SEK: Still seeking growth

Back when I was entering the workforce, you searched for a job by buying a newspaper and scrolling down the classified listings. (By scrolling I mean moving your finger and eyes down a paper page, rather than flicking your finger on a screen). As the internet started to gain momentum, the founders of SEEK (ASX:SEK) quickly realised that this process could be so much more efficient by creating a well structured database coupled with an easy to use user interface, which could be accessed by anyone with a computer and a dial up modem.

Seek was launched in 1998 and soon graced the BRW Fast100 list as one of Australia’s fastest growing businesses. It wasn’t long before newspaper classifieds for job ads were a thing of the past, and Seek dominated the online job ads marketplace.

Job ads is a competitive market and Seek estimates they have about 31% market share in Australia and about 23% in the Asian markets where they operate, namely Indonesia, Singapore, Malaysia, Philippines, Thailand and Hong Kong. The key to success is to build a strong marketplace which is attractive to employers, thereby generating the most listings, which in turn makes it attractive to job seekers as there are the most opportunities. Having the most job seekers further increases the attractiveness to employers as it increases the chance of finding the right person thus creating a network effect. In Australia, Seek’s lead over their nearest competitor is 3.1 times.

Last week I wrote about another marketplace business Rea (ASX:REA). In that case the revenue drivers over the last year had been a decline in volume, but an increase in yield (i.e. pricing). It is the same story with Seek. In their ANZ business, which accounts for 71% of revenue, job ads volume declined by 4% in FY23, whereas average ad yield was up 8% resulting in an overall increase in revenue of 5%. Despite this decline in volume, job ad volumes are still 21% above their FY19 (pre-Covid) level.

Seek earns good margins, a byproduct of their strong competitive advantage. Gross margin for the ANZ business was 60%. Overall operating margin was 26.7%. These margins are contributing positively to the Quality Score of 74. The Health Trend of 4 is detracting from the Quality as a number of the key ratios moved in the wrong direction in FY23 although the changes were generally not large. The long-term average return on capital employed is on the low side at 5.4%.

The Asian side of the business generates 20% of revenue. This business operates at a lower gross profit margin of 39% but that was a big improvement on the prior year’s level of 26%. As with the ANZ business volumes dropped and yields rose, but by more extreme amounts of -9% and +28% respectively. Asian revenue growth was strong at 22%. This was assisted by currency movements, but even on a constant currency basis growth was still very strong at 17%. Growth was strong across both the developed and the emerging markets.

They also generate about $70 million from their Mexican and Brazilian subsidiaries. At an EBITDA level they are operating at breakeven.

Source: Seek, FY23 Full year results, 15/8/23

They also have a minority stake in Zhaopin of 23.5%. They originally invested in Zhaopin in 2006 and in 2021 sold down from their 61% holding. This was a very profitable investment for shareholders with a return of more than five fold.

Seek also have an investment of almost $2 billion in the Seek growth fund. This is a fund that invests in emerging companies in related verticals, namely education, HR SaaS and contingent labour firms. In prior year the fund has been consolidated into the overall results, but from the second half of FY23 it is being treated as an equity accounted investment, i.e. it is no longer consolidated into the accounts. Seek have determined that they no longer control the fund, despite the fact that they have an 84% holding in it. This has led to a very high NPAT figure of $1,024 million, but about $840 million relates to the fund deconsolidation so is really just an accounting outcome rather than a reflection of the underlying business.

In terms of its factor scores, Seek is similar to other marketplace businesses like Rea (ASX:REA), Domain Holdings Australia (ASX:DHG) and Car (ASX:CAR). Quality and Momentum are relatively high, whereas Value is low. This reflects the high value that the market places on businesses that have a strong network effect.

The Australian business is fairly mature. Strong revenue growth will be harder to achieve. There is still room for growth in the Asian and Latin American markets, especially in the emerging markets where internet adoption for the purpose of job searching is not as well established. They are also looking at ways to make their overall operations more cost effective. They are in the midst of a big technology project, implementing a unified system across their businesses, with the aim of driving significant cost reductions. There is also the possibility of strong returns from the growth fund, but this comes with a greater degree of uncertainty.

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