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UOB Kay Hian analyst Clement Ho has started Sea Limited at “buy” with a target price of US$314.48 ($415.81), as he sees the group’s “high growth momentum” as a catalyst for its share price.
The target price estimate implies 93 times FY2021 adjusted operating earnings, says Ho.
“The high multiple is in line with the price-earnings growth (PEG) multiples of comparable industry peers, supported by our forecast for Sea to generate a 5-year adjusted operating profit compound annual growth rate (CAGR) of 50.9% over FY2020 to FY2025,” he writes in a May 31 report.
Ho’s report comes after Sea reported a 144% y-o-y surge in adjusted revenue of US$2.1 billion and an 81% increase q-o-q in EBITDA of US$88 million for the 1QFY2021 ended March.
Incidentally, Sea was included in the MSCI Singapore on May 27, replacing Suntec REIT. Sea’s inclusion follows MSCI’s announcement in November 2020 that foreign listings will be eligible to be included in its Singapore indices from its semi-annual index review in May.
Sea, which operates digital entertainment and e-commerce platforms, Garena and Shopee, is one of the largest internet companies in Southeast Asia.
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Shopee is the largest e-commerce platform in its key markets of Singapore, Malaysia, Thailand, Indonesia, the Philippines, Vietnam and Taiwan in terms of gross merchandise value (GMV) and total orders from 2017 to 2020, according to consulting group Frost and Sullivan.
The group’s digital financial services business, SeaMoney, looks set to be the “next engine of growth”. It is licensed to offer electronic money services in Vietnam, Thailand, Indonesia, the Philippines and Malaysia.
In addition, the group looks set to expand and enhance its self-developed gaming hit, Free Fire. In 2020, Sea has expanded its game development team to over 750 in 2020 from 400 previously. It has also acquired an independent games studio in Canada, all of which will help the group save on licensing fees, says Ho.
Shopee’s expansion into Latin America since late-2019 have been gaining momentum, notes Ho. In 2020, Shopee was the ninth most downloaded application in Brazil.
“Compared with local competitor Mercado Libre, Sea has superior financials, having accumulated net cash of over US$5 billion from various fund raisings in the last three years,” he writes.
In the FY2021, Sea has guided that growth will likely remain high.
On this, Ho expects digital entertainment bookings to grow by 25.5% y-o-y to US$4.0 billion in 2021. Of the sum, US$2.91 billion will be recognised as revenue, with the remaining US$1.08 billion recorded as deferred revenue.
E-commerce revenue in the FY2021 is also estimated to see revenue grow 133.7% y-o-y to US$4.63 billion, in line with Sea’s guidance.
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This, says Ho, is due to the “strong momentum” in Indonesia, the expansion of product categories, as well as its expansion to Latin America.
“While we note that GMV per order saw a steady decline from US$14.43 in 1QFY2020 to US$11.90 in 4QFY2020, we expect this trend to reverse as the company rolls out financing programmes that support the sale of larger ticket items,” notes Ho.
Going forward, Ho expects Sea to record higher group sales and marketing expenses by 78% y-o-y to US$3.26 billion due to the group’s expansion in Latin America and forays into banking and consumer loans.
To this end, Ho views an earlier-than-expected reduction in cash burn and market share gains in its e-commerce segment as share price catalysts for Sea.
Shares in Sea Limited closed US$7.38 lower or 2.8% down at US$253.24 on May 28.
