Company Reports

We expect Seek’s near-term challenges to center around navigating a return to trend in the Australian and New Zealand, or ANZ, employment market. After the onset of the covid-pandemic, supportive fiscal and monetary policy, as well as changing societal attitudes toward work and work life balance, led to the great resignation and a booming jobs market, boosting Seek’s ANZ business. We estimate revenue from Seek’s ANZ business was around a third above trend in fiscal 2023. However, Seek also more than doubled expenses in its ANZ business since the pandemic, leading us to believe it will be challenged with material operating deleverage when the employment market normalizes.

We maintain our AUD 20 per share fair value estimate for narrow-moat Seek following its full-year results. Shares fell on the result and now screen as fairly valued.

We maintain our AUD 20 per share fair value estimate for narrow-moat Seek following its announcement of an impairment of its investment in Zhaopin, the Chinese online employment marketplace. Seek will impair AUD 120 million in the carrying value of its 23.5% equity-accounted investment and a further AUD 21 million impairment of the Zhaopin net consideration receivable, which is partially backed by recourse to equity and is now deemed less valuable. At current prices, Seek shares screen as fairly valued.

We expect Seek’s near-term challenges to center around navigating a return to trend in the Australian and New Zealand, or ANZ, employment market. After the onset of the covid-pandemic, supportive fiscal and monetary policy, as well as changing societal attitudes toward work and work life balance, led to the great resignation and a booming jobs market, boosting Seek’s ANZ business. We estimate revenue from Seek’s ANZ business was around a third above trend in fiscal 2023. However, Seek also more than doubled expenses in its ANZ business since the pandemic, leading us to believe it will be challenged with material operating deleverage when the employment market normalizes.

We raise our fair value estimate for narrow-moat Seek by 5% to AUD 20 per share following its decision to sell its Latin American businesses. The increase in our fair value estimate reflects our expectation for stronger execution in Seek’s core markets as a result of management’s improved focus.

We maintain our AUD 19 per share fair value estimate for narrow-moat Seek, following its half-year results. Results were broadly in line with our expectations for a continued deceleration in Seek’s Australia & New Zealand, or ANZ, business, which accounts for around 70% of group revenue, as new job listings further normalize from elevated levels. Shares fell 5% but despite the steep fall, we continue to view Seek shares as materially overvalued.

We expect Seek’s near-term challenges to center around navigating a return to trend in the Australian and New Zealand, or ANZ, employment market. After the onset of the COVID-pandemic, supportive fiscal and monetary policy, as well as changing societal attitudes toward work and work life balance, led to the great resignation and a booming jobs market, boosting Seek’s ANZ business. We estimate revenue from Seek’s ANZ business was around a third above trend in fiscal 2023. However, Seek also more than doubled expenses in its ANZ business since the pandemic, leading us to believe it will be challenged with material operating deleverage when the employment market normalizes.

We think narrow-moat Seek has been overearning since the pandemic. The "great resignation," fueled by supportive fiscal and monetary policies and changing societal attitudes toward work, led to abnormal labor market churn. Employers, needing to backfill vacant rolls, pushed job listing volumes to levels significantly above trend; and with the unemployment rate near a 50-year low, hiring managers were willing to pay up for more expensive ad tiers to attract candidates, improving Seek’s yield per ad.

We expect Seek’s near-term challenges to center around navigating a return to trend in the Australian and New Zealand, or ANZ, employment market. After the onset of the COVID-pandemic, supportive fiscal and monetary policy, as well as changing societal attitudes toward work and work life balance, led to the great resignation and a booming jobs market, boosting Seek’s ANZ business. We estimate revenue from Seek’s ANZ business was around a third above trend in fiscal 2023. However, Seek also more than doubled expenses in its ANZ business since the pandemic, leading us to believe it will be challenged with material operating deleverage when the employment market normalizes.

We have cut our fair value for narrow-moat Seek by 9% to AUD 18.50 per share following its first-half financial result. The fair value cut is driven by the sell-down of Seek’s investment in Zhaopin, to an equity stake of 24% from a prior 61%, at a valuation below the implied value of the investment in our financial model. Offsetting this impact to some degree is the positive effect of higher earnings forecasts for the ANZ, business, which exceeded our expectations in the first half, and lower earnings forecasts for the Asian and South American businesses, which are performing below our expectations.

Seek captures 90% of total time spent online searching for jobs, dominating the Australian market. This dominance within a small niche global geographic market, built through a first-mover advantage, represents a strong competitive advantage given its network effect. Australians view seek.com.au as their first port of call for looking for employment, which is why we ascribe a narrow moat to the company.

