Most of Seek’s earnings now derived offshore

With Seek’s (ASX: SEK) share price up over 10% since the release of its six months result (ending 31 December 2015) late February, it’s no secret how the market felt about the job search site’s 9% growth in underlying profit to $102.4 million.

Given the recent subdued economic conditions, revelations that Seek has consolidated its market leadership position with 7.1 million user profiles on its platform – up 41% from the prior comparable period – comes as welcomed relief for long-suffering shareholders who’ve watched the stock shed its ‘market darling’ status and bounce progressively lower since late December last year.

Excluding the profit on the sale of its stake in IDP Education, underlying net profit was flat at $93 million.

But this shouldn’t overlook the fact that much of Seek’s growth can be attributed to its ever expanding international division – now spanning 14 countries, including China, Brazil, Mexico, Africa, India and Bangladesh – which delivered a record 36% uplift in earnings before interest, tax, depreciation and amortisation (EBITDA) to more than $100.6 million.

Interestingly, first half international earnings were for the first time, higher than the domestic division’s $88.6 million, and that’s a significant milestone. But given that EBITDA in the local division was up 18%, there’s little substance to the notion that its Australian business is now ex-growth.

Equally noteworthy, despite the lingering disruptive threat from well-resourced competitors, Seek’s sustainable competitive advantage, and the ‘network effect’ – where the greater the number of people joining, the more valuable and bigger it becomes in scale – is alive and kicking, and this allowed it to lift prices 4%.

While Seek’s domestic market is looking a lot more mature these days, expectations of 5-8% full year earnings growth, and 15-18% revenue growth – with profit expected to be about $195 million – proves that the company’s growth story remains intact, even if the second half is somewhat than the first.

Much of the softening in the second half can be attributed to weakness in Seek Learning and Brazil, plus absence of any contribution from IDP Education,

But while there is still growth to be had within the domestic market, Seek International remains the company’s most significant source of earnings growth.

Losses from Seek’s early stage investments will be a little higher than expected in 2016. But founder and CEO Andrew Bassat has urged the market to look beyond the latest result to the next five years, when he expects the company’s China and south-east Asia ventures to grow bigger individually than its Australian operations.

Beyond Asia, Seek expects significant growth from its Seek Learning’ type business in Mexico, where enrolments almost tripled in the half and has launched a similar business in Brazil.

The single biggest unknown right now is whether Seek will accept a takeover bid for its 62% stake in China’s market-leading Chinese jobs website Zhaopin.

The bid consortium has offered a 22% premium to the prevailing share price for each ordinary share Seek doesn’t own.

While this offer might appear attractive, it’s unclear whether Seek has its own plans to change the material direction of Zhaopin.

Zhaopin is clearly strategically important to Seek, but given that it comprises less than 20% of total intrinsic value, isn’t expected to change broker valuations or risk assessments on the stock.

With Seek’s international businesses now dominating its earnings, investors need to be more mindful of the stock’s heightened exposure to foreign exchange movements.

Despite having a long-term funding gap of $688 million, Seek does have an investment grade balance sheet, and has successfully reduced net-debt to equity from 42.81% in 2015 to 5.95% in 2016.

Earnings per share (EPS) has been excellent over the last five years and is expected to remain so; with EPS of $0.44 in 2015 forecast to jump to $0.59, $0.63, and $0.72 in 2016, 2017 and 2018 respectively.

Meantime, return on equity (ROE) is expected to grow from 14.79% in 2015 to 18.55% in 2018.

If you own the stock, there’s neither reason to sell nor buy more shares. Currently trading on a forward (2016) price to earnings (P/E) of 26.81, and a 50% premium to its intrinsic value, the stock does look expensive.

However, it’s still trading at an 11% discount to its 12 month high of $17.93, and the stock does have the capacity to consistently deliver positive news to the market.

While further upgrades are likely, $13 currently makes for a more attractive entry point.

Watch further announcements on Zhaopin closely, especially any decision by Seek not to sell.