Why this quality ASX 200 action is really cheap: expert

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The last 18 months have been outstanding for Australian stocks, with the S & P / ASX 200 Index (ASX: XJO) gaining more than 53% since the COVID-19 trough of March 2020.

But it also means that there are a lot of expensive stocks. It’s not really a buyer’s market, you might say.

But one expert believes he has found a reliable large-cap ASX stock that costs significantly less than the rest of the market.

“We estimate Seven Group Holdings Ltd (ASX: SVW) is trading at a P / E multiple of less than 14x FY22 earnings, which is about a 25% discount from the S & P / ASX 200, and in our opinion a low valuation. demanding, ”Airlie Funds analyst Joe Wright said in a memo to clients.

Seven Group Holdings is a conglomerate that owns several industrial companies, as well as its better-known free-to-air TV channel of the same name. Seven West Media Ltd (ASX: SWM).

Seven Group shares closed down 1.95% on Friday, selling for $ 21.12. The stock has lost around 9.5% this year so far.

“In listed stocks, ‘conglomerate’ is a dirty word,” Wright said.

“It can involve complexity, opacity and bloat, where the structure of the company is at odds with the interests of shareholders, and many investors choose to avoid conglomerates for these reasons.”

So why is Airlie Funds bullish on Seven Group shares?

Two jewels floating in a sea of ​​mediocrity

Two of Seven Group’s arms are a mining service brand WestTrac and equipment rental company Coats.

According to Wright, these types of companies are “often unloved” by investors because of their “volatile returns and capital intensity.”

But Airlie Funds sees nuggets in these two subsidiaries.

“In our mind, WesTrac and Coates are quality companies in mediocre industries pushed even further by the conglomerate structure of Seven,” Wright said.

“As investors digest the high-profile market takeover of Boral Limited (ASX: BLD) or lament the decline in free-to-air TV business of the same name, WesTrac and Coates quietly demonstrate their quality and make up the majority of our review of Seven.

Seven’s “sum of the parts” is greater than the current share price

Wright believes that the strength of WesTrac and Coates makes the total value of conglomerate Seven higher than current market capitalization suggests.

This is provided that management successfully implements the promised transformation program and “unleashes additional value in the non-core real estate portfolio”.

In our ‘sum of the parts’ analysis of the company, we see a rise in the current share price when we consider more mid-cycle earnings from WesTrac and Coates, and before including any significant upward valuation of the Boral business. “

The other trump card in Seven’s round is concentrated ownership.

“Seven remains 60% owned by the Stokes family, with Kerry Stokes as chairman and her son Ryan as CEO,” Wright said.

“In our view, this gives shareholders meaningful alignment with the board and management, and we’ve found that over time, companies run by founders tend to consistently outperform the larger index. “


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