Following the New York Stock Exchange-listed TCDX’s 3QFY2023 results ended Sept, analysts from PhillipCapital and CGS-CIMB Research have lowered their target prices to US$8.60 ($11.49) and US$6.20 respectively.
Jonathan Woo of PhillipCapital has kept his “buy” call, while Ong Khang Chuen and Kenneth Tan of CGS-CIMB have maintained their “hold”.
Revenue from TDCX’s top two clients, which make up 47% of its total revenue, declined 21% y-o-y on reduced seat volumes, according to Woo.
“Near-term outlook remains cloudy, with uncertainty around when these clients will begin to contribute meaningfully again to overall revenue growth,” he adds.
However, the analyst says that TDCX’s 3QFY2023 revenue was in line with expectations, with better-than-expected earnings helped by lower employee expenses, lower taxes, and higher interest income. The firm’s net margin expanded 150 basis points (bps) y-o-y as a result.
Its revenue contribution excluding the top five clients continued to grow at 29% in 3QFY2023 as compared to 18% in the same period a year before. Meanwhile, its newer verticals such as gaming, travel, fast-moving consumer goods (FMCG), and e-commerce have begun to expand.
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Woo says that TDCX has reaffirmed its FY2023 revenue growth range to 2%-4% in constant currency, which translates to a flat to slight negative y-o-y growth in actual currency.
The weakness reflects a cut in seats and volumes of TDCX’s top digital advertising and media client, he notes. Meanwhile, strong earnings for some of TDCX’s key clients have not translated immediately into seat volume, with uncertainty surrounding when this would turn around.
“On the flip side, we expect TDCX’s smaller clients to continue increasing their revenue contributions and grow at a about 50% CAGR in the near term, helping to alleviate the drag on revenue by its top two clients. Future growth is expected to be driven by this group of clients,” says Woo.
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The PhillipCapital analyst has reduced his FY2024 revenue forecasts by about 4% as a result.
Meanwhile, Ong and Tan of CGS-CIMB says that TDCX’s unchanged FY2023 revenue guidance suggests 4QFY2023 revenue could decline by more than 4% y-o-y in constant currency basis.
Likewise, they note that TDCX sees continued drag from its largest customer, Meta, which has been focusing its efficiency drive this year amid softer digital advertising demand.
“TDCX said its key digital advertising clients have started to show better results in their recent quarterly earnings, and it is a matter of time before they choose to reinvest, which could provide more volume stability for TDCX in FY2024,” they say.
Even though the analysts say that revenue diversification is taking shape with rapidly growing contributions from new clients, it is still insufficient to offset declines from top client, Meta.
However, Ong and Tan see bright spots in the firm’s business development efforts. They note that TDCX sees good progress for its new artificial intelligence (AI) consulting arm, although monetisation could still be some time away.
As such, the analysts reiterate their ‘hold’ calls, amid undemanding valuation, but continue to see near-term risks with 4QFY2023 likely y-o-y weaker.
“We cut our target price to US$6.20 on lower earnings per share assumptions, still pegged to 4.7x FY2024 ev/ebitda (in line with peer TaskUS that shares a common major customer),” they say.
Shares in TDCX closed 0.1 US cents lower, or 2% down at US$4.90 on Nov 28.
