DBS Group Research analyst Sachin Mittal has expressed that he prefers Sea Limited among the Internet sector stocks for its fundamentals and for its re-rating after its ebitda breakeven for the 4QFY2022 ended Dec 31, 2022.
“[We] argue for a 50%-60% premium over Grab (versus a 35%-40% premium earlier,” says the analyst. “However, Sea is trading at 2.7x 12-month forward adjsted revenue vs 1.5x for Grab implying [an estimated] 80% premium.”
Mittal says he also likes Indonesia-listed Bukalapak for its “rock-bottom valuation”. To the analyst, he sees the counter experiencing a potential re-rating, seeing an adjusted ebitda breakeven in nine to 12 months.
In his report on the overall sector dated March 20, Mittal notes that the gross merchandise value (GMV) for the Southeast Asia e-commerce sector grew at a compound annual growth rate (CAGR) of 45% over FY2019 to FY2022. The analyst attributes the growth to the pandemic, which drove consumers to embrace e-commerce for their shopping, grocery and discretionary needs.
However, with the macroeconomic uncertainties, the analyst is expecting e-commerce penetration in Southeast Asia (SEA) to rise at a slower rate, from 21% in FY2022 to 24% in FY2025, lower than Euromonitor’s projection of 27% in FY2025.
Shopee’s e-commerce segment in particular, says Mittal, is also expected to experience a slowdown. As such, he has lowered his GMV CAGR for Shopee to 9% from 13% from FY2022 to FY2025. The lower estimate, compared to Google, Temasek and Bain’s estimate of 17% over the same period, is due to the rising take rates, reduced discounts, macroeconomic factors and recovery in offline retail stores, says Mittal.
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Due to the same reasons, the analyst is projecting a lower delivery/mobility GMV CAGR of 10%/20% over FY2022 to FY2025 from 11%/21% previously for Grab.
On this, Mittal is also projecting Sea to achieve a lower ebitda of US$6.3 billion ($8.37 billion) for the FY2027 down from US$7.3 billion due to its scaling back of its expansion plans.
Likewise, Mittal sees Grab achieving an FY2027 ebitda of US$916 million compared to US$1.03 billion due to slower GMV growth.
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The analyst has kept his estimates for Buka unchanged, seeing higher upside potential for the stock with a waiting period of nine to 12 months.
Mittal has rated “buy” on Sea and Buka with target prices of US$103 and IDR355 (3.1 cents). Meanwhile, he has given Grab a “hold” call with a target price of US$3.02.
His bear-case target prices for Sea, Grab and Buka are US$68, US$2.43 and IDR255 respectively, adding that investors should accumulate into Sea and Buka should their share prices dip to levels near his bear-case target prices.
Shares in Sea and Grab closed at US$85.56 and US$3.02 on March 29 while shares in Buka are trading at IDR248 as at 4.41pm on March 30.
