Seeking an opportunity with SEK

We recently reviewed SEEK (ASX:SEK) after the Company reported its recent interim results release (1H24). A key consideration for investors is whether market concerns about volume weakness and the value upside from SEEK Growth Fund are factored onto the share price.

About 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. The SEEK Australia & NZ (ANZ) division is the largest contributor to revenue (70%). The Company also owns an 84.5% stake in the ‘SEEK Growth Fund’.

Key Fundamental Drivers

Pricing Remains Main Driver of Profit

Pricing power in SEEK ANZ has significantly improved following changes to the business model initially implemented in 2020. These changes include a new contract and pricing structure (‘dynamic pricing’).

The Company reported a +10% lift in yield (a key pricing indicator) in 1H24 for ANZ. The two main reasons for this include: i) Increasing “depth” adoption by hirers for premium ads and ii) The shift to dynamic prices for different ads in different sectors of the economy.

Despite FY24 guidance downgrade being driven by continued weakness in ANZ and Asia volumes in 2H24, SEK expects continued growth in yield in 2H24. In particular, the Company expects ~10% growth in ANZ and Seek Asia to grow “mid-teens”. SEK’s guidance of ANZ yield growth of 10% in 2H24 appears conservative given indications that the Company has already achieved ~10-11% price increases from variable pricing in the current half (2H24).

Importantly, there are several factors underpinning expectations for SEK to continue growing yields at mid-to-high single digit % over the medium term:

i. Continued depth penetration, which is considered structural;
ii. The customer mix is continuing to skew towards the higher yielding SME & Corporate segments;
iii. Applications per ad are increasing, in line with a softer labour market. This dynamic helps more variable ad pricing;
iv. Improvement in SEK’s placement share;
v. Selective/rational price increases by SEK. (Continued price increases may force some advertisers to rationalise their listings; thereby driving volume underperformance; and
vi. Potentially higher yield contribution from the Pay Per Applicant Model, following commercialisation (expected over the next 6-12 months).

Seek Growth Fund – Help or Hindrance?

By way of background, earnings from the Seek Growth Fund are not consolidated it in its financial statements. While SEK is the largest shareholder with an 84% interest, it does not control the fund.

At present, the market is ascribing minimal value to the Seek Growth Fund, given:

i. Concerns about the structure and transparency of the Fund, given the lack of disclosure about its precise shareholdings and the operating performance of investments,
ii. A significant de-rating of unprofitable technology companies – both listed and private – over the last 1-2 years, and.
iii. A lack of monetisation events (i.e. asset sales) of major assets in the fund, to prove value created

Having said that, any action taken by the Company to monetise its investment is likely to be a catalyst for the share price, provided that SEK exercises its options at a premium valuation. Aside from removing the above-mentioned market concerns about the fund, it likely that the cash proceeds would be used for either capital management, and/or repayment of debt.

Gearing Remains Elevated

Since December 2021, gearing (on a net debt to EBITDA basis) has progressively increased due to higher debt utilised for contribution to the SEEK Growth Fund and acquisitions. Other contributing factors include lower earnings and higher investment associated with Platform Unification.

Gearing increased from 2.0x as at 30 June 2023 to 2.46x as at 31 December 2023. Gearing is expected to remain elevated above 2x in FY24. However, it is expected to fall to <2x in FY25, as market conditions improve and SEK cycles out of Platform Unification investment.

Notwithstanding the higher gearing level, it is worth noting that the business restructure enables the Company to utilise 3rd party capital for its investments.

Fundamental View

With the dynamic pricing strategy underpinning strong yield growth in SEEK ANZ, SEK will have very strong earnings leverage once volumes return to growth. Indeed, the expected volume declines in FY24 will arguably bring SEK closer to the bottom of the job ad cycle.

However, there is uncertainty about the extent and timing of a volume recovery. This is because the Reserve Bank is set to continue its focus on softening the employment market in order to ease inflation. In addition, gearing levels remain elevated. These factors warrant a more cautious view on the shares based on its current trading multiple.

Charting View

For the past year and a half, SEK has been edging higher over time in a clear channel. It is currently in the middle of that range. It may continue to drift back from here in the short-term. For those looking to buy SEK, we would be targeting a bounce off support near in the $22-$23 area with a view that it will head back up towards $27 over time.

SEEK (ASX:SEK) weekly chart
SEEK (ASX:SEK) weekly chart


Michael Gable is managing director of Fairmont Equities.


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