Australia | May 30 2012
– Seek expands presence in Latin America
– Consolidates online businesses in Brazil and Mexico
– Stockbrokers positive in that it expands Seek's operations in growth markets
– Ratings for Seek range from Sell to Buy
By Chris Shaw
Online employment classifieds group Seek ((SEK)) yesterday announced further investment in two Latin American online job portals Brasil Online and OCC of Mexico. The moves will cost just over US$100 million but, importantly, allow Seek to consolidate both investments on its balance sheet as it will now hold more than 50% of each company.
The advantage of consolidation in the view of JP Morgan is it will give the market a clearer view on the value of Seek's international businesses. Macquarie is similarly positive, noting the market is likely to ascribe a higher valuation to both businesses now earnings can be consolidated.
The other positive is the investments make the balance sheet more efficient, Macquarie noting the money spent uses excess cash that can be redeployed from earnings interest into growth businesses.
Deutsche Bank estimates Seek's offshore platforms are currently valued at around $1 billion or $2.97 per Seek share. In Deutsche's view there is significant potential upside to this valuation if the platforms can achieve similar levels of penetration, yield and profitability as the Australian operations.
As well, JP Morgan notes the investments lift Seek's exposure to growth markets, which is important given most of Seek's exposure at present is to the relatively mature Australian market. But here Macquarie is more cautious as it notes outside of the Australian classifieds business, education and offshore businesses are less established and located in less familiar jurisdictions and this means more earnings risk.
UBS suggests the transaction implies a combined enterprise value of the businesses in line with existing expectations. While a premium was paid for the Mexican business this was appropriate in UBS's view, given a better business model and greater transition risk than the Brasil Online business.
According to Deutsche Bank the transactions will be slightly accretive to cash earnings in FY13, meaning minor changes to the broker's forecasts. Others have made similar changes, with estimates in general being lifted by 1-2% through FY13. Consensus earnings per share (EPS) forecasts for Seek according to the FNArena database are 36.9c for FY12 and 44.6c for FY13.
The changes to earnings estimates have prompted some minor changes to price targets, Deutsche lifting its target to $7.90 from $7.75 and BA Merrill Lynch to $6.25 from $6.15. The consensus target according to the database is now $7.27, up from $7.19. Targets range from BA-ML at $6.25 to UBS at $8.15.
Ratings for Seek are unchanged, the FNArena database showing the stock scores three Buy ratings, three Hold recommendations and one Sell, this from BA-ML. While not in the FNArena database, Goldman Sachs also rates Seek as Neutral.
The issue in BA-ML's view is the offshore push is not enough to offset an expected slowdown in growth for the Australian operations, so the current share price premium looks difficult to justify given the expectation of sluggish earnings growth in the core business.
The Neutral argument of JP Morgan is while the latest investment is a positive it isn't enough to prompt any significant increase in earnings expectations or valuation. Macquarie shares this view, particularly given its caution on the growth potential of the offshore operations of Seek.
Those in the Buy camp for Seek include Deutsche Bank, reflecting the view the offshore platforms offer significant upside over time as penetration rates and returns are lifted. UBS also sees value, suggesting at current levels the expected toughening of conditions in the Australian business is priced in, meaning growth from overseas represents some upside potential in coming years.
In a weaker market today shares in Seek are trading unchanged at $6.66. This compares to a range over the past 12 months of $4.87 to $7.55, the current share price implying upside of around 7% to the consensus price target in the FNArena database.
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