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DBS ups Sea Limited's TP to US$103 as it sees a turnaround in its e-commerce and fintech segments

Felicia Tan
·2-min read

DBS has upped its adjusted ebitda estimates for the FY2023 to US$2.3 billion compared to a loss of US$321 million earlier.

DBS Group Research analyst Sachin Mittal has kept his “buy” call on Sea Limited as he sees a turnaround in Sea’s e-commerce and fintech segments. The analyst has also upped his target price to US$103 ($137.55) from US$100 previously.

Following Sea’s net profit and ebitda positive results for the 4QFY2022 ended Dec 31, 2022 on March 7, Mittal is also upping his adjusted ebitda estimates for the FY2023 to US$2.3 billion compared to a loss of US$321 million earlier.

“We believe e-commerce’s turnaround, achieving adjusted ebitda positive across each market by FY2023, will be the key share price catalyst. This shall outweigh potential digital entertainment weaknesses owing to high inflation, which might hurt discretionary spending on games,” the analyst writes.

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Further to his report, the analyst lowered his FY2027 ebitda estimates by 14% to US$6.3 billion from US$7.3 billion previously on slower gross merchandise value (GMV) growth as Sea scales back its expansion plans. For the FY2027, Mittal also sees Sea achieving an adjusted ebitda margin of 20%.

His new target price is based on 15x Sea’s FY2027 ev/ebitda discounted back annually by 15% assuming its investors seek a 15% return annually.

“[Sea’s] e-commerce peers are trading at 10x-20x 12-month forward ev/ebitda while projected ebitda margins for these peers in FY2023 range from 16% - 33%. Most of the upside will be driven by 28% revenue growth in FY2024 with the stock trading around its current 2.8x EV to revenue by end of FY2023,” says Mittal.

Sea’s e-commerce arm, Shopee, holds the top place among its e-commerce peers across all its key markets except in Southeast Asia, where it is in second place.

“We expect top two e-commerce to thrive in most markets due to economies of scale. Sea also stands to benefit from its leading position as a digital lender in the region,” says the analyst.

That said, the analyst is also estimating Sea’s TP drop to US$68 in a bear case scenario. This target price assumes long-term group ebitda margins of [around] 18% (20% under base case) and 12x FY2027 ebitda (15x under the base case) due to irrational competition.

In his view, a sharp decline in Sea’s GMW will affect its revenue for its e-commerce segment.

“[Sea’s] e-commerce revenue is expected to contribute 68% to group generally accepted accounting principles (GAAP) revenue in FY2023 and a sharp decline in GMV will adversely affect this contribution,” writes Mittal.

Shares in Sea Limited closed US$1.49 lower or 1.90% down at US$76.91 on March 20.

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