MENU

Top broker says its time to take profit on the SEEK share price run

The SEEK Limited (ASX: SEK) share price tumbled this morning after UBS downgraded the stock following the online job website’s half-year results announcement.

The SEK share price tumbled 3.7% to $18.07 in morning trade to reverse some of its stunning 8% plus gain yesterday when investors embraced its profit results.

The morning sell-off makes SEEK’s share price one of the worst performers on the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index although it’s still holding up better than the Adelaide Brighton Ltd. (ASX: ABC) share price, Lynas Corporation Ltd (ASX: LYC) share price or Vocus Group Ltd (ASX: VOC) share price.

Investors too optimistic

But UBS thinks investors should use yesterday’s the share price rally in Seek to dump the stock and has cut its recommendation to “sell” from “neutral” while lowering its price target to $17 from $18.50 per share.

The market is underestimating SEEK’s earnings risk in FY19 and FY20, according to UBS, and the broker thinks the stock is at risk of suffering a consensus earnings downgrade if the Australia and New Zealand (ANZ) job market softens and China’s economic conditions worsen.

“At a headline level, revenue growth of +21% yoy was higher than UBSe +18% yoy [year-on-year] – driven by a beat in Zhaopin offline revenues,” said UBS.

“However, the step-up was partly due to a one-time lift in outsourcing revenues (which is unlikely to repeat in FY20) as well as strong growth in lower-margin campus revenues.”

Further, the broker believes there are signs that Zhaopin (Seek’s Chinense job site) online revenue growth will slow into the second and third quarters of the current financial year ending in June 30.

ANZ growth about to slow?

While SEEK’s ANZ job ads also appeared strong in the first half, UBS warns that forward growth is likely to fall as the months of February to April have been weak periods for Seek in 2018 and the trend could repeat this year.

What this means is that investors shouldn’t extrapolate SEEK’s good 1HFY19 results into the second half (or FY20), particularly as the company isn’t likely to take its foot off the pedal when it comes to capex even if revenue slows as senior management key KPIs are tied more to customers than revenue or earnings.

“We also remind that SEK LTI’s have no EPS hurdles – only an absolute share price hurdle,” said UBS.

“This suggests consensus expectations for FY20 EBITDA growth to accelerate to +13% yoy (vs. UBSe FY19 +7%) are overly optimistic. Below EBITDA, a continued ramp in capex should also see D&A continue to rise. We see FY20E NPAT (post ESV’s) of only c$203m vs. consensus expectations of c$230m+.”

Top 3 ASX Blue Chips To Buy For 2019

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked...

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2019."

Each one pays a fully franked dividend. The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies move – we may be forced to remove this report.

Click here to claim your free report.

Motley Fool contributor Brendon Lau owns shares of Vocus Communications Limited. The Motley Fool Australia has recommended SEEK Limited and Vocus Communications Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…

Including:

The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!