Seek: Result 2015

A major theme working against the online classified companies this reporting season has been 'reinvestment'. Last week Carsales and today employment classifieds company Seek highlighted the reinvestment they're making in their businesses. The idea is to drive future growth as well as widen their business moats.

The market, with its short-term focus, sees reinvestment more pessimistically. It instead focuses on the additional costs involved and in particular the hit to short-term profitability. Today Seek announced that its 2016 profit will fall because of ongoing reinvestment.

The 2015 result itself was not the main problem. Revenues and earnings before interest, tax, depreciation and amortisation (EBITDA) grew strongly enough (see Table 1). Full-year dividends were lifted 20% to 36 cents, fully franked.

Outlook statement

Instead the outlook statement disappointed the market, and for three reasons. First, higher depreciation, amortisation and interest charges will hit net profit in 2016. Second, Seek Learning reported a 14% decline in earnings in 2015 which will continue into 2016 as regulatory reforms take effect. And third, Seek's $6m of losses from 'early stage investments' in 2015 are likely to triple in 2016.

The result is that underlying net profit (we prefer to include early stage investment losses in our definition of underlying) will be around $180m in 2016, compared to $190m in 2015. EBITDA is forecast to increase to at least $365m, which is much lower than consensus estimates of above $400m.

Growth companies that stop growing – even only temporarily – tend to get whacked. Seek felt the market's displeasure with the stock falling 11% today.

What's perhaps being ignored, though, is the bigger picture. Seek Domestic's revenue hit an all-time high despite a 6.2% unemployment rate, the highest since the company listed in 2005.

Seek International's business is the most advanced of all the ASX-listed online classified companies, with look-through EBITDA having tripled between 2011 and 2015 (to $108m).

More diversified

Seek Education also has produced astounding – if somewhat lumpy – growth, with look-through EBITDA falling slightly to $73m in 2015. Despite occasional setbacks, Seek's international and education businesses have been phenomenally successful and they mean the company is significantly more diversified than its online classified peers.

On a 2016 forecast PER of 23 and EV/EBITDA multiple of 12.7, the stock looks less expensive than it has for some time. If Seek resumes growing in 2017 and beyond, then this price will look excellent value.

But there's some work to do to analyse Seek's growth initiatives, as well as the headwinds facing Seek Education. So look out for a comprehensive review shortly after reporting season, or earlier if possible.

The stock is down 27% since Seek: Interim result 2015 and acquisition from 25 Feb 14 (Hold - $16.90) when we said 'we'd love to buy it' at a lower price. Seek certainly looks much more reasonable value and is now close to the $12.00 price at which we expressed interest. For now HOLD, but put the stock on your watchlist for a potential upgrade.