Broker's take: Goldman Sachs lowers target price of TDCX

GOLDMAN Sachs on Thursday (Mar 10) lowered its 12-month target price for Singapore-headquartered TDCX to US$23.70 from US$31.60, though it still maintains a "buy" position on the counter listed on the New York Stock Exchange.

The new target price implies a potential upside of 82.3 per cent, from the counter's Thursday closing price of US$13. Shares of TDCX were up 1.5 per cent or US$0.19 at the time.

It also implies an enterprise value (EV) to the earnings before interest, taxes, depreciation, and amortisation (Ebitda) ratio of 15.5 times, versus a peer median of 10.8 times. Goldman Sachs believes this is justified, given TDCX's faster revenue growth profile and higher quality business, resulting in higher margins.

The target price revision comes as Goldman Sachs lowers its Ebitda estimates for the digital customer experience (CX) services provider by 9 per cent for FY2022, and 8 per cent for FY2023 and FY2024.

In the research report, Goldman Sachs analysts Pang Vittayaamnuaykoon, Piyush Mubayi and Kelsey Santoso said that growth in TDCX's omni-channel CX solutions would be affected by a slower-than-expected recovery of the travel segment.

The lower Ebitda estimate also factors in additional expenses from stock-based compensation, with the company's introduction of a performance share plan in the 4th quarter of last year. The share plan means TDCX employees can earn actual stock in the company when specific financial objectives have been achieved.

Excluding the impact of stock-based compensation, Goldman Sachs estimates that TDCX earnings would increase by between 2 and 3 per cent from better-than-expected rental, maintenance, recruitment and transport expenses.

Despite revising TDCX target price and earnings estimate lower, Goldman Sachs remains "constructive" in its outlook. This is because Goldman Sachs expects TDCX to grow faster than its peers due to its high exposure to customers that are in the fast-growing, new-economy sectors.

There is also attractive market opportunity as the CX solutions industry in South-east Asia is also expected to reach a total market demand worth US$14.2 billion by 2025, Frost & Sullivan estimates.

TDCX reported on Wednesday a 7 per cent increase in net profit for its 4th quarter on the back of higher revenue.

Net profit for the 3 months ended Dec 31, 2021 rose to S$28.8 million, from S$27 million during the same period a year earlier.

The company also reported revenue growing 28.8 per cent on year to hit S$154.8 million in the 4th quarter.

A report from CGS-CIMB reiterated the "add" call on TDCX and maintained its target price of US$24.

In contrast with Goldman Sachs' concerns about the travel industry's impact on TDCX, CGS-CIMB analysts Ong Khang Chuen and Kenneth Tan noted that the company expects its travel and hospitality vertical to see a modest recovery in FY2022, in line with regional border reopenings.

"We continue to like TDCX as a relatively defensive proxy to the fast-growing digital economy, given its recurring revenue model, highly cash-generative business and net cash position," said the analysts.