BUSN8006: DRIVING FINANCIAL PERFORMANCE

RATIO ANALYSIS ASSIGNMENT

Student name and number: xxxxxx

Course: xxxxx

Name of the Professor: xxxxxx

Name of the Institution: xxxxx

To: MEMBERS OF THE EXECUTIVE TEAM
From: FINANCIAL ANALYST - ASSOCIATE
Date: April 11, 2024

Subject: ANALYSIS OF FINANCIAL PERFORMANCE AND FINANCIAL POSITION OF THE SEVEN

GROUP HOLDINGS LIMITED

Thank you for commissioning me to report on the competitive financial analysis of SEVEN GROUP

HOLDINGS LIMITED. My report is divided into three sections which deal with the findings about the

company's health & future prospects with conclusions, references, and appendices.

Findings

Background: The Company is a large investment group listed on the Australian Stock Exchange,

operating and having an interest in different sectors to maintain its profitability. The Company's main

sources of income are from different sectors which include industrial services, media services, energy

products, and also from strategic investments with the ultimate goal of operational excellence and

maximization of the shareholder's wealth.

Being a leading investment group SGH plays an important role in the Australian economy by providing

its services and essential products to such as mining, construction, energy, and media. This

diversification also serves the Company’s strategies concerning its shareholders such as:

 Due to the SGH diverse operations and investments the major economy sub-sectors depend upon

it which helps the company to grow and sustain its business. By increasing business in various

sectors the shareholder's risk becomes less and helps the management to keep the maximization

of wealth of its shareholders by delivering long-term sustainable returns. The key strategy to keep

this up is the exercising of financial discipline and decisive management.

 To maintain the company’s name and for sustainable growth, the managers have the

responsibility to keep its external shareholders such as customers satisfied. The SGH

management has a very keen focus on ensuring that the services and products provided to the

customers are of top quality which in turn also keeps the Company as a leader in the market.

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  One of the other key strategies of management regarding the shareholders is to keep the

company innovative and open to rapid responses which shape the Group in the changing

environment. Furthermore, the priority of the SGH management is to stay ahead in the rapidly

evolving market and help to grab opportunities.

Investments: During the year the Company has increased its investment by 3% in the construction

material via further investment in Boral Limited. As of now, the Company holds major shareholdings in

Boral Limited and influences its operating decisions. Before the acquisition, Boral was facing very

difficulties in maintaining stable earnings. This reset of the leadership team and implementation of the

operating model resulted in an increase in the earnings of Boral by 117% in FY23, reflecting the team's

disciplined focus on improving performance, including pricing traction across all the product lines. While

EBIT OF $232 million and EBIT margin of 6.7% show the best asset positioning of Boral Limited.

Management is of the view that the same will be sustained in coming years also. Further in 2024, the

SGH offers 1.2$ billion for full control of Boral Limited. (Manekar, 2024)

This acquisition could be a great fit for the following reasons:

 As the Seven Group Holding Limited has a good presence and high stakes in the construction

and retail sectors that heavily rely on construction materials. Owing Boral Limited allowed the

Seven Group Holdings to vertically integrate their supply chain and improve control over the

quality of the material and also on the delivery times that helps to satisfy the customer needs.

 Seven Group Holdings Limited can integrate its R&D department to develop new and better

quality products. Furthermore, with the help of Boral expertise in supplying the materials for major

infrastructure and the best Seven Group holdings limited logistics network the Company can

expand its network in the sector which helps it to increase in market share.

 Both companies have a growing focus on sustainability that will also increase the trust of external

environmental groups in the operations of the company and help the Company to deal with a

more sustainable construction supply chain.

There are also some potential challenges regarding this investment:

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  Boral holds production rights to several quarries. Quarry production may result in disturbance to

the environment, including ground stability, air quality, and noise. Any quarry, oil, or gas project

may be exposed to production decline or stoppage, which may be the result of facility shut‑downs,

mechanical or technical failure, and other unforeseeable events causes loss of production.

 Integration cost might be high and complex which will impact the profitability in the short term.

