Yahoo Finance Analysts lift Sea Limited's TPs after 4QFY2022 earnings exceed expectations; UOB Kay Hian upgrades to 'buy'
UOB Kay Hian and Citi have lifted their target prices to US$94.34 and US$110 respectively.
Analysts are remaining positive on Sea Limited’s prospects after the tech company turned net profit and ebitda positive for the 4QFY2022 ended Dec 31, 2022, surpassing the market’s expectations.
UOB Kay Hian analysts John Cheong, Jacquelyn Yow and Heidi Mo have upgraded their call to “buy” with a higher target price of US$94.34 ($127.20) from US$58.77 after Sea’s 4QFY2022 results came in “way above” their expectations, as well as that of the consensus.
“We attributed the strong earnings in 4QFY2022 to its cost efficiency where Sea had cut its sales and marketing expenses by 42% q-o-q and 61% y-o-y in 4QFY2022 alone,” the analysts write.
“Although there could be near-term fluctuations in the performance of Sea, management remains confident on its long-term growth potential,” they add.
With the strong set of results posted for the 4QFY2022, the analysts see that the company may report its first yearly net profit for FY2032, which is also earlier than previously expected.
“The strong net profit growth in FY2023 would be mainly driven by strong cost efficiency and higher transaction fee for its e-commerce segment, higher contribution from its value-added service in logistics, and higher contribution from its digital financial services (DFS) segment,” the analysts write.
“Based on our channel checks, we understand that Sea has been working on streamlining and expanding its own logistic services,” they add.
As such, they have upped their FY2023 earnings estimates to US$935 million from their previous estimate of a US$1.6 billion loss. The new earnings estimate factors in lower sales and marketing expenses, higher transaction fees for the e-commerce segment, and better contribution from Sea’s DFS segment.
Citi Research analyst Alicia Yap has kept her “buy” call on Sea with a higher target price of US$110 from US$105 previously as Sea turned net profit and ebitda positive in the 4QFY2022. Sea’s total generally accepted accounting principles (GAAP) revenue for the 4QFY2022 also beat her expectations by 12%.
“While most investors and analysts had expected overall loss could be narrowed by a large margin, we view the significant turn to net profit and ebitda profitable in 4QFY2022 as a big surprise,” writes Yap.
“GAAP revenue for digital entertainment (DE) came in significantly above expectation (though our GAAP revenue estimates were already higher than [the] street’s), which were 46% higher than our estimates,” she adds.
Sea’s e-commerce revenue stood in line with her estimates though order numbers and gross merchandise value (GMV) came in lower than expected.
Sea’s DFS segment and Shopee also came in ebitda positive, which was earlier than expected, notes Yap.
Following the briefing given by Sea’s management, Yap has adjusted her total GAAP revenues for the FY2023, FY2024 and FY2025 by 2.3%, 1.7% and -0.8% respectively.
She has also forecast non-GAAP earnings per average diluted share (EPADS) to US$2.66, US$2.98 and US$3.89 for the FY2023, FY2024 and FY2025 respectively.
Finally, Yap is forecasting Sea’s gaming bookings to come in at US$561 million in the 1QFY2023 and US$2.26 billion in FY2023.
Her estimates for Shopee’s GMV and GAAP revenue for the 1QFY2023 to US$17.1 billion and US$2.04 billion and to US$77.3 billion and US$9.3 billion for the FY2023.
“Post estimates revision, we raise our sum-of-the-parts (SOTP) target price to US$110 (from US$105), reflecting faster growth and improved profitability offset by higher diluted share count use,” says Yap.
CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan have also kept their "add" call on Sea Limited with a higher target price of US$105 from US$85 previously after Sea saw a "rapid turnaround" for the 4QFY2022.
The target price increase in Ong and Tan's March 7 report comes just five days after their previous increase to US$85 from US$75 in their March 2 report. At the time, the analysts expected Sea to report a "better-than-expected" ebitda for the 4QFY2022 with significantly narrower losses during the quarter.
"With Sea turning profitable in 4QFY2022, we believe it is on a stronger footing to capture longer-term tailwinds from Asean digitalisation," the analysts write in their March 7 report.
That said, given the macro headwinds, the company's key focus for FY2023 is to drive "sustainable topline growth," they note.
"For Shopee, its priority is to solidify efficiency gains and optimise cost structure to lower cost to serve – management believes this is key to further expand its reach to underserved buyers and sellers and enable longer-term total addressable market (TAM) growth. Meanwhile, Sea plans to further enhance SeaMoney offerings ([with the] launch of Insurtech and WealthTech) while also deepening the penetration of its consumer credit products. It plans to leverage ecosystem synergies in its product rollout; Sea does not plan to adopt a landgrab strategy and will instead focus on quality growth. Lastly for gaming, while near-term challenges remain, Sea plans to focus on core games and promising projects to improve margins in FY2023," they write.
Ong and Tan's higher target price is based on a higher e-commerce multiple of 4x FY2024 price-to-sales (P/S) ratio from 2.9x previously.
Shares in Sea Limited closed US$14.35 higher or 21.84% up at US$80.06 on March 7.
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