DBS Group Research analyst Sachin Mittal has kept a “buy” rating on Sea as he sees “room for positive surprise” with the company aiming to achieve ebitda breakeven in 12 to 18 months compared to his 18-24 month projection.
At its current share price levels, Sea is trading at 3x EV to five-year ebitda as compared to its peers at 10x-20x EV to 12-month forward ebitda, Mittal notes.
Additionally, Sea’s adjusted Ebitda losses are set to narrow by 70% in FY2023 due to its e-commerce businesses. Mittal observes that Southeast Asia and Taiwan are likely to be the biggest drivers by recording positive adjusted ebitda of approximately US$500 million ($712.0 million) in FY2023, followed by an approximate US$400 million reduction in Brazil losses and around US$300 million in savings from exiting other markets.
At present, Sea operates across the sectors of e-commerce, digital payments and financial services and entertainment. Its businesses include Shopee, Garena and SeaMoney.
Most notably, Shopee was a major beneficiary from the boom of online shopping due to the Covid-19 pandemic. However, offline stores are now making a greater comeback, coupled with how Shopee has begun to charge higher delivery charges for smaller deliveries considering mounting logistics costs. “This encourages users to consider purchasing from brick-and-mortar stores, thus benefiting physical store players, in our view,” says Mittal.
That being said, this move by Shopee continues to be very much a “pur[suit] of profitability” to Mittal as well, considering how the free shipping discount on Shopee was no longer automatically applied upon checkout from April.
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In addition, the analyst notes that Shopee’s well-known market strategy to acquire market shares within a short time and offering free shipping and vouchers in the form of cash has been beneficial to the group.
Mittal notes that e-commerce peers are trading at 10x to 20x 12-month forward EV/ebitda while projected ebitda margins in 2022 range from 14% to 34%.
“In terms of timing, Sea’s 4QFY2022 results coupled with FY2023 guidance in February to March 2023, will dictate the stock price,” writes Mittal.
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For Sea’s gaming arm, Mittal expects that the adjusted ebitda margin might decline gradually over the next two to three years. “We project gaming to exhibit some weaknesses despite stabilisation of an active user base as high inflation may hurt discretionary spending on games,” the analyst says.
DBS lowers TP to US$100
Despite his positive outlook, Mittal has lowered his target price to US$100 from US$126.
For his new target price, the analyst uses a conservative 12x FY2027 EV/ebitda discounted back by 12% each year for his valuation. “At Sea, we project a conservative ebitda margin of 20% from 17% previously, leading to a FY2027 Ebitda of US$7.3 billion from US$8.0 billion previously,” he says.
The analyst has also set a bear-case target price of US$63 per share, while assuming long-term group ebitda margins of approximately 15% due to irrational competition.
Shares in Sea closed 53 cents down or 1.11% lower at US$47.39 on Oct 20.
