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Analysts 'cautiously optimistic' on TDCX’s outlook on FY2023 despite higher-than-expected 3QFY2022 earnings

Felicia Tan
Felicia Tan11/28/2022 06:14 PM GMT+08  • 5 min read
Analysts 'cautiously optimistic' on TDCX’s outlook on FY2023 despite higher-than-expected 3QFY2022 earnings
Laurent Junique, the founder and CEO of TDCX. Photo: Albert Chua/The Edge Singapore
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Analysts from CGS-CIMB Research and PhillipCapital are “cautiously optimistic” on TDCX’s outlook for FY2023 ending Dec 31, 2023 even as the company’s management stated that it expects to maintain its double-digit topline growth next year.

“While there are concerns over a potential slowdown of the digital advertising space, TDCX notes that a new client (short-form video social media platform) started to contribute meaningfully in 3QFY2022, and an increasingly competitive environment could lead key clients to expand their sales and digital marketing (SDM) campaigns to drive sales,” write CGS-CIMB analysts Ong Khang Chuen and Kenneth Tan.

“Meanwhile, other key client verticals including travel and hospitality (back to pre-Covid levels, but expect continued growth with China reopening as potential boost) and fintech (healthy customer wins) should continue to fare well,” they add.

Ong and Tan have kept their “add” call on TDCX with an unchanged target price of US$13.80 ($18.99).

Their positive outlook on TDCX’s prospects are based on the company’s “resilient growth riding on structural trends” as well as its “highly cash-generative business model”.

Their unchanged target price is now at a lower FY2024 EV/ebitda ratio of 10x (growth-adjusted versus its peer group) as they roll their valuation base year over. The lower ratio came about given the concerns over a weaker macro outlook, the analysts explain.

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TDCX, which released its results for 3QFY2022 on Nov 22, saw the quarter’s core net profit coming in at $35 million, up 15% y-o-y and 14% q-o-q.

The quarter’s core net profit surpassed Ong and Tan’s expectations with TDCX’s core net profit for 9MFY2022 forming 78% of the analysts’ estimates for FY2022.

TDCX’s revenue for 3QFY2022 rose 16% y-o-y and 6% q-o-q to $173 million with all segments showing growth, especially its SDM segment, which grew by 32% y-o-y, Ong and Tan note.

See also: Citi maintains 'buy' rating on Genting Singapore off the back of MBS results beat

To them, the “key surprise” was TDCX’s stronger adjusted ebitda margin, which improved by 0.8 percentage points q-o-q to 31.8%. This, the analysts add, were helped by the company’s “strong cost management and foreign exchange (forex) tailwinds”.

In its results release, TDCX narrowed its revenue guidance for FY2022 but kept its mid-point unchanged at +19% y-o-y. The company also repeated its adjusted ebitda margin at 30% to 32% for FY2022.

In the analysts’ view, TDCX’s strong logo wins year-to-date (ytd) have begun to “bear fruit”, with the company launching campaigns for 12 new clients in 3QFY2022. As at end-September, TDCX had a total of 72 launched clients, which was 50% higher y-o-y.

“Revenue growth for clients outside of top-five doubled that of group level, lowering TDCX’s revenue concentration from top-5 clients to 82% in 3QFY2022 (3QFY2021: 85%),” the analysts note.

“In a bid to capture more wallet share of top clients and benefit from the industry consolidation trend, TDCX is continuing its geographical expansion drive to improve language capabilities. Four newer geographies (Colombia, India, Romania and South Korea) have started to bear fruit, making up close to 10% of the y-o-y revenue growth for 3QFY2022,” they add. “While new offices could lead to weaker margins in the near-term as they ramp up, TDCX is confident that its group margin profile could remain at healthy levels in FY2023 given the complexity of its service offerings.”

Meanwhile, PhillipCapital analyst Jonathan Woo has also maintained his “buy” call as TDCX’s 9MFY2022 revenue stood in line at 73% of his FY2022 forecasts.

The company’s patmi for the period came in above expectations at 84% of the analyst’s full-year forecasts due to higher interest and higher other operating income.

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In Woo’s view, TDCX’s travel and hospitality vertical continues to provide “growth tailwinds, returning to pre-pandemic levels with 29% y-o-y growth for 3QFY2022”.

In light of the company’s higher-than-expected patmi, the analyst has upped his patmi estimates for FY2022 by 12% to $108 million. Again, the higher estimates come on the back of the higher-than-expected interest and other operating income. Woo’s FY2022 revenue estimates remain unchanged.

Like his peers at CGS-CIMB, Woo is taking on a more cautious outlook on TDCX’s FY2023 prospects, cutting his FY2023 revenue growth forecasts by 5%.

In his report dated Nov 24, Woo points out that TDCX’s revenue growth has been decelerating sequentially over the first two quarters of the FY2022.

“Growth is expected to continue trending downwards for the rest of this year given inflation fears and significant pullback in expenses spending by many new economy companies,” he says. “4QFY2022 revenue growth is expected to be around only 13% y-o-y – taking the midpoint of the company’s FY2022 guidance,” he adds.

TDCX’s adjusted ebitda margin, which is down by almost 4% y-o-y, is also not a good sign, in Woo’s book. “Stripping out share-based compensation that did not occur in 3QFY2021, TDCX’s adjusted ebitda margin for 3QFY2022 was down 370 basis points to 31.8%.”

Some of these reasons include TDCX’s “significantly higher business volume in 3QFY2021 compared to 3QFY2022, a catch-up revenue reduction related to a warrants agreement with Airbnb, increasing corporate overhead costs due to business expansion, as well as [a] 30% [increase in] employee benefits expense y-o-y due to increasing demand for talent”.

Apart from cutting his revenue growth forecasts for FY2023, Woo has also reduced his target price to US$15.50 from US$16.39 previously, representing a weighted average cost of capital (WACC) of 10.4% and a terminal growth rate of 3.0%.

For CGS-CIMB’s Ong and Tan, the reopening of China’s borders, which could boost the recovery of the travel industry, as well as accretive acquisitions are re-rating catalysts to TDCX’s prospects while downside risks include economic uncertainties slowing down order wins.

Shares in NYSE-listed TDCX closed 10 US cents higher or 0.95% up at US$10.62 on Nov 27.

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