Listed in April 2005 at $2.10, SEEK (SEK) was something of a novelty to investors, who were familiar with the brand but less au fait with the financial substance of the online employment go-to website.
SEEK’s success was attributable to two things that established it as the incumbent job advertising benchmark in Australia and its platform for expanding its footprint into new areas of growth.
The first was its quirky yet powerful branding that made it the ‘alternative’ job-advertising platform, when advertising on the internet was a new-ish concept. SEEK has cleverly maintained its brand awareness, without surrendering any of its appeal as the website has matured over the last decade.
Today, the employment category of classified advertising is dominated in volume terms by online ads with nearly 90% share.
The battle for job advertisements has clearly been won by the online medium, but the second front of pricing is still evolving.
Better pricing power
Most job ads that appear in print form only, are still inexplicably more expensive than the online alternative for an equivalent ad.
Despite this, the broader trend in pricing is for print prices to decline from historically much higher levels, while online prices are still climbing from historically quite cheap amounts.
For example, SEEK’s casual rate for a single job ad on its website in June 2005 was $135 including GST. Remember, that advertisement stayed on the website continuously for 30 days (unlimited text length) compared to a once-off print ad (priced per line of text) on a single day. Now, SEEK charges $264 for a casual ad.
The increase in pricing (yield) has been SEEK’s biggest contributor to its earnings growth over the last eight years, with an average increase in yield of 11% each year. SEEK’s employment advertising revenue has grown at almost 18% per annum for the last eight years, and reached $235 million in FY13.
[1]Operating earnings for SEEK’s employment advertising division have grown at about the same rate as the company has been able to manipulate its expenses, to maintain a relatively steady margin of about 55% over that period. That’s impressive and a telling factor in SEEK’s overall success.
At $141.6 million in FY13, EBITDA from employment advertising represented almost 60% of group operating earnings.
Margins could have been much higher, but the company chose to reinvest its operating cash flow into better systems, better products and indeed into other related businesses.
A consequence of the big operating margins was that SEEK funded the growth of its total business almost exclusively from its own operating cash flow and with virtually no reliance on debt.
The combination of a large, dominant share of a growing market, together with fantastic margins, high cash flow, low capital expenditure and capable management, is what gives SEEK a very high valuation multiple.
It’s interesting to note that the board last year doubled the salary of the chief executive, Andrew Bassat, in exchange for the removal of short-term bonus incentives. The idea was to provide greater transparency for shareholders by simplifying the pay structure. That’s an innovative and constructive piece of corporate governance that should also please shareholders.
Old versus new
It is quite amazing to think that Fairfax, once a blue chip iconic business, was valued by the market at almost $4 billion in June 2005 (before it acquired Rural Press in 2007) while SEEK was initially valued at just over $600 million when it listed at that time. Today, Fairfax is a mere shadow of its former self valued by the market at around $1.2 billion while SEEK is now valued at $3.8 billion.
The value shift has occurred even more dramatically over the last two years as the print and free-to-air television companies have suffered injurious declines in revenue. The following table demonstrates the change by showing the market value of a selection of listed media companies in the ‘old media’ category and the three major online companies:
[2]
Seeking the future
The employment advertising division will continue to provide a significant proportion of SEEK’s earnings for some time. The company has used its Australian success to transport the expertise to other countries, where it is now building internet job sites in places like Mexico, Brazil, Malaysia and China. There is the potential to list the subsidiary, Zhaopin, in the latter, which could release substantial value for SEEK shareholders but the complexity of that pathway should not be underestimated.
The education-related businesses SEEK is building, struggled to gain traction in the early days, but are beginning to look much more viable. The education industry will always be subject to political nuances and regulations, but there is certainly a large and valuable market to explore.
It is worth noting the effort and muscle that media companies like News Corporation are putting into the business of education. This industry is taking a similar path to healthcare, where there is room for private investment alongside what is seen as primarily a public service.
Along the way, SEEK has been canny enough to enlist the help of other large investors with different skill sets, such as Macquarie Group. Again, that seems to be a sign of maturity from the company that is aware of its limitations.
SEEK has made some mistakes along the way, without doing any major damage to its reputation or wellbeing. On balance, it has made many more good decisions than bad.
It is not a cheap stock, based on standard valuation metrics with a PE ratio above 20 times FY14 estimated earnings per share, although this is in line with its online peers. Nor is it a big dividend yield stock with a net yield sitting around 2.0%.
Its attraction lies in its tremendous core business of online employment advertising, combined with the potential for its international ventures. The share price doesn’t reflect much value to the offshore investments, which is fair, but given the company’s track record, it becomes a reasonable proposition that eventually it might.
That is what makes SEEK a good portfolio stock to own.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Also in the Switzer Super Report:
- Peter Switzer: Term deposits will tell you when to dump stocks [3]
- James Dunn: Stocks to watch: Five stocks under 50 cents [4]
- Geoff Wilson: An international buy – UK’s Royal Mail [5]
- Paul Rickard: Leighton – just a Fairfax “beat up” [6]
- Rudi Filapek-Vandyck: Buy, sell, hold – what the brokers say [7]
- Penny Pryor: Sydney reports over 80% clearance rates [8]