Truck sales drive Seven Group’s profit

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Kerry Stokes’ Seven Group Holdings (SVW.AX) has reported a massive jump in net profit for the six months to December 2012, coming in at $258 million, on revenues of $2.7 billion.

Earnings rose 392% on the back of strong results from mining equipment business, WesTrac Australia and the group’s 45% holding in industrial hire company, Coates Hire. Seven Group divested its holding in Consolidated Media – resulting in proceeds of $491 million, and a $50 million profit. Cons Media was taken over by News Corporation (NWS.AX).

WesTrac Australia is by far the largest contributor to Seven’s results, contributing 88% of revenues ($2.4 billion), and 71% of earnings before interest and tax (EBIT). WesTrac holds the exclusive licence for Caterpillar equipment, including 400 ton mining trucks, loaders and excavators in Western Australia, New South Wales, the ACT and north-east China.

Despite Coates Hire reporting a 3% rise in revenues, and an 18% rise in underlying net profit, Seven is reviewing its stake, and is looking for a buyer of its holding. Media reports also suggest Seven could look to sell out of its Caterpillar business in China, which has not performed to management’s expectations.

Seven Group also holds around 35% of Seven West Media (SWM.AX), 11% of Prime Media Group (PRT.AX), both of which are struggling in a weak advertising market, and a listed investment portfolio currently valued at around $800 million.

In an effort to shore up the company’s balance sheet, Seven used the proceeds from the sale of its Cons Media shares and operating cash flows to reduce debt by 51% from $1.7 billion to $837 million.

Looking to the outlook for the next six months, Seven said that it remained cautious regarding trading conditions. The second half is unlikely to see the same level of Caterpillar sales as the first, and as a result, full year earnings are expected to be between 10 to 20% higher than the previous year, excluding significant items and major changes to the share price of Seven West Media.

Foolish takeaway

For income minded investors, Seven Group declared a fully franked interim dividend of 20 cents, slightly up on previous corresponding period. Foolish investors should note that the company is highly leveraged to the resources sector – commodity prices will have a large bearing on the future performance of the business.

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