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PhillipCapital, CGS-CIMB lower TPs on TDCX after FY2023 revenue guidance narrows

PhillipCapital and CGS-CIMB analyst have lower their TPs to US$10.00 and US$6.50 from US$12.10 and US$9.50 previously.

PhillipCapital Research analyst Jonathan Woo has kept his “buy” call on TDCX with a lower target price of US$10.00 ($13.55) from US$12.10 previously, after the NYSE-listed tech company announced 2QFY2023 earnings that were up 9.4% y-o-y to US$19.8 million.

Meanwhile, CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan have maintained their “hold” call with a decreased target price of US$6.50, down from US$9.50 previously.

For the period ended June 30, TDCX also posted a total revenue of US$126.2 million, up 5.5% y-o-y, which included a 5.8 percentage point negative impact of foreign exchange rates compared with 2QFY2022. In constant currency terms, TDCX was up 11.3% y-o-y for 2QFY2023.

As of June 30, the company’s client count had increased to 91, compared to 60 the same time last year, improving its client diversification. Revenue from the company’s clients outside the top five rose 67% y-o-y, while revenue mix from its top five clients lowered to 73% in 2QFY2023 from 83% in the year ago period.

PhillipCapital’s Woo cites this increasing revenue diversification as a positive factor for TDCX, noting its successful 1HFY2023 expansion into Indonesia and Brazil. Its office in Brazil has attained a headcount of over 100 and is receiving increasing inquiries from potential clients, he says.

The analyst explains that Brazil is geographically important as it allows TDCX to reach the Portuguese and Spanish-speaking markets of Latin America, enabling the company to serve a wider range of cross border international clients.

During the period, TDCX also expanded into the new vertical of HealthTech and added an established global e-commerce platform, he says.

However, TDCX has lowered its full-year revenue guidance to 2% to 4%, from 3% to 8% previously. CGS-CIMB analysts Ong and Tan say this narrowed guidance range “overshadows” its set of “decent results” for the quarter.

TDCX reported a 2QFY2023 core net profit of US$28 million was offset by weaker adjusted ebitda margins that were down 3.5 percentage points y-o-y. The weaker margins were attributable to the company's geographical and service expansion and a higher agent headcount in order to cater for future business ramp-ups, say the analysts.

And while 1HFY2023 core net profit formed 46% of their FY2023 forecasts, Ong and Tan say the company’s lowered FY2023 revenue growth guidance was a “key disappointment”, as this would imply around a 5% revenue decline y-o-y in the second half of FY2023. They note that TDCX also narrowed its adjusted ebitda margin guidance range for FY2023 to 25% to 27%, down from 25% to 29% previously.

Still, they believe “green shoots” could be sprouting for a better FY2024 for the company. “Apart from continued growth from newly onboarded clients, TDCX is also cautiously optimistic on better volumes from its digital advertising clients. TDCX notes that its key digital advertising clients have shown good results in their recent quarterly earnings, and it is a matter of time before they choose to reinvest,” say Ong and Tan

“TDCX is also seeing good momentum on its deal pipeline as recession fears start to subside and it is making progress on its AI consulting arm, with some clients entrusting TDCX on advisory services to pilot and implement AI-enabled CX solutions,” they add.

The CGS-CIMB analysts have lowered their target price to US$6.50, pegged to a 4.7x FY2024 enterprise value-to-ebitda ratio, down from 7x previously.

Recognising longer sales cycles, a slower-than-anticipated velocity on closing and continued cautious spending by clients as the reasons for the revision in guidance. PhillipCapital’s Woo has also cut his FY2023 revenue and patmi forecasts by 6% and 11% respectively, with regard to the expected weakness in 2HFY2023.

He has lowered his target price to US$10.40 but maintained “buy” in expectation of long-term tailwinds in the expanding business process outsourcing (BPO) market to continue to benefit TDCX, with the company well-positioned to capture much of this due to its strong presence in Asia. In addition, the business continues to generate healthy cash flows, and is sitting on a large cash position that could be used for increasing share buybacks, says Woo.

On the other hand, CGS-CIMB’s Ong and Tan view TDCX’s downside risks to include weaker topline amid macro uncertainties and margin pressure due to inability to pass on costs.

Shares in TDCX closed 1 US cent or 0.17% up at US$5.90 on Aug 25.

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