Brokers' take: DBS lowers target price on Sea to factor in Free Fire India ban

DBS Group Research has lowered its target price on consumer Internet company Sea to factor in the ban of its marquee game Free Fire in India. It maintains its "buy" call on the stock.

The research team on Wednesday (Feb 23) cut its target price on Sea to US$272 from S$278, implying a potential upside of about 116.4 per cent from the counter's closing price of US$125.72. Sea's shares were down 1.5 per cent or US$1.97 at the time.

DBS said Sea is trading at an enterprise value of 5 times the brokerage's revenue expectations, versus the historical average of 7.4 times. Its target price is based on projections of US$185 per share for Sea's e-commerce and fintech businesses, US$71 for gaming and the group's net cash position of US$10 per share.

Notwithstanding the India ban on Free Fire, DBS expects stable cash flows for Sea's gaming business over the next 3 years as Free Fire Max - the same game but with better graphics - receives a good response.

On Sea's e-commerce business, DBS said that Sea offers higher e-commerce growth than its peers. It also noted that Shopee - Sea's e-commerce platform - will likely break even when it comes to earnings before interest, taxes, depreciation and amortisation (Ebitda) in South-east Asia during the second half of 2022.

DBS estimates e-commerce revenue to grow at a compound annual growth rate (CAGR) of 54 per cent over FY2021 to FY2023. This is higher than any other major e-commerce player and more than double the average CAGR (24 per cent) of Sea's global peers.

"We expect Shopee to generate a low single-digit Ebitda margin in 2023F, which could be deployed to fund Shopee's expansion into new markets in Latin America and Europe," said DBS analyst Sachin Mittal.