TOL - 20th Aug, 2022
Profits soar 81% as employees walk
Are you one of the millions of Australians who switched companies and roles this year? This places you as part of The Great Resignation. It’s been a significant business problem and cost this year.
Except for this ASX-listed company. In fact, you could say it’s been a boon.
A tight labour market and demand helped Seek’s ASX: SEK revenues jump 47% and net profits from continuing operations soar 81% for FY22. In fact, it posted a record 325,000 job advertisements in March this year. The highest number in its history.
Despite this, Seek has fallen 6% since market open. The market fears that Seek has been operating in a peak environment and there are tougher times ahead. Ray David, Portfolio Manager and a member of the Portfolio Construction Committee within the Schroders Australian Equities Team, agrees times may be tougher but still views Seek as attractive.
“We’re not that concerned about job volumes falling because there’s enough cost in the business to take out when things get tough. We think the yield growth will help offset some of the volume headwinds.”
In this wire, Ray shares some of the highlights from Seek's FY22 result, and gives us his outlook on the company and its sector for the year ahead.
Seek Limited (ASX: SEK) FY22 key results
- Revenues up 47% to $1.12 billion
- Net profit (continuing ops) up 81% to $245.5m
- EBITDA up 53% to $509.1m
- Net debt of $1.05 billion
- Capital expenditure (CAPEX) down to $8m
- Margin of 46%, up from 44% in prior FY
- End of year dividend of 21c, record date 8-Sep
- Earnings per share of 44c, up 10%.
- Guidance: FY23 net profit $250-270 million
Note: This interview took place on Tuesday 16 August. Seek is a core holding in the Schroder Australian Equity Fund and the Schroder Australian Equity Long Short Fund portfolios. To learn more about these funds click the link below:
Managed Fund
Schroder Australian Equity Fund - PC
Australian Shares
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What were the key takeaways from this result? What surprised you the most?
The result was very strong and in line with their guidance. If you look at ANZ, EBIT was up 70% and what really drove that was a tight labour market with volumes up 39% and yield growth of 11%.
There were two key things that stood out to me. Firstly, that management are putting a lot of costs into the business and second, the premiumisation of the business.
So firstly, despite the record result, management are putting a lot of costs into the business. If we look at costs in the Australian segment, they went up by about $89 million. If you compared that to the results put out by realestate.com.au ASX:REA or carsales ASX:CAR, it’s the opposite. Those companies are seeing expanding margins whereas the Seek management are not banking the margin.
They’re taking the opportunity of higher revenues in the high volume environment to reinvest in the business. I think that’s a sign of good management because they’re thinking about the future of the business. They’re not focused on short-term profitability metrics, but it also gives them some levers to pull, i.e., costs to take out when things get more difficult. That’s probably the first takeout, that investment expenses are high and will start to fall off in FY24.
The second takeout was the depth and penetration into the market through premiumisation. That is, Seek charging for premium ad slots across the website. They now receive $111 per ad of incremental revenue and that’s increased over the years from about $30. This is also shown in the chart below. This push also demonstrates their ability to exercise pricing power.
What was the market’s reaction to this result? Was this an overreaction, an under reaction or appropriate?
The market is quite concerned about the guidance from Seek so the stock sold off by 6%. Seek has given an EBITDA forecast of $560-590million. This was in line with analyst forecasts but assumes a continuation of strong job volume trends. It also assumes ongoing yield uplift. The market is worried that these assumptions are too optimistic and the guidance will need to be revised.
My take on this is that if you look at the past few years, we’ve had unprecedented strong conditions so clearly job numbers and volumes will slow. We don’t think job volumes will fall off a cliff and we’ve factored this into our valuations.
This cycle is different. In 2021/22, there were twice as many job vacancies to ads because people couldn’t fill positions and stopped advertising (see chart below). Job numbers may not fall as much as people expect because the volume of vacancies is unprecedented. This should help Seek because one of the issues they have faced is employers not aggressively spending on premium advertising.
Would you buy, hold or sell Seek on the back of these results?
