Brokers’ take: CGS-CIMB downgrades TDCX to ‘hold’, lowers target price on near-term headwinds

CGS-CIMB downgraded its call on New York-listed TDCX to “hold” from “add”, after the digital customer solutions provider guided for FY2023 revenue growth of 3 to 8 per cent year on year – lower than both the brokerage’s and Bloomberg consensus forecasts.

In a report on Wednesday (Mar 8), CGS-CIMB analysts noted that the group’s healthy topline growth in Q4 was offset by margin pressures.

The FY2023 guidance disappointment reflected the cautious view of TDCX’s management amid macroeconomic headwinds, said the research house, despite the group’s reassurance it had not observed contract pricing erosion to date.

“The company’s FY23 adjusted Ebitda (earnings before interest, taxes, depreciation and amortisation) guidance of 25 to 29 per cent also disappointed as TDCX expects transitory margin pressure given the time lag between volume contraction versus direct cost reduction,” observed the analysts, comparing the latest guidance to FY2022’s adjusted Ebitda growth of about 30 per cent.

This, along with expectations of near-term operating pressures, prompted CGS-CIMB to cut its FY2023 to FY2024 earnings per share estimates to result in a target price of US$13.30, from US$15.50 previously.

The new target implied a lower 9.5 times enterprise value-to-Ebitda multiple based on FY2024 estimates, as opposed to the previous 10 times.

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It nonetheless remained in line with TDCX’s peers, said the analysts, who added that they remain positive on the group’s longer-term outlook for its ability to ride on structural trends, as well as its highly cash-generative business model.

Shares of TDCX on the New York Stock Exchange ended Wednesday down US$1.01 or 7.7 per cent at US$12.08, after the release of its latest financial results.