Seek downgraded
Recommendation
In Seek above buy price from 12 Oct 15 (Buy – $12.79) we explained that 'any further price rise will require a downgrade'. With the stock now up 12% (plus a 17-cent dividend) since Seek finds success overseas from 8 Sep 15 (Buy – $12.06), it's time to adjust the recommendation. While it shows buying opportunities don't last forever, keep your fingers crossed for another.
There wasn't much news in the 2015 annual report, which was released last week. Managing director Andrew Bassat did however reiterate that 'I believe that we should be re-investing more rather than less at this point in our evolution'. His long-term focus is something to behold.
The float of Seek's 50%-owned education business IDP is on track, with the float pricing likely to approach or exceed our 'high' valuation from the sum-of-the-parts table in the upgrade review ($311m). IDP is a great business but, after speaking with the company, Seek shareholders will apparently not be offered any priority allocation in the float.
This is unacceptable, despite being standard practice. Seek shareholders own 50% of the IDP business and the company is potentially gifting stag profits to the investment banking clients of Macquarie Capital. While the pricing of IDP looks full, the long-term potential of the business is high. Seek shareholders should have been offered an opportunity to participate.
The sale of IDP will be slightly dilutive to Seek's earnings (although the sale will not affect our valuation significantly). IDP paid dividends to Seek of $19.5m in 2015, a much higher rate of return on its capital than the 3.5% weighted average interest rate it pays on its debt. However Seek has plenty of growth options so we expect the capital released by the sale to be reinvested at a decent rate of return in short order.
All up, with Seek now trading well above our $12.50 buy limit, the value is less obvious. The recommendation moves to HOLD.
Note: The Growth Portfolio owns shares in Seek.
Disclosure: The author owns shares in Seek.