 Boral manufacturing operations and related services depend upon the critical plant. Any operation

failures and outrages will impact the production output. Also, Boral has the inflationary risk from

rising outputs, and late delivery of the raw materials to the factory can lead to less production

which ultimately leads to the wastage of time and profit.

 The Australian construction material market might be nearing saturation which will become a

hurdle for the Group in effective organic growth. For this SGH can focus on its operational

efficiencies to overcome it.

 Boral also has the current exposure of increasing oil and diesel prices that affect the delivery cost.

But this can be handled by hedging.

Conclusion: As a one-line Boral Limited has the potential to be strategically beneficial for Seven

Group Holdings Limited. Vertical integration, synergies, and alignment in infrastructure and

sustainability sectors could create more value. However, managing integration costs in a potentially

saturated market and debt burden (as the Group has many plans regarding expansion of the Boral

which in turn may be funded by a debt) will be crucial for long-term success and mostly how the

Group manages all this for a long term sustainability and maintains value creation for its shareholders.

Financial Analysis:

< Ratios of SGH> 2023 2022 2021

Revenue 20% 66% 6%
Gross profit margin 15% 13% 17%
Net profit margin 7% 6% 13%
Return on equity 14% 10% 16%
Return on asset 6% 4% 9%
Debt to equity ratio 66% 68% 54%
Current ratio 1.68 1.41 1.04
Interest coverage ratio 3.83 3.08 5.65
*These ratios are based on the Appendix – A

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The evaluation of these ratios is below:

 The revenue shows a strong increase from 2021 to 2022, as the revenue increased by 66% in

that year but then again significantly decreased IN FY2023 and shows only an increase of 20%

as compared to FY2022. This could be due to the significant challenges faced or the maturity of

the industry trend based on the energy, construction, and media during the year. Thus the revenue

is very fluctuating.

 The Gross profit margin shows a decreasing trend from 17% in FY2021 to 15% in FY2023. This

means that the company monitors the cost controls on the cost of the goods sold over the years.

 The net profit margin has also a decreasing trend from 13%(FY2021) to 7% (FY2023 which shows

that the company profitability related to the revenue is in the declining phase.

 The return on equity and return on assets also decreased from 16% and 9% respectively

(FY2021) to 14% and 6% (FY2023) which shows that the Company failed to use the shareholder's

equity and allocation of assets more efficiently for the generation of profits over the years.

 Debt to equity ratio is an increasing trend that shows more financial risk the Company has faced

over the years. Further, the acquisition of Boral Limited also put pressure on the debt-to-equity

ratio and more financial risk. The Company has to come up with a strategy to overcome this.

 The company's current ratio is in an increasing trend from 1.04 (FY2021) to 1.68 (FY2023)

showing good current financial health of the Company.

 The interest coverage ratio is decreased from 5.65 (FY2021) to 3.83 (FY2023) which is not good

as the company profits are decreasing and further with the acquisition thing going on the company

has to obtain more debt which in turn put more pressure on the finance cost and maybe

company’s profits are not enough to pay interest in the future if the interest coverage ratio tends

to move downward.

Comparison with Major Competitor: The major competitor as large conglomerate of the Seven Group

Holding Limited is Wesfarmers Limited. For ease in the decision-making regarding which company

international investors must choose to get the wealth maximization following is the analysis and

comparison of the last 3 years’ financial numbers of Wesfarmers Limited with SGH:

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 < Ratios of WFL > 2023 2022 2021
Revenue 18% 9% 10%
Net profit margin 6% 6% 7%
Return on equity 30% 29% 24%
Return on asset 9% 9% 9%
Debt to equity ratio 69% 71% 63%
Interest coverage ratio 26.99 35.58 29.58
(Limited, 2023)

 Unlike SGH, WFL’s revenue has the constant growth over the last 3 years as the increase is from

10% (FY2021) to 18% (FY2023) showing the shifting of the increasing customers towards WFL.

 Unlike SGH, the net profit margin is also constant showing no fluctuation with revenue. Maybe

the reason is that WFL has less control over cost monitoring.

