Seek’s Underrated Pricing Switch

This story features SEEK LIMITED, and other companies. For more info SHARE ANALYSIS: SEK

The current share price might be underestimating potential upside for Seek.

-Analysts say investors in Seek should focus on revenues over advertising volume
-Are benefits from new pricing being underestimated?
-Management’s aspirational revenue target
-Potential upside from the company's growth fund

By Mark Woodruff

Putting aside current negative sentiment for growth stocks, share prices will ultimately follow if earnings outpace the market over the medium to long term. Based upon this view, Wilsons likes the long-term structural growth qualities of Seek ((SEK)).

Over the last three months, shares of Australia’s dominant online recruitment service have descended from above $35 to be currently trading around $30, after a recent 10% bounce. Should management execute on various growth options, the broker estimates a valuation above $40.

The consensus target price of five brokers in the FNArena database, not including Wilsons, is $33.97, which implies 13.4% upside to the last share price. These targets were set following mid-February first half results that outpaced the consensus forecast and included a FY22 guidance upgrade.

A&NZ volumes recovered across all segments with small-to-medium enterprise (SME) rising by 60%, corporates up by 73% and recruiters lifting by 26%. While advertising volumes will potentially reach a record in FY22, Wilsons expects a normalisation over FY23-25.

However, the analyst feels the market should focus on revenue instead of advertising volumes. The former should hold up better due to the removal of the recruiter fee discount and ongoing value-based pricing.

The market is potentially underestimating the benefit of the switch to value-based pricing, much like it did with Carsales ((CAR)) and REA Group ((REA)), points out the broker. As the name implies, the value-based pricing strategy incorporates differential pricing for advertisements, which allows strong forms of monetisation while also dampening the impact of the economic cycle.

While Wilsons believes the company’s Growth Fund should be written down to reflect publicly traded multiples, a -20% reduction would only impact the overall company valuation by -5%. Assets within the fund include Seek Asia, Brasil Online and 24.5% of Chinese employment portal Zhaopin.

Given management has an aspirational target of $1bn in additional revenue by 2025, the broker feels around $700m of this will most likely derive from the Growth Fund. Importantly, it’s felt consensus forecasts are currently only factoring in around 30% of this $1bn goal.

First half results and guidance upgrade

Among brokers covered in this article, Jarden has set the highest target price of $40.80 for Seek, which was increased from $40.10 after first half results beat expected earnings by 19%.

Jarden expects first half momentum from higher margins in A&NZ and general strength in the jobs market to continue for the second half and into FY23.

When commencing coverage of Seek late last year, Jarden predicted first half results would lead to a guidance upgrade. This was predicated on higher-than-normal churn and employment challenges which were triggering an uptick in advertising volumes.

The broker, not one of the seven updated daily in the FNArena database, likes the leverage to rising jobs growth domestically and offshore. Another reason to maintain an Outperform rating is the exposure to high-growth venture capital early-stage companies within the Growth Fund.

Goldman Sachs, also not one of the seven, came away from the results more confident the company could improve pricing power to offset likely volume and depth declines.

However, the broker maintained its Sell rating, despite noting the guidance upgrade was driven by very strong job advertisement volumes in Australia and Asia, along with positive technology and contract changes.

Goldman Sachs is of the view those changes will exacerbate the cyclicality of the business across labour market cycles. Moreover, current market tightness is constraining the company’s ability to raise pricing on its new contracts. Nonetheless, the target price was increased by 7% to $29.10.

Competition

Macquarie noted Seek’s share of Australian job placements increased in the first half to 34.3% from 29.8% for FY21, while LinkedIn's and Facebook’s share slightly declined.

The prior strength of these platforms was due to the impact of covid in increasing the employment activity in the SME market, explains the analyst. Meanwhile, given elevated competition in China, the company is expected to continue investing in the Zhaopin portal.

The broker maintained its Outperform rating following first half results and noted early evidence suggests Seek will achieve its aim to double revenue in five years.

There are three Buy and two Hold ratings in the FNArena database. 

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