Earnings growth back online

The number one position in online employment advertising is driving operational leverage for Seek as the job ads market recovers. Seek’s normalised net profit after tax of $83.1 million for the 2010 financial year was 50% ahead of the prior year. Much of this represented a recovery in the job ads market generally, but also a consolidation of Seek’s leading position in the market.

“As at June 2010, Seek had almost 3.9 million unique browsers compared to 1.3 million on Fairfax’s MyCareer website and 1.5 million on News’s CareerOne website”

Seek’s solid improvement in FY10 has been driven by a return to more normal employment market conditions across the year. The current trend is still improving as the market is approximately 30% below its December 2007 peak in terms of job ad volumes. The company is anticipating most of its revenue and earnings increase for FY11 will still come from volume growth, supplemented by a more modest lift in ad yield and new product releases.

Turning to the charts, Seek broke out from a ‘Flag’ continuation pattern formed during early January to early February. This marked the surge higher from the lows of $6.00 to a recent high of $8.57 on May 4.

To date, Seek has been in its retracement phase over the last three months, range bound in between a symmetrical triangle formation. The bullish moving average cross and the higher lows in place are suggestive of an upward break in the near term. A convincing break above the downtrend line at the $7.80 region would confirm this. We would expect a boost of upside momentum to follow, with an upside target back towards the $8.57 high.

Simplistically, with Australia’s unemployment rate sitting at 5.3% in July 2010, it would appear at first glance to offer limited upside for the online employment market. But the same levers to Seek’s impressive growth over the last five years will boost its operating metrics again in FY11, defying the apparent ceiling in employment.

When people feel sufficiently confident about changing jobs, this creates simple opportunities for volume growth as replacement staff are sought. Recruitment agencies have increased the volume of advertising they are placing on Seek’s website as the propensity for job churn begins to lift towards more normal levels once again. Recruitment firms represent about 60% of Seek’s total ad volume and are beginning to exceed their contracted bulk volumes, making up for a deficit throughout last year.

As Seek penetrates further into the small and medium enterprise (SME) market – companies with fewer than around 200 employees – volume growth can also lift from this source as well. Seek’s high awareness among job seekers, the ease of placing a casual ad, and the low cost of the ad all play a role in attracting more business from the SME sector. The same is true of the corporate and government sectors where Seek continues to make inroads.

Relative to the competition, Seek is maintaining a strong lead in the number of users of its website and the time spent on the website per visit. As at June 2010, Seek had almost 3.9 million unique browsers compared to 1.3 million on Fairfax’s MyCareer website and 1.5 million on News’s CareerOne website. That translated into more jobs advertised on Seek’s website with a monthly average of 126,000 jobs. That lead sustains a significant advantage for Seek as the basis for its earnings growth.

In 2010, Seek’s employment revenue grew just 1.1% across the year, but that masked a 26% lift in the second half after an 18% drop in the first half. The turnaround indicates that the employment market substantially improved from around January 2010 and Seek confirmed the first seven weeks of the new financial year are perpetuating the trend. Second half revenue growth was a combination of a 15% increase in volume and a 10% increase in yield.

Seek instigated an 8% price increase earlier this year after leaving its prices untouched as the GFC period played out. The recruitment market particularly appreciated the gesture and has remained loyal to Seek as a consequence. Seek is only anticipating a modest lift in yield in FY11 but future price increases can comfortably be maintained well above inflation. That is a good indication of the pricing power Seek has in the online employment market.

Seek is progressively rolling out a new database product that will only make a small contribution to FY11 earnings, but is hoped to become more significant in future years.

Earning from learning

Seek’s education businesses are making progress after several years of investment. Seek Learning generated $43.6 million in revenue in FY10 and operating earnings of $16.7 million.

The domestic education market has been subdued throughout the GFC period but the underlying demand for career related education and training remains unfulfilled. Seek has steadily built relationships with education providers such as TAFE NSW and Kaplan in the provision of courses. The THINK Education group, which is now fully owned by Seek, has aggregated a number of colleges offering specialist training in design, hospitality, natural therapies, psychology and counselling and beauty treatment.

IDP is half-owned in conjunction with 38 Australian universities and provides placement services for international students looking to study in Australia.

All these businesses are reinvesting and expanding the number of courses and products on offer, resulting in strong revenue growth and operating earnings, but from a small base. Over time, as the market matures, this business will provide a valuable diversification from the main employment website earnings.

International expansion

After the financial year ended, Seek announced it has spent US$40 million to acquire 40% of a Mexican employment website, OCC. It is the clear leader in the Mexican market with 5.5 times the number of unique visitors and 1.5 times the number of job ads as the number two competitor. Seek will take 2 of the 5 board seats to provide an active input into the development of the business.

In Brazil, the Brasil Online business is beginning to generate rapid growth in this user-pays market. Very strong jobs growth of 58% is helping lift revenue growth (30%) and operating earnings growth (52%).

As the Chinese market continues to develop, Zhaopin is boosting its position with improved traffic and volumes metrics. Seek replaced the chief executive earlier this year and is happy with the realignment of focus.

In Malaysia, JobStreet is showing good improvement in the same key metrics. Seek is helping the website to develop new products as well as lift its share of volume in this high growth market.

Overall, Seek’s equity investments contributed $11.4 million in earnings to the full year result, reversing last year’s $1.4 million loss.

The weekly chart clearly depicts the corrective phase, between support at $6.61 and resistance at $8.57. Consolidations are healthy as part of the broader uptrend as this period allows for energy building to occur. We would anticipate a continuation of the uptrend over the broader term in line with the longer term uptrend firmly in place.

Summary

The fundamental factors that drive Seek’s earnings are in good shape as the employment market quickly returns to its pre GFC growth path. Being the number one employment website gives Seek a considerable advantage on its competitors, while the on-going structural shift of job advertising from print to online continues.

The valuation metrics of Seek and the other pre-eminent online sector companies reflect the high growth of the online market relative to traditional media businesses. We see no reason for this ratings gap to contract while the online market is still developing.

We will continue to hold Seek in the Fat Prophets Portfolio.