Grab is Southