Seek: irons in the fire

The long-term outlook for Seek is as good as it's ever been. But with the company becoming larger and more complex, there's greater potential for things to go awry occasionally.

The 2018 financial year was an example, when the relatively small Latin American businesses - Brazil and Mexico - suffered from external events. Not everything could be blamed on outside factors, though: Seek's nascent Mexican education business, which initially looked promising, fell in a heap in 2018 due to 'operational issues'.

Nor are the risks confined to the international operations. The large and tremendously profitable Australian and New Zealand (ANZ) business - which has an operating margin of 61% - has benefited from strong economies here and across the ditch. Management highlighted that about half ANZ's 2018 revenue growth came from employers placing more job advertisements.

Seek has benefited from strong employment growth in construction-related industries in recent years. With the outlook for that sector deteriorating, ANZ revenue growth might weaken into 2020. There's always been a cyclical element to Seek's business, so concerns about the outlook have contributed to the 16% slide in the share price since the 2018 result.

Despite that, management confirmed its previous 2019 guidance at yesterday's annual general meeting (although remember that employment growth tends to be a lagging indicator). In summary, earnings before interest, tax, depreciation and amortisation (EBITDA) is forecast to rise 5-8%, with net profit to be flat.

Deep and meaningful

What was more interesting, however, was that the company expects the aggregate of ANZ, Asia and Zhaopin to report 'meaningful double-digit growth' in revenue. This implies the underlying businesses are stronger than the flat earnings indicate.

In Asia - now 100% owned - Seek has reported accelerating revenue growth over the past four halves. That suggests Seek Asia is holding competitors at bay, while the division is having success selling premium ads. Revenue from 'depth products' in mature markets grew 34% in 2018.

China remains an early stage market, so the risks remain high. However, there's early evidence that Zhaopin's transition to a 'freemium' business model might be taking market share. Hirer growth and job postings were up sharply in 2018 while 51job, the company's major competitor, has recently reported lower customer numbers after hiking prices earlier this year.

The division we're particularly excited about is the one that flies under the radar. Seek's 80%-owned Online Education Services (OES), which offers online university courses, originally started off with just one university partnership (Swinburne Online).

OES is fast becoming a multi-partner platform, with three university partnerships now signed. Western Sydney University Online now offers nine courses, while the newest partnership - with Queensland University of Technology - will roll out its first courses in January 2019.

Wait for it

Scaling up the course offer and student enrolments takes time, which means there's little profit in the early years. But the relationship with Swinburne was extremely profitable once it matured - in 2016 the joint venture generated an EBITDA margin of 34%. There's significant upside as recent partnerships mature and more universities join the platform.

Seek continues to invest heavily across ANZ, Asia and Zhaopin. This expenditure, together with higher spend on early-stage ventures, means 2019 net profit will be flat for the third year in a row. While a significant proportion of this expenditure is presumably defensive, we remain comfortable with Seek's long-term potential.

Seek's revenue growth is already accelerating following recent investments, and history suggests that earnings will follow. However, we're cognisant of the cyclical risks, particularly within Australia.

Our Buy price of $16 already allows for some cyclical risk although we can see a case for lowering it slightly. We'll stick with it for now, which means Seek remains a HOLD.

Disclosure: The author owns shares in Seek.