The other way to make more money from Seek
Key statistics: ASX: SEK
Closing share price 09.05.17: $17.850 52-week high: $17.890 52-week low: $- Most recent dividend: 23c Annual dividend yield: 2.37% Franking: 100%
Seek is a high-quality business that has been part of our portfolio for a few years. We like it for several reasons, including its dominant market position and its ability to pull the pricing power lever.
The company lived up to our expectations when it delivered its half-year results. The core Australian employment business posted a strong revenue result.
We talk about pricing power as being a key signal of the strength of a business.
It provides investors with protection against unexpected shocks to the business, as well as an additional lever to drive earnings and return growth.
Pricing power can be demonstrated through an ability to raise prices on the same product or service. While this delivers significant benefits to earnings and margins in the short term, it raises the risk that customers become resentful and/or competitors are encouraged to enter the market.
A more sustainable sign of pricing power is when a company can effectively lift average product prices by providing customers with product enhancements. That way the customer perceives a benefit in return for paying a little more.
In the results for the six months to December 2016, Seek's Australian employment business delivered 13% revenue growth.
However, only 3% of this came from increased volumes. The other 10% came from a 3% increase in price, 2% from a shift in volume mix toward higher average price customers and 5% from increased uptake of premium products.
With multiple levers to drive revenue growth, Seek reduces its pure exposure to the cyclical nature of employment demand in Australia.
The strong revenue growth in Australia in the first half has allowed the company to continue to step up its investment while delivering over 9% operating profit growth relative to the prior year in its Australian employment business.
The key to the long-term success of Seek will be its ability to leverage the data it captures on job seekers to provide value-added products into the recruitment and human resources functions of its customers.
Seek estimates that the employment advertising market in Australia is worth $500 million a year in revenue.
Results over the next two to three years will be critical indicators of whether Seek's new products are gaining traction in the broader market.