Brokers’ take: JPMorgan initiates coverage on TDCX with ‘overweight’, US$13.80 target price
Ry-Anne Lim
JPMORGAN has initiated coverage on Singapore-headquartered TDCX with an “overweight” rating and a target price of US$13.80.
The target price implies a potential upside of 49 per cent from TDCX’s Oct 3 closing price, which ended down 1.2 per cent or US$0.11 at US$9.26 on the New York Stock Exchange.
In a report on Tuesday (Oct 4), JPMorgan analysts highlighted TDCX – which provides digital customer experience solutions with a focus on new economy companies – as a “profitable customer experience play on growth in the new economy”.
The stock has been valued at a 9.5 times EV/Ebitda (enterprise value to earnings before interest, taxes, depreciation and amortisation) multiple, compared to its peer average of around 8.2 times EV/Ebitda.
The analysts believe that such a valuation is justified with the group’s strong growth profile and high profit margins due to its “industry-leading profitability”.
They noted that compared to its peers, the stock has a higher Ebitda margin, while its higher profitability is driven by a number of factors such as industry-low attrition rates and a higher proportion of complex workload.
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The research team is also expecting a continued 15 per cent CAGR (compound annual growth rate) in the company’s revenues from FY2021 to FY2024 – with the possibility of more than 10 per cent of its free cash flows (FCFs) potentially being converted into revenues.
“With TDCX converting more than 10 per cent of its revenues into FCFs, its net-cash position could swiftly grow to more than 30 per cent of its current market cap by FY2024,” said the analysts.
“This raises prospects of mergers and acquisitions, where TDCX could expand its services and/or geography.”
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They added that another driver of growth is the advancement of TDCX’s clients, where new economy companies are a key driver in the customer experience industry, accounting for 93 per cent of revenue in H1 2022.
But the analysts cautioned that profit margins might be limited going forward due to an absence of major technology innovation and automation, especially in an environment of wage inflation.
Further risks to the stock include wage inflation, which could affect customers’ spending, and “intense” competition in a fragmented industry, of which TDCX has a 3 per cent market share. “(This) intense competition can impact revenue and profitability,” the analysts said.
Earlier in January this year, CGS-CIMB initiated coverage on TCDX with an “add” call and US$24 target price. This was later cut to US$18 on reduced growth estimates in a subsequent May report.
In April, Phillips Securities started coverage on the stock with a “buy” rating and US$22 target.
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