Australia | Jul 09 2013
-Bear case for employment classifieds
-Citi sees shares priced for recovery
-Upside potential from other avenues
By Eva Brocklehurst
Seek and you shall find it's bearish. A deteriorating jobs market spells difficult times for SEEK ((SEK)). Online employment advertising volumes are depleting as economic activity flattens in Australia.
SEEK's core business is online employment classifieds in Australia and New Zealand and it is the leader in Australian online recruitment. A key measure of the health of the job market, the ANZ job ads series, has been in decline since September 2012. ANZ internet job ads were down 18% in June and down around 17% in the first half of 2013. Moreover, SEEK's own new job ads data highlights weakness in the key resource states of Western Australia (down 25%) and Queensland (down 27%) in the first five months of 2013. JP Morgan forecasts a 15% volume decline for Seek in the second half of 2013. Citi has also found the downtrend in employment ad volumes has accelerated. Citi believes ad volumes will stabilise at current levels but this implies a fall of 5% in FY14. The broker expects employment to recover in FY15, forecasting 10% ad volume growth.
The volume of employment advertising has been highly correlated with changes in the unemployment rate. Following the trends of employment in previous cycles, Citi believes the bottom in online employment volumes is around 90,000 ads per week and this correlates to an unemployment rate of 6.5%. This could be more bearish than is the case, as Citi's economics team forecasts the unemployment rate to peak at 5.9% in mid 2014. Last month, BA-Merrill Lynch focused on unemployment expectations, with a base case for an unemployment rate of 6.75% by early 2016 and a bear case of 7.5% by mid 2016. This broker has pushed out expectations for economic recovery domestically by two years and believes the market is expecting a recovery way too soon. Merrills' earnings forecasts for SEEK are therefore some 9-15% below consensus and the broker has an Underperform rating.
SEEK advised that the second half earnings should be moderately higher than the first half. This implies FY13 net profit of $140-142m. JP Morgan's forecasts are lower, at $135m. The broker maintains an Underweight view because the outlook is challenging for online employment while the decline in employment print classifieds has accelerated and is likely to reduce the remaining market. Citi has made the greatest downgrade to FY14 earnings forecasts and expects net profit around $149m for that year. The broker has downgraded SEEK to Sell from Neutral as, while there is modest earnings growth in coming years, the shares already appear priced for a recovery and are trading above fair value.
SEEK also operates online training courses and has acquired stakes in learnings businesses IDP and Think. It has majority stakes in a number of international online employment businesses including China, Brazil, Mexico and South East Asia. From these other sources is likely to come any upside risk to the overall bearish view, in JP Morgan's opinion. Last month UBS noted the company's acquisition of a 25% stake in One Africa Media, the largest online classifieds in the continent with a presence in Nigeria, Kenya and South Africa. The deal was not expected to affect current earnings estimates but UBS believes it is a solid strategic move with longer-term importance.
There is a glimmer of hope in all this weakness. Last month CIMB reviewed the stock and chose to retain the Outperform rating. The reason for this was that about one third of the company's earnings are now seen coming from offshore and the stock is increasingly exposed to movements in the exchange rate. CIMB expects the benefit of the decline in the Australian dollar will help to offset the downside risk from job advertising weakness. As a result, the stock is the broker's top pick in the online classified sector on its multiples and longer-term growth profile.
Taking a look at ratings on the FNArena database there are quite mixed views totalling four Sell, two Hold and one Buy (CIMB). The consensus target price is $8.97, suggesting just 0.9% downside to the last share price. Over the past week the target has eased from $9.04. The range on targets is $7.56 to $11.20.
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