Brokers’ take: CGS-CIMB upgrades Sea to ‘add’ as losses narrow
Michelle Zhu
CGS-CIMB has upgraded its call on Sea Ltd to “add” from “hold” as it believes the gaming and e-commerce group’s strategic shift to focus on profitability has begun to bear fruit.
According to the research house, this is evident in the significant narrowing of losses at Shopee and SeaMoney over the third quarter of the financial year - which more than offset weakness in Garena and resulted in the group’s Q3 losses coming in narrower than forecasted.
“We note that losses would have been even lower if one-time severance package and early lease termination costs (of US$85 million) were excluded,” said CGS-CIMB in a report on Wednesday (Nov 16).
Its target price on the stock has been lifted to US$75 from US$61 to reflect a higher FY2023 price-to-sales ratio of 2.9 times for the e-commerce segment as compared to 2 times previously.
While the research house cautions that Shopee’s earlier-than-anticipated adjusted Ebitda (earnings before interests, taxes, depreciation and amortisation) breakeven could come at the expense of weak gross merchandise value growth in the near term, its analysts highlight that the revised breakeven expectations for end-FY2023 are a year ahead of CGS-CIMB’s expectations.
They also underscored management plans to “only look to re-accelerate growth in a more sustainable manner after achieving groupwide self-sufficiency”.
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Additionally, the analysts are positive on SeaMoney’s improved performance in Q3 as adjusted Ebitda losses narrowed on the back of “more disciplined spend” on driving mobile wallet adoption, as well as “healthy” profitability in the credit business.
Sea’s gaming segment however remains the sole weak spot in the group’s latest set of financial results, with lower guided bookings for FY2022 implying a 26 per cent quarter-on-quarter decline in Q4 at the mid-point.
“Sea notes that reopening trends continue to have an impact on user engagement, and game spend was further impacted by macro uncertainties hurting discretionary spend,” they added.
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Likewise, DBS Group Research sees “signs of weakness” in the group’s gaming segment based on its latest set of Q3 financials. The brokerage foresees this to be further exacerbated by a combination of macroeconomic factors and softer bookings due to moderating user engagement and monetisation.
In a separate note on Wednesday, DBS reiterated its “buy” rating on the stock with an unchanged US$100 target, which is based on a “conservative” enterprise-value-to-Ebitda (EV/Ebitda) ratio of 12 times FY2027 estimates.
DBS is projecting a lower FY2027 Ebitda of US$7.3 billion versus US$8 billion previously.
It notes that the stock’s e-commerce peers are currently trading at 10 to 20 times 12-month forward EV/Ebitda, while projected Ebitda margins range from 14 to 34 per cent.
For Shopee, it projects margins to come in at about 18 per cent in FY2027.
“Rising take rate coupled with cost control measures are expected to support Shopee in achieving Ebitda breakeven much earlier than our expectations.”
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