3 Communication Services’ Stocks Under Discussion - SEK, CAR, REA

  • June 23, 2020 03:28 PM AEST
  • Team Kalkine
3 Communication Services’ Stocks Under Discussion - SEK, CAR, REA

Summary

  • SEEK Limited expects to report a statutory loss in FY20, owing to large impairments to its LatAm business and investments in early ventures.
  • Carsales.com is strengthening relationship with stakeholders through support measures, while business continues to be stable.
  • REA has moved to cut costs, as COVID-19 disrupted recovery in the real estate market that was well underway in the early part of this year.

Communication services businesses, other than telecommunications, are generally cyclical. With economic picture less bleak than before, the outlook for communication services (ex-telco) will likely remain subdued, given that businesses are cutting on advertising expenditure and demand is expected to be lower. But it all comes down to individual businesses for the level of impact.

In this backdrop, let us discuss three ASX-listed communication services’ stocks.

SEEK Limited (ASX:SEK)

SEEK Limited has provided a trading update for FY20. In the last two weeks of March 2020, the company experienced sharp falls in the billing of Asia and ANZ businesses. In April, the rate of decline in these businesses stabilised to -65% to -70% range compared to same period last year. And, Asia and ANZ businesses are experiencing declines between -40% and -50% in June.

In China, Zhaopin billings were down 60% compared to pre-virus expectations in February. The business has seen improvement since early March that has continued in April and May. Billing was improved to -10% compared to the pcp in May.

SEEK’s Latin American business has been significantly impacted by the virus; however, its OES and ESVs businesses have not been impacted due to the COVID-19 crisis. In FY20, the company expects to report revenue of ~$1,575 million and EBITDA of approximately $410 million.

Due to deterioration in financial outlook and economic condition in Brazil and Mexico, the company expects to incur an aggregate non-cash impairment charge of $190 million to $230 million. These impairments would be recognised in Brasil Online, OCC Mundial and non-core minority investments. As a result, SEEK expects to report a statutory NPAT loss in FY20.

The company has also obtained temporary adjustments in covenant limits for its senior syndicated debt facility. SEK has reported its plan to purchase the $175 million Floating Rate Senior Notes issued in April 2017 that would be funded through existing senior syndicated debt facility and available cash balances.

The purchase of $175 million senior note debt will provide covenant flexibility, enable to issue additional debt and extend maturity profile of the debt of the company. SEK has not made any decision on dividends and seeks to maintain balance sheet flexibility.

On 23 June 2020 (AEST 02:30 PM), SEK was trading at $21.500, down by 1.421% from the previous close.

carsales.com Limited (ASX:CAR)

Recently, carsales.com provided a business update and FY20 estimates. Its estimates are subject to audit review, and these estimates could be volatile to COVID-19. Excluding COVID-19 package of $26 million, the company expects revenues in the range of $419 to $423 million for FY20.

CAR expects to report adjusted EBITDA in the range of $228 million to $232 million and reported EBITDA would be between $199 million and $203 million. Net profit after tax (adjusted) is expected to be in the range of $134 million to $138 million.

In Australia, the business has witnessed improvement, compared to previous update, in lead and volume traffic due to easing social distancing measures. Between late-April and mid-June this year, its lead volumes increased strongly over the previous corresponding period.

Also, the company has seen a decrease in inventory of carsales.com, driven by an increase in demand from buyers, issues in obtaining new and used cars by dealers due to social distancing, and its research indicates an increase in first time buyers as they want to avoid public transport.

For international business, the company highlighted that trends are similar to the previous update. Encar business continues to perform with inventory, listing volumes and traffic growing, translating to revenue and EBITDA growth over the pcp. In Brazil, rising COVID-19 infections have impacted key non-financial operating and financial metrics.

carsales also restructured its debt facility. Tranche A maturity was extended to July 2024 from July 2021 and facility size was increased to $440 million from $335 million earlier. There has been no change to the facility of $210 million, expiring in July 2023.

Lenders from the syndicate showed keen support to the refinancing. It doesn’t see any impact on its dividend pay-out, which is around 80% of the adjusted NPAT. CAR noted that the business has a strong balance sheet and appropriate gearing levels to navigate the current operating environment.

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It has also completed the sale of 50.1% in Stratton Finance, resulting in a net gain of $1.7 million after revaluation of Ratesetter. And, CAR intends to focus on core business of the company.

On 23 June 2020 (AEST 02:50 PM), CAR was trading at $17.680, up by 0.971% from the previous close.

REA Group Limited (ASX:REA)

In May, the company provided results for the quarter and nine months ended 31 March 2020. In the nine-month period, REA recorded revenue after broker commission of $640.2 million, down by 4% from the same period last year.

Excluding losses from associates and joint ventures, its EBITDA for the period was $390.8 million compared to $404.7 million in the previous corresponding period. REA has reported a free cash flow of $195.2 million, down 14% from $227.9 million in the same period last year.

In 3Q FY20, the company recorded revenue of $199.8 million against $198.6 million in the previous year. Its free cash flow was down 20% over the previous corresponding period at $66.7 million from $82.9 million.

The company announced a range of measures in the residential, developer and commercial business, which has increased advertising duration and would be extending the revenue recognition period. It also announced new features like online auctions and digital inspections.

COVID-19 has impacted the real estate market. The group expects revenues to be impacted due to customer support measures and weakness in new listings. It has implemented cost saving measures and expects lower operating expenses in Q4.

The market update highlighted that the group has a strong balance sheet, cash balance of $135 million (30 April 2020), and low debt levels. In addition to a $20 million overdraft facility, REA Group has secured an additional $149 million in loan facility, which is due to mature in December 2021. The company increased liquidity to navigate any event of a prolonged market downturn.

On 23 June 2020 (AEST 02:55 PM), REA was trading at $110.960, up by 0.081% from the previous close.

 

With the pandemic continuing to affect the globe, healthcare companies are evaluating their lead compounds for COVID-19 treatment. Future revenue for these stocks depends on the probability of launching an approved treatment in the market.

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