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Seek, Domain on track despite earnings downgrades

Lex Hall  |  01 May 2019Text size  Decrease  Increase  |  
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Online jobs site Seek and real estate listings company Domain Holdings are likely to shrug off earnings downgrades and have strategies in place to boost their revenue streams, says Morningstar.

Seek’s decision to expand its investment in offshore online learning platforms may be a short-term burden to its bottom line but will ultimately pay off for Australia's number one online jobs site, says Morningstar equity analyst Gareth James.

Seek (ASX: SEK) reported on Monday that it will invest $92 million to buy 50 per cent of UK-based online course platform FutureLearn.

It will also put $50 million into the latest investment round for Coursera, the world’s largest online learning platform, giving Seek a minority stake in this venture.

Seek reported a slight downgrade to fiscal 2019 earnings guidance but not enough to alter its Morningstar fair value estimate of $19.

At 3pm, Seek's share price was up 3.27 per cent at $18.80.

James says criticism of Seek’s expansion plans is short-sighted, arguing it is crucial to maintain exposure to disruptive business models in the sector.

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“In the short to medium term, this is likely to mean revenue growth will be prioritised and profits will be affected but the long-term prospects of the company should improve,” he says.

Founded in 1997 and listed in 2015, Seek’s Australian listings business receives 30 million hits a month, more than three times that of its closest rival. Seek says it operates in 14 countries, with exposure to almost 3 billion people.

These offshore markets are crucial to its growth, says James, who cites its tie-up with Chinese firm Zhaopin as potentially worth more in earnings than Seek’s Australian operations.

James expects Seek to generate an average return on capital of about 100 per cent during the next five years, well above the weighted average cost of capital of 8.2 per cent. 

Morningstar’s $19 fair value estimate implies a fiscal 2019 price-to-earnings ratio of 35 times, enterprise value-to-EBITDA of 17 times, and free cash flow yield of 7.5 per cent.

Seek, however, does face threats. These include the expansion of social media, particularly that of job networking site LinkedIn. And, James says, “the online jobseeker is likely to fragment through specialist sites offering differentiated industry opportunities.”

Domain: unfazed by earnings downgrade

James has also left intact his $2.80 fair value estimate for real estate listings company Domain Holdings (ASX: DHG) despite a downgrade in guidance.

The weakness in Australia’s east coast property markets is likely to abate and poses no threat to Domain’s long-term outlook, James says.

Domain was the worst performer on the ASX200 yesterday, falling 7.53 per cent to $2.70 after the company said its total revenue was down 6 per cent in the three months to 31 March.

Residential real estate prices have fallen 3.4 per cent and 3.2 per cent in Sydney and Melbourne respectively, in the third quarter of fiscal 2019.

James, however, expects the downturn to be cyclical. He anticipates property listings and Domain’s profits will eventually rebound on the back of population growth and growing listings.

“We continue to expect a real estate rebound in fiscal 2020, but even if this is delayed to fiscal 2021 it’s unlikely to impact our long-term view,” James says.

“Although the fiscal 2019 price/earnings ratio of 45 is relatively high, this multiple does not reflect our expectation of a real estate market rebound or the underlying growth trends we expect over the next decade.”

James expects Domain to close the gap on rival REA Group, which operates realestate.com.au. The two websites are now roughly equal on their number of real estate listings, and Domain’s app has been downloaded 6 million times, which is comparable to REA Group’s 6.7 million downloads.

Super Retail Group margins feel the heat

Super Retail Group remains overvalued despite posting a record 4.3 per cent rise in sales, which boosted its share price to a six-month record.

At one point yesterday, Super Retail Group (ASX: SUL) was trading up 4.59 per cent at $8.76, its highest level since late October. However, it has since fallen about 7 per cent to $8.04. Morningstar analyst Johannes Faul says the company is overvalued and has set a fair value rating of $7.50.

Faul argues that while the company leads its respective markets in Australia, it faces formidable competition from new and existing rivals – not least from Amazon – and will be forced to cut prices to maintain its market share, which will in turn hurt its profitability.

Management said its Supercheap Auto and Rebel Sports brands were performing in line with expectations, while Boating Camping and Fishing was maintaining its growth trajectory despite pressure on margins and Macpac was running at full-year expectations.

Faul says Supercheap Auto’s physical store network adds value for customers because of its in-store services. However, he is less bullish about its commoditised sports goods retailing segment. Stiff competition in this area is forecast to drive down earnings margins to 8 per cent from over 9 per cent currently.

A new enterprise bargaining agreement is another factor weighing on the retailer's near-term margins. The proposed EA covers about 10,000 staff and could inflate wages by 5.8 per cent in 2020, and by a further 2.9 per cent in the following years, Faul says.

“For the group, we have lowered our fiscal 2019 sales growth estimate to 4.4 per cent from 5.4 per cent in line with the reported year-to-date group sales growth of 4.4 per cent.”



is senior editor for Morningstar Australia

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