Seek buys in Brazil and Asia

Seek is buying more of two businesses it knows well. But the market has been disappointed by the company’s 2017 outlook.

Seek’s share price continues to be strong, having risen 8% since Seek: Interim Result and 29% since we first upgraded in Seek finds success overseas last September. We don’t plan for recommendations to work out this quickly, but it’s nice when they do. Don’t forget Seek’s dividends either – 38 cents since the initial upgrade.

There’s been a bit of news since the interim result, including today’s update to profit guidance. Seek confirmed that 2016 profit would meet market expectations of about $195m before deducting the costs of early stage investments of about $20m. We prefer to deduct those costs, which means Seek should report 2016 earnings per share of about 51 cents.

The company has also increased its stakes in two international investments. It has moved from 51% to 100% of its Brazilian venture, Brasil Online, at a cost of $104m. That values the entire business – which produced $44m of EBITDA in 2015 – at $212m, so it seems like an absolute steal. With the Brazilian economy in a bad way and Seek keen to invest in various initiatives there, the transaction perhaps implies Brazilian earnings could weaken in the short term.

Key Points

  • 2016 guidance confirmed

  • Boosting Brazil and Asia stakes

  • 2017 guidance a touch disappointing

Seek is also lifting its stake in Seek Asia from 81% to 86% at an implied cost of $78m (via a buyback). While the Brazil transaction values that business at less than our sum-of-the-parts valuation last year, the Seek Asia transaction implies an (offsetting) higher valuation. It also simplifies the ownership structure of Seek Asia, with the only other shareholder now News Corporation (with 14%).

What disappointed the market, however, was the 2017 outlook. Seek said it expected earnings of $215m–220m for 2017, before early stage investment costs. That’s lower than market expectations, especially as it includes the additional earnings Seek has acquired in Brazil and Asia.

Above average

The market did what the market does, and sent the stock down 4%. But, as we’ve said before, what matters is what Seek is likely to report five and ten years hence, not this year or next. Seek is a wonderful business and its long-term growth prospects remain well above average.

There are a couple of minor irritants to flag, however. The first is that LinkedIn, which is effectively a Seek competitor, will be acquired by Microsoft for US$26bn. While Microsoft’s acquisition record is patchy – and that’s being generous – LinkedIn could become as ubiquitous as its Office software in time. It’s something to watch rather than worry about.

Finally, Seek’s Nasdaq-listed Chinese subsidiary Zhaopin received another takeover bid last month. The bidding consortium includes Zhaopin’s senior management, which may make their positions untenable if it is knocked back. Like the January bid, this one appears to undervalue Zhaopin and we can’t imagine Seek would be a seller.

None of this changes our view on Seek. The stock is no longer obviously underpriced but nor is it expensive. The company should remain a high-growth business for years to come. HOLD.

Disclosure: The author owns shares in Seek.

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