Intersuisse:Seek Limited SEK Wednesday 30 April 2008High flier...

Intersuisse:

Seek Limited SEK Wednesday 30 April 2008
High flier falls back to realistic P/E ratios

Recommendation: Buy

Investment Rationale

SEK has two operating divisions - online job classified, and training and
learning. SEK is Australia’s premier online job classifieds provider with close to
60% of the Australian and New Zealand market. Earnings and margins should
grow substantially through a combination of strong employment markets,
continued migration from print classifieds to online media, a strong distribution
network and strong brand name.
SEEK Learning now makes a significant contribution to profits. It started by
providing online training courses that enable IT workers to upgrade their skills
by becoming accredited experts in Microsoft, Cisco and other products. It has
expanded its range considerably and its ‘distance education’ now covers many
vocations. SEK has taken 50% stakes in IDP Education (for international
students) and Amadeus Education (for domestic students), thus dramatically
broadening its reach with strong education-focused partners.
The virtuous cycle of existing dominance is a powerful barrier to entry. Strong
operating leverage and minimal capex translates revenue growth into strong
free cash flow. SEK, normally ‘expensive’, is now on attractive fundamentals.
Event
�� SEK enjoyed very strong growth in 1H08 to December 2007, with EPS up
48.8%. All sectors of the business appeared strong and overall SEK
�� Revenue has grown in every period to $99.9m in 1H08 from $17.5m in
1H04 with NPAT of $35.6m compared with $5.5m in 1H04. EBITDA
margin rose from 30.0% to 51.5%. The Company’s outlook was strong.
�� Since February 2002, online job ads rose from a base of 100 to near 450.
�� Neilsen split December 2007 market share of job ads 59% to SEK, 21%
MyCareer and 20% CareerOne, with other measures yet more in favour.
�� SEK’s monthly employment index measures the ratio of new jobs ads to
job application, to show supply against demand. For March this was down
4.9% on an annual basis, indicating a slowing of ads / rise in applications.
Impact
�� We think SEK can offset a cyclical slowdown by growing its business into
immature sectors, such as government, education, healthcare and blue
collar fields that have been slow to adapt to online for finding staff. In an
environment of cost pressure the attraction of online increases its appeal.
�� SEK has capacity to reduce its costs structure. SEK is also expanding its
educational services which are counter cyclical to employment growth.
�� But, overall, we see the march towards online recruitment and job seeking
is inexorable and SEK ideally placed as sector leader.
Recommendation Impact
The potential for growth at SEK is still very exciting and there is much more to
come. The figures in our table are deliberately pitched conservatively and we
would not be surprised to see FY09 NPAT of over $100m, EPS of 34.3¢ to
hold growth at 29.4% (way below results to date!) and so a P/E of only 14.4x.
The economic climate and low risk appetite, high interest rate environment in
Australia has compressed P/E ratios and high growth stocks such as SEK
have come back substantially in price.
We deliberately focus attention on low-P/E high-yield stocks in growth sectors
for obvious advantages of their prospects for rewarding growing yields.
But in our view the market changes have also created an excellent opportunity
for clients to build useful stakes in some erstwhile high fliers.
SEK is a particularly good example and we recommend BUY.