CGS-CIMB Research analysts Ong Khang Chuen and Kenneth Tan have downgraded their call on TDCX to “hold” as they see “near-term weakness” for the counter.
Ong and Tan have also lowered their target price to US$13.30 ($18) from US$15.50 previously after the Singapore-based, NYSE-listed company guided for a weaker FY2023 on macro headwinds.
“[TDCX’s] FY2023 revenue growth guidance of 3%-8% y-o-y (on a constant currency basis) was below our/Bloomberg consensus expectations of 15%/16%,” Ong and Tan write in their March 8 report.
“TDCX attributed this to a weaker near-term outlook for the digital advertising industry, which has led to softer volumes for its Omnichannel CX segment. Near-term uncertainties also led to key clients within the industry providing shorter visibility ([around] three months) on project requirements, versus six to nine months previously,” they add.
The company’s adjusted ebitda guidance of 25% to 29% for the FY2023 (compared to FY2022’s 30%) also disappointed expectations. This is as TDCX expects transitory margin pressure given the time lag between volume contraction versus a direct reduction in costs, note the analysts.
“The weaker margin outlook also takes into account continued strategic investments to drive longer-term growth (geographical and service expansion) and foreign exchange (forex) headwinds. TDCX reassured that it has not observed contract pricing erosion to date,” they add.
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However, the company is remaining optimistic on its sales and digital marketing segment during the FY2023, seeing “continued strength”. It is also upbeat about the prospects for its other key client segments, including travel and gaming.
During the 4QFY2022 ended Dec 31, 2022, TDCX reported profit of $25 million, down by 13.3% y-o-y. Its core net profit came in at $29 million for the quarter, 14% lower y-o-y. The company, which saw a 14.2% y-o-y growth in its 4QFY2022 revenue of $176.7 million, was offset by margin pressure, leading to the y-o-y decline in profit.
TDCX’s core net profit of $124 million for the FY2022, however, stood largely in line with Ong and Tan’s estimates at 99% of their full-year forecast.
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Despite the downgrade, Ong and Tan remain positive on TDCX’s longer-term outlook as it sees it riding on structural trends. The company’s “highly cash-generative business model” is also a plus, in their view.
The lower target price is now based on 9.5x TDCX’s FY2024 ev/ebitda, which is in line with its peer group, and down from 10x previously.
The analysts have also lowered their earnings per share (EPS) estimates for the FY2023 to FY2024 by 16.4% to 16.7% due to lower revenue growth and margin assumptions.
“Re-rating catalysts include successful execution of earnings-accretive mergers and acquisitions (M&A), and stronger revenue ramp-up from new clients. Downside risks include margin pressure from the inability to pass on costs, slower topline growth amidst macro uncertainties, and weaker employee retention rate,” the analysts write.
Shares in TDCX closed US$1.01 lower or 7.72% down at US$12.08 on March 8.
