.

The result was underpinned by the Westrac business, which sells Caterpillar heavy machinery equipment and enjoyed an outstanding first half. The company noted that iron ore customers continue to be active but coal sector customers are subdued, putting pressure on second-half earnings. The company also managed to reduce debt by over $1 billion, resulting in net debt at $713 million at year end. Seven Group’s portfolio of listed shares — excluding the shareholding in Seven West Media (ASX: SWM) — also performed extremely well, increasing in value by $145 million to $759 million.

Seven’s full-year results are in stark contrast to many companies exposed to the resource sector and particularly to heavy earthworks equipment hirer Emeco Holdings (ASX: EHL), which got caught by the resource sector slowdown a lot sooner and more severely than Seven.

While there was plenty to like about the results for the 12 months to June, as Seven’s share price implies it is the outlook that investors are focussed on. Management stated in comments on the firm’s outlook that Westrac is focussed on reducing costs and remains cautious regarding trading conditions. Meanwhile the company expects its media investments to be hampered by “overall advertising markets which will remain subdued with low single digit growth in television, and a continuation of the current trend experienced in newspapers, but the rate of decline in magazines is expected to lessen.”

And here is the crunch!

Based on the slowdown in the mining services sector and the lacklustre outlook for media, Seven’s management stated that it expects “the FY14 results will be below that achieved in FY13 and FY12, and will likely be closer to FY11 levels. This means we anticipate underlying EBIT to be down between 30% and 40% on FY13.”

Foolish takeaway

Seven’s shares fell around 10% after releasing its results. It appears the market is still coming to terms with just how far profits were boosted by the resources boom. With the excessive profit margins from the boom likely a thing of the past, investors need to remain vigilant to avoid value traps and overpriced stocks.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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