Analysts are remaining positive on Sea Limited’s prospects after the tech company turned net profit and ebitda positive for the 4QFY2022 ended Dec 31, 2022, surpassing the market’s expectations.
UOB Kay Hian issues upgrade
UOB Kay Hian analysts John Cheong, Jacquelyn Yow and Heidi Mo have upgraded their call to “buy” with a higher target price of US$94.34 ($127.20) from US$58.77 after Sea’s 4QFY2022 results came in “way above” their expectations, as well as that of the consensus.
“We attributed the strong earnings in 4QFY2022 to its cost efficiency where Sea had cut its sales and marketing expenses by 42% q-o-q and 61% y-o-y in 4QFY2022 alone,” the analysts write.
“Although there could be near-term fluctuations in the performance of Sea, management remains confident on its long-term growth potential,” they add.
With the strong set of results posted for the 4QFY2022, the analysts see that the company may report its first yearly net profit for FY2032, which is also earlier than previously expected.
See also: Test debug host entity
“The strong net profit growth in FY2023 would be mainly driven by strong cost efficiency and higher transaction fee for its e-commerce segment, higher contribution from its value-added service in logistics, and higher contribution from its digital financial services (DFS) segment,” the analysts write.
“Based on our channel checks, we understand that Sea has been working on streamlining and expanding its own logistic services,” they add.
As such, they have upped their FY2023 earnings estimates to US$935 million from their previous estimate of a US$1.6 billion loss. The new earnings estimate factors in lower sales and marketing expenses, higher transaction fees for the e-commerce segment, and better contribution from Sea’s DFS segment.
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
Citi lifts TP to US$110
Citi Research analyst Alicia Yap has kept her “buy” call on Sea with a higher target price of US$110 from US$105 previously as Sea turned net profit and ebitda positive in the 4QFY2022. Sea’s total generally accepted accounting principles (GAAP) revenue for the 4QFY2022 also beat her expectations by 12%.
“While most investors and analysts had expected overall loss could be narrowed by a large margin, we view the significant turn to net profit and ebitda profitable in 4QFY2022 as a big surprise,” writes Yap.
“GAAP revenue for digital entertainment (DE) came in significantly above expectation (though our GAAP revenue estimates were already higher than [the] street’s), which were 46% higher than our estimates,” she adds.
Sea’s e-commerce revenue stood in line with her estimates though order numbers and gross merchandise value (GMV) came in lower than expected.
Sea’s DFS segment and Shopee also came in ebitda positive, which was earlier than expected, notes Yap.
Following the briefing given by Sea’s management, Yap has adjusted her total GAAP revenues for the FY2023, FY2024 and FY2025 by 2.3%, 1.7% and -0.8% respectively.
For more stories about where money flows, click here for Capital Section
She has also forecast non-GAAP earnings per average diluted share (EPADS) to US$2.66, US$2.98 and US$3.89 for the FY2023, FY2024 and FY2025 respectively.
Finally, Yap is forecasting Sea’s gaming bookings to come in at US$561 million in the 1QFY2023 and US$2.26 billion in FY2023.
Her estimates for Shopee’s GMV and GAAP revenue for the 1QFY2023 to US$17.1 billion and US$2.04 billion and to US$77.3 billion and US$9.3 billion for the FY2023.
“Post estimates revision, we raise our sum-of-the-parts (SOTP) target price to US$110 (from US$105), reflecting faster growth and improved profitability offset by higher diluted share count use,” says Yap.
CGS-CIMB ups TP twice in five days
CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan have also kept their "add" call on Sea Limited with a higher target price of US$105 from US$85 previously after Sea saw a "rapid turnaround" for the 4QFY2022.
The target price increase in Ong and Tan's March 7 report comes just five days after their previous increase to US$85 from US$75 in their March 2 report. At the time, the analysts expected Sea to report a "better-than-expected" ebitda for the 4QFY2022 with significantly narrower losses during the quarter.
"With Sea turning profitable in 4QFY2022, we believe it is on a stronger footing to capture longer-term tailwinds from Asean digitalisation," the analysts write in their March 7 report.
That said, given the macro headwinds, the company's key focus for FY2023 is to drive "sustainable topline growth," they note.
"For Shopee, its priority is to solidify efficiency gains and optimise cost structure to lower cost to serve – management believes this is key to further expand its reach to underserved buyers and sellers and enable longer-term total addressable market (TAM) growth. Meanwhile, Sea plans to further enhance SeaMoney offerings ([with the] launch of Insurtech and WealthTech) while also deepening the penetration of its consumer credit products. It plans to leverage ecosystem synergies in its product rollout; Sea does not plan to adopt a landgrab strategy and will instead focus on quality growth. Lastly for gaming, while near-term challenges remain, Sea plans to focus on core games and promising projects to improve margins in FY2023," they write.
Ong and Tan's higher target price is based on a higher e-commerce multiple of 4x FY2024 price-to-sales (P/S) ratio from 2.9x previously.
Rerating for Sea seems imminent: Maybank
Maybank Securities analyst Kelvin Tan has kept his "buy" call on Sea with a higher target price of US$105 from US$98 previously.
