NewsBite

Seek and you may still find good growth

DURING the last decade the job classifieds market has undergone a radical transformation.

DURING the last decade the job classifieds market has undergone a radical transformation. Gone are the days of trawling through Saturday's newspapers with a pen, circling prospective career opportunities. Like most other classifieds, job lists have made the transition from print to online and in the process, people are now Seek-ing more career opportunities from one website than any other. But like the print classifieds market before it, is the sun beginning to set on this golden period of online growth?

Seek is the leading employment classifieds website in Australia, attracting 75 per cent of total ads and 78 per cent of visits among all the job websites in the domestic market. Competitors have been unable to make meaningful inroads into Seek's market share and this has resulted in the company increasing its earnings by 22 per cent a year, from 7c a share in 2003 to 44c in 2012.

Seek has managed to sustain its leading market position because of the network effect: the more people who use the website to advertise a job, the more this increases the value to other users. Yet Australia is not a very big market, and the downside to such strong growth is that maturity can be reached relatively quickly. Old age hits Australian businesses more quickly than elsewhere.

After operating for 15 years, Seek appears to be reaching middle age, if not old age. The latest half-year results revealed Seek's revenues and profits from domestic classifieds decreased for the first time in the company's history. Does this mean that the dream run is over?

Middle age in Australian job classifieds, however, doesn't mean that Seek's growth prospects have completely diminished. You see, Seek is a very good case study of how management can deploy recurring earnings to support alternative ventures. Seek has used its knowledge of the jobs market to find success in providing complementary services and international investments.

Education and retraining is necessary for many job seekers and Seek Learning helps people enrol in career-related university and TAFE courses, while Think offers higher education and vocational qualifications. Seek's IDP offering provides support and guidance to international students in Australia.

While it was argued that Seek paid too much for Think following the loss in 2011, Seek has turned the division around and online profit margins can increase quite quickly with scale. In the first half of 2013, revenues from Seek Education grew from $106.7 million to $119.5m, resulting in EBITDA margins increasing from 10 per cent to 18 per cent.

The biggest driver of future growth for the company, however, will be from its offshore investments, which currently constitute 17 per cent of the group's earnings. Management realised that it would be difficult to penetrate the offshore markets with its domestic business model. As such, it has been buying stakes in listed entities and then gradually increasing their holdings as the divisions grew.

Seek has a majority holding of the leading job sites in Mexico, Brazil and Asia. But Seek's potentially most lucrative venture is its 78 per cent stake in China's second-largest online jobs list, Zhaopin. It was recently announced that Zhaopin would be floated on the Hong Kong exchange or the Nasdaq. This could result in a valuation of more than $650m, not bad when you consider that Seek's market capitalisation is $3.3 billion. Seek has commented that it is not looking to exit its position once Zhaopin floats, which provides a clear indication that there is a lot more potential growth in store for the company.

Investors should look through a company's short-term wins or losses and focus on the long-term prospects.

Many online darlings with positive network effects are having difficulty replicating their success elsewhere but this does not appear to be Seek's problem.

Roger Montgomery is the founder of Montgomery Investment Management and the author of Value.able: How to Value the Best Stocks and Buy Them for Less Than They're Worth, available at www.rogermontgomery.com.

Roger Montgomery
Roger MontgomeryWealth Columnist

Roger Montgomery is the founder and Chief Investment Officer of Montgomery Investment Management, which won the Lonsec Emerging Fund Manager of the Year award in 2016. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch. He is the author of the best-selling, value-investing guide book Value.able and has been writing his popular column about investing and markets for The Australian since 2012. Roger is an unconventional investment thinker, launching one of the earliest retail funds in Australia with a broad mandate to be able to hold large amounts of cash when perceived risks exceed implied returns.

Original URL: https://www.theaustralian.com.au/business/wealth/seek-and-you-may-still-find-good-growth/news-story/aea78d509517ea45119635c9bd033f67