Seek is one of the core holdings in our portfolio. We think it looks like attractive value despite slowing conditions and economic headwinds.
Seek is on around 19x forward EBIT. By comparison, REA is on 28x and carsales is 23x. Seek is trading at a discount to its online peers because the market is worried about the outlook. When you take out Seek’s investment portfolio, that multiple drops to around 17x.
We think that management has smoothed out some of the earnings volatility by front-loading a lot of the costs. Costs are up in excess of over $200million at a group level between 2020 and 2022 so there’s some they can take out if things get difficult.
We like that Seek is quite early in the premiumisation journey. Realestate.com has been aggressively putting up prices for a decade. Seek has just started to exercise pricing power with the rollout of dynamic pricing.
Dynamic pricing is the ability to price job ads by job type, industry, salary band and state. The average price per ad is around $250. If you compare this to the average wage in Australia of $90,000, the cost to clients is quite low. There’s a lot of growth to come from premiumisation.
The third point is that Seek has international operations in Asia. They are also number one in these markets and rolling out dynamic pricing in Asia. If they can execute on that growth in Asia, Seek will be well positioned.
So for us, Seek looks like pretty attractive value. We’re not that concerned about job volumes falling because there’s enough cost in the business to take out when things get tough. We think the yield growth will help offset some of the volume headwinds.
If Seek continues to de-rate further, we will be adding more. Our valuation assumes a 20% fall in volumes in FY24 and a further 15% volume decline in FY25. We still think the stock is attractively priced with those volume falls.
What’s your outlook on Seek and its sector over FY23?
It’s a much more difficult environment than what they’ve experienced in FY22. The guidance and consensus earnings will probably have to factor a more pessimistic job outlook. The FY23 forecasts will have to come down. We think a lot of that is in the price. The stock has de-rated quite heavily. It trades at a discount to realestate.com or carsales. These businesses don’t need a lot of capital expenditure. We think as conditions roll over, Seek will be able to smooth out its earnings. Growth might slow from here but a lot of that is already in the valuation.
Are there any risks to this company and its sector that investors should be aware of given the current market environment?
There are a few risks for Seek.
- If we go into a really deep downturn recession from central bank tightening.
- If job volume numbers fall further than what I’m forecasting and the market has anticipated.
- Technology risks.
This is a technology company and they’re spending a lot of money on technology unification. They have to do this to operate in a competitive environment. They compete against Indeed and LinkedIn. Competitive intensity is always a risk for Seek.
On the other side, we think Seek’s management team is one of the best in the market. They’ve navigated cycles before and they’ve shown they were able to take costs out.
Unlike realestate.com and carsales, Seek has always operated in a competitive environment. They’re used to innovating, competing and growing a product to fit the market.
From 1-5, where 1 is cheap and 5 is expensive, how much value are you seeing in the market right now? Are you excited or are you cautious on the market in general?
Rating: 3
It’s not expensive and it’s not cheap. It’s certainly come down since December 21.
We see value in the cyclical names, commodities, energy and building materials. These stocks have been hit pretty hard on recession concerns. We see less value in healthcare and technology. The market has crowded into these sectors because they are seen as defensive. We think materials, energy and cyclical stocks can outperform.
There’s a large spread at the moment between the cheapest and most expensive stocks in the market so there are definitely pockets of value.
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Sara is a Content Editor at Livewire Markets. She is a passionate writer and reader with more than a decade of experience specific to finance and investments. Sara's background has included working at ETF Securities, BT Financial Group and Macquarie Group. She also holds a degree in psychology which drives a continued fascination with how human behaviour drives and is driven by investments and market activity.
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Sara is a Content Editor at Livewire Markets. She is a passionate writer and reader with more than a decade of experience specific to finance and investments. Sara's background has included working at ETF Securities, BT Financial Group and...
Sara is a Content Editor at Livewire Markets. She is a passionate writer and reader with more than a decade of experience specific to finance and investments. Sara's background has included working at ETF Securities, BT Financial Group and...
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