Trouble at SEEK?
SEEK Limited (ASX: SEK) this week released a trading update that contained some disappointing news. SEEK’s learning division has not performed as well as hoped in the second half of 2015, and SEEK now expects the second half of 2015 Net Profit After Tax to be broadly in line with the first half of 2015 – some 10 per cent short of what was implied by broker consensus.
There were a couple of issues noted, including IT problems related to an upgrade undertaken by TAFE NSW that has resulted in enrolment and withdrawal problems. SEEK had expected these problems to be resolved more quickly than they have been.
SEEK also noted some pressures as a result of a more competitive environment for SEEK Learning, and flagged investment in new products and services. This latter investment is expected to deliver high returns, but may reduce earnings in the near-term.
The markets response to this was decisive: SEEK shares declined by $2, or 12.3 per cent on the day.
On the face of it, this response looks to be overdone. Assuming the IT problems are solvable, the impact to value should be relatively small, and a conservative assessment of the investment in new products and services is that it will deliver no more than the cost of capital – i.e. value neutral.
That leaves us with a more difficult environment for SEEK Learning as the justification for a $2 per share price decline. Using UBS numbers as a guide, SEEK Learning only contributes around $0.70-$0.80 per share of value to SEEK, so a $2 decline seems like a lot.
Admittedly, SEEK trades on a robust multiple, and it is possible to quibble with the valuation at these levels. However, SEEK is a high quality business with attractive long term growth prospects, and its core business continues to track well. Further, in the current market there is nothing very remarkable about a high quality business trading on a robust multiple.
To us it looks like the share price reaction was a little excessive. In these circumstances, a slight increase in the Montgomery Funds’ exposure to SEEK seems warranted.
So that’s what happened.
Tim Kelley is Montgomery’s Head of Research and the Portfolio Manager of The Montgomery Fund. To learn more about our funds please click here.
Tim joined Montgomery in July 2012 and is a senior member of the investment team. Prior to this, Tim was an Executive Director in the corporate advisory division of Gresham Partners, where he worked for 17 years. Tim focuses on quant investing and market-neutral strategies.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Wojciech Blad
:
I’m software developer working as contractor and I don’t find seek as useful as it used to be few years ago. About 90% of potential contracts are now coming to me from linkedin.
Linkedin offers are closely matched to my skills, recruiter (agency or in-house) already spent time reading my profile and decided it is worth effort to start discussions with me.
The number of offers being emailed to me from seek is declining over last year or so, the same jobs are emailed every day, and very often same job is advertised by 5 or more agencies.
Seek’s user interface and features hasn’t changed much in the last 10 years, they only managed to fix search criteria last year, I used to receive few jobs matching my search criteria, the remaining majority was just plain garbage, dump of all it jobs posted on specific day.
My overall impression is that seek stopped innovating their job searching business long time ago, there is powerful competitor on the market and soon someone else may decide seek’s fate.
Gaveen Jayarajan
:
Perhaps Seek could be a case of the disrupters being disrupted?
Kelvin Ng
:
Thanks a lot Tim. Perhaps you guys could also talk about the Flight Centre profit downgrade today? (They seem to be coming through thick and fast!)
Thanks.
Kelvin
Random Ash
:
Never fully understood why you guys think SEEK is a high quality business. Purely from a personal point of view, I find their job site useless because of the flood of fake jobs from recruitment agencies.
Tim Kelley
:
We think about it mainly from the standpoint of long-term owners, who have done well, but bad user experience is a negative point.
Sam Goh
:
Hi Tim,
Im surprised that TMF have bought more. I thought $14 would still be a tad expensive for you guys. Thanks.