The Seek Limited (ASX: SEK) share price has followed the struggling S&P/ASX 200 Index (ASX: XJO) to slump more than 6% on Thursday. Adding further insult to injury, Seek has come under strong scrutiny from an offshore shorter, Blue Orca Capital. Blue Orca published a 39-page report that values the Seek share price at just $7.20. Here is the rundown of the report.
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The Seek business
Seek has a portfolio of employment, education and volunteer businesses which span across Australia, New Zealand, China, South East Asia, Brazil, Mexica, Africa and Bangladesh. The company is regarded as a tech company as it creates product technology solutions to address the needs of job seekers and hirers. It then facilitates the matching between job seekers and hirers across its online employment marketplaces.
Blue Orca's short report
Blue Orca critiques Seek's legacy platform in Australia as stagnating in growth. But the report mainly target's Seek's China business. Its Chinese online recruiting platform Zhaopin has been cited by Seek as China's #1 player and growing rapidly. In FY20, Zhaopin accounted for 48% of the company's consolidated revenues and was Seek's only segment which reportedly grew revenues and profits. Blue Orca points to Seek's Chinese business as a driving factor for why the company is able to trade at 404 times forward earnings.
However, Blue Orca's due diligence has revealed that "Zhaopin's platform is inundated with fake postings by companies which were deregistered, in liquidation or flagged as abnormal operations" by Chinese authorities. Companies that Blue Orca had called out about their job postings on the website "stated directly that the postings were fraudulent".
Blue Orca has described the Zhaopin platform as "rotten" and "devastating for Seek's prospects". It also takes a jab at the company's financials, stating that Seek's dividends give the false impression that its business produces healthy profits and cash flows, but these payments have "largely been funded by debt".
Rather than valuing Seek as a fast-growing online recruiting platform, Blue Orca describes the business as one that is "a slow or no-growth platform whose core business is shrinking and which carries a dangerous amount of debt". As a result, it values Seek's business at a "generous 20.5 times EV/adjusted EBITDA" and value's the Seek share price at just $7.20 per share.
Foolish takeaway
Whether these statements are true or not, this situation is very similar to the short attack on WiseTech Global Ltd (ASX: WTC). J Capital made similar, seemingly outrageous statements such as Wisetech delivering overstated profit, suspect European growth and underperforming acquisitions. The repeated back and forth between J Capital and Wisetech was devastating for the Wisetech share price and sentiment. However, the company has since made a significant recovery from its previous lows.
