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DBS keeps 'buy' on Sea but slashes TP by 55% to US$115

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DBS Group Research analyst Sachin Mittal has lowered his target price to US$115 from the previous US$256.

Despite maintaining his “buy” call for Sea, DBS Group Research analyst Sachin Mittal has lowered his target price to US$115 from the previous US$256.

In his May 18 note, Mittal says Sea is trading at an enterprise value of 2.9x 12-months forward revenue, versus its 7.2x historical average. “Lack of a clear path to profitability in FY2022/FY2023 and the general market sentiment towards new economy counters could explain the weakness,” says Mittal.

He points out that Sea posted below-par results in 1QFY2022. The company’s total generally accepted accounting principle (GAAP) revenue of US$2.9 billion was 3%-4% below DBS’s expectations.

Sea’ 1QFY2022 total adjusted EBITDA loss of US$408 million — which is 14% higher q-o-q — was also larger than DBS’s estimates. The sharp increase was due to higher-than-expected losses in e-commerce, explains Mittal.

“E-commerce adjusted EBITDA loss of US$743 million accounted for 27% of our full-year EBITDA loss projection of US$2.7 billion. Almost half of the rise in Shopee’s adjusted EBITDA loss came from US$162 million rise in headquarter losses on an annual basis due to higher staff costs, general and administrative expenses such as building facilities and server hosting expenses,” he adds.

During Sea’s 1QFY2022 analyst call, Sea has revised its management guidance by extending the range of e-commerce GAAP revenue at the lower end, from US$8.9 billion to US$9.1 billion due to elevating macroeconomic uncertainties. The revised midpoint guidance of US$8.8 billion portrays a 72% y-o-y growth compared to 76% based on the previous guidance.

“However, management still sees the previous guidance as achievable,” says Mittal.

On the back of the lower e-commerce GAAP revenue, DBS has trimmed its FY2022 and FY2023 GAAP revenue estimates by 4% each. Mittal projects normalised gross merchandise value CAGR of 42% over FY2021-FY2023 as Sea seeks expansion in the Latin American markets, especially in Brazil.

Although Shopee is en route on achieving EBITDA breakeven in Southeast Asia and Taiwan, overall headquarter costs could continue to rise in other markets, impacting the overall e-commerce EBITDA margin. Hence, Mittal has raised his total adjusted EBITDA losses estimates by 43% and 45% during FY2022 and FY2023.

“​​From FY23F onwards, EBITDA losses should narrow once Southeast Asia and Taiwan achieve breakeven,” he adds.

DBS’s target price is the sum of US$42 for gaming based on 15x FY2022 earnings; US$69 per share for e-commerce and fintech based on 3.1 12-months revenue; and net cash of US$4 per share.

Shares in Sea closed US$6.01 lower or 7.49% down on May 18 at US$74.20.

Photo: Bloomberg

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