Seek (SEKAU) Hybrids

We believe there is value in the Seek hybrids, which are leveraged to favourable employment markets set to provide a tailwind over 2022 and 2023. This should support job ad volumes and yield – which alongside the theme of the ‘Great Resignation’ playing out in many job sectors, will support revenue and EBITDA growth. The company has high cash flow generation which provides the ability to reinvest into the business, as well as pay an appropriate return to debt and equity holders.

Seek has been able to diversify its business away from Australian & NZ (ANZ) successfully over the last five years. Its investments in China, South-east Asia, Brazil, and Mexico have contributed a significant amount of group sales and EBITDA (to date). The geographical diversification not only lessens Seek’s dependence on the Australian economy, but also creates further growth potential.

Seek has actively managed its balance sheet, with FY21 net debt to EBITDA sitting at a low c.2.34x and set to improve if the company hits its FY22 EBITDA guidance. As at FY21, Seek had facility limits total AUD1,652m, with c.AUD536m available in an undrawn capacity providing ample liquidity buffer. The company’s new dividend policy is also a more conservative metric, which debt investors will be happy to see.

The step-up in coupon to 5.70% above 3m BBSW from the first call date is steep for an issuer that all-else-equal would sit somewhere between a BB and BBB rated credit. Thus, assuming no unforeseen lockdown in funding markets, it would make sense for the issuer to call at the first call date.

As of FY21, the current total interest cost for Seek is 3.60% based on its consolidated debt profile (i.e., AUD47m/AUD1,312m). Based on current 3m BBSW, the Seek hybrids would be costing the company a total interest cost of 7.5%. In our view and based on the credit quality improvement (to date), Seek should be able to raise subordinated debt at a rate of less than 5.70% above 3m BBSW.

The risks to the credit and a non-call are: increased competition from Indeed and LinkedIn could impact Seek’s lead in the ANZ online employment market and/or a massive acquisition/takeout by private equity − which would push the company towards a B rated credit.

As a short-term opportunity, the Seek hybrids look fair value versus the other subordinated bond opportunities out there in the BB and BBB space (we see Seek as a stronger credit than Peet and Avanti respectively, but on equal footing with Qube).

We see call risk as low, given the company’s overall interest cost and the progress the company has made in deleveraging its balance sheet. We would expect to come to the market and refinance its subordinated security with either a new hybrid and/or a combination of bank and senior bond debt.

At greater than 6% yield to maturity (YTM) for 1-year, the Seek hybrids also stack up well as a switch out of either major bank T2 and AT1 securities (both ASX-listed and wholesale OTC). We note the Seek hybrids do not have franked distributions liked the major bank ASX-listed securities.

Source: IAM Capital Markets

Source: BondAdviser

• Subordinated, unsecured, convertible, exchangeable preference shares
• Interest is deferrable (but cumulative), floating rate and paid quarterly in arrears
• The margin is 3.70% above 3m BBSW
• Investors are protected via a dividend stopper, a step-up margin upon a change of control, and a cross default mechanism
• Seek has the right (but not the obligation) to redeem at the first call date of 20 June 2023. However, if the notes are not redeemed at first call date, the margin will step-up to 5.70% above 3m BBSW
• The final maturity is 20 June 2026

• Seek is essentially a portfolio of employment, education, and volunteer businesses creating product technology solutions to address the needs of job seekers and hirers and facilitates the matching between job seekers and hirers across online employment marketplaces.
• Seek is comprised of the core Seek Asia Pacific & America’s (AP&A) business, certain portfolio investments − primarily Zhaopin (23.5% interest) − and the Seek Growth Fund. The AP&A business is led by Ian Narev, former CBA CEO.
• The Seek Growth Fund is a newly created unit trust in which Seek will initially hold c.84.5% of the units. This business is led by Andrew Bassat and managed by an independent management company (Seek Investments).
• In what was a tough COVID-19 environment, FY21 revenue (up 17%) was driven by job ad volumes and yield. Seek’s ad volumes have responded quickly to changes in COVID-19 restrictions, both positively and negatively. Yields are also sensitive to the areas of the economy in which activity occurs.
• FY21 EBITDA to operating cash flow conversion was 94%. Cash flow from operating activities excludes interest, transaction costs, and tax payments (Continuing Operations).
• FY21 EBITDA margin improvement was especially pleasing given the pull-forward of costs into a period which had cyclical revenue weakness. Continued investment should also allow for greater operating leverage to emerge over time.
• FY21 balance sheet leverage was significantly reduced following the sale of the Zhaopin transaction. FY21 net debt to EBITDA is now sitting at c.2.34x and set to improve if the company hits its FY22 EBITDA guidance.
• Seek is set to receive total gross proceeds of AUD697m (AUD560m net). As of FY21, Seek had received c.AUD500m gross proceeds (c.AUD438m), which had been applied to Seek’s senior debt. Remaining proceeds are expected in H1 2022 and will be used to:
  1. extinguish Zhaopin Ltd’s remaining pre-transaction debt (AUD77m at 30 June 2021); and
  2. pay down Seek’s senior debt.
• Seek will equity account for Seek’s interest in Zhaopin as it retains a 23.5% interest, thus recognising its share of Zhaopin profits/losses in ‘share of equity accounted profits/losses’.
• Seek has updated its dividend policy to reflect a target payout of greater than 75% of cash NPAT less capex, which is a more conservative metric.

Source: Seek FY21 Report

Cash NPAT less Capex defined as:
Reported NPAT excluding significant items
+ Depreciation and Amortisation
+ Share-based payments (net of tax and NCI)
+/- Associate equity accounted NPAT contribution
+ Dividends received
+/- Fair value accounting adjustments
– Committed capex

1. Seek: EBITDA of AUD425-450m, revenue of AUD950-1,000m, NPAT of AUD190-200m
2. Seek Growth Fund: Equity accounted share of the NPAT losses to be in the range of AUD20-25m for H1 2022

Source: Seek FY21 Report

Source: Seek FY21 Report

The difference between debt per the above and the calculation below reflects finance lease and operating lease liabilities of around c.AUD205m, which have been included within debt.

Source: IAM Capital Markets

Seek has facility limits totalling AUD1,652m, with c.AUD536m available in an undrawn capacity. The average tenor of debt is c.2.9 years. The next maturity is not until November 2024. The borrower group includes Seek Limited and all subsidiaries in which its ownership is at least 90%.

The company’s calculation of leverage for the borrower group only includes senior debt facilities and excludes Seek’s AUD225m subordinated debt. We include Seek’s AUD225m subordinated debt in our calculations below. As at FY21, the borrowings and cash relating to the Seek Growth Fund are not included in the numbers presented above.

Note: Forecasts are based on Bloomberg Consensus and reflects Continuing Operations, not Discontinued Operations.

As a result of the structure changes and the Zhaopin sell down, Seek’s FY21 statutory financial results have been reported on a Continuing Operations basis. The table below describes what was classified as Continuing Operations versus Discontinued Operations.

Source: Seek FY21 Report

Source: Bloomberg

Source: Bloomberg

Source: Bloomberg

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