Seek: When a catalyst becomes a detriment
About the author:
- Author name:
- By Anthony Porto
- Job title:
- Senior Analyst
- Date posted:
- 23 February 2021, 8:00 AM
- Sectors Covered:
- Online, Emerging Tech
- Seek (ASX:SEK) has reported a very strong 1H21 result (relative to expectations) significantly upgrading FY21 earnings guidance, with market recovery coming quicker than expected.
- These strong results were overshadowed by the announced sale of a stake in Zhaopin, with the price achieved coming in below our previously assumed value of the asset by ~30%
- Additionally, the end of an era was announced, with founder and current MD Andrew Bassat stepping away from the role, to be replaced by Ian Nareev, following a move to operationally split the company.
- We retain the Hold rating with an increased price target (login to view) awaiting further details with regards to the nature of the business separation.
1H exceeds expectations, 2nd upgrade to FY21 may not be the last
1H group revenue and EBITDA of $819m and $246m were 7% and 37% ahead of Morgans respectively.
Positive momentum into the normally subdued festive period, greater cost control than envisaged and a very strong result from Online Education Services (OES) were the key surprises.
Seek has upgraded guidance for the second time this FY and given current momentum we sit 5% above this guidance at the EBITDA line.
Zhaopin goes to PE, price attained leaves punters wanting more
We had seen an update on the sale of a stake in Zhaopin as a key short-term catalyst for Seek.
However, a sale value ~30% below our assessed value of Zhaopin and a larger than expected proportion of the business being sold (down to 23.5% from 61.1%) likely caused some of the 7% price drop on result day.
Note the ~$760m negative movement in mkt cap versus the ~$500m reduction in assessed Zhaopin value indicates other factors may have also been at play.
At this stage we have not excluded Zhaopin from our forecasts or valuation, initial thoughts are a ~10% reduction in our DCF may be forthcoming on the sale.
Structural split and changing of the guard cause some consternation
Another key announcement was the impending split of the business, with OES and the investment portfolio to be split from the core Seek business (incl a smaller Zhaopin stake).
Whilst the merits of such a delineation appear sound (ability to attract external capital into the investment portfolio, AP&A able to concentrate on their own capital requirements and heightened management focus) we await further details on the practicalities of the split and proposed investment portfolio structure going forward.
We maintain the Hold, with a revised target price
Whilst we see the attraction to Seeks’ current growth profile and see the company as benefiting from the re-opening trade, we await further detail on the structural separation and potential use of Zhaopin net proceeds, before becoming more constructive on the stock.
We maintain the Hold, increasing our target price (login to view).
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