Prior to its results release, Seek (ASX:SEK) had seen its share price rise 55 per cent since it last reported results in August 2020. This performance came on the back of rapidly improving monthly job advertisement data in Australia and New Zealand, as well as a broadly improving economic outlook from the roll out of a range of COVID-19 vaccines.

The company also faced a short seller attack in late October, which had a short-lived negative impact on the share price before turning into a squeeze. This helped drive up the share price 41 per cent between the end of October 2020 and 22 February 2021.

Heading into the release of Seek’s 1H21, market expectations were high for an upgraded near-term earnings outlook from the company.

Pleasingly, Seek did upgrade its guidance, with revenue in FY21 expected to be 6 per cent higher than management’s forecast at the Annual General Meeting (AGM) at A$1.7 billion, EBITDA to be 15 per cent higher at A$460 million, and net profit double its previous estimate at A$100 million.

The upgrade to guidance since the AGM is due to an acceleration in the rate of recovery in job ad volumes in Australia, New Zealand, and to a lesser extent Hong Kong, Singapore and Thailand.

Areas of positive surprise

Outside of the upgraded guidance, the primary areas of positive surprise were:

• The strength in yields in the ANZ business, which increased 12 per cent relative to the prior year. However, most of this increase appears to be due to mix shift toward the higher yielding SME channel, which grew volumes 15 per cent. This compares to a 16 per cent reduction in overall volumes, implying recruiter and corporate job ad volumes declined around 29 per cent.

The risk is that the benefit from mix partially reverses in future periods once recruiter volumes recover.

• Online Education Services showed both revenue and EBITDA growth. The business has been a definite COVID winner as students opt for online courses. The business has also successfully brought on new partners in recent years, which should see the business grow going forward.

There was an overriding negative from the result however. The company provided more detail on its intention to sell down its holding in Chinese job portal Zhaopin. While the transaction has not been finalised, the indicated price values the company at A$2.2 billion. Seek is looking at selling down to a 23.5 per cent stake in the company from its current 61 per cent ownership (slightly lower on a fully diluted basis).

This implies a valuation of around A$1.3 billion for Seek’s stake in the company. The problem is that most analysts value Seek’s stake in Zhaopin materially higher than this figure. Looking at the most recent valuations for five sell side analysts, the average value incorporated for the Zhaopin stake was A$2.47 billion and ranged from A$1.4 billion to A$3.3 billion. Reducing this to A$1.3 billion would reduce their overall Seek valuations by an average of A$3.30 per share.

The other issue for investors is that the sell down reduces Seek’s exposure to its largest long term growth opportunity, China. This will force investors to change their investment case on the stock to some degree.

Increased competitive intensity

The other concern from the result was comments that Facebook had noticeably increased its job ad volumes in the period. Seek’s share of the job placements fell from 33.4 per cent in FY20 to 30.9 per cent in 1H21, with the company flagging increased competitive intensity.

While management said Facebook had mainly grown in low value/low skill job placements, it is a concern that it could gain a toehold in the market and act as an anchor on pricing going forward. Seek’s new pricing structure should make it more competitive in the low-end market as prices are reduced, offset by price increases on higher skill, small candidate pool job placements.

Last, the company announced further management transition, with co-founder and current MD Andrew Bassets moving into an Executive Chairman role while also taking up the CEO role for the Investments division. Former Commonwealth Bank CEO Ian Narev will become the Group CEO of Seek from 1 July 2021. This will coincide for the retirement of the long-term CFO Geoff Roberts. While Ian Narev stated his support for the current strategy, changes to the top two executives in the company increase the potential for strategic change more broadly at Seek.

Andrew Bassat also commented on the potential to split the AP&A and Investment divisions into two separate companies. This could see a greater focus on the underlying value of the loss-making Early Stage Ventures business and unlock hidden shareholder value.

The Montgomery Funds own shares in Seek. This article was prepared 24 February with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Seek you should seek financial advice.