We have maintained our earnings forecasts and fair value estimate for narrow-moat Seek Limited at AUD 20.50 per share following the publication of a range of allegations about the company by short-selling research firm Blue Orca Capital. At the current market price of AUD 21.21, we continue to believe Seek is fairly valued.

Seek captures 90% of total time spent online searching for jobs, dominating the Australian market. This dominance within a small niche global geographic market, built through a first-mover advantage, represents a strong competitive advantage given its network effect. Australians view seek.com.au as their first port of call for looking for employment, which is why we ascribe a narrow moat to the company.

Narrow-moat-rated Seek’s share price fell by 9% following the release of its fiscal 2020 result; however, we think the company is in better shape than the share price reaction suggests. It comes as no surprise that employment advertising has been hard-hit during the coronavirus pandemic and management already provided two updates to fiscal 2020 earnings guidance since the interim financial result in February 2020. The fiscal 2020 financial result itself wasn’t particularly surprising, with reported revenue in line with our forecast, underlying EBITDA just 1% above our forecast, and reported NPAT 10% below our forecast, albeit inclusive of a range of one-off costs.

We have cut our fiscal 2020 earnings forecasts for narrow-moat-rated Seek following management’s guidance that the company is being impacted by the coronavirus outbreak and that this may drag on into fiscal 2021. Seek is primarily exposed to the impacts of the virus via its 61% stake in Chinese employment platform Zhaopin, which comprises around 50% of consolidated group revenue and around a third of group EBIT.

Seek’s share price has performed well in 2019, rising 36% and outperforming the 20% increase in the S&P/ASX 200 Index. To some degree, Seek’s 2019 performance benefited from the global technology stock sell-off in late 2018, which pushed its share price down before the start of the year. Over the past two years, the stock is up 23% versus the 12% rise in the index. The relatively weak longer-term performance reflects a tug-of-war between those investors who are comfortable with management’s decision to sacrifice short-term profits for long-term growth, and those who disapprove of the strategy.

Narrow-moat-rated Seek’s fiscal 2019 financial result was broadly in line with our forecasts. However, we have increased our fair value estimate to AUD 20.50 on the basis of higher earnings forecasts and impact of the time value of money on our financial model. At the current market price of around AUD 20, Seek appears fairly valued. Our fair value estimate implies fiscal 2020 price/earnings of 40 and dividend yield of 1.8%, or 2.5% including franking credits. These relatively bullish metrics are justified by our forecast of a strong revenue compound annual growth rate of 11% over the next decade and an accompanying earnings per share CAGR of 15%.

We have maintained our earnings forecasts and AUD 19.00 fair value estimate for narrow-moat Seek despite the slight downgrade to fiscal 2019 earnings guidance and the announcement of new acquisitions. Management have changed their description of the fiscal 2019 reported NPAT guidance to ‘moderately’, rather than ‘slightly’, below the prior year and we assume our forecast 4% decline is in line with the guidance. At the current market price of AUD 18.21, we still believe Seek is fairly valued.

Narrow-moat Seek reported a slightly stronger first-half result than we expected, with revenue up 19% versus our previous full-year growth forecast of 16%. Management maintained full-year revenue growth guidance of 16% to 20%, versus our revised forecast of 21%, and EBITDA growth guidance of 5% to 8%, versus our 4.4% forecast. Management also increased their estimate of the cost of investments in early stage ventures in fiscal 2019 to between AUD 40 and AUD 45 million from AUD 35 to AUD 40 million. This means management now expects reported NPAT to be slightly below the prior year, rather than "broadly similar." However, these changes aren’t material to our valuation.

Shares in narrow-moat-rated Seek have followed global technology stocks lower in recent months, falling 28% since August as technology sector sentiment has deteriorated. However, the sentiment change has not affected our earnings forecasts, and we have increased our fair value estimate by 3% to AUD 18.60 to reflect the impact of the time value of money on our financial model. At the current market price of AUD 17.10, the shares now appear undervalued. The share price implies a fiscal 2019 price/earnings ratio of 31 versus 34 at our fair value estimate and 14 for the S&P/ASX 200 index. Over the past decade, Seek’s one-year forward P/E ratio has traded between 9 and 37 times, meaning our fair value-based P/E looks expensive relative to both the market and the stock’s historical range. However, the relatively high P/E is justified, in our view, as near-term earnings are being affected by reinvestment to support revenue growth and do not reflect the long-term potential of the underlying business. Over the next decade, we forecast a relatively high underlying EPS compound annual growth rate of 11%.