Analysts mixed on TDCX, as visibility for core revenue contributor remains poor

Nicole Lim
4-min read

PhillipCapital and CGS-CIMB have kept “buy”, while CGS-CIMB reiterates “hold” with a lower TP.

Analysts from three different brokerages are mixed on Singapore-based, NYSE-listed TDCX, following the company’s earnings results for the 1QFY2023 ended March 31, which presented a profit of US$20.5 million ($27.8 million).

Jonathan Woo from PhillipCapital Research has maintained his “buy” call, with a higher target price of US$9.19, as he says that TDCX’s 1QFY2023 revenue and patmi results at 23% and 25% were aligned with his expectations.

Similarly, analysts Varun Ahuja and Syahda Chandra from Credit Suisse Research maintain their “buy” call, but have lowered their target price by 2% to US$15.75, as they roll forward their valuation by three months to end June 2024.

Meanwhile, CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan reiterate their “hold” call, with a lowered target price of US$9.50, citing that 1QFY2023’s core net profit was below expectations at 20% of their expectations, and Bloomberg consensus’ full-year forecasts.

According to Ahuja and Chandra from Credit Suisse, TDCX’s 1QFY2023 revenue grew 8% y-o-y to $164.9 million, on the back of 23% y-o-y increase in revenue sales from digital marketing services, and 9% y-o-y growth in omnichannel customer experience (CX) solution, while content trust and safety revenues declined by 17% y-o-y. Adjusting for foreign exchange, TDCX’s revenue on a constant currency basis grew 13% y-o-y.

However, all research houses note TDCX’s weak ebitda margin of 24%, representing a decline by 7% percentage points y-o-y. Analysts from CGS-CIMB attribute this to geographical and service expansion, and an excess agent headcount who are undergoing training for upcoming service requirements and for strategic talent retention to cater for future business ramp-ups.

Woo from PhillipCapital remains upbeat on TDCX as he notes that the customer solutions provider has a continued diversification in its revenue mix.

“Revenue, excluding its top five clients, grew 45% y-o-y. Top five clients’ revenue contribution as a percentage of total revenue stood at 76% in 1QFY2023 (1QFY2022: 83%). Newer geographies incorporated in 2021, such as South Korea, Colombia and Romania, are also starting to show meaningful contributions, with revenue growing more than four times in 1QFY2023 vs 1QFY2022.” says Woo.

He also notes that the revenue from TDCX’s second largest vertical, travel and hospitality, was up 34% y-o-y, offsetting significantly the slight contraction in y-o-y revenue from the company’s largest vertical, digital advertising and media, boosted by continued rebound in cross-border travel. He expects this trend to continue as outbound China travel increases.

In addition, TDCX’s recent launch of TDCX AI, a new specialised consulting division using AI insights and tools to deliver personalised customer experience solutions, is a positive for Woo. He notes that more than 70% of TDCX’s business is B2B, with many clients looking for increasingly complex business solutions.

Likewise, Ong and Tan from CGS-CIMB acknowledge that TDCX’s venture into AI solutions is the right move, noting TDCX’s industry-leading margins of 30% as compared to its peers at 22% for FY2022 adjusted ebitda.

However, the analysts’ lack of confidence for TDCX can be attributed to a poor volume visibility for its core client base in the digital advertising industry, which makes up about 50% of its revenue contribution.

“Aside from continued business development efforts and maintaining strong customer satisfaction, management said that it will focus on margin recovery in the coming quarters via minimising over-resourcing (closer engagement with clients to update campaign requirements) and productivity improvements.” say Ong and Tan.

Their lowered TP is pegged to a 7x FY2023 ev/ebidta, from 9.5x previously, as they expect near-term earnings pressure from the weak macroeconomic environment.

Finally, Ahuja and Chandra from Credit Suisse say that they believe there is an element of conservatism built into TDCX’s management guidance of 3% to 8% y-o-y growth despite a strong beat on guidance in 1QFY2023, and have thus revised their 2023 to 2025 earnings per share by 7% to 8%.

Shares in TDCX closed 58 cents higher or 6.31% up at US$9.77 on June 6.

See Also: