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Is Seven Group Holdings Ltd one of the best opportunities on the ASX?

A number of fund managers and analysts certainly seem to think Kerry Stokes’ Seven Group Holdings Ltd (ASX: SVW) is a bargain at current prices.

Seven Group holds a varied portfolio, including a 35% stake in Seven West Media Ltd (ASX: SWM), a $900 million investment portfolio, ownership of a number of businesses including Westrac Group, AllightSykes and Coates Hire Group as well as recent investments into energy.

The company certainly appears cheap, paying a fully franked dividend yield of 6.3% and trading on a P/E ratio of just 8.5x. That may well be the market pricing in further declines in earnings though. The company also seemed to think shares were cheap, initiating a buyback of around 11.9 million shares, roughly 4% of shares outstanding.

In the 2014 financial year, underlying net profit slumped 36.5% to $252 million, as revenues dropped by a similar percentage from $4.7 billion in 2013 to $3.1 billion last financial year. Much of the fall can be attributed to Westrac Australia – the business that sells Caterpillar mining equipment. Revenue fell from $4.1 billion to $2.4 billion in 2014, and margins were also hit, dropping to 8.4%. Given the recent problems experienced by Titan Energy Services Ltd (ASX: TTN) and WDS Limited (ASX: WDS), there’s no reason to believe that Westrac’s business is going to turn around anytime soon.

As resources investment continues to fall, Westrac Aust may in fact see further falls in revenues and margins. Given its 54% contribution to Seven Group’s total earnings before interest and tax (EBIT), management will need to drive significant growth in other businesses to compensate for sliding revenues. In 2013, Westrac Aust earnings represented 71% of the group’s total EBIT.

Seven West Media delivered flat EBIT, while Coates Hire and AllightSykes are underperforming, suggesting the company’s forecast of flat earnings in the 2015 financial year will be a stretch.

That is likely to see earnings and dividends fall – hence the reason why shares in Seven Group appear cheap. Entry into the energy sector could also be a risk and the company appears more a value trap than a bargain. Foolish investors may well want to let this one pass by, and wait for better opportunities.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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