The Seek Conundrum

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Seek’s miss on earnings and guidance was all about hard-to-predict job ad volumes, but strong yield, market share gains and solid operating leverage have brokers looking forward to better times ahead.

-Seek’s FY24 earnings and FY25 revenue guidance disappoint
-Yield growth nonetheless impressive
-Cost control suggests strong operating leverage
-Re-rate opportunity when the RBA starts cutting

By Greg Peel

As was the case in February when digital employment classifieds company Seek ((SEK)) posted its first half result, its full year result was also a miss on most financial metrics. More significantly, FY25 guidance was even more disappointing, and the likely driver of a -7% share price hammering on the day (the share had been weak already beforehand).

The miss surprised, particularly given Seek provided a market update on its Zhaopin (China) impairment as late as July 25, but did not take the opportunity to provide updated guidance.

“Seek needs to improve the timeliness of its updates to the market (particularly on cyclical-related matters out of its control,” suggests Jarden, “as we think the guidance miss (largely on volume) has overshadowed strong operating outcomes such as 13% yield growth in Australia/New Zealand”.

And therein lies the crux of the matter. Seek’s revenues are dependent on job ad volumes, which are economically cyclical and out of the company’s control. What it can control is the yield it achieves on its ads through dynamic pricing and various advertising options, as well as its costs.

Since peaking in FY22, when the local employment market was tight and filling positions was difficult post-covid, job ad volumes have been on the decline. Seek’s FY25 guidance assumes a further “low-teens” percentage decline in volumes in A&NZ and “low single digit” declines in Asia.

Jarden infers volumes will be -10% below “mid-cycle” in FY25. Where mid-cycle volumes sit is critical to valuing Seek, the broker notes, but forecasting volumes is difficult.

Seeking Volumes

The key debate, suggests UBS, is whether Seek’s volume guidance is a worse-case scenario or a reasonable outcome. More importantly, the broker sees Seek’s volume weakness as being largely cyclical rather than structural; it is not losing market share — which suggests a strong re-rate opportunity when the volume outlook stabilises.

Indeed, Seeks’ share of job placements in FY24 increased in A&NZ to 32.8% — the highest level in four years.

But exactly when will the volume outlook stabilise? Australia’s unemployment rate has remained stubbornly low through the RBA hiking cycle which began in 2022, but recently it has been creeping up. This is not a bad thing as far as economists are concerned, as rising unemployment will be a prompt the RBA needs to start cutting.

Expectations for when that will be have been pushed out to later in 2025, given sticky inflation, but brokers agree volumes can increase once cutting begins, which is likely an FY26 story.

Macquarie’s analysis suggests job ad growth follows rate changes with a 12-month lag. So don’t hold your breath. But Macquarie also suggests expectations are now sufficiently rebased lower into FY25.

Yield

Seek delivered another year of strong yield growth, particularly in A&NZ, where second half yield growth of 16% exceeded its February guidance of 10%, as the company continues to flex its variable price lever. UBS remains constructive on Seek’s pricing power over the medium term supported by strong placement share.

This is likely to drive flat margins in FY25. Looking into FY26, UBS assumes compound annual yield growth of 9%, with potential further upside from outcomes-based pricing initiatives, such as pay per qualified applicant and pay per hire, which are currently in experimental phase.

Operating Leverage

Seek re-iterated that following completion of Asian unification, cost growth would not exceed mid-high single growth per annum, so any significant recovery in volumes would drive strong operating leverage.

With the technology infrastructure spend now largely complete as of end-FY24, Morgans expects Seek to utilise the flexibility in its cost base (noting mid-to-high single digit cost growth through the cycle) and show overall operating leverage. Indeed, this broker expects widening “jaws” (revenue growth exceeding cost growth) if volumes recover to mid-cycle levels over time.

Total FY25 cost guidance is for a 5% year on year increase excluding unification spend. Management is indicating revenue growth should exceed total cost growth (opex plus capex) implying margin expansion. Given the track record, Macquarie suggests investors are right to be cautious on this front, although the broker thinks the likelihood increases post-unification.

Morgan Stanley views Seek as the deepest cyclical amongst the digital classified stocks, and for now prefers CAR Group ((CAR)) and REA Group ((REA)), but history suggests the job ad cycle will eventually turn up again (likely after RBA rate cuts), and when that occurs, the high operating leverage, which is currently hurting Seek’s earnings and the share price, will turn around to the company’s advantage.

Morgan Stanley thus retains an Overweight rating, with a $31 price target.

Macquarie cites early evidence of dynamic pricing success, alongside increasing discipline on cost management to benefit operating leverage in its decision to upgrade to Outperform from Neutral with an unchanged $23 target.

Now cycling a period in which Seek’s performance was robust due to strong domestic listings and candidate shortages driving increased reliance and utilisation of Seek’s products, Morgans expects job ad volumes to continue to normalise from the record highs seen in FY22.

However, this broker believes Seek has the ability to pull levers to drive growth in the medium term and retains an Add rating, trimming its target to $25.00 from $25.80.

Despite cutting earnings forecasts, as have all other brokers, UBS reiterates its Buy rating on Seek with the stock trading on a two-year forward forecast earnings multiple more than one standard deviation below the average of the last five years. UBS cuts its target by -6% to $25.40.

Despite being indignant about poor updating, Jarden retains Seek as its top pick in the space, with an unchanged Buy rating. Jarden’s target falls to $26.60 from $28.00.

Seek is the number one employment classified player in Australia and New Zealand by revenue, with international operations across Asia, notes Goldman Sachs. This broker nevertheless remains Sell-rated given it believes the company is the most exposed to a near-term deceleration in earnings driven by its cyclical volume exposure against a very robust labour market in 2022.

There had to be one. Goldman has a target of $19.50, well below Morgan Stanley’s chart-topping $31.00.

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