SEEK: A riddle, wrapped in an enigma
About the author:
- Author name:
- By Ivor Ries
- Job title:
- Senior Analyst
- Date posted:
- 26 February 2020, 1:00 PM
- Sectors Covered:
- Information Technology, Online Media
- SEEK has suspended formal earnings guidance as China’s coronavirus crisis makes revenue forecasting impossible.
- SEEK’s bold ‘growth before earnings’ strategy means that temporarily earnings are caught in the vice between large and expanding growth investment costs and revenues under pressure.
- Investors were looking for clarity on the impact of the new pricing model for Australia. None was forthcoming.
- We have made modest changes to near-term forecasts but have added a 10% price rise in China in FY24. Our DCF valuation rises (login to view).
- We maintain a REDUCE recommendation. We like the long-term SEEK story, but the valuation looks stretched.
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China problems put forecasting on hold
SEEK’s first half result was broadly in line with our expectations but the company was forced to suspend formal guidance for FY20 due to the unpredictable effects of the coronavirus epidemic in China.
In constant currency terms revenues grew 13% and EBITDA grew 1%. Reported net profit fell 24% to A$75.6m, but this was close to our estimate.
SEEK’s aggressive crash through or crash approach to growth means the market is, for the time being, prepared to overlook short-term hiccups.
Changes to forecasts, valuation
As we downgraded our forecasts on 4 February to reflect the impact of the coronavirus, most near-term changes to our forecasts are not substantial at the cash flow level.
The only substantial change to our forecasts occurs in FY2024, where we assume that Zhaopin can implement a 10% price rise that was not included in former forecasts. Our DCF valuation increases.
Risks and catalysts
Near-term risks to SEEK’s earnings outlook include:
- further softening of the Australian labour market
- slow take-up of the Premium Talent Search (PTS) product
- unfavourable moves in exchange rates
- sharp downturns in the Chinese, South East Asian or Latin American economies
Potential near-term re-rating catalysts include:
- a rebound in growth in Australian labour demand
- accelerating adoption of PTS
- improvement in exchange rates
- firmer tone in the Chinese, South East Asian and Latin American job markets
SEEK offers investors exposure to the global hiring cycle and the increasing migration of employment advertising to the online market.
To date the company has shown the ability to respond to competitive threats.
As the stock trades at a premium to our revised share price target, we maintain a REDUCE recommendation.
Morgans clients can login to view our detailed report and share price target for SEEK (ASX:SEK). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
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