We recently researched SEEK (ASX:SEK) in The Dynamic Investor after the Company re-iterated guidance for the 12 months to 30 June 2023 (FY23) at its AGM in mid-November. The announcement was initially well received by the market. This was especially given a weaker outlook for SEEK ANZ volumes, as reflected in market expectations for a steady rise in the unemployment rate, and the recent deterioration in job ads. With the share price having retraced significantly since early December, do current levels present a more attractive entry opportunity?
Overview of SEEK
SEEK is a provider of online recruitment and education services in Australia, China, South East Asia, and Latin America. In Australia, SEK is the dominant online recruitment service, accounting for ~34% of all placements made. In China, SEK’s 23.5% owned associate is one of two market leaders, with a commanding presence in the SME market. In South East Asia, the company operates under the Jobstreet, JobsDB and JobsKorea brands, which are market leaders in most countries in which they operate. In Latin America, Brasil Online and OCC Mexico are the local market leaders.
SEK owns an 84.5% stake in the ‘SEEK Growth Fund’ which houses Online Education Services (OES). This provides software and services to universities to assist in the recruitment and management of online students, and a large and growing portfolio of early-stage ventures in the employment technology and education technology sectors.
Key Fundamental Drivers
Price Increases Unlikely to Stick
The Company has completed the rollout of the new contract and pricing structure across the SEEK ANZ business. This accounts for over 95% of group EBITDA (given EBITDA losses incurred in the Latin America and Platform Support segments). The new structure (‘dynamic pricing’) has enabled the Company to improve its pricing structure.
The introduction of the new pricing structure resulted in the average yield per listing growth of 11% in FY22, driven by dynamic pricing uplift in Classic ads (priced $140- 325), and uptake of Premium ads (priced $425-895). Classic ad prices on average are estimated to have increased by ~9% over the July to November 2022 period, which is an acceleration on the ~5% increase achieved for FY22. The key factors underpinning the growth include more active usage of dynamic pricing mechanism and signs of increasing labour churn.
Based on recent figures for Applications per Ad and recent trends in job ad volumes, it appears unlikely that the ~9% increase in Classic ad prices over July to November 2022 will be sustained for the full year (FY23). In particular, there has been a recent downward trend in Applications per Ad, which in turn is likely to limit the extent of price increases that SEK can implement under its new dynamic pricing model.
Does Cost Growth Present a Risk to Guidance & Earnings Estimates?
By way of background, SEK aims to have one unified platform by the end of FY24. A major (negative) surprise from SEK’s FY22 results release was higher-than-expected expenditure on platform unification costs (from guidance of $125m at the interim results to $180m). The majority of the increase in costs reflect: i) Expanded scope of the APAC Enterprise Resource Planning (ERP) and Asia Customer Relationship Management (CRM) projects; ii) Online program and program management area; and iii) Increased salary costs for technology roles.
The increased expenditure on platform unification is also a key operating expenditure headwind in FY23. However, the expenditure is expected to improve EBITDA margin for the SEEK ANZ segment, as i) The ERP software will now be fully integrated across APAC (rather than separate ANZ and Asia implementations) and ii) Upon completion of the platform unification program, SEEK ANZ will charge SEEK Asia a licence fee for use of the unified platform.
In terms of the impact on the Profit & Loss Statement, it is worth noting that while a greater portion of the overall cost is expensed, a significant a portion of these costs are capitalised. As such, the actual expenses on platform unification are higher – implying that while benefits from the expenditure are expected in FY24 (i.e. a more efficient post-unification), the actual return on investment (and EBITDA margin) is also lower.
Gearing Level Remains Comfortable
Gearing as at 30 June 2022 increased to 1.9x, as a result of higher debt utilised for contribution to the SEEK Growth Fund and acquisitions. Notwithstanding the higher gearing level, it is worth noting that the business restructure enables the Company to utilise 3rd party capital for its investments.
Also, the Company refinanced its syndicated debt facility in December 2021, which has reduced its debt refinancing risk. The next maturity is due on 30 November 2024.
SEK shares are currently trading on a 1-year forward P/E multiple of ~28x, which is broadly in line with the long-term overage (~29x) and reflects the market’s optimism that the Company can achieve yield growth over the medium term through dynamic pricing. To this end, we contend that lower listing volumes; potentially lower Applications per Ad; as well as risk of higher costs in FY23 given the potential for further re-investment warrant a cautious view on the shares, especially given that the current multiple appears demanding in the context of consensus EPS growth forecasts of ~8% over FY22-25 on a CAGR basis.
Accordingly, to become more positive on the stock, we will need to see a sustainable improvement In Applications per Ad, which in turn would support higher yields.
SEK shares remain in a downtrend which started a year ago. Most recently, we can see that it traded higher off the September lows in a channel (diagonal blue lines). However, it broke under that channel a few weeks ago (circled) and it now looks set to fall again. It is now coming up to retest the underneath of that downtrend line. If it can’t move higher from here, then investors can wait to get SEK shares at cheaper levels.
Michael Gable is managing director of Fairmont Equities.
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