International employment classifieds and education business SEEK Limited (ASX: SEK) reported its full-year results to the market today. In addition to a significant gain on the sale of IDP Education Ltd (ASX: IDP), Seek's underlying results were also impacted by an increasing share of losses in new ventures.
Here's what you need to know:
- Revenue rose 11% to $950 million
- Net Profit After Tax ("NPAT") rose 27% to $357 million
- NPAT excluding significant items (like IDP sale) declined by 4% to $179 million*
- Earnings per share excluding significant items of ~51 cents per share
- Dividends per share of 40 cents per share
- Strong revenue and Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) growth across all classifieds segments
- SEEK Learning impacted by strong competition
- Guidance for Net Profit After Tax of $215 million to $220 million before investments in early stage ventures of $25 million (total of $190 million to $195 million)
*If losses from early-stage ventures were excluded NPAT would have risen $5 million to $198 million
So What?
Seek's results can be little confusing due to all the significant items as well as the impact of loss-making businesses which, if excluded, would have seen Seek's profits rise 14%.
Yet the key stats – in the classifieds businesses – continued to impress with sales revenue rising 30% and 35% across the Zhaopin and SEEK Asia businesses respectively. EBITDA at Zhaopin rose only 19% due to reinvestment, while SEEK Asia EBITDA was up 54% due to synergies and the effects of an acquisition as well as organic growth. The mature ANZ market also performed well, with revenue and EBITDA both rising 15%.
Zhaopin and SEEK Asia account for approximately 22% and 21% of EBITDA respectively, while the ANZ businesses account for 48%. The remainder is made up by Brasil Online and OCC Mundial and SEEK Education businesses.
Overall, SEEK's results (excluding one-off items) were impacted by higher depreciation and amortisation costs (due to acquisitions, among other things) as well as higher interest expenses due to debt used to finance an acquisition. This was enough to drag down SEEK's profit (excluding one-offs) even though a number of investments made during the year may pay off in the future.
Investing for the future
Through acquisitions as well as a number of strategic investments and innovations, SEEK is positioning itself to capture more of its various markets as well as key niche opportunities. These investments are expensive however and appear to be holding back profits, given that revenues rose substantially faster than profits (excluding one-off items) during the year. SEEK's outlook for 2017 for profits between $190 million and $195 million is significantly ahead of this year's result of $179 million, once the impact of loss-making businesses is accounted for.
In fact, the impact of loss-making businesses is set to rise even further, from $19.2 million in 2016 to $25 million in 2017. This acts to mask significant underlying profit growth – while additionally building SEEK's business for the future.
Accordingly I believe it would be more appropriate for buyers of SEEK today to focus on the group's investments – and the success of these – – rather than the decline in ordinary profits. There are risks that increased investment doesn't pay off if business conditions or competition worsen materially, but while investments are earning attractive returns it makes sense for SEEK to double down on its Asian and Australian businesses.
Although SEEK has delivered the goods, it is also starting to look pricey at around 30 times earnings. Given its success and ongoing heavy investment in new ventures however I would not consider selling.
