DBS Group Research analyst Sachin Mittal has maintained “buy” on Sea Limited as he believes its securing of a digital full bank (DFB) licence by the Monetary Authority of Singapore (MAS) could accelerate its growth in the greater Southeast Asia region.
“Its licence award seems ideal because Sea has a trio of digital services; Garena (digital entertainment), Shopee (ecommerce) and SeaMoney (digital financial services). Obtaining the licence to operate as a fully-fledged digital bank would allow them to cater to the users it acquired through its three core business segments while offering banking services to the underserved segments and small and medium businesses in Singapore,” he writes in a Dec 7 report.
As such, Mittal has upped Sea’s target price to US$228 ($304.41) from US$204 previously, mainly on higher valuation for digital financial services.
“The change in our target price is derived from a fair value of US$22 (previously US$2) for digital financial services (DFS) as we switch to Enterprise Value (EV) to user base (from EV to revenue earlier) and a fair value of US$83 (previously US$80) for the gaming business on higher Price to Earnings Ratio (PER) of 24x (previously 23x) based on peer valuation,” he adds.
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The winning of the DFB licence on Dec 4 is currently expected to accelerate Sea’s growth in the digital financial services.
To this end, Mittal has projected FY2019-2022F adjusted revenue compound annual growth rate (CAGR) of 91% for e-commerce, 34% for gaming and 124% for digital financial services.
Potential catalysts that could contribute to Sea’s share price include the growth in e-commerce adjusted revenue as well as sustained growth in profits in the gaming business.
That said, Mittal says the brokerage’s FY2020F/2021F adjusted revenue are 10% higher than consensus’ estimates.
SEE:DBS ups Sea Limited’s TP on 'surging popularity' of Free Fire
Its gaming segment is also seeing growth. Sea’s in-house developed game, Free Fire, has continued to enjoy popularity amid the movement restrictions amid Covid-19. The game is also benefitting from the ban of the PUBG game in India, one of Sea’s largest markets.
“Sea’s mounting cash flow from its gaming business is a big competitive edge in: consolidating its leadership position in the e-commerce business, and kick-starting growth of its nascent payment business,” says Mittal.
“Sea might burn more cash in the e-commerce business to raise its market share further. We expect the e-commerce and DFS segments to continue to report adjusted earnings before interest, taxes, depreciation and amortisation (EBITDA) losses in FY20F/21F due to the intense competition,” he adds.
“Our projections could be at risk if Free Fire slows down next year and if Sea is unable to develop a pipeline of new games. For e-commerce, cross-border revenue could disappoint due to regulatory issues.”
Shares in Sea are trading at US$198.78 with a price-to-book value of 139.7x.
