What Earnings Can Seek Find?

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This story features SEEK LIMITED.
For more info SHARE ANALYSIS: SEK
The company is included in ASX50, ASX100, ASX200, ASX300, ALL-ORDS and ALL-TECH

By Andrew Nelson

There seems to be consensus in the analyst community that the recent acquisition campaign Seek ((SEK)) has set off on will eventually pay off. Where they differ is on the question of when will the benefits be seen and will that be soon enough to offset the deterioration in job ad spending that most expect to continue.

Looking at the current environment of Australian job ads and you couldn’t blame the more cautious among the brokers to voice some concerns. The recent ANZ job ads series certainly support this frame of mind, with confirms the view, with jobs advertised on the internet and in newspapers recording their sharpest fall in 7.5 years in August.

The survey showed there was a 4.9% fall in the number of jobs advertised in newspapers and on the internet in August, the fourth straight month of decline.

At the time, Reserve Bank governor Glenn Stevens chimed in, saying national unemployment was likely to rise above 5% in the coming 18 months. The view was echoed yesterday in the Q3 Westpac-ACCI Survey of Industrial Trends, with Westpac Senior Economist Anthony Thompson saying the read implied an even steeper slowing in jobs growth than was expected, which will add upward pressure on the unemployment rate.

The theme is clear, the employment market is starting to respond to slowing macro conditions in a significant way. This is the problem analysts at both Citi and Merrill Lynch have with the stock. Citi is predicting job ads volume will decline by a minimum of  5% and possibly slow as much as 20% in its worst case scenario. The broker has reduced its FY09 EPS forecasts for Seek by 12.2% and cut the stock to Sell on the back of this.

Merrill Lynch analysts are of a similar mind, noting that 85-90% of earnings will come from Aus/NZ classifieds over the next two years, making it unlikely the stock will outperform in the short-term. This is despite its overall belief that the company is a well-run company and has an attractive business model. The broker even admits the company is well placed to lift yields when volumes slow, but still it is afraid the slowing Australian employment market will significantly hurt earnings.

Is the jobs outlook really that dim?

Three brokers that don’t think so are Deutsche Bank, Macquarie and UBS, who are far more interested in the company’s recent acquisitions than they are about surmising about the prospects of local job ads trends. Seek has announced two acquisitions over the last two days, a 10% stake in JobStreet in Malaysia and a 30% share of Brazil Online in Brazil. These add to its previous Zhaopin investment in China.

Along with the first of these acquisitions earlier in the week, the company also announced a $200 million syndicated loan facility to fund future purchases. The next day it bought the stake in Brazil Online, with Macquarie estimating there is still about $96 million in the kitty.

None of them expect either of these new acquisitions to be EPS accretive in the short term. But they do see Seek investing in an entrenched market leader which is positioned in a high growth market.

In Macquarie’s view, these investments now give Seek exposure to not only Australia and New Zealand, but also large addressable markets in South East Asia, China and Brazil. This international expansion into early stage markets and recent investments in learning should provide the next leg of growth for the company. The stockbroker says it is aware of the downside risk to FY09/10, but thinks the impact of the advertising slowdown is already in the price.

Even Citi and Merrill Lynch were positive about the acquisitions.

ABN Amro is in the middle of the pack, and provides a bit of clarity to proceedings. As evidenced by the Zhaopin deal, it says the market won’t ascribe much if any material benefit for either investment until Seek consolidates its position further or until the earnings contribution becomes material. None of the brokers polled think the company is planning any more offshore acquisition in the near term, thinking management will focus on these two investments.

Hence why the two main questions will remain unanswered, for now.

How much will the domestic economy slow down and how bad will the domestic job ads market get?

While all agree this week’s acquisitions look good, what will they be worth and when?

To highlight the spread of possible responses to these questions, the FNArena sentiment indicator is sitting at 0.3, with 5 Buys, 2 Holds and two Sell/Underperform. The average target price is $5.87 and ranges from $4.60 (no surprise from Citi) to $6.92 (no surprise from Macquarie). Today at 14:11, shares were trading at $5.40 versus a 12 month range of  $4.27 to $ 9.48.

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