Brokers' take: DBS slashes Sea target price on dimmer e-commerce, gaming prospects

BLEAK US data has prompted DBS to lower its price target for Sea Ltd from US$402 to US$278, despite maintaining "buy" on the stock.

The revised price target comes on reduced projections of US$185 per share for Sea's e-commerce and fintech businesses (versus US$292 previously) and US$83 for the gaming business (from US$100), as well as the group's net cash position of US$10 per share.

Based on the latest key US economic indicators, DBS believes the first year of the country's economic re-opening may lead to slower growth for the e-commerce and gaming sectors.

It has therefore cut its FY2022 and FY2023 e-commerce revenue forecasts by 9 per cent and 5 per cent to now project a normalised gross merchandise value (GMV) compound annual growth rate (CAGR) of 29 per cent for Shopee over FY2021 to FY2025.

This forecast is significantly lower compared to 39 per cent earlier, although it remains above the industry CAGR of 18 per cent.

DBS has also trimmed its gaming revenue estimates by 4 per cent for FY2022 and 10 per cent for FY2023 to assume slower segment growth as lockdown measures ease, leading to a moderation in time spent on gaming.

In a report on Monday (Jan 10), analyst Sachin Mittal said he foresees continued stability in gaming cash flows to support Sea's expansion of its new businesses, which should help to offset the impact of less-frequent gaming.

Going forward he believes the continuous rollout of new content and features for Free Fire - the core profit driver of Sea's gaming segment - will be "critical" to retain and grow the number of paying users, enabling monetisation rate to increase.

The analyst is projecting for Sea's adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) to break even in FY2023 due to rising losses in Brazil, as opposed to consensus expectations of a breakeven in FY2022.

He also notes that Sea's current enterprise value has re-traced to 7.3 times its 12-month forward revenue estimate from earlier highs of 15 to 16 times in FY2021.

DBS's revised FY2022 and FY2023 revenue projections now stand at 10 per cent and 5 per cent below consensus estimates, respectively.

"FY2022 consensus revenue might be trimmed 8 to 10 per cent over the next 1-2 months; the stock may rise once consensus estimates are more realistic," said Mittal.

Sea ended flat at US$187.10 on the New York Stock Exchange on Jan 10.

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