SEEK: A complex simplification
About the author:
- Author name:
- By Anthony Porto
- Job title:
- Former Senior Analyst
- Date posted:
- 25 August 2021, 10:30 AM
- Sectors Covered:
- Online, Emerging Tech
- Seek’s desire to simplify its operating structure, removing the financial burden of funding the ESV portfolio on balance sheet, has led to a complex FY21 result and forecast changes, but should achieve the aim of focusing investor attention back on the core operating business, which is poised for a period of strong growth.
- Core business performance was inline with May’s guidance at the rev and NPAT lines, a move of capex to opex (acc policy change) saw a 1.3% EBITDA miss (1.5% beat ex). Strong domestic conditions were offset by weakness in Asia and Latam.
- The formation of the ‘Seek Growth Fund’ has seen material changes to forecasts above the NPAT line, but more muted changes to EPS estimates. A stronger assumed domestic growth profile has seen us upgrade our valuation/TP by 9%.
- With a -4% TSR and trading on ~56x FY22 (1.5x PEG) we think this growth profile is being adequately captured in the share price and remain on a Hold.
Buoyant employment conditions in 2H set up a strong FY21 result
A strong domestic employment market (record volumes in March 21) and cycling COVID lockdowns in pcp has seen continuing operations (ex Zhaopin, OES and ESV’s) record 17% revenue growth (+57% in 2H) to $760m ($1,591m for group, +1%) and 30% EBITDA growth (103% in 2H) to $332m ($474m group, +15%).
In addition to volume improvements (+8% on pcp) the ANZ business (73% of cont ops rev FY21) has benefitted from a large increase in depth penetration (+60%, now 32% of division rev) and yield increases (mainly mix to SMEs but also continued alignment of price to value) and additional value add products.
Asia continues to be COVID impacted, with the need to reinvest in the face of ever present competition. Asia saw an 11% drop in revenue (-2% constant currency with FX weak) led to a 35% EBITDA reduction (-27% CC).
Guidance implies strong core growth
Seek’s FY22 guidance implies 28% and 32% rev and EBITDA core bus growth respectively. The ~120bps implied margin expansion comes despite continuing heavy investment in product and marketing. Seek is looking to fast track the move of the Asian business onto the ANZ platform (~$135m project over 3yrs ~80% cap).
A reduction in Seek’s placement share (29.8% latest survey versus mid-30% most of the last 5 years) although attributed in part to market mix changes (higher SME proportion) signals that Seek cannot afford to let product innovation slip.
The ‘Seek Growth Fund’ (pre-ann) will house OES and 14 ESV’s in an initial $1.67b fund (Seek 84.5% stake post contributing an additional $200m and vend in of assets). We see merit in the structural split and acknowledge the fund as a way to keep Andrew Bassat’s expertise within the Seek ecosystem, whilst removing the requirement for Seek to fund ESV’s in a capital intensive period of their lifecycle.
Forecast and valuation update
The impact of the removal of OES and the ESV’s, has been subdued by upgrades to the core business (mainly ANZ). At the EPS level our forecasts decline 4%,1% and 5% in the next 3 FY’s. We have also made some adjustment to 1H/2H splits given current lockdowns, but generally see a strong 1H22 likely.
An improved domestic growth profile sees our DCF based valn inc 9% to (login to view).
Strong growth profile adequately reflected in current pricing
Whilst we acknowledge a strong growth profile ahead for Seek (both domestically and in Intl markets) we believe this is adequately reflected in current pricing (~56x FY22 PE) noting Seek is one of the more cyclical online players.
Near term uncertainty around lockdowns may also impact. .
Likely update post deconsolidation of Growth Fund, AGM (Nov)
Upside risks include continued strong yield increases in domestic market, valuation uplift on Seek Growth Fund, continued M&A, strong Intl business growth.
Downside risks include changes in comp intensity, weakening eco conditions, investments not producing desired ROI and cost overruns (eg Asian re-platforming)
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