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+."