 Unlike SGH, WFL’s return on equity and return on the asset are very attractive for an investor as

it has been increasing 24% to 30% and 9% to 9% respectively (from FY2021 TO FY2023) showing

highly effective utilization of the shareholder's money and assets to generate sustainable profits.

 Debt to equity of WFL is also increasing like the SGH from 63% (FY 2021) to 69% (FY2023).

However, there has been an insignificant risk involved as the interest coverage ratio is 27 times

whereas the SGH interest coverage ratio in the latest year was only 3.8 times. This shows that if

WFL goes for a further debt situation this will put no or minimal burden on the profits of the

company without hurting the shareholders' return on profits.

Conclusion and recommendations:

SGH has a diversified portfolio with investments in various sectors of Australia with little exposure to the

other markets and it holds a strong position in its key industries which helps it to withstand the

competition. Irrespective of the economic fluctuations SGH has maintained its financial stability. But this

also comes with lots of weaknesses such as the SGH revenue being heavily dependent upon specific

sectors making the profits vulnerable if downward trends start in those industries the profits of the

company as compared to its major competitors will heavily fall. Furthermore, focusing primarily on the

Australian markets and very limited exposure to the international markets will put a stop to the company’s

growth opportunities. Further, the increasing debt-to-equity ratio puts a burden on the profits that

ultimately affect the shareholder’s earnings per share and that will not be acceptable for the shareholders.

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The company can come up with a strategy to overcome these things in order to grow further. Like less

reliant on quick growth by mergers and acquisitions better to focus on the organic control that comes

internally. Put more tight controls on the cost without compromising the quality of its products. For the

saturated market, the company should develop its products by combining its subsidiaries' R&D

departments. Further, the Group can collaborate with any other company in the international markets to

get quick access to the different markets and customers. This expansion and leveraging the technological

advancements could present great growth opportunities for SGH, but it needs to remain vigilant about

competition and regulatory changes.

Furthermore, based on the above financial analysis if any international has to invest in the Australian

market in a company like SGH which has a strong presence in the Australian market and a diverse

portfolio and is willing to take less risk and to get a constant earning as a shareholder, then my advice is

to invest in the Wesfarmers Limited because of the stronger financial position & performance, diversified

business operations (unlike SGH who has diversified portfolio across the industry) and major global

presence rather than a limited exposure of the international markets with a strong risk management

framework in place, mitigating potential risk effectively.

The analysis above is based on the up-to-date information. Future results can be different depending on

the management strategy and economic conditions.

I hope this report helps you.

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 Appendix - A

Primary Statements
Consolidated Statement of Profit or Loss and Other Comprehensive Income
For the year ended 30 June 2023
CONTINUING OPERATIONS
2023 2022 2021 2020
$m $m $m $m

Revenue 9,627 8,013 4,839 4,563

Other income 41 57 47 63

Share of results from equity accounted investees 200 257 239 80

Revaluation of equity accounted interest arising from - - -
acquisition of Boral Limited 757

Impairment of intangible assets - (728) - -

Impairment of equity accounted investee (76) (83) 93 (162)

Impairment of producing and development asset - - - (117)

Expenses excluding depreciation and amortisation (8,139) (6,961) (4,032) (3,782)

Profit before depreciation, amortisation, net finance
expense and income tax 1,653 1,312 1,186 645

Depreciation and amortisation (512) (475) (260) (263)

Profit before net finance expense and income tax 1,141 838 926 381

Finance income 23 6 1 1

Finance expense (298) (272) (164) (151)

Net finance expense (275) (266) (163) (150)

Profit before income tax 866 572 763 231

Income tax expense (210) (129) (128) (114)

Profit for the year from continuing operations 656 443 635 118

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Primary Statements
Consolidated Statement of Financial Position
As at 30 June 2023
2023 2022 2021 2020
Current assets $m $m $m $m

