Brokers' take: CGS-CIMB raises Sea target to US$315 ahead of likely MSCI inclusion

CGS-CIMB believes Sea Ltd's anticipated inclusion as a constituent stock on the MSCI Singapore Index this year could serve as a near-term catalyst for the tech startup, while also boosting institutional interest in its name.

In a Thursday note, it reiterated its "add" call on the New York Stock Exchange (NYSE)-listed counter with a higher target price of US$315 compared to US$210 previously, on expectations of a higher gaming multiple and stronger Shopee monetisation.

MSCI in November 2020 announced that foreign listings will become eligible for the Singapore Index starting May 2021, following its Semi-Annual Index Review for the month.

With Sea assumed to hold the largest weight in the index post-rebalancing at about 20 per cent, its stock would take over the current top position of DBS. This could potentially translate into US$2.5 billion in passive inflow, said CGS-CIMB based on its estimates.

"We continue to like Sea for its solid execution across all key segments (gaming, e-commerce and fintech) and see further share price re-rating by strong operational data," it noted.

The research house is also expecting a strong set of Q4 FY2020 results - which will be released on March 2 - to serve as a potential share price catalyst.

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For Sea's upcoming Q4 results, CGS-CIMB is projecting its gaming subsidiary Garena's revenue to grow 6 per cent from the previous quarter and 109 per cent year on year, due to the "unabating popularity" of its newly launched battle royale game, Free Fire.

Citing data from market intelligence mobile app Sensor Tower, it noted that Free Fire's monthly revenue trend remained strong over Q4 as it reached another new high in December 2020.

CGS-CIMB is also anticipating Shopee to book another strong quarter of gross merchandise value (GMV) gains, as the group's retail unit continues to retain its pole position as South-east Asia's top e-commerce platform. It reckons Shopee will report 16.9 per cent quarter-on-quarter and 92.5 per cent year-on-year GMV growth to US$10.9 billion in Q4 FY2020.

Continued growth in the mobile wallet space as well as Sea's recent digital bank licence win in Singapore could further ramp up revenue growth for Shopee's digital financial services, it added.

Overall, the research house forecasts Sea to report adjusted revenue of US$1.9 billion for Q4, up 12.6 per cent from a quarter ago and 106.4 per cent higher than the previous year.

"We do expect Sea to report another quarter of positive adjusted earnings before interest, tax, depreciation and amortisation (Ebitda) in Q4 FY2020. However, given the typically higher spend on promotional activities by Shopee in Q4 for major e-commerce events, as well as the increased push to drive adoption of ShopeePay, we forecast Sea's adjusted Ebitda to be lower quarter on quarter versus Q3 FY2020," said CGS-CIMB.

Shares of Sea closed at US$267.50 on the NYSE on Thursday.