Brokers' take: Analysts slash Sea target prices on weak gaming guidance

BROKERAGES have lowered their target prices for Sea, after the Singapore-based consumer Internet company guided for lower bookings under its gaming arm Garena for FY2022.

In a research note on Thursday (Mar 3), Maybank Securities analyst Lai Gene Lih slashed his target price by 56 per cent to US$160, down from US$379, despite only reducing the FY2022-2023 revenue estimates by 8-9 per cent.

This is due to a slowdown in earnings and lower multiples from the gaming segment, as well as Lai changing the ratio chosen to represent e-commerce segment to the estimated FY2023 price-to-sales ratio instead of the estimated FY2022 price-to-gross merchandise value ratio.

He noted that the "disappointing" guidance for Garena's FY2022 bookings, which represent generally accepted accounting principles (GAAP) revenue plus change in deferred revenue, was US$2.9-3.1 billion, lower than the FY2021 guidance of US$4.7 billion, with the company's actual FY2021 bookings figure standing at US$4.6 billion.

This takes into account headwinds from further reopening of economies globally and the recent India ban of Free Fire, Garena's marquee game, said Lai.

However, he highlighted that should Garena be more resilient than anticipated, there could be an upside risk to the target price, particularly if Free Fire becomes available in India again.

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Like Lai, Citi on Wednesday adjusted its target price lower to US$221 from US$241 based on the gaming guidance, which also resulted in the brokerage cutting its gross bookings estimate by 34 per cent year on year and GAAP revenue estimate by 19 per cent year on year.

While Free Fire continues to rank well in app store grossing tables, the big spike-up in user metrics in 2021 seems unsustainable and to reverse completely in 2022 back to 2020 levels, said Citi.

It expects the approximately 40 per cent earnings before interest, taxes, depreciation and amortisation (Ebitda) for the segment to be the new norm, while projecting impact on GAAP revenue to be more moderate than a slowdown in grossing.

Meanwhile, DBS Group Research on Wednesday said that quarterly gaming Ebitda will be critical for Sea's share price and projects lower gaming Ebitda to result in adjusted group Ebitda losses widening for FY2022.

Contrasting the lower gaming Ebitda estimate, DBS analyst Sachin Mittal forecasts group revenue for FY2022 to increase by 4 per cent, and for FY2023 by 8 per cent.

Alongside gaming Ebitda, he sees quarterly e-commerce Ebitda in Sea's core markets, mainly in South-east Asia, as catalyst for the stock, as earnings from both segments will go into funding new opportunities and expansions in 2023.

Mittal has therefore revised his target price for Sea downwards to US$256 from US$272, summed from lower gaming and higher e-commerce figures, and a net cash of US$5 per share.

Sea, which trades on the New York Stock Exchange, closed at US$117.75, down US$8.75 or 6.9 per cent, on Wednesday.

READ MORE:

• Sea FY2021 losses widen to US$1.5 billion, revenue up 127.5 per cent
• Singapore hopes India ban on Sea's game can be resolved quickly
• Sea invests in Singapore motion-capture gaming startup Refract's S$8.5m round