Is Seek morphing into a venture capital fund? It spent $19m on early stage ventures in 2016. This year management forecasts Seek will spend $25m. You only need look to the company’s long-term performance – earnings have quadrupled over the past ten years – to understand this management team is adept at creating value. But be warned; several of these investments will inevitably be duds.
Some ventures are interesting lottery tickets. In 2016 Seek invested $10m to take its stake in One Africa Media – an early stage African version of Trade Me – to 35%. Some, like Seek’s development of Jora (a job listings aggregation website) are defensive moves to head off competitors like Adzuna and Indeed.
Other investments, though immaterial, seem a little odd. Apart from capital, what Seek brings to start-ups like employee scheduling platform Ximble or online labour hire company Sidekicker is open to question. Perhaps Seek imagines it might become the Australian version of Alphabet Inc, which devotes some of its prodigious cash flow to various ventures outside Google, its most famous subsidiary.
Domestic and international businesses both strong
Need to watch early-stage investments
Start-up ventures are capital-hungry (as shareholders of iCar Asia don’t need to be told), so there’s a risk this year’s $25m turns into next year’s $40m. In 2016, our preferred measure of Seek’s underlying net profit fell 6% to $179m (see Table 1). Without the higher spending on early stage ventures net profit would have increased 3%, so it's a material effect.
Investments in new ventures won't be perceived as a problem while the core businesses is performing well. Seek’s 2016 revenue and EBITDA rose 11% and 5% respectively (Table 1, again). As with Trade Me, Seek has been reinvesting in its business, so earnings growth should accelerate in time.
While the market was once concerned that Seek’s domestic business (ANZ Employment) was ‘ex-growth’, recent results have put paid to that. While growth was slower than that reported in the first half, price rises and premium services helped drive ANZ Employment revenue and earnings both up 15%. Based on this result, the ‘High’ valuation for the division provided in Seek finds success overseas looks reasonable rather than aggressive.
It’s a similar story for Seek’s international businesses. Zhaopin grew revenue 19% and earnings by 9% as the Chinese company invested in sales and marketing. All the evidence points to Zhaopin taking market share from competitor 51job.com. Zhaopin is a wonderful asset with enormous potential and it was pleasing to hear Seek management confirm they were looking for the right partners following takeover approaches. The implication is that Seek will remain an investor in Zhaopin even if the business de-lists from Nasdaq.
|Year to 30 June||2016||2015|| /(–)
|* Final dividend 19 cents, ex date 15 Sep|
|Note: Figures are underlying results|
Results elsewhere were also decent. In 2016 Seek benefited from a full year of results from Seek Asia, although underlying revenue growth was just 4%. Weaker economic conditions in Hong Kong, Malaysia and Singapore were the culprit but, like Zhaopin, the long-term potential from Seek Asia is substantial.
Turning to Latin America, earnings fell only 7% in Brazil, despite that country’s severe recession (depression?). Seek operates an unusual dual business model in Brazil, with one of its sites requiring jobseekers to pay for access. This has undoubtedly cushioned the blow.
Seek’s Mexican business OCC might be smaller than the others but it’s notable for two things. First, its 2016 result was excellent, with earnings up 25%. And second, its budding education business – similar to Seek Learning in Australia – is performing ‘extremely well’ and is already profitable. It’s an example of the potential Seek has to build education businesses outside Australia.
That’s certainly a good thing, because Seek Learning in Australia reported a frightful result. Seek Learning is suffering following regulatory changes in the vocational education sector: revenues almost halved while earnings plummeted 85%. During its heyday Seek Learning benefited from funnelling students to the burgeoning number of education providers, many of which are now struggling. Seek management says the worst is over but it’s unlikely to recover quickly.
Elsewhere, the news is better at Seek’s other remaining education business, Online Education Services (formerly Swinburne Online). Here revenue and earnings rose 28% and 19% respectively, cementing its position as one of Seek’s best investments.
Seek management forecasts a net profit of $190m–195m for 2017, including the early stage venture losses of around $25m mentioned earlier. We’re not entirely sure how useful it is to focus on that number, as Seek is a diverse business with many moving parts. Management’s forecast is already facing a headwind, as it’s based on an Australian dollar exchange rate of US$0.73 (currently US$0.76).
Far better to focus on revenue and EBITDA growth, we think. Revenue growth should be around 10% in 2017, although EBITDA growth will be lower as the company reinvests in the business (once again). It will be important to watch those early stage ventures this year and next – accelerating losses could cause some heartache.
As is our custom (at least when an investment works out!), we were too conservative at the time of our original upgrade in Seek finds success overseas. The share price is up 37% in the meantime but we hope to remain shareholders for years to come.
With our valuation at the time too conservative – and mounting evidence the value of the business is growing quickly – we’re lifting our price guide to reflect the quality of this business. Economic weakness in Asia or a blowout in early stage venture losses might give us another buying opportunity in Seek but for now the recommendation is HOLD.
Disclosure: The author owns shares in Seek.