Brokers’ take: DBS scales back price target for Sea, flags potential Q3 loss

DBS Group Research has shaved its price target for Sea to US$70 from US$78, as it believes the tech conglomerate may disappoint consensus expectations of positive adjusted group earnings before interest, taxes, depreciation and amortisation (Ebitda) in the third quarter of its fiscal year.

In a report on Wednesday (Oct 11), analyst Sachin Mittal said that this comes as Sea’s management “seems still quite cautious” as it warned of potential group losses after the release of its Q2 financials. In his view, the group may report adjusted Ebitda losses in Q3 – particularly if Shopee continues increasing its investments in live-commerce and logistics in H2 FY2023, which would in turn affect e-commerce adjusted Ebitda. “The investment in live video and promotions using key opinion leaders is expected to continue into Q4 FY2023, while Shopee may engage various TikTok Shop sellers as well,” said Mittal.

DBS in late September raised its price target on Sea to US$78 from US$66 following news of Indonesia banning e-commerce transactions on social media platforms. Its latest US$70 target accounts for a 9 per cent reduction in FY2024 adjusted group Ebitda to US$2 billion, and a 5 per cent cut to FY2025 adjusted group Ebitda projections to US$2.5 billion. It also factors in a lower net cash of US$3.6 billion versus US$4 billion previously, as Mittal expects higher losses in H2 FY2023.

DBS’ curtailed adjusted Ebitda projections for Sea have factored in a slower recovery in the group’s e-commerce segment, in view of how 40 per cent of Sea’s e-commerce gross merchandise value (GMV) remained exposed to TikTok Shop. The research house said that it now expects Shopee’s adjusted Ebitda as a percentage of GMV rising from 0.3 per cent to 0.7 per cent in FY2024, down from 0.9 per cent earlier. It nonetheless foresees a “sharp reduction in losses” from Indonesia, which accounts for nearly 25 per cent of Sea’s total e-commerce GMV.

“While Sea is attractive at below 10 times FY2024 adjusted EV (enterprise value) to Ebitda versus its peers’ 20 times, investors would look forward to Q4 FY2023 and FY2024 guidance by (the group’s management),” said Mittal. “Overall, we expect Shopee to march towards rising profitability with lower shipping subsidies and higher in-house logistics, partially offset by the rising investment in livestreaming video.”