Undervalued stock of the week - Seek

December 7, 2012, 11:55 am John Abernethy Yahoo7

They are in a difficult market with some serious competitors, but Seek has potential upside at their current price.

GOOD value shares are becoming hard to find on the Australian market. Fund managers are constantly looking for undervalued shares to boost their portfolios and many of the stocks that we have been recommending to subscribers of our Myclime stock valuation service have risen in price in recent weeks and months as other investors have cottoned on. So much so that many of those shares are now fully valued.

However, there are always some that are overlooked, and we believe that Seek (ASX:SEK), the job website, is among them. The one caveat here is that it is facing some fairly strong headwinds in terms of a weakening domestic job market. And of course, fewer jobs being listed is bad news for a company that makes its money from the recruitment sector.

However, given Australia’s incredible resilience during the height of the global financial crisis - when our unemployment rate stayed far lower than anybody predicted - our ongoing skills shortage, and Seek’s growing international diversification (particularly in the emerging markets), we think this is a decent bet for those prepared to take a little short-term risk.

Seek is the leading online classified jobs site in Australia and New Zealand with a market capitalisation of $2.2billion. Although there are other challengers in this space, such as Linkedin, we think Seek is best placed to appeal to the mass employment market. If it can maintain its dominant position, it will be able to leverage this in the form of higher advertising rates which could help to offset any downturn in the domestic jobs market.

However, if we do see further softening in the job ads market, the share price may well fall further in the short term, a fact which we think would represent an even better buying opportunity for patient investors.

More importantly, in the longer term, Seek’s international expansion will prove crucial. It has bought significant stakes in numerous employment sites in fast-growing developing markets where jobs are being created at a rapid rate, and internet penetration is also increasing fast. Both factors will help boost these foreign online job operations, increasing revenues from overseas.

Seek now owns 56 per cent of zhaopin.com, the second biggest employment website in China; 55 per cent of jobsdb.com, a leading south-east Asian employment website; 22 per cent of Jobstreet, a Malaysian listed SE Asian recruitment operation and 51 per cent of Brasil Online Holdings, the owner of the first and second-ranked jobs sites in Brazil.

Finally it owns 57 per cent of Online Career Center, the top career site in Mexico.

While these operations contribute a relatively small percentage of Seek’s earnings today, these fast-growing economies will provide a much greater proportion of earnings in years to come – a key reason why Seek is a good bet for investors with a longer-term outlook.

We have a valuation of $7.90 for 2013 which represents a gain of around 20 per cent on current prices, but we forecast impressive future growth beyond that as its foreign operations gain momentum.

Company: Seek
Current price: $6.53 (7th December)
Forecast value: $7.90 and above ++
Potential upside: 20%

Readers of Yahoo7 Finance can obtain a free 14-day trial offer of the MyClime online share valuation and research service at www.clime.com.au.

Investors should not rely on this information alone and should seek independent financial advice from a qualified expert before considering any share market investment.
++Fair or forecast value is the price placed on the share after calculating a range of factors including profitability, assets, debt and, most importantly, Return on Equity – the same measure used by Warren Buffett to assess long-term value.

Shares are assessed by Clime Asset Management to calculate which companies are undervalued or over-valued based on their return on equity. History has shown that the most successful companies are those that produce the highest returns per dollar of shareholders' equity, yet this is not typically how shares are valued. This system highlights shares that are undervalued on this key measure. Shares are expected to reach this value in 3-5 years, as price tends to follow value in time.

Information is intended as a guide only. For specific advice contact your financial services professional.

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