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Not many tech companies are expected to produce earnings growth in FY23, but online employment marketplace Seek (ASX:SEK) is one of them. We admit that this company is formally categorised as ‘Media and Entertainment’ by the ASX, although it is difficult to argue that this company is not a tech company. And perhaps it is in the right place at the right time.
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Who is Seek?
Seek is a provider of online employment classifieds in over 18 countries globally. It runs multiple websites, including the Seek website – covering Australia and New Zealand – JobStreet, Catho and occmundial.
The company makes money from prospective employers that pay to have advertisements on the site. Seek also has a stake in the Seek Growth Fund that has interests in Chinese job seeker website Zhaopin and recruiting software company JobAdder. After several years of sitting under Seek’s corporate umbrella, the Growth Fund now operates independently, albeit still owned by the parent company.
Seek was founded in 1997 by Matt Rockman, Paul Bassat and Andrew Basset. Only Andrew Basset remains on the company’s board today, although he is no longer CEO, having handed the reigns to ex-CBA boss Ian Narev. Seek was listed on the ASX in April 2005 with a market capitalisation of $587m, a figure that has grown to $7.5bn nearly 18 years on.
Benefited from the re-opening of the economy
FY21 and FY22 were solid years for Seek as the economy re-opened from pandemic hibernation. During FY22, the company made $1.1bn in revenue (up 47%) and $509.1m in EBITDA (up 53%). The company’s NPAT from continuing operations $245.5m and 81% up from FY21, although statutory NPAT from total operations was $168.8m, down 78% from the year before.
The latter set of numbers takes account of discontinued operations including Zhaopin (a Chinese job site) and the Seek Growth Fund, which won’t be reflected in future results. This is because Zhaopin has been substantially sold down by Seek (but not completely), while the Seek Growth Fund will operate as a standalone business. Seek paid a dividend of 44c per share, reflecting a payout of 85% of cash NPAT less Capex, and a yield of 2.1%.
An FY23 downgrade, but a small one
For FY23, the company initially issued guidance of $1.25-$1.3bn in revenue (up ~16%), $560-$590m in EBITDA (up 13%) and $250-$270m NPAT (up 6%). This guidance assumed that largely positive economic conditions continued, and that costs were in line with expectations.
Three weeks ago, however, it cut its revenue guidance for FY23. It was only a 1.2% reduction, from $1.26bn to $1.245bn, but enough to send shares down 5% that morning.
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In our view, three things would concern investors.
First, that Seek gave a warning that job ad volumes were moderating. The company wasn’t specific beyond that general warning – it did not state the extent to which they were moderating and how long it was expected. Granted, it is clearly not too vehement if Seek’s revenue guidance is only being downgraded by 1%.
Second, the company’s unchanged EBITDA and NPAT guidance was assumed to be offset by lower than assumed operating expenditure. And third, the fact that the company’s guidance was downgraded so soon after it was iterated – just 5 weeks earlier at its 1HY23 results.
Ultimately, only time will tell if its guidance holds. But investors may be forgiven for being sceptical amidst 4-decade high inflation.
What does the future hold?
Consensus estimates call for $1.24bn in revenue (up 11%), $558.5m in EBITDA (up 10%), and $0.71c EPS (up 4%). For FY24, $1.28bn in revenue (up 4%), $597.1m in EBITDA (up 7%) and $0.78 EPS (up 10%). Seek is trading at FY23 multiples of 15.7x EV/EBITDA, 29.3x P/E, 1.6x EV/EBITDA-to-EBITDA growth and 1.4x PEG.
Although these multiples suggest the company’s pricing is more on the expensive side, maybe investors are getting what they pay for. The median share price among the 14 analysts covering the stock is $28.22, a 16% premium to yesterday’s closing share price of $24.19.
Our own DCF models derive a value of $28.94 per share, a 19.6% premium. This isn’t the biggest opportunity by any means, but it is one of the few top tech stocks offering the promise of any sort of return in the foreseeable future. It is worth noting that this assumes modest revenue growth of 5% per year, cost inflation moderating from FY25 onwards to 3% per year and it uses a 10.47% WAAC (a 4.5% risk free rate of return, a 5% equity premium and a 1.2 beta).
There are risks, but some of the risks could also be an opportunity
We think the biggest risk with the company is macroeconomic conditions. Inevitably, a deterioration in macroeconomic conditions would lead to a fall in jobs on the platform, and the company’s revenues and earnings as a consequence. Seek’s shares fell by nearly two thirds between October 2007 and March 2009, between the ASX’s pre-GFC peak and its GFC low. During the Corona Crash, in February and March 2020, Seek suffered a 40% share price plunge. But even if a recession occurs next year, we don’t think Seek’s share price will be as significantly impacted as during the GFC & Corona Crashes. This is because of the tighter labour market relative to those eras.
We think a deterioration in the labour market may pose the opportunity for the company to buy assets at lower prices. Seek exploited the GFC to start buying into JobStreet, a move that gave the company its first major step into the broader Asia-Pacific region. Notwithstanding those two potentially mitigating factors, we still think investors should be aware of this risk.
We see three further risks to Seek:
Firstly, a cyber attack, something would likely impact the company worse than Medibank considering its global reach and higher user base. Second, increasing industry competition. Unlike some comparable ASX companies that have the market virtually to themselves, such as REA (ASX:REA), Seek faces competition from other platforms such as LinkedIn, CareerOne and Indeed. Thirdly – and ironically – the tight labour market could be something that impacts Seek itself, making it difficult to attract and retain staff.
Set to outperform
We will admit that this isn’t a company you would buy if you wanted a completely recession-proof company. But if past downturns are any guide, the company should be able to pick itself up off the ground from any impact.
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