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Why Seven Group Holdings Ltd hit a record high in 2018

Investors have been bullish on Seven Group Holdings Ltd (ASX: SVW) shares due to growth across three fronts.  

The first is the improving commodity prices and years of under investment in the mining sector which are benefiting Seven Group’s industrial services division.

The need to replace ageing fleets, and the increased utilisation of mining equipment has led to a resurrection in the mining services sector in the last 12 months. The Department of Industry has predicted an increase in the contribution of the mining services sector to the economy and that resources exports will hit a record high in 2017-18, so this run looks set to continue. 

Strong increases in infrastructure investment, particularly on the east coast of Australia, have also fuelled growth in the industrial services segment.

Projects such as the Westconnex in Sydney, as well as upcoming rail projects in Melbourne, Canberra and Brisbane will drive earnings growth for Seven Group’s Coates Hire and WesTrac businesses. With peak infrastructure investment expected around the year 2020/2021, Seven Group looks set to benefit for a number of years to come.  

And to complete the trifecta, Seven Group’s energy investments through SGH Energy and Beach Energy Ltd (ASX: BPH) are benefiting from increased prices in both oil and gas. And whilst this looks set to continue, prices in this area are hard to predict (just ask OPEC). 

Shares are currently trading at roughly 30x FY 2017’s earnings, with investors betting that this strong growth will be borne out in its earnings when the company reports its results in February. This is despite Seven Group’s 41% holding in Seven West Media Ltd  (ASX: SWM) trading at 52-week lows due to structural challenges facing its traditional media division. 

Foolish t akeaway  

Seven Group appears to be in a sweet spot with regards to much of its business. However, the time to buy a cyclical business such as this is closer to the bottom of the cycle, and with the additional drag caused by its media assets I feel there are better investments on the ASX.   

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Motley Fool contributor Matt Chessell has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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