It seemed a statement of the obvious when Rupert Murdoch recently observed that classified revenues are undoubtedly migrating to the web, probably not to return to traditional media.
Classifieds migration, an issue that has been confronting newspapers since home broadband became ubiquitous, is one of the most talked about themes among media analysts. The factors driving classified advertising to the internet include the reduced cost of advertising as production and distribution costs are dramatically lower than the print alternative, together with a richer user experience online thanks to search functionality and capacity for additional content, such as photos.
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The curious thing about classified migration is that falling advertising revenue (analysts estimate that Fairfax Media’s metropolitan newspaper classifieds are down as much as 25 per cent this year alone) is hitting newspaper company share prices, but specialist internet classifieds businesses, which boomed when home broadband penetration was increasing rapidly, are not seeing a corresponding increase in support. Seek is down by more than 55 per cent from its highs of late 2007, while realestate.com.au is off about 35 per cent.
The answer to this inconsistency may be that there is little migration in Australia. In fact, newspaper classifieds are declining in many categories while the internet holds broadly steady. The majority of jobs, houses and cars have been advertised on the net for years now. Some have also been advertised in print. Increasing recognition that consumers are looking to the internet as their main source of classified advertising is prompting advertisers to continue with online advertising while reducing print expenditure.
The reasons for Seek’s share price decline become obvious when historic broker forecasts are compared with actual performance. Looking at analyst assumptions from 2007 is a window into an era where rosy expectations about both the robustness of the job market and the long-term positive impact of structural shift in the advertising market prevailed. Macquarie’s price target of $8.17 at the time was predicated on earnings before interest and tax growing from $78 million in 2007 to $142 million this year and $217 million in 2012. Cyclic factors were not anticipated in these numbers!
In fact, the company’s fortunes have played out differently. While Seek’s investor presentations maintain that migration to online is continuing (focused on job categories including health care, education, trades and government), it is more than outweighed by a decline in the number of jobs on offer. Indeed, industry data for online job ads showed negative year-on-year performance for the first time in October 2008, down 18 per cent in the December quarter. Current trends will see Seek achieve EBIT of just $88 million this year and a continued flat performance next year. The share price is below $4.
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With Seek experiencing earnings cyclicality for the first time, it is apparent that structural change is not going to provide permanent growth in earnings. Consequently, analyst valuations have been revised downwards to be broadly in line with the current share price, and even at that level there is no allowance made for the risk that new providers, focused on specific industry niches and providing content additional to a jobs board, will find a way of gaining traction in specialised employment fields. Strong increases in the Seek share price are only likely if the employment market recovers faster than is anticipated, or if Seek’s expansion activity in new geographies (such as China and Brazil) proves fruitful.
In contrast to Seek, the prosperity of realestate.com.au is less reliant on either continued structural change in classified advertising channels, or on absolute volumes of transactions. Seek charges a fee for each job advertisement placed while realestate.com.au is positioned as an industry utility where real estate agencies pay a monthly subscription fee (currently averaging just under $1000) to list all of their properties on the company’s websites with very little transactional advertising. As a consequence, variation in the total number of properties advertised has little impact on the company, although the model is shifting slightly to allow vendors to pay additional fees for their listing to be given greater prominence. It would take agencies closing their doors in large numbers to materially impact the company’s earnings.
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There is a lot to like about the realestate.com.au model. A commanding leadership position, attracting more than twice the number of visitors of its nearest Australian rival, provides protection from all but the most well-funded of new entrants and ensures that individual estate agents will not risk sitting out from realestate.com.au. There is no obvious barrier to maintaining the company’s market position while above-CPI subscription price increases should be achievable. The monthly subscription model provides good earnings visibility, with analysts expecting the Australian business to generate $67 million of earnings before interest, tax, depreciation and amortisation this year after full allocation of corporate and other costs. The company is cash positive and has a market capitalisation of under $590 million.
One factor that has constrained its share price has been the previous strategy of reinvesting cash flow from the Australian business, which is a cash cow, into new businesses overseas. The group’s investments in Britain and Italy will together lose close to $20 million in EBITDA this year. With a new CEO recently joining realestate.com.au, analysts anticipate a more ruthless approach to either achieving profitability or exiting these businesses.
The combination of low-risk Australian earnings and a strong growth outlook, together with the prospect for easy wins in the international businesses, is sufficient for Carpathia to rate realestate.com.au as a “buy” at current prices.
By David Symons
May 23, 2009
source: business.smh.com.au