SGH: Industrial Conglomerate - Peak Margins at Peak Multiples
SGH: Industrial Conglomerate - Peak Margins at Peak Multiples
In a Nutshell
Executive Summary
In a Nutshell
Seven Group Holdings operates the exclusive Caterpillar dealership across Western Australia and NSW, Australia's largest construction materials network, and the nation's biggest equipment hire fleet. At A$47.23 versus fair value A$33.00, the stock is overvalued by 30%. The market is pricing in permanent peak margins that are more likely cyclical than structural, with group EBIT margins at a record 15.6% that historically prove unsustainable for diversified industrials.
Investor Profiles
| Profile | Rating | Rationale |
|---|---|---|
| Income | ★★☆☆☆ | The 1.4% dividend yield (A$0.65 forecast) ranks at the bottom of ASX industrials. The 26% payout ratio signals capacity for growth, but management prioritises reinvestment and M&A over distributions. Dividend growth is steady but unspectacular—income seekers will find better yields elsewhere. |
| Value | ★☆☆☆☆ | At 17.8x FY27 earnings versus the 13.5x peer median, SGH trades at a 32% premium that requires perfection. The stock offers 30% downside to fair value with limited upside even in the bull case (A$36). No margin of safety exists at current levels—value investors should wait for a better entry point below A$35. |
| Growth | ★★☆☆☆ | Revenue grew just 1.3% in FY25 and declined 2% in the latest half. The forecast 2.8% three-year revenue CAGR lags GDP growth. All earnings improvement is margin-driven, but margins are at record highs with limited room to expand. Without residential construction recovery or M&A, organic growth remains absent. |
| Quality | ★★★★☆ | SGH earns a 7.2/10 business quality score with genuine competitive advantages—an exclusive 60-year Caterpillar dealership, 76 quarries with decade-long planning approval barriers, and the largest equipment hire fleet at 2x the nearest competitor. The ~40% Stokes family ownership creates exceptional alignment. ROIC of 12% versus 9% WACC confirms value creation, though not exceptional. |
| Thematic | ★★☆☆☆ | SGH benefits from Australia's A$1.7 trillion infrastructure pipeline, but residential construction remains suppressed by elevated interest rates. The mining fleet ageing trend extends the rebuild cycle 3-5 years as electric vehicle adoption is deferred. However, single-geography concentration limits upside from broader industrial trends—this is an Australia-only play. |
Best Fit: Quality Investors. SGH's wide moats—Caterpillar exclusivity, irreplaceable quarry permits, and equipment hire scale—create genuine 10+ year competitive advantages. The Stokes family's 40% stake delivers alignment rare among large-caps. At fair value (A$33), this would be compelling. At current prices, quality alone cannot justify the premium.
Executive Summary
Seven Group Holdings is a diversified industrial conglomerate operating across three segments. WesTrac sells and services Caterpillar equipment as the exclusive dealer for Western Australia and NSW. Boral manufactures and distributes construction materials through 76 quarries and concrete plants. Coates hires equipment through a fleet valued at A$1.85 billion. The company also holds a 15.5% stake in the Crux LNG project and Beach Energy shares.
The latest half-year results showed operating cash flow surging 32% to A$741 million, driven by record margins rather than revenue growth. Group EBIT margins reached 15.6%, with Boral achieving 14.7%—up 470 basis points since the 2023 acquisition. Cash conversion hit 98%, validating earnings quality. However, revenue declined 2% year-on-year as residential construction weakness offset mining and infrastructure strength.
The investment case hinges on whether these peak margins are structural or cyclical. Management's "SGH Way" operating model has demonstrably improved performance, but historical industrial conglomerates rarely sustain margins above 16%. The stock requires sustained 15%+ margins, 4%+ revenue growth, and full realisation of Crux and M&A optionality. At A$47.23 versus fair value A$33.00, the stock is overvalued by 30%.
Results & Outlook
What Happened?
The December 2025 half delivered A$741 million in operating cash flow, up 32% on continued margin expansion across all divisions. WesTrac's product support revenue (parts and service) grew 4% as mining companies maintained ageing fleets rather than buying new equipment. Boral's EBIT margin reached 14.7% as infrastructure demand offset weak residential volumes. Coates' time utilisation improved to 61% with win rates climbing 6.6 percentage points as smaller competitors exited. Revenue fell 2% year-on-year as capital equipment sales declined.
| Metric | FY24 | FY25 | FY26E | FY27E |
|---|---|---|---|---|
| Revenue (A$m) | 10,750 | 10,675 | 10,900 | 11,200 |
| EBIT (A$m) | 1,505 | 1,527 | 1,590 | 1,650 |
| EBIT Margin (%) | 14.0% | 14.3% | 14.6% | 14.7% |
| EPS (A$) | 2.38 | 2.42 | 2.49 | 2.65 |
| FCF per Share (A$) | 0.67 | 1.13 | 1.58 | 1.60 |
| Net Debt/EBITDA (x) | 2.3 | 2.1 | 1.9 | 1.6 |
What's Next?
Earnings growth plateaus as margins approach natural limits. Management guides to low-to-mid single-digit EBIT growth for FY26, achievable through modest volume recovery and continued cost discipline. The key catalyst is post-FY28 when Crux LNG capex (A$200 million per year) drops to near-zero, lifting normalised free cash flow from A$650 million to A$850-970 million annually. The residential construction recovery depends on RBA rate cuts, now pushed to late 2026 after February's surprise hike to 3.85%. Boral's CEO departs in March 2026 with no successor announced, creating a 12-month execution window. Balance sheet capacity grows to A$1.5 billion by FY28 for M&A, though no deals are imminent. The structural margin debate—whether Boral can sustain 14%+ EBIT margins—will be resolved over the next three reporting periods.
Valuation & Risks
| Metric | Value |
|---|---|
| Fair Value | A$33.00 |
| Current Price | A$47.23 |
| Downside | -30% |
| Confidence Range | A$25–A$41 |
What Could Go Wrong?
The single biggest risk is margin mean reversion. Group EBIT margins at 15.6% sit at the upper boundary of what diversified industrial conglomerates sustain historically. Boral's 14.7% margin—up 470 basis points in two years—reflects favourable pricing conditions that may moderate as competition normalises. Our analysis weights the margin outlook 55% structural versus 45% cyclical, but if the cyclical view proves correct, terminal margins compress to 12% and fair value falls below A$25. Three consecutive halves with Boral margins below 13% would confirm reversion. The risk carries a 30% probability and would reduce EBIT by A$100-150 million. The market's 20x earnings multiple assumes permanent peak margins; any slippage triggers re-rating toward the 12-13x standard industrial multiple, amplifying downside. At current prices, investors are paying for perfection with no margin for error.