A beat-up multi-media business looking to turn a corner and an online juggernaut seeking global domination impressed the market this week, with both having taken different paths since Fairfax Media Limited (ASX: FXJ) reportedly declined the opportunity to buy a stake in SEEK Limited (ASX: SEK) around the year 2000, because Fairfax believed it unnecessary on future assumptions.
The advertising revenue followed the consumers online and SEEK's market value is now around two-and-a-half times that of Fairfax. With ecommerce still the key growth paradigm, what is the future for these two now?
Fairfax's half-year results showed a 48.5% increase in net profit year-on-year for continuing businesses, despite revenues continuing to fall. The group has floundered in the face of declining print and advertising revenues, with the improving profit largely a result of annualised cost savings of $260 million.
On a like-for-like basis Fairfax Group revenue declined 5.5% on the prior period and unless it can turn around the top line decline the outlook remains tough.
It's hoping several relatively new revenue initiatives will help turn the tide. Digital subscriptions for The Sydney Morning Herald and The Age are one avenue it has gone down, but whether consumers will stump up for content they are able to receive for free elsewhere is questionable, especially with competition set to intensify.
Among the established digital businesses, the highlight was Domain.com's online revenue growth of 33% and earnings growth of 50%. The big picture still shows only 16% of group revenue coming from digital though; in other words a significant proportion of other revenue is still from sources that perhaps face terminal structural decline, in particular its metropolitan and regional newspapers and other print operations. Given this picture, Fairfax needs to keep finding revenue growth from its established digital mastheads like The Sydney Morning Herald, The Age, Domain, Drive and RSVP.
Based on forecast FY14 earnings Fairfax trades on a price-earnings ratio around 18 and presuming it is at least able to maintain the interim dividend declared of two cents per share is trading on a forward dividend yield around 4.5% fully franked.
In contrast to Fairfax, SEEK just posted a spectacular 29% boost in profit, 38% rise in revenue and 40% increase in dividend payout for the half year to December 2013. The key drivers of the result were SEEK International and SEEK Education with the market-leading domestic business even seeing revenues and profits a touch down on the prior period. SEEK expects overall profit to be marginally greater for the second half of FY 2014.
It claims to have exposure to over two-billion people in the online recruitment market and much investor excitement has been focused on its potential in Asia through its 80% owned Chinese subsidiary, Zhaopin, the number two jobs website in China. This week it also announced the full acquisition of Jobstreet, an online employment business that operates in Vietnam, Malaysia, Singapore, Indonesia and the Philippines.
However, the jewel in SEEK's international crown may be its 51% ownership in Brasil Online which achieved 47% EBITA growth for the half year to December 2013. SEEK also has a substantial interest in Online Career Centre Mexico and the two countries combined have populations of more than 320 million less than half of whom currently have internet penetration.
Based on forecast FY 2014 earnings SEEK is trading on a price-earnings ratio around 34 and dividend yield of 1.5% fully franked.
Foolish takeaway
SEEK's success has been based on its ability to stay ahead of some ferocious competition including LinkedIn, CareerOne and Fairfax's MyCareer. As Fairfax knows, it's one thing getting to number one, but quite another staying there. SEEK is a quality founder-run business, but given the competitive risks, it looks far from cheap at today's prices. While Fairfax is not out of the woods yet and also looks fully valued at today's prices.
