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Seek Ltd: A true Australian technology leader
This month we take a look at the well-known job advertisement business, Seek Ltd, led by the formidable Paul Bassat. Seek was founded in 1997 by Paul Bassat, utilizing its first-mover advantage and network effects to entrench itself into the Australian employment market. It is one of Australia’s true technology leaders driven by a management team who refuse to stand still and strive for continuous innovation. The company controls 90 per cent of total time spent online looking for jobs in Australia, with some 30 million monthly visitors to its website.
Supported by revenue growth of around 20 per cent per annum, the company has leveraged its Australian cash flow into acquisitions for future growth. This strategy has been focused around taking minority (and eventually larger) stakes in the leading online job placements sites in Emerging Markets; Zhaopin (63 per cent owned) in China being a perfect example, but similar positions exist throughout Brazil, Thailand and Malaysia where internet penetration is in its early stages. The company has further solidified its diversification by entering the less cyclical online education space, via venture capital investments and partners with the likes of Coursera.
SEK is a company we long identified as a global leader, however, valuation and pricing were such that initiating a position could not be justified. SEK has a track record of delivering 15 per cent revenue growth over the last five years and earnings growth of around 7 per cent. This is supported by a profit margin of close to 55 per cent; incredible to say the least. That being said the company experienced a difficult end to 2019, recording earnings growth of just 4 per cent to $247m for the half as the Hong Kong protests, trade war and a slowdown in South America impacted profits. Net profit also fell 24 per cent to $75m. This came at the same time that the company is ramping up early-stage venture investments within the technology and online education space, which must be expenses against profit in the year they are made. The result was a 46 per cent cut to the dividend as the payout ratio was reset to a more appropriate 30-50 per cent of net profit going forward. We view this change positively, as SEK is a true growth business that in our view should be reinvesting the majority of profits into new opportunities rather than paying them out as dividends.
The Australian business represents a quarter of revenue, $224m, but 55 per cent of earnings, $134m, whilst the majority stake in Chinese leader Zhaopin, grew revenue 31 per cent to $418m, but delivers less earnings at $69.9m, as the company continues to ramp up. The company’s Online Education business ($43m revenue) and Latin American investments ($43m) are the next largest by size. One of SEK’s key strengths is its operating cash flow to earnings conversion, which is 101 per cent along with its annual capital expenditure of $51m in 2019.
It’s not all good news, the company has been heavily impacted by the COVID-19 outbreak, initially in their Chinese business and subsequently in Australia. There is little doubt the company will face a difficult 6 – 12 months as the flow-on effects are known, however, we believe the majority of this risk has already been priced in following the 30 per cent fall. The threat of an increase in unemployment in Australia is of concern, management is confident that this will be transitory with SEK’s dominant position in placing 22 per cent of all employees in the country, but primarily those in low skill and low paid positions will return to growth quickly after. Management is currently working on the basis of the virus peaking between June and August, before seeing a recovery in Australia in Q4. The company’s diversification strategy, through which it has teamed up with the likes of Coursera, Swinburne and QUT to both deliver and connect its members to education courses, will benefit from working at home restrictions and cushion any blow of a potential 12-month recession. The primary risk we see is that the current issues continue for an extended period of time and eventually require Seek to undertake a capital raising; however, analysis suggests even under a GFC-like deep recession, this would not be required until mid-2021.
