Sea's rapid improvement in cost structure should lead to positive FY2023 net profit, analysts maintain 'buy'

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Sea’s share price may weaken in the near term in view of the lower q-o-q earnings in 1QFY2023.

Analysts at Maybank Securities and UOB Kay Hian have kept “buy” on Sea Ltd with target prices of US$105 ($141) and US$94.34 respectively following the company’s 1QF2023 ended March announcement.

For its 1QFY2023, Sea’s net profit stood at US$88 million, below Maybank’s estimates due to a US$118 million goodwill impairment charge from previous acquisitions.

Excluding the one-off impairment of goodwill, core net profit came in at US$205 million, well within UOBKH’s expectations.

Shopee and SeaMoney both saw healthy momentum within the quarter, with 36% and 75% revenue growth y-o-y respectively, notes Maybank analyst Kelvin Tan. The segments’ ebitda further improved by 6% and 31% q-o-q, after a rapid turnaround in profitability at the end of FY2022.

Sea’s digital entertainment bookings further declined to US$462 million in 1QFY2023 due to persistently weak user trends and reduction in consumer discretionary spending. On the upside, however, quarterly active users showed signs of rebound, growing 1% q-o-q after five quarters of consecutive declines.

User trends were positive as at April 2023 with Free Fire achieving a new peak monthly active users in the past eight months, Tan says. He notes that Garena is set to roll out two new games through its publishing business in 1H2023.

Maybank believes that Sea is able to print a net profit in FY2023. This is on the back of faster-than-expected cost-cuts; more sustainable reinvestment to defend its regional e-commerce market leadership; as well as its broadening digital bank offerings across Southeast Asia.

UOBKH analysts John Cheong, Jacquelyn Yow Hui Li and Heidi Mo echo this, expecting FY2023 to be the first annual positive net profit for Sea with the improvement from all segments.

They highlight that Sea had achieved positive free cash flow in 1QFY2023, with the management continuing to focus on their long-term strategy of business opportunities in a profitable and sustainable way.

Moving forward, the UOBKH analysts expect stable margins for Shopee, with strong transaction-based fees and the increase in value-added service revenue. They reckon that the logistics services cost leadership strategy — which involves increasing the capacity and integration for the company’s in-house logistics arm and automation to their delivery centre — would enhance the segment’s margin.

“The management had also guided that Shopee Brazil will be able to breakeven soon with their strong growth and significant appearance in Brazil,” the analysts add.

Meanwhile, SeaMoney has been increasing its external funding for its digital financial services especially in Indonesia. The analysts expect this segment to continue growing with the increasing loan base, expansion of e-wallet as well as other new products such as insurtech.

UOBKH notes that the Sea’s share price may weaken in the near term in view of the lower q-o-q earnings in 1QFY2023. Despite this, the analysts are recommending investors to accumulate on weakness in the view that Sea would be the first Southeast Asian e-commerce company to record positive earnings for 2023.

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