Cash and cash equivalents 877 1,255 161 120

Trade and other receivables 1,629 1,499 832 775

Inventories 1,501 1,348 804 837

Current tax assets 26 40 - -

Other current assets 190 139 40 60

Derivative financial instruments 38 33 1 3

Assets classified as held for sale 3 4 5 5

Total current assets 4,263 4,317 1,843 1,800

Non-current assets

Other receivables 20 36 - -

Inventories 346 345 - -

Investments accounted for using the equity method 1,701 1,629 2,787 1,000

Other financial assets 96 163 437 854

Right of use assets 712 707 595 637

Property, plant and equipment 3,498 3,425 967 982

Producing and development assets 477 366 112 112

Exploration and evaluation asset - - 239 236

Intangible assets 2,222 2,229 1,627 1,623

Deferred tax assets 109 167 - -

Other non-current assets 36 25 - -

Derivative financial instruments 150 186 148 205

Total non-current assets 9,367 9,277 6,913 5,648

Total assets 13,630 13,593 8,755 7,448

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Current liabilities

Trade and other payables 1,125 1,007 585 449

Lease liabilities 71 76 49 53

Interest bearing loans and borrowings 450 1,365 804 58

Deferred income 555 260 160 216

Current tax liability 25 29 30 23

Provisions 102 134 30 31

Employee benefits 200 187 90 87

Derivative financial instruments 8 3 16 1

Total current liabilities 2,536 3,060 1,764 917

Non-current liabilities

Other payables 2 1 1 1

Lease liabilities 913 889 786 811

Interest bearing loans and borrowings 4,443 4,298 1,628 2,497

Deferred tax liabilities 572 520 384 273

Provisions 470 457 70 66

Employee benefits 17 23 7 7

Derivative financial instruments 61 63 50 10

Total non-current liabilities 6,479 6,250 2,926 3,666

Total liabilities 9,015 9,310 4,690 4,582

Net assets 4,615 4,284 4,066 2,865

Equity

Contributed equity 24 3,375 3,411 3,405 2,878

Reserves 25 (1,527) (1,496) (600) (789)

Retained earnings 2,062 1,635 1,244 761

Total equity attributable to equity holders of the
Company 3,910 3,550 4,049 2,851

Non-controlling interest 705 734 17 14

Total equity 4,615 4,284 4,066 2,865

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 References
List of references:

References

1. Corp, L. (2023, August 17). Boral Limited Results Release. Retrieved from LISTCORP:
https://www.listcorp.com/asx/svw/seven-group-holdings-limited/news/fy23-full-year-results-release-
2910585.html

2. David. (2023, December 1). NAVIGATING SUCCESS: INSIDE SEVEN GROUP HOLDINGS. Retrieved from
ROGER MONTGOMERY: https://rogermontgomery.com/navigating-success-inside-seven-group-
holdings/

3. Investor, I. (n.d.). Seven Group Holdings Limited. Retrieved from informedinvestor:

https://informedinvestor.com.au/asx-product/105511/Seven-Group-Holdings-Limited

4. KOHUT, B. (2024, March 1). Wesfarmers (ASX: WES) Take Profits, HOLD, or BUY. Retrieved from The Bull:
https://thebull.com.au/news/wesfarmers-asx-wes-take-profits-hold-or-buy/

5. Limited, S. G. (2023, August 18). FIVE YEAR FINANCIAL HISTORY. Retrieved from SGH:
https://sevengroup.com.au/investor-centre/five-year-financial-history/

6. Limited, S. G. (2023, August 25). RESULTS & PRESENTATIONS. Retrieved from SGH:
https://sevengroup.com.au/investor-centre/results-and-presentations/

7. Limited, W. (2023, August 25). Five year Financial history. Retrieved from Wesfarmers:
https://www.wesfarmers.com.au/investor-centre/company-performance-news/five-year-financial-
history

8. Manekar, S. M. (2024, February 19). Australia's Seven Group offers $1.2 bln for full control of Boral.
Retrieved from REUTERS: https://www.reuters.com/markets/deals/australias-seven-group-offers-12-
bln-full-control-boral-2024-02-18/

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