Tag: Australian Market

Business Strategy and Outlook

Seek captures 90% of total time spent online searching for jobs, dominating the Australian market. This dominance within a small niche global geographic market, built through a first-mover advantage, represents a strong competitive advantage given its network effect. Australians view seek.com.au as their first port of call for looking for employment, which is why we ascribe a narrow moat to the company. 

Seek’s international investments offer strong growth potential. Through a close working relationship with investment group Tiger Fund, Seek has acquired minority shareholdings in the number-one online job sites in Brazil, Mexico, Indonesia, Thailand, Malaysia, the Philippines, and China. Low Internet penetration is a common feature among these countries while gross domestic product growth rates remain comparatively high. The Chinese investment, Zhaopin, is of particular interest, as funds continue to be reinvested back into further establishing its growing online market share. Internet data indicates that Zhaopin and rival 51Job continue to trade the desired number-one market position back and forth from month to month. Morningstar analysts view Seek as an entrepreneurial organisation that is unafraid to create new concepts and push the boundaries in offering a range of new services within education and job-seeking to an online market that is rapidly evolving, compared with traditional business models.

Morningstar analysts have increased our fair value estimate for narrow-moat rated Seek by 8% to AUD 21.50 per share following its stronger than expected first-half financial result. The strong result partly reflects the currently tight job market in Australia but also more maintainable improvements, such as higher revenue per advertisement. The fair value increase reflects a combination of the time value of money boost to our financial model and higher earnings forecasts. For example, we’ve increased our revenue CAGR for the “core” ANZ business to 11% from 8% over the next decade and increased its average EBITDA margin to 63% from 62% over this period.

Financial Strength

Morningstar analysts have increased our fair value estimate for narrow-moat rated Seek by 8% to AUD 21.50 per share following its stronger than expected first-half financial result. The strong result partly reflects the currently tight job market in Australia but also more maintainable improvements, such as higher revenue per advertisement. The fair value increase reflects a combination of the time value of money boost to our financial model and higher earnings forecasts. For example, we’ve increased our revenue CAGR for the “core” ANZ business to 11% from 8% over the next decade and increased its average EBITDA margin to 63% from 62% over this period.

Bulls Say  

• Seek has a dominant position in the Australian market underpinned by a network effect-based economic moat. This enables strong cash generation to fund other overseas businesses. 
• Seek has successfully diversified beyond its core Australian business to build a global online employment marketing group. 
• The network effect, epitomised by successful online market Titans such as Google, eBay, and Facebook, demonstrates the virtuous circle of the largest audiences attracting more and more users because of audience size.

Company Profile

Seek operates the dominant Australian online job advertising website, capturing 90% of time spent online looking for jobs. It also has an education division that provides vocational courses online. Overseas investments provide Seek with market-leading positions in the online jobs market in Asia and Latin America.

(Source: Morningstar)

• Relative to the pcp: (1) 

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Investment Thesis:

• Leading global market position, with high barriers to entry (very capital intensive).
• Attractive exposure to both developed markets and emerging markets’ growth.
• Clearly defined strategy to create shareholder value.
• Bolt-on acquisitions provide opportunity to supplement organic growth.
• Solid balance sheet.
• Leveraged to a falling AUD/USD.
• Benefits from the recently completed Bemis acquisition to start flowing through. 
• Capital management initiatives – current share buyback of $600m. 

Key Risks:

• Management fail to realize the synergies proposed in the Bemis transaction. 
• Competitive pressures leading to margin erosion and potential balance sheet pressure (e.g. reduced earnings leading to potential debt covenant breaches). 
• Input cost pressures in which the Company is unable to pass on to customers (even though the Company does pass through input costs).
• Deterioration in global economic growth.
• Value destructive acquisition. 
• Emerging markets risk.
• Adverse movements in AUD/USD.

Key highlights:

AMC’s 1H22 result highlighted the Company’s defensive capabilities and ability to recover higher input costs. Despite supply chain constraints holding back volumes, the Company delivered volume growth during the period and, on a further positive note, management’s comments suggested demand remains robust leading into 2H22. EBIT margin in both segments Flexibles and Rigid were down during the period (driven by input costs) but should improve in future periods. Management reiterated their previously provided FY22 guidance – EPS growth of 7-11% – however increased the share buyback amount to $600m (from $400m previously) for the full year. In our view, AMC’s current share price is screening attractively – trading on a 12-mth forward blended PE multiple of 13.9x and dividend yield of ~4.0%.  

• Group 1H22 headline results : AMC delivered solid 1H22 results, with revenue up +12% to $6.93bn, operating earnings (EBIT) up +5% to $769m and EPS up +9% to 35.8cps. Top line growth was assisted by approximately $650m driven by price increases highlighting AMC’s ability to pass through higher costs. Excluding pass through, organic sales were up +2% driven by higher volumes and favourable mix. AMC repurchased ~$300m shares in 1H22 and expect to repurchase a total of $600m in FY22. Group leverage (net debt / EBITDA) at the end of the period was 2.9x.

• Flexibles segment : Segment revenue was up +10% to $5.35bn, consisting of 2% organic growth (focusing on priority segments such as Healthcare, Coffee & Pet Food) and $480m boost from higher raw material costs recovery.

• Rigid Packaging segment : Segment revenue was up +17% to $1.58bn, however this includes +13% uplift from the pass through of higher raw material costs. Excluding pass through, segment revenue was up +4%. In North America, AMC saw solid underlying demand in the beverage business with volumes up +3% (accelerating to +6% in 2Q22).

• M&A quite whilst Bemis is bedded down and Covid hinders DD process : AMC hasn’t been active with bolt-on acquisitions in recent history, a key part of AMC’s growth strategy.

• Outlook – reaffirmed previous guidance : Management expects adjusted EPS to grow by 7-11% in constant currency terms, adjusted free cash flow of $1.1 – 1.2bn, and approximately $600m allocated to share repurchase (increased from $400m previously).

Company Description: 

Amcor Limited (AMC) is an international integrated packaging company offering packing and related services. Amcor primarily produces a wide range of packaging products which include corrugated boxes, cartons, aluminum and steel cans, flexible plastic packaging, PET plastic bottles and jars, and multi-wall sacks. The company has operations in Australasia, North America, Latin America, Europe, and Asia. 

(Source: Banyantree)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.