Seeking Jobs Growth

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– Seek surprises to the upside
– Yield growth offsets weaker volumes
– Subsidiaries bounce back
– It's nevertheless all about jobs growth forecasts

By Greg Peel

A 25% increase in underlying net profit for FY12 from online employment specialist SEEK Ltd ((SEK)) took analysts and the market by surprise. In an weak macro environment of slowing jobs growth in Australia and China Seek proved the resilience of its business model, even as the ANZ job ads series, for example, has seen an eleven month run of declines for a 6.6% drop in ads year to date, including an 8.6% drop (post Seek's reporting period) in July.

The ANZ job ads series is as good a driver of general market sentiment towards Seek – the more mature of the coterie of ASX-listed digital advertising services – which is why the result was such a surprise. Analysts note Seek is trading at a discount to peers as a result of cautious sentiment, but then not all brokers believe this is unjustified.

A big surprise in the result was an expected sudden turnaround in the earnings fortunes of Seek's diversified Learning and Think businesses. Analysts see the potential for both to continue to improve in FY13. However the more fundamental surprise was the resilience of Seek's core Australian job ads business. BA-Merrill Lynch notes that while job ad volumes increased by a mere 1%, job ad revenue increased by 11%. Management puts this impressive increase in yield down to churn and job ad repostings.

Things were not quite as resilient in China, where subsidiary Zhaopin suffered a clear revenue slowdown in the second half and is staring at an imminent refinancing resolution. However at 15% for the next three years, Zhaopin's tax rate is materially lower than analysts had assumed, which serves to offset revenue weakness. Hong Kong's JobsDB is also suffering a slowdown.

Deutsche Bank is arguably the most positive of brokers having reported on the Seek result to date, justifying its Buy rating with the belief that “while we expect earnings growth to slow in FY13 we consider the group remains very well positioned to generate superior earnings growth and deserves to trade at a premium to the market”. Were labour market conditions to improve, suggests, Deutsche, record earnings growth could be expected.

And therein lies the real issue. Will labour market conditions improve? 

Management is relatively circumspect. Seek International and Seek Education are expected to post higher earnings in FY13 but job ads earnings are expected to be flat, relying on increased yield to offset falling volumes. The Macquarie analysts note this offset in applying a Neutral rating. Goldman Sachs is also on Neutral given the labour market outlook along with Seek's valuation.

Valuation is indeed an issue. The share price leapt 7% yesterday and has outperformed the ASX 200 by 13% this month alone. It's too much for JP Morgan who has now downgraded to Underweight. JPM's ratings are sector-based and the analysts prefer Seven West Media ((SWM)) in the space.

JP Morgan also sees an 18x price/earnings estimate for FY13 as a bit rich. Yet Seek's valuation can be viewed from different angles. Both UBS (Buy) and Deutsche point out Seek is trading at a significant discount to local online peers REA Group ((REA)) in real estate and Carsales.com ((CRZ)) in auto ads, and this is unjustified. Merrills acknowledges this discount but then notes Seek is trading at a significant premium to Asian jobs boards with greater exposure to early stage structural growth.

Take your pick.

Merrills (Underperform) remains concerned that poor consumer sentiment is likely to see new job volumes deteriorate further in FY13 and sees repostings at a risk of decline as contracts roll off during the year. The analysts expect a similar 9% growth in revenue yield in FY13 but revenue will contract by 10% on Merrill's forecasts given an expected 18% drop in volumes.

JP Morgan has downgraded but is not quite as dour on the jobs growth front, expecting a 9% contraction in volumes.

In the busy result season not all FNArena database brokers have updated their views on Seek as yet, leaving fur Buy or equivalent ratings, one Hold and four Sells. Target price upgrades to date see the consensus target lift to $7.24, offering a mere 2.2% in upside on today's trading price. The consensus target nevertheless may improve on some further broker reports.

Seek has done extremely well, it seems, but like so many stocks on the ASX its all about the macro climate, and thus what the investor's view on that might be ahead. At 16% plus forecast earnings growth for FY13 on consensus, Seek cannot be sniffed at. But is there value at this level?

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