Are Expectations For Seek Set Too High?

This story features SEEK LIMITED. For more info SHARE ANALYSIS: SEK

-Cash conversion strong
-Pay-out ratio increased
-Costs rise with competition
-Needs time to bed down Jobstreet
 

By Eva Brocklehurst

Online employment classifieds and education business, Seek ((SEK)), missed profit forecasts in its first half result, despite delivering solid growth at the top line and increasing the dividend pay-out ratio. The market was clearly disappointed and the share price reacted negatively. While there were both pleasing and not-so-pleasing aspects to the numbers, several brokers wonder whether the market has set its expectations too high.

JP Morgan observes that while the company re-affirmed FY15 guidance and increased the payout ratio, the market is grappling with the amount of reinvestment being undertaken in the employment division, as well as the increased competition in Seek Learning and the new Seek Asia combination. The pay-out range was increased to 50-60% from 50% previously, reflecting strong free cash flow and a strong balance sheet. Management hastened to allay concerns this did not reflect a lesser desire to invest, either by capital expenditure or acquisitions, nor a lack of investment opportunity.

Guidance implies expectations for FY15 profit may be hard to achieve, in Morgan Stanley’s observation. The result missed the broker’s forecasts because of higher operating costs in the domestic business. The company has suggested underlying profit in the second half should be modestly higher than the first half, but the broker observes consensus expectations are looking for 29% growth in the second half, substantially more than the 9.0% achieved in the first half.

Credit Suisse also highlights the step-up in the domestic cost base, which emanates from investment in the company’s placement strategy and a more competitive environment. Upside remains difficult to quantify, although investment in the business should support longer-term revenue growth. The broker believes the stock is fully priced and retains an Underperform rating. UBS now implies 10% underlying growth for the second half in its estimates. Despite the attractive asset base, placement and international learning opportunities this broker also believes the stock is expensive. A third of Seek’s growth is driven by its Chinese employment site, Zhaopin. UBS is inclined to sell Seek and buy the Chinese stock.

Morgans claims the market is unnecessarily spooked by the implications for the second half. The company has a long tradition of being conservative in its forecasts. The second half should be supported by a full six month contribution from the merged Jobstreet business – which will be more than double the size of the former standalone business JobsDB – and the rolling impact of the prior year’s price rises. Moreover, volumes are growing domestically and the second half is traditionally stronger for education. Worries about a lack of margin growth are also misplaced, in the broker’s opinion.

Morgans also flags cash conversion, which remains excellent despite the heavy IT spending. Moreover, Zhaopin overcame intense competition and slowing economy to grow revenue by 27% in local currency terms in the first half and Morgans points to leading indicators on that front which suggest growth should continue at a solid rate.

Citi observes market expectations may elevated but execution risk is also increasing. The risk to earnings forecasts is to the downside, given the high expectations and premium valuation. Hence, Citi retains a Sell rating. Further cost inflation across the domestic employment and Seek Learning businesses into FY16 is expected. That said, the broker believes the assets are well positioned for growth. 

The damp squib in the results was the higher level of expenditure being directed towards placement products, in Macquarie’s view. The broker does not doubt expenditure and costs are higher but also points to the strong underlying trends, and believes it is too early to judge the outcomes of the company’s initiatives. Macquarie retains an Outperform rating, noting Seek is expecting to create material value in Asia over a number of years following the Jobstreet acquisition, while driving new revenue streams in placements and expanding its learning platforms.

FNArena’s database has a spread of views with three Buy, two Hold and three Sell ratings. The consensus target is $16.98, suggesting 1.5% downside to the last share price. Targets range from $13.70 (UBS) to $19.97 (Morgans). 
 

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