SEEK Limited (ASX: SEK) is the leading online jobs advertising business in Australia, provides online vocational training and international student placement services, and part owns a number of online job sites in Asia, Africa and the Americas.
SEEK accounts for 22% of total job placements in Australia currently, and there is potential for it to continue to grow its market share. Also, it is likely that even more of the industry will move online in the future, presenting further growth opportunities.
However, this part of the business is reaching maturity and growth has slowed in recent years. In addition, the performance of the division is strongly tied to the Australian unemployment rate and so is impacted by economic cycles.
SEEK's education division generates similar revenues to its Australian jobs business on a "look through" basis, but only around half of the profits. It is split into three businesses, SEEK Learning, IDP and Swinburne Online. SEEK Learning is an online course aggregator, IDP provides university placement services to international students and Swinburne Online offers vocational training via distance learning. Both IDP and Swinburne Online are 50% joint ventures with universities.
The division is still very much in its growth phase, with both revenues and profits growing at over 20% per year. The Swinburne Online joint venture, established in 2012 is already generating around $28 million per year in earnings before interest, tax, depreciation and amortisation (EBITDA).
Handily, the education division provides a natural hedge to the domestic jobs business because demand for vocational courses tends to rise with higher unemployment.
SEEK's international business has the most exciting growth potential of its three divisions, with a presence in Africa, Mexico, South East Asia, India, Bangladesh, Brazil and China. It already makes up 38% of group revenue on a "look through" basis and 31% of group EBITDA.
In particular, the 66% owned Chinese jobs website Zhaopin contributes over $40 million EBITDA per year having only reached profitability in 2011.
SEEK's strategy is to invest in online job portals in developing countries. Once it has found a suitable investment, it will grow its stake incrementally which is less risky than outright acquisition. It allows SEEK to assess the progress of the business before fully committing, whilst retaining the skillset and motivation of the vendors.
SEEK's investments
IDP
SEEK paid around $36 million for 50% of IDP in 2006 and its share of EBITDA is now $28 million per year
Swinburne Online
The joint venture was established in 2012 costing Seek $5 million and its share of EBITDA is now $14 million per year.
Zhaopin
Zhaopin listed in America last year and SEEK's 66% share is worth US$530 million based on Zhaopin's current market capitalisation. Seek's share of EBITDA is around $42 million per year and incredibly its total net investment is under $150 million.
Brasil Online
SEEK's 22% stake cost around $150 million and its share of EBITDA is now about $22 million
JobsDB and JobStreet
These two South East Asian businesses are perhaps the only black marks against management's track record. Around $600 million in total was paid for a combined annual current EBITDA contribution of under $40 million.
Other
SEEK has committed more than $100 million to a number of other early stage ventures in Mexico, India, Bangladesh and Africa.
Foolish takeaway
SEEK is a high-quality business and unsurprisingly it is still run by one of its founders, Andrew Bassat. Whilst I normally don't like growth by acquisition strategies, SEEK's approach mitigates many of the risks involved. The company is well positioned to benefit from decades of growth driven by improving living standards in the developing world.
Unfortunately, the company is priced for perfection at almost 30x enterprise value to free cash flows. On a discounted cash flow basis with a 10% discount rate, the current price implies that SEEK will grow profits by 15.5% per year for the next 10 years and then continue to deliver its tenth year profits for ever. I actually think that SEEK is one of the few companies capable of this, but there is no margin of safety should it disappoint.
