We recently researched SEEK (ASX:SEK) in The Dynamic Investor. We concluded that the retreat in the share price from over $27 in mid-November presented an opportunity. In particular, the resumption of listings (i.e. volume) growth, is likely to be the main catalyst for a recovery. While the latter has yet to materialise, we outline the key factors underpinning our view that a recovery in SEK shares from current levels remains likely.

About SEEK

SEEK is a provider of online recruitment and education services in Australia, China and South East Asia. In Australia, SEK is the dominant online recruitment service, accounting for ~33% 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.

SEK also owns an 84.5% stake in the ‘SEEK Growth Fund’ which houses HR SaaS, Contingent labour, as well as Online Education Services (OES). OES 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

Resumption of Volume Growth a Key Driver of Sentiment

SEK reported a -20% decline in advertised jobs (‘job ads’) on its websites as at FY24 and followed a -5% decline in FY23. We consider that the volume decline in these two periods is largely cyclical rather than structural, as evidenced by:

i. Continued strengthening in placement share. In particular, SEK’s placement share in Australian & NZ (ANZ) strengthened over the course of FY24 (to 32.8% in 2H24 compared to 30.8% in 1H24). SEK’s placement share is at its highest level in four years.
ii. SEK’s share of Australian listings relative to competing websites LinkedIn and Indeed has remained relatively stable over the last three years in Australia.

Given SEEK’s guidance factors in “low teens” decline in job ad volumes for FY25, the trajectory of recent job ad volumes is arguably better than initial market expectations. In a trading update issued to the ASX on 19 November, SEK commented that Australian volumes have been slightly above expectations in FY25 to date,

Overall, job ad volume growth is expected to turn positive in FY26, on the back of expectations for RBA interest rate cuts. While the first rate cut is expected in May 2025, the timing of a recovery in job ads remains uncertain.

Continued Yield Growth Expected Over the Medium Term

In 2020, SEK introduced a pricing structure called ‘dynamic pricing’. Under the latter, the Company is able to charge a lower price for roles where there is a high supply of candidates, and a higher price where there is a low supply of candidates in the location employers are looking for.

While volume (i.e. job ads) remain in decline, yield growth remains an offsetting factor. Yield for ANZ increased 13% in FY24, with the improvement in mostly reflecting the benefits of dynamic pricing for different ads in different sectors of the economy.

In the recent trading update, the Company maintained guidance for high single digit yield growth across APAC in FY25. To this end, outline several factors underpinning our expectations for continued improvement in yield over the medium term. Estimates are for high single-digit growth over FY25-27.

• Outcome-based ads remain in the early stages of development.
• The customer mix is continuing to skew towards the higher yielding SME & Corporate segments.
• Strong price increases continue to be pushed through.

Potential For Margin Expansion

SEK’s ability to manage its operating costs has improved after completion of the major IT upgrade “Unification Project” in the 1st quarter of the 2024 calendar year. Progress in this regard places the Company in a better position to cut fixed costs (i.e. headcount). It also allows the Company to match costs to revenue in the event that the ANZ jobs market and revenue line deteriorates further than expected from current levels.

At the FY24 results release, SEK provided new guidance that, due to flexibility now in the cost base, total expenditure will generally grow slower than revenue in each year. This guidance implies sustainable operating leverage over the medium term. The unification project is expected to be a key driver to allow SEEK to be more flexible with its cost base, thereby enhancing the prospects of achieving consistent margin expansion.

Fundamental View

SEK shares are currently trading on a 1-year forward P/E multiple of ~42x. However, this multiple is misleading because of the inclusion of the SEEK Growth Fund, which does not contribute to SEK’s EPS calculation, as it is no longer consolidated, or equity accounted. When adjusting for the latter, as well as subtracting the value of SEK’s written down value in Zhaopin’s growth fund value (equivalent to $1.21 per share), the adjusted 1-year forward P/E multiple is ~31x. The latter multiple places the shares at the bottom end of the trading range over the last ~5 years and below the 1-year forward P/E multiple for online classifieds peers CAR (~34x) and REA (~50x).

While the timing of a recovery in listing volumes remains a key investment risk, at current levels we believe equity markets will begin to look at SEK as a medium-term recovery story, in light of: i) Continued yield growth, ii) Expectations for job ad volumes to grow in FY26 and iii) The resumption of operating leverage in FY26/27. To this end, SEK will have very strong earnings leverage once volumes return to growth and the EPS growth profile suggests +17% growth over FY24-27 on a CAGR basis.

Charting View

SEK has fallen sharply towards support near $22 and then bounced. It ls looking oversold on the RSI (circled) but we don’t have a clear buy signal yet. More aggressive traders can look to buy SEK here and have a tight stop under $22. Otherwise, more conservative investors will want to wait for SEK to start moving higher first and form a higher high and higher low.

 

Michael Gable is managing director of Fairmont Equities.

 

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