Australia | Aug 14 2020
This story features SEEK LIMITED. For more info SHARE ANALYSIS: SEK
Seek has taken a sober view on the FY21 outlook for job advertisements, expecting further declines until a slow recovery in the second half.
-Dynamic pricing should deliver longer term benefits
-Continues to invest in core business and Early Stage Ventures
-Upside hinges on monetising utility provided to recruiters and SMEs
By Eva Brocklehurst
As unemployment grows and a growing number of industries shed personnel, Seek ((SEK)) has bitten the bullet, framing a substantially weaker earnings scenario for FY21.
The company's "illustrative" operating earnings guidance is calculated at $330m, well below expectations, and the drivers appear to be largely cyclical: reduced Australasian revenue on lower volume assumptions, lower listings growth in Asia and a softer outlook for Zhaopin.
Goldman Sachs assesses the company is taking a conservative stance but suspects there is greater leverage in job advertisement yields to the economic cycle than previously appreciated. The broker revises FY21-23 estimates materially lower to reflect the FY20 result and the FY21 outlook but expects volumes to recover and the company benefit from its investments.
Ord Minnett forecasts Australasian job listings in FY21 will drop by -18.5% and Australasian revenue is unlikely to match FY19 until FY22.
Over the longer period there are positive offsets as dynamic pricing has now been launched for all customer groups and UBS suggests this may have potential to grow the earnings base, although costs would have to revert from from the lows of FY20-21.
Morgans finds commentary around the yield impact of a transition to a variable pricing model underwhelming at present but acknowledges this is understandable given the current operating environment.
The "illustrative scenario" is telling, Credit Suisse asserts, in that it effectively assumes declines in billing in July will continue throughout the first half before there is some recovery in the second half. The broker significantly reduces estimates to reflect this but remains of the view that the pricing model transition should deliver longer-term benefits.
Morgans also points out, in a period where most companies are tightening up, Seek continues to invest in both its core business and Early Stage Ventures. Investment in analytics, architecture, security and innovation increased by 15% in FY20.
The company has also sought to reassure the market on the merits of its current investment strategy, based around human capital where there are very large addressable markets. Morgans notes geographic expansion of marketplaces, which has had mixed results, ceased some time ago. Hence, the attraction is now in the large end-markets the company is seeking to dominate.
The broker believes it will take time and investment to replicate the domestic success overseas and the most material opportunity is in Zhaopin. Zhaopin was relatively resilient in FY20 with online revenue down -11% and a total revenue uplift of 21%. Morgans notes a change in revenue recognition at Zhaopin means, on the surface, the revenue performance will look weak over the next two years.
While the domestic business is unlikely to be ex growth as yet, the drivers are now different from previously. Structural print-to-online tailwinds are largely over, UBS assesses, and the upside will hinge on monetising the utility being delivered to recruiters and small-medium enterprises (SME).
The broker likes the stock and the quality of management as well as the long-term strategic plan. Still, the short-term downgrades caused by the pandemic are material. Ord Minnett agrees there is an impressive track record from management with high returns on investment and this can continue despite macroeconomic headwinds, yet lowers operating earnings estimates by -25.8% and incorporate management's scenario.
Given ongoing unemployment, the broker finds it prudent to wait for a better indication of what the job situation is like in the December quarter along with assessing the impact of repeated lockdowns on large parts of the retail and tourism market, downgrading to Hold from Accumulate.
Morgans, too, awaits more concrete evidence of the return profile and ability to accelerate earnings in the core business, but has moved its rating to Hold from Reduce.
Credit Suisse notes debt metrics would be uncomfortable under normal circumstances but increased covenant limits to June 30, 2021 will provide headroom. Receipt of dividends from Zhaopin also remains an option as Zhaopin has immediate access to around $250m in cash.
FNArena's database has three Buy and three Hold ratings. The consensus target is $21.06, suggesting 7.6% upside to the last share price. Targets range from $17.90 (Morgans) to $23.10 (Credit Suisse). Goldman Sachs, not one of the seven stockbrokers monitored daily on the FNArena database, has a Neutral rating and $17.30 target.
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