PhillipCapital has initiated “buy” on TCDX with a target price of US$22 ($30), which offers a potential upside of 58.3%.
In his April 19 note, PhillipCapital research analyst Jonathan Woo says the Singapore-based, New York Stock Exchange-listed digital customer experience (CX) solutions provider is a proxy for high-growth new economy companies.
He points out that TDCX is growing its existing client revenues in scale and scope, increasing the number of contracts and headcount under each client as well as cross-selling additional services.
The company posted revenue of $555 million in FY2021, increasing 28% y-o-y and has been growing at a 45% CAGR since FY2018. This is in line with growth among new economy companies, says Woo. “90% of its revenue comes from its existing clients, many of whom are new economy industry leaders like Facebook and Airbnb."
In FY2021, TDCX increased its client count to 52 from 38, expanding into verticals such as fintech, gaming and food delivery. Woo believes this expansion is essential to diversifying and reducing the company’s revenue concentration risk.
Additionally, the Southeast Asian new economy CX market – TDCX’s main addressable market — is expected to grow at a 3-year CAGR of 13%, further enhancing its new client acquisition efforts, says Woo.
“A big reason for this growing market is the fact that fast-growing new economy companies neither have the capabilities, nor the patience, to take on large hiring and training projects to support labor-intensive portions of its businesses. As a result, they outsource these services to companies like TDCX who specialise in efficiently scaling labour intensive functions such as CX, or other back-office requirements,” he adds.
PhillipCapital expects TDCX’s ability to grow its existing clients organically; ability to acquire new clients and expand across new vehicles; as well as tailwinds from the growing Southeast Asian CX market to support the company’s revenue growth of 25% y-o-y over the next two years.
Woo also highlights that TDCX employs a very stable, cash generative and asset-light business model. The company’s EBITDA margins have remained in a steady range of 30%-22%, with net margins around 20%.
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“PATMI has also been growing steadily at a 3-year CAGR of 37% from FY2018 to FY2021, and we expect this growth to continue at 35% over the next two years. TDCX also uses an asset-light business approach, where all their offices are leased not owned, allowing for more financial flexibility when scaling up or shifting allocation of resources,” says Woo.
Shares in TDCX closed flat at $14.59 on April 19.
