Seek: Result 2017

If you want an example of the conflict between the market's short-term behaviour and the long-term investing we practice, look no further than Seek's 2017 result. While the company met its profit guidance, management's 2018 outlook – for earnings before interest, tax, depreciation and amortisation (EBITDA) growth of about 10% – disappointed those who care about such trivialities.

The stock fell 3% yesterday as a result (and it was down 8% at one stage). Look a little bit closer, though, and Seek's long-term outlook looks brighter than ever. To reflect our optimism we're about to lift our price guide but, before we explain why, let's consider the result.

Seek's revenues hit $1,041m, passing the billion dollar mark for the first time, up 10% (see Table 1). Underlying EBITDA rose 2% to $376m, while net profit rose 13% to $202m (if you deduct the losses from early stage ventures, which we do). A fully franked final dividend of 21 cents was declared (ex date 14 Sep).

ANZ Employment, as management calls the Australasian business, was the standout. Revenues rose 14% to $356m, while EBITDA increased 11% to $198m. The heavy period of investment in the business – partly to defend itself from LinkedIn – has literally paid dividends, with earnings rising 48% over the 2014–2017 period. Those who called the ANZ Employment division ‘ex-growth' have been proven very very wrong.

Seek's International business is now its largest, though, producing half of the company's earnings. But with difficult economic conditions in emerging markets, an appreciating Australian dollar, and ongoing heavy investment in new products and technology, the 2017 international numbers were less impressive than in periods past. Overall revenue rose 6% (or 13% in local currency terms), while EBITDA fell 3%.

Chinese burn

Chinese employment business Zhaopin is on fire, with revenue rising 24% in the period in local currency. With the company investing heavily in marketing and product development, though, EBITDA growth was a more subdued 9%. This investment bodes well for the future, although management wouldn't commit to a timeframe for margin expansion on the conference call.

That's wise, as Zhaopin's heavy investment program has depressed its market price. The privatisation and delisting of Zhaopin from Nasdaq is imminent, with Seek to retain its 61% interest. In our view the shareholders – including Seek – are snaring a bargain.

Elsewhere in the international portfolio, the other businesses reported either flat or lower earnings. Seek Asia's earnings were flat, although the 6% revenue increase in the second half points to an improving economic environment. Brazil's earnings fell 17% in local currency as job candidates gave up their search, although there are early signs the economy has bottomed (as Carsales also noted recently). And OCC, the small Mexican operation, saw earnings fall 15% due to heavy investment in product, technology and marketing.

Go west

Seek's Education business has had a tough couple of years but Online Education Services (the former Swinburne Online division) has been a stalwart. EBITDA grew 9% but the big news was that Seek has signed Western Sydney University as its second online university partner. With other agreements possible, and management confident the Western Sydney University deal might eventually rival Swinburne Online for profitability, the potential is enormous.

Management is also pleased with the early stage ventures, which consumed $19m in 2017 (and which management forecasts will consume $25m–30m in 2018). Nevertheless, there have already been some failures – Seek wrote off $9m of unsuccessful investments in the period (including its stake in Indian jobs portal Babajob).

Despite market disappointment with the 2018 profit guidance, our confidence in the long term has increased. Management pointed to revenue growth of 20–25% for 2018, a significant acceleration compared to 2017's 10% revenue growth. Of course, currency movements could be a swing factor.

As we've seen at Seek and other online classified companies, revenue growth combined with heavy cost investment tends to lead profit growth. Seek's management confirmed as much, with the potential for much stronger earnings growth beyond 2019.

Turning to the valuation, Zhaopin looks worth considerably more than we estimated in Seek's Learning difficulties. So does Online Education Services. If OES signs several new university partners, it could be worth multiples of the almost $399m value attributed to the division when Seek increased its stake from 50% to 80% earlier this year.

There are many more growth opportunities besides, which we'll review in more detail following reporting season. But it's clear that Seek's value is rising, whatever the share price does on a day to day basis. With that in mind we're increasing our recommended Buy price to $15.00 and our Sell price to $23.00.

Of course, a few more disappointments and we might get the opportunity to buy again. But for now the recommendation is HOLD.

Note: The Intelligent Investor Growth and Equity Income portfolios own shares in Seek. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.

Disclosure: The author owns shares in Seek.