SEEK: Approaching peak Seek?

About the author:

Anthony Porto
Author name:
By Anthony Porto
Job title:
Former Senior Analyst
Date posted:
18 November 2021, 9:00 AM
Sectors Covered:
Online, Emerging Tech

  • Seek’s AGM trading update confirmed strong trading conditions FYTD both domestically and in the larger Asian markets in which the company operates. Subsequently Seek is trading towards the top-end of FY22 guidance provided in August. The likely conservative approach taken by Seek in not upgrading guidance caused some minor market consternation post a period of share price strength.
  • We make material upgrades to our FY22 forecasts and sit above the top-end of Seek guidance (~+5% and +7% at the revenue and EBITDA lines respectively). Outer year changes are more muted with a pull forward in assumed investment constraining FY23 forecasts.
  • The current buoyant trading conditions are likely to see Seek accelerate product and platform investment initiatives, the largest being the unification of the domestic and Asian platforms.
  • Forecast changes and a slight reduction in WACC (COD down to 3%) sees our valuation rise 7% to (login to view). We see Seek as currently fully priced but appreciate the current market environment has the potential to see further upgrades in the name. We maintain the Hold recommendation.

Event – AGM trading update confirms strong market conditions – guidance looks conservative

Seek has confirmed current strong trading conditions both domestically and in the main Asian markets. With current domestic listings ~+65% on pcp and +44% on a relatively strong CY18, and combined Asian volumes +~80-90% on a weak pcp, the market environment for Seek does look quite buoyant.

In this context Seek’s reiteration of guidance provided at the FY21 results (Rev $950m-$1b and EBITDA $425m-$450m) albeit confirming the top end to be a more likely outcome and potential to exceed this, looks conservative.

Analysis

Current market conditions are likely to see Seek accelerate investment spend, the largest being the Asian re-platforming project (expected $125m spend over 3 years, ~80% capitalised).

This may allow the benefits of the project (improved product development, cost efficiencies) to flow through earlier than expected, although access to talent (project required the hiring of ~200 additional employees) may stifle Seek’s ability to accelerate the development timeline.

Forecast and valuation update

We make significant upgrades to our FY22 forecasts with revenue +9% and EBITDA +9% and NPAT +29%. We sit 5% and 7% above the top-end of FY22 guidance at the Rev and EBITDA line.

Our medium term forecasts are largely unchanged (EBITDA -1% and +2% in FY23/24) as we assume an element of pull forward in employment demand and an increased investment profile in FY23.

Forecast changes and a reduction in our assumed cost of debt (down to 3% from 3.3%) has seen our DCF based valuation +7% to (login to view).

Investment view

Seek is currently enjoying buoyant market conditions, with record domestic listings and candidate shortages driving increased reliance on Seek’s products. With obvious operating momentum and the traditional seasonal decline into the festive period yet to eventuate, further upgrades cannot be ruled out.

We believe we have almost fully incorporated both the near and longer term earnings growth potential of the Seek business, with our valuation sitting 9% below the current price, we see this outlook as adequately reflected in current pricing and maintain the Hold rating.

Price catalysts

Continued strong market conditions, potential accretive M&A, guidance update at 1H’22 result.

Risks

Upside – strong domestic yield increases, Growth Fund uplift, M&A, Intl growth.

Downside – changes in comp intensity, weakening of strong market conditions, investments not producing desired ROI, investment cost overruns.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.


Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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