Seek's Learning difficulties

Well, that's $300m we're never getting back. When we upgraded Seek in Seek finds success overseas last year, we put a ‘high' value on Seek Learning, which funnelled students into third-party education courses, of almost $300m.

Even that high value seemed reasonably conservative, given that Seek Learning had earned a record $47m in earnings before interest, tax, depreciation and amortisation (EBITDA) in 2014. Had Seek Learning been listed on the ASX, we suspect the business would have been valued by the market at close to $700m at its peak.

Last week, at the company's 2016 annual general meeting, Seek effectively announced the division was worth something between zip and not much. Government legislation has been proposed that will ban brokers – Seek Learning meets the definition – that push students into vocational education courses.

While Seek maintains it acted ethically, it certainly benefited from the mad scramble of educational providers to sign up students following the government's ill-advised deregulation of the vocational education sector in 2012.

Derailed

The gravy train has come off the tracks and, while Seek Learning looked like a wonderful business, it was in fact an illusion. At the annual meeting, Seek announced it will incur one-off post-tax charges of $16m for Seek Learning in 2017 as it scales back operations. It's a reminder of the benefits of diversification.

Thankfully, as we've indicated in previous reviews, Seek's domestic employment classifieds business and Seek Asia both look like they're worth considerably more than we outlined in September last year. We've updated our sum-of-the-parts valuation to reflect changes in value, as well as the sale of the company's stake in IDP Education last year (see Table 1).

Zhaopin, the company's American-listed Chinese operation, also continues to grow nicely. For the first quarter of 2017, management announced revenue and earnings growth of 21% and 14% respectively. Zhaopin continues to invest in product, sales and marketing, so earnings growth remains lower than sales growth. There's still no news on whether Seek will permit Zhaopin to be taken over; we continue to think it will remain a shareholder if so.

Day of the dread

With the elevation of US President-elect Donald Trump on 8 November, we're a little more wary of Seek's emerging markets exposure. Perhaps the most obvious risk is to the company's OCC employment and education business in Mexico although, with a net profit contribution of $3m in 2016, it's the company's smallest international division.

OCC has, however, been growing fast. OCC's fledgling education business is something of a star, having produced revenue growth of 72% in 2016. It remains to be seen whether Trump's posturing has any effect on the Mexican economy in the years ahead but it's something to keep in mind.

More worrying is Seek's much larger exposure to Asia. Seek Asia and Zhaopin together contributed $67m in net profit to Seek's 2016 results, so any Asian economic downturn – Trump-inspired or not – would hurt. While these businesses continue to have fantastic potential, they do come with above average risk.

These concerns – emerging markets risk, and Seek Learning's disappearing act – have contributed to the 10% slump in the share price since Seek: Result 2016. But any Asian economic downturn – or fear thereof – might provide the opportunity to upgrade our Seek recommendation again. At this stage we'll stick with Buy below $14 although the potential for a profit crunch in Asia means we reserve the right to lower it.

New venture

Seek continues to invest in new projects which, as previously noted, will slice $25m off the bottom line in 2017. One of these ‘early stage ventures', as Seek calls them, was announced at the annual general meeting.

Seek anticipates this new education venture will have two services. One will be like ‘Tripadvisor' (the travel review site) but for education courses, while the other will offer free phone-based careers counselling.

The revenue model Seek will adopt is unclear but establishing this new venture will be costly in the short term. Seek anticipates it will incur losses of $6m in 2017, which will be included in the $25m of early stage venture losses already forecast. That suggests Seek will redirect funds from elsewhere, so presumably management considers the venture promising.

In the end, though, Seek still depends largely on its Australian and New Zealand employment classifieds business, which accounts for around half of the company's value. The story here is promising, with the business having lifted earnings by 15% in 2016. Revenue has almost doubled since 2010 and we expect the company's pipeline of new products to continue driving growth (if not at quite the same rate).

It's testament to management's abilities that the failure of the Seek Learning business has put barely a dent in Seek's growth profile. It's another reason why we think this is one of the Australian market's best businesses, even if it's not quite cheap enough to buy. 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.