Brokers’ take: CGS-CIMB downgrades Sea to ‘hold’ on dimmer Shopee prospects
Michelle Zhu
CGS-CIMB believes Shopee’s gross merchandise value (GMV) could remain weak in the near term after its parent company Sea suspended FY2022 revenue guidance for the e-commerce business, in a surprise move earlier this week.
In a report on Wednesday (Aug 17), the research house cited inflation-weakened consumer sentiment, forex headwinds from a stronger US dollar, as well as longer-than-expected stabilisation trends as potential reasons that could “force Sea to ease off the pace of its monetisation push” for Shopee.
It nonetheless remains cognisant of Shopee’s improving gross profit margin and narrower net losses on a quarter-on-quarter basis, though Sea’s overall Q2 results missed the research house’s expectations.
To reflect Shopee’s weaker GMV outlook, the research house has introduced a lower segment target multiple of 2.9 times FY2023 price-to-sales ratio as opposed to the previous 5 times, now based on 1.5 standard deviation below its peers’ historical average.
This has resulted in a downgrade of Sea to “hold” from “add”, with a significantly lower price target of US$92 compared to US$150 previously.
“While we remain hopeful for re-acceleration of sequential revenue growth in H2 with an easing comparison base, we think the suspended FY2022 guidance for Shopee signals that near-term GMV growth could remain weak,” said analysts of CGS-CIMB.
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They however observed “signs of stabilisation” for Sea’s gaming segment as Garena’s quarterly active users (QAU) for Q2 came in flattish quarter-on-quarter amid the continued impact of economic reopening on game consumption.
Operating statistics for Sea’s digital financial services segment SeaMoney also remains strong in their view, as QAU and mobile wallet total payment volumes continued to grow year on year in Q2.
“Sea sees (SeaMoney) as a high-quality revenue driver without significant need for investment to scale. We believe that with scale and commercialisation, the digital financial services segment will be able to reach positive cash flow in the short- to medium-term,” added the analysts.
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While Maybank Securities has also lowered its forecasts across the board for Sea and slashed Shopee’s GAAP (generally accepted accounting principles) revenue estimates for FY2022, it continues to project Ebitda (earnings before interest, tax, depreciation and amortisation) breakeven in FY2024.
The research house maintains its “buy” call on the stock, with an unchanged US$105 price target. It still views Sea as an undervalued stock compared to its peers.
In a Thursday report, analyst Samuel Tan noted that Sea’s share price now trades markedly below the “lowest valuation of US$82.30 that we (Maybank) can give to Sea on the same forecast” - using the “lowest justifiable” multiples of 11.7 times FY2023 forward enterprise value (EV) to Ebitda ratio for Garena, and 1.1 times FY2023 forward EV/sales ratio for Shopee.
Commenting on the group’s latest set of Q2 financials, Tan believes improving adjusted Ebitda metrics supports Maybank’s latest EV/sales multiple hike on Shopee to 1.8 times from 1.5 times previously.
Despite Sea’s suspension of e-commerce revenue guidance, Tan sees “tailwinds to fulfilment costs” for Shopee moving forward as supply chain issues ease - with the World Container Index composite recently posting its 24th consecutive weekly drop to US$6,430 per forty-foot equivalent unit.
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