Seek (SEK) has learned a hard lesson from its online vocational education business as technology issues at a major supplier have caused it to downgrade earnings forecasts for FY15. Seek now expects the second half to be in line with the first, having previously expected moderate growth. Furthermore, the company has also moderated its outlook for FY16, stating it expects to make aggressive re-investment in its brands.
That may be the case but Morgans believes the subsequent sell-off in the share price was excessive, as expectations were already being scaled back for FY16 onwards. The broker reduces profit forecasts over FY16-20 but believes downside is limited as long as the Australian employment market holds its current levels. Seek remains one of the fastest growing Australian multinationals in Morgans’ view, with the potential to deliver a further 5-10 years of earnings growth, and this justifies an Add rating.
The revenue shortfall emerging in the learning business in FY15 has been partly caused by a new platform for enrolment and administration introduced by TAFE NSW, which is Seek’s second largest provider of courses. Moreover, heightened competition for student enrolments in the vocational education space has also had a material impact. Morgans observes the downgrade in learning has been offset in other segments, notably domestic employment, Zhaopin and Brazil Online.
Weakness in learning was not unexpected but the magnitude of the downgrade surprised Citi. Also, the company’s statement regarding aggressive re-investment in FY16 exceeded the broker’s expectations. Citi believes the challenges facing the tertiary education sector are being widely felt and, while the TAFE contract is specific to Seek and problems could abate in FY16, there is the prospect of diminishing returns because of competition and government reforms.
While the argument for a need to spend to defend its market share can be made, Citi believes the long lead times on the strategy and escalating costs raises the risks. With the share trading at fair value the broker retains a Neutral rating.
To Macquarie the company’s robust outlook is far from lost. Years of strong growth have been hit at the one time by increased competition, structural risks and the one-off impact of the IT problems. FY15 is considered a consolidation, or stagnant, year. The broker accepts the outlook is more precarious because of competition and industry reforms, and, taking a more conservative view, downgrades earnings estimates to account for the learning division downgrade and some softer projections for Zhaopin. Nevertheless, Macquarie maintains an Outperform rating.
The broker believes the learning business needed to be de-rated materially but this appears priced in with the aggressive sell-off of the stock. Over time, the market should regain confidence in core assets that are well positioned for growth. The broker also observes Seek has always invested aggressively in its businesses, albeit causing some frustration for investors. Current momentum remains strong for job ads while Seek Asia can capitalise on the benefits of merging JobsDB and JobStreet. Macquarie expects double digit revenue growth in this segment as revenue synergies begin to come through.
The extent of the wound inflicted by TAFE NSW was of particular surprise to Deutsche Bank and, even when considering the IT problems will likely be a one off, the company has also cited the vocational education fee reforms as another factor which will inhibit earnings. The reforms, which prohibit providers from levying all fees in a single transaction, are likely to impact timing as payments are spread over a longer period, while some students may withdraw if they do not progress. Given earnings for the learning business have historically been very lumpy the broker expects a near-term decline while the issues are being managed.
UBS also believes the market has been too short-sighted in its reaction, with the downgrades largely confined to the learning business and the short-term re-investment designed to tap new opportunities. Despite this view, the broker maintains a Sell rating as the stock still appears expensive despite the fall in its price.
FNArena’s database has three Buy, three Hold and two Sell ratings. The consensus target is $16.29, suggesting 12.2% upside to the last share price. This compares with $17.13 ahead of the announcement. Targets range from $13.40 (UBS) to $19.12 (Morgans).