Brokers’ take: Maybank cuts Sea target price but reiterates ‘deep value’ opportunity

MAYBANK on Monday (Jul 25) slashed its target price for e-commerce and gaming giant Sea from US$140 to US$105. But the research house is maintaining its "buy" call on the stock, citing the opportunity for a "deep value" investment on the back of supply chain recovery.

The target price still represents a significant upside of more than 30 per cent to the group's US$77.32 closing price as of Friday, even after halving Shopee's enterprise value to sales multiple from 3 to 1.5, on the back of supply chain risks.

"Sea is testing our bedrock valuation of US$73.30 per share and could become a deep-value buy and a strong play on normalisation of supply chains once interest rates peak," said Samuel Tan.

Maybank forecasts Sea's revenue to hit a compounded annual growth rate of 26.5 per cent from FY2021 (ended December) to FY2025, boosted by its e-commerce and digital financial services verticals. The research house expects breakeven in FY2024.

Tan believes that the stock has been oversold on negative news around job cuts and its exits from France, Spain and India. Sea has emphasised that the exits are a normal part of its market testing, and that job cuts are mostly centred on non-core businesses and markets to improve cost efficiency.

Sea has exposure to China, which has been facing supply chain issues around container and trucking capacity in ports. The company's direct cross-border sales from the country make up a high single-digit to low-teens proportion of its gross merchandise value (GMV), noted Tan. It also has China-sourced items in merchant inventories.

But he believes that recovery for China's supply chain woes is on the horizon and that freight rates have come off their peak. Combined with Sea's strong global presence in manufacturing hubs, the company "presents an opportunity to invest in a likely supply chain normalisation story", Tan added.

He further reckons that Sea is in a good position to reduce its reliance on China, given how it retained its presence in Poland, expansion in Mexico, as well as investments in 5 distribution centres in Brazil. Shopee's dominance in South-east Asia - a region seen as a substitute for China manufacturing - could also help it pivot with shifts in supply chains, said Tan.

While the analyst believes e-commerce consumer sentiment also remains strong, he notes that Sea's ability to raise additional cash for expansion may be curtailed, as its recent fall in share price is likely to reduce the attractiveness of the group's convertible issuances, and makes public market capital raising "highly dilutive".

Tan nevertheless believes that Sea can remain in a net cash position through FY2024, with enough cash flow to fund investments in e-commerce and fintech verticals.



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