ANALYSTS are taking heart from Sea’s earlier-than-expected reversal into profit for the fourth quarter of 2022, a development which has shocked the market and shown the effectiveness of the group’s cost-cutting measures.

Sea’s adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) turned positive three quarters ahead of market expectations, said DBS Group Research on Wednesday (Mar 8). Notably, both e-commerce subsidiary Shopee and fintech subsidiary SeaMoney turned profitable.

In a separate report, UOB Kay Hian (UOBKH) upgraded the stock to “buy” and raised its target price by 60.5 per cent to US$94.34 from US$58.77. This implies a potential upside of 17.9 per cent from the counter’s Tuesday closing price of US$80.

The research team believes Sea has the potential to report its first yearly net profit in 2023, with strong contributions from its e-commerce and digital financial services segments.

Likewise, CGS-CIMB has raised its target price on Sea to US$105 from US$85, implying a potential upside of 31.3 per cent. Its new target price of US$105 is based on a higher e-commerce price-to-sales multiple of four times, compared with 2.9 times previously. CGS-CIMB also reiterated its “add” call on the stock.

With the group turning profitable in Q4, Sea is now better placed to pursue long-term tailwinds from its Asean digitalisation, said CGS-CIMB in a separate report on Tuesday. The results beat CGS-CIMB’s estimates by 11 per cent and consensus forecasts by 15 per cent.

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Meanwhile, DBS has maintained “buy” with an unchanged target price of US$100, implying a potential upside of 25 per cent. The research team noted that Sea is trading at an enterprise value which is 2.8 times its sales and is also trading at a 35 per cent premium to Grab. This is because Sea achieved Ebitda breakeven earlier and has a superior Ebitda margin potential.

New York-listed Sea posted US$422.8 million in net income for the fourth quarter ended Dec 31, reversing from the US$616.3 million loss recorded in the year-ago period.

This was partly due to a US$199.7 million net gain on debt extinguishment, and a reversal of US$130 million in previous accruals for certain expenses, amid aggressive cost cuts and layoffs over the past year.

Overall sales and marketing expenses had also fallen by 61.2 per cent year on year to US$474 million, on top of sequential improvements in research and development spending and headquarter costs.

Last week, CGS-CIMB predicted that Sea would achieve better-than-expected Ebitda for the fourth quarter of fiscal 2022, but only expected the group to hit Ebitda breakeven by Q2 2023. Hitting the profit milestone will allow the gaming and e-commerce group to return to a focus on reaccelerating topline growth in FY2024, the research team said.