Sea's revenue for the FY2022 beat Tan's expectations at 101% of his full-year estimates thanks to deeper monetisation on Shopee, which saw its take-rate hit a new record.
"Stripping out exceptional items of US$150 million, Sea swung to a net profit for 4QFY2022 at US$271 million from a year-ago loss," writes Tan.
"We believe Sea’s faster-than-expected improvement in cost measures and e-commerce and fintech monetisation should enable it to break even in FY2023 at the adjusted ebitda level." he adds.
Expanding further, Tan believes Sea will be able to "re-accelerate" its topline growth in FY2024 upon achieving the profitability milestones. As such, he has forecasted Sea's revenue for the FY2024 and FY2025 to grow by 15% and 16% y-o-y respectively. This is as the company "reinvests in a more sustainable manner to defend its e-commerce market leadership position and broaden its digital bank offerings across Southeast Asia".
In the near term, the analyst expects Sea's share price to remain volatile in the near-term due to the recent shift in interest rate expectations and his forecast of slower topline growth in FY2023 to FY2024. The slower topline growth is caused by steep cuts to sales and marketing costs.
"That said, we continue to like Sea as a proxy for Asean digitalisation, given its strong regional market leadership in e-commerce (Shopee) and ability to cross-sell high-margin digital financial services. We believe a rerating for Sea remains imminent, but are realistic as a return to its all-time high in the near and medium terms seems unlikely," he says.
Tan's SOTP-based TP is based on a higher e-commerce multiple of 3.4x (from 1.9x) as he rolls his valuations forward to FY2024.
Investors may now be comfortable with Sea's cost structure: OCBC Investment Research
The research team at OCBC Investment Research (OIR) is in "shock and awe" at Sea's pivot to profitability with all segments turning an adjusted ebitda positive in the 4QFY2022.
"Management has completed the path to profitability within two quarters and can now focus on growing its businesses going forward," the team writes.
"However, underlying revenue trends continue to be weak for most of their business segments, and management highlighting near-term weaknesses as well. The company has taken a knife to its cost structure and its balance sheet now looks much healthier," it adds.
Coming off its 4QFY2022 and FY2022 results, the team sees that the narrative of Sea has shifted.
"We think investors will now become comfortable with the cost structure of the company. Therefore, we move our fair value estimate (FV) higher from US$84 to US$95," the team writes. The team has also kept its "buy" call following Sea's results.
On Sea's cost-cutting exercise, the team thinks that the company has "done all they can" with the delta in its adjusted ebitda from 3QFY2022 to 4QFY2022 close to US$650 million.
"Operating cash flow was also positive for this quarter, the first time since 3QFY2021. Cash and cash equivalents would have grown by US$210 million from the previous quarter if they had not used cash to repurchase convertible bonds, which we think is a good sign of resiliency with the balance sheet going forward," the team writes.
Going forward, the team sees the growth from Sea's e-commerce and financial businesses being offset by declines in the gaming business, adding that the company will only be able resume its growth when gaming revenues stabilise.
"Competitive dynamics within the e-commerce business, especially within their core markets in Asean will also be something to be mindful of, as it has been reported that Tiktok is looking to expand their operations in these markets. As fourth quarters tend to be seasonally strong for online retail sales due to festive spending, a flattish GMV in 4QFY2022 likely points to weakness in the e-commerce business going forward. That said, showing positive GAAP earnings likely puts a floor under the share price, as valuation support now comes in – stock is now trading at 23x non-GAAP and 36x GAAP 4Q22 annualised earnings," the team writes.
"While we (and street) revise up forecasts for FY2023 and FY2024, we caution against annualising 4QFY2022 earnings for FY2023 – management has warned that earnings may fluctuate from quarter to quarter, and continued gaming revenue declines, or heightened e-commerce industry competition could lead to declines in margin and earnings from 4QFY2022," it adds.
OIR's fair value estimate incorporates its existing environmental, social and governance (ESG) discount of 5%.
Sea's results overall "strong", says CLSA
In its first take, CLSA analysts Neel Sinha and Lin Daxin have kept their "buy" call on Sea with a target price of US$159.
Sea's FY2022 GAAP revenue came in line with the analysts' full-year estimates, while its adjusted ebitda for the 4QFY2022 was a "miss". Excluding the impairment on the goodwill of US$178 million, the miss would have been much smaller, write Sinha and Lin.
"For 4QFY2022, at the group level perhaps the most important takeaway was ebitda and net profit were in the black both on GAAP and an adjusted basis; the earlier positive ebitda guidance from the core markets of Asean+Taiwan by end 2023 looks to be within striking distance," they add.
"At the divisional level, a mixed bag: 4QFY2022 Shopee GMV down 5% y-o-y, but take-rates up 1.5 percentage points q-o-q to 11.6% more than compensated; Garena softer as expected with Covid lockdowns largely done with, and DFS had another solid quarter with revenues up 16% q-o-q/92% y-o-y. Overall a strong result," they note.
Shares in Sea Limited closed US$14.35 higher or 21.84% up at US$80.06 on March 7.
