SEEK/SEK

Seek, the big online ad employment company, downgraded FY earnings.

We wrote back in December that we thought this would happen, and thus to that end, it is pleasing to see it play out.

It’s a great company, no doubt about it, just the forward multiple (c40x earnings) into a weaker employment environment, which whilst strong in level terms is weaker in growth terms, and sometimes it’s levels and sometimes its relativities that drive the market, and in this case I think the impacts at the margin will dominate the outcome today for the share price.

The cashflows are also worth focussing on. Operating cashflows are essentially unchanged over the past four years, despite revenues doubling. Compare today’s OCF of ~$130m with the average below, going back to 2019.

It isn’t quite the cash generating machine that is consistent with a multiple of 40x.

Now there’s the pandemic in there, it’s been confusing to get a read on “steady state”, but given that the tightest labour markets in 50 years didn’t produce better outcomes, one has to be more than a little skeptical.

It’s also worth noting, given the downgraded guidance, that the declining activity accelerated (i.e., got worse) into November and December, and the new guidance assumes things hold at the December level, but not necessarily worsen. Should employment moderate further, Seek will downgrade again.

The bull case is given by the reverse. Here, the analyst is making the case that “given pricing power, and pricing levers you can pull, if volumes behave aren’t you set up for a strong FY25”.

I don’t think that tells us anything new (not meant critically). We know Seek enjoys pricing power, and the depth and yield aspects of revenue growth are real and relevant.

To round out, with leverage at ~2.5x, and cashflows that are, in our view, a little lighter on than they should be, with employment potentially set to moderate further, the risk reward is just not there.

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