What's new?

As traditional print media companies are painfully aware, classified advertising is moving online at a rate of knots. Media players that have failed to establish a market-leading presence online - and that's all of them - now see the revenue increasingly flow to specialist web-based companies. Recruitment website Seek has had its revenues increase from just $40 million in 2004 to $210 million in 2008.

Fairfax (publisher of this newspaper) rejected an offer to buy a strategic stake in Seek in the early days on the grounds the asking price was too high. After almost five years, Fairfax could claim vindication because the bear market has savaged its share price. But the reality is Seek hosts about 60 per cent of all online jobs on Australia's major job sites while Fairfax's MyCareer site comes in at 18 per cent.

After establishing market dominance in the employment classified sector in Australia and New Zealand, Seek has begun to expand internationally. The company now has a 42.9 per cent interest in Zhaopin, a Chinese employment website, and has invested in companies with employment websites in South-East Asia and Brazil.

In Australia, Seek is moving beyond classifieds and building a presence within the broader education market. In 2006, the company invested in IDP Education, a provider of English-language testing and enrolment services for international students studying in Australia.

Seek has also invested in training and education providers Think and Dynamic Web Training.

The outlook

With almost 90 per cent of revenue derived from employment classifieds, the current global economic slowdown has made, and will continue to make, life very difficult for Seek. Recessions mean unemployment and while there will be more people seeking work, there will be fewer jobs available. Recent data shows online job ads declining rapidly and we expect this to continue into 2009.

Price

Of course, the market saw this coming and Seek has been massively de-rated throughout 2008. Since November last year, the stock has fallen from almost $9.50 (where it traded at a ridiculous 30-plus times earnings) to less than $3. From a charting perspective, the stock does not look particularly healthy so more falls would not be surprising.

Worth buying?

Given the economic sensitivity of the stock, there is a risk of further earnings downgrades for Seek as the global slowdown continues. Increasing the risk profile of the company is the fact the international expansion has been debt-financed at the worst possible time.

In August, the company negotiated a $200 million debt facility to finance the Asian and Brazilian expansion, which took gearing to higher levels than the market is now comfortable with.

For these reasons we would be cautious on buying. Having said that, Seek remains a good company that generates high returns on equity, even in cyclical downturns.

This downturn may exact more punishment on the stock price before the economic environment begins to improve, so we'd put the stock on the watch list but not buy just yet.