Afternoon Report / Seek reinvesting for growth at the expense of profits (SEK, AMC)

By Market Matters 06 August 18

Seek reinvesting for growth at the expense of profits (SEK, AMC)

Market Matters Afternoon Report 6th August 2018

WHAT MATTERED TODAY

A positive session to kick off the week although it was quieter with a bank holiday reducing volumes - a couple of reasonably important company updates across the ticker – Amcor (AMC) announcing their intent to buy Bemis Company in an all scrip deal that values Bemis, which is listed in New York at around US$5bn. Bemis Company is another large packaging company that would complement Amcor’s current operations, however at around $7bn in Australian currency terms, it’s a big purchase.

Elsewhere, Seek (SEK) updated the market today on their expected profit numbers that were scheduled in about a week’s time. They met in terms of revenue and earnings for FY18 however their guidance for FY19 was soft, and the stock fell around 9%. This is the type of stock we’d avoid during this reporting season – highly valued growth orientated businesses where market expectations are high.

Overall, the ASX200 added +38 points today or +0.61% to close at 6273 – Dow Futures are currently trading up  +30pts. We are now neutral the ASX200 with a break of 6140 required to turn outright bearish.

Australian Reporting season is underway – for a full list of company reporting dates – click here

ASX 200 Chart

ASX 200 Chart

CATCHING OUR EYE

Broker Moves; Not a lot on the ticket today given the bank holiday – although that didn’t extend to the market / nor the MM team…

·         Pilbara Minerals Cut to Hold at Baillieu Holst Ltd; PT A$0.93

Pilbara Minerals (PLS) Chart

Seek (SEK)  $20.00 / -8.76%;  International jobs classifieds business Seek pre-released their full year result this morning ahead of their scheduled full year reporting date on the 15thAugust. While the numbers were preliminary and unaudited, the market snubbed them and sold the stock off fairly hard,  down  -8% at time of writing. The current year is tracking along well with underlying numbers kicking along at the top end of company guidance, however the outlook for FY 19 in terms of profit was below market expectations while we also saw a couple of asset write downs which is not a good look when the company is aggressively investing overseas.

In terms of the numbers, it looks like  FY18 revenue will be around $1,285B vs consensus at $1,275B, which is good, EBITDA of 432.2M vs 434.4M which is okay, however the outlook for EBITDA and indeed profit for FY19 was well below market expectations. At the mid-point of the company guided range, SEK will do revenue in FY19 of $1.51B which is ahead of market expectations of $1.44B, however (assuming midpoint) EBITDA will be $460m versus current expectations of $483m while profit will be flat on FY18 whereas the market was looking for growth of 19% implying  reported NPAT of $243m, however it will likely be nearer to $200m.

It seems to us there are a few issues bubbling away under the surface of this update from SEK which is one of Australia’s top growth stocks. The top line revenue is okay, so they’re growing the business which is good on one hand, however the cost of growing the business in other markets has been high. This means that although revenue is growing, the growth in revenue is not dropping down into growth in profits, instead they’re reinvesting in the business for future growth.

That’s fine if they invest well, however today they also wrote down the carrying value of their Brazilian operation  (Brasil Online) along with their Mexican business (OCC) by a combined amount of A$178m. So on one hand they say we’re investing for future growth – trust us – and on the other hand they’re saying the value of these businesses have gone backwards and they need to be written down. This leaves a sour taste and when a business is trading on 34x forward earnings, it’s hard to swallow! SEK has an incredible operation in Australia, a market it dominates however growing overseas in larger markets will continue to cost money. We have no interest in SEK at current levels.

Seek (SEK) Chart

 

Amcor (AMC) $15.28 / unchanged; Amcor remained in a trading halt while considering an all-scrip deal to buy American plastic packaging company Bemis. The deal currently being worked through values Bemis on around 18x 2019 PE, above Amcor’s current PE of around 15x, however the deal will largely be focussed on synergies the combined entity can achieve, as well as fulfilling Amcor’s long desired goal of major international expansion.

Amcor has recently come under pressure some as rising oil prices forced resin prices up, however in the packaging business, scale is a very impact concept and this deal would certainly give AMC a lot of it! AMC has a strong track record of making acquisitions work however this sort of acquisition is in a new league. The final product of the deal would likely see Amcor become dual-listed on the NYSE. Watch the space!

Amcor (AMC) Chart

OUR CALLS

No trades across the MM portfolios today

Have a great night

James / Harry & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

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