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COMPANY NEWS & UPDATES

Seek Limited ( SEK )

Sell Valuation $ 18.50

Earnings Forecast

* Profit & EPS adjusted for options , goodwill , notional earnings and nonrecurring items .

Zhaopin Selldown

We have cut our valuation for Seek by 9 % to $ 18.50 per share following its first-half financial result . The valuation cut is driven by the selldown of Seek ' s investment in Zhaopin , to an equity stake of 24 % from a prior 61 %, at a valuation below the implied value of the investment in our financial model . Offsetting this impact to some degree is the positive effect of higher earnings forecasts for the ANZ business , which exceeded our expectations in the first half , and lower earnings forecasts for the Asian and South American businesses , which are performing below our expectations .

At the current market price Seek remains overvalued . Like many companies , Seek experienced a strong share price rally from its lows last March , nearly tripling in value over the past year . However , we expect some of the rally was due to interest-rate cuts in 2020 , and we ' re not surprised that the sharp falls in Seek , and other growth stocks has coincided with a sharp increase in long bond yields .

We also expect the fall in Seek ' s share price is partly due to the price achieved for Seek ' s investment in Zhaopin . Seek has agreed to reduce its stake in Zhaopin with the transaction value implying an equity value of $ 2.2 billion valuation for Zhaopin on a 100 % basis , or just $ 1.5 billion including taxes and transaction costs . This is materially below our implied valuation for the company and we expect , investors have lowered valuations accordingly .

Although Seek did not declare an interim dividend , the company intends to pay a dividend in lieu of the interim dividend prior to the FY21 financial result in August of 20 cents per share and we expect dividends to be reinstated and sustainable from the full-year FY21 result .

Seek ' s prior 61 % shareholding in Zhaopin resulted in full consolidation of Zhaopin and Seek ' s financial statements . This meant Seek recognised 100 % of Zhaopins ' s revenue and costs but reversed nonattributable earnings via a noncontrolling interests line on the income statement . The sell-down of the shareholding means Seek will now equity account the investment , meaning all of Zhaopin ' s revenue and costs will be removed from Seek ' s financial statements , other than for a single entry in the equity accounted investments line . The change in accounting has implications for management ' s earnings guidance .

Seek ' s other big news is its intention to separate the company into two businesses : one comprising the relatively mature core businesses , and the other comprising the relatively early-stage Early Stage Ventures , or ESV , division and Online Education Services .

We ' re not surprised by the decision to separate the group , considering investor concerns in recent years about the impact early-stage investments were having on group profitability . Although the core ANZ business has a very dominant position in the Australian market and is a reliable generator of cash , the ESV ' s are a very different proposition . The nature of early-stage investment in technology is that revenue growth is usually prioritised over profitability , and some investments simply won ' t succeed . This means the type of investor , which would be interested in Seek ' s core businesses is likely to differ from those interested in the earlystage investments . From Seek ' s shareholders ' perspective , the separation may enable a higher market valuation for each of the combined entities and potentially more success due to more focused management . However , we expect the two entities to continue to have very close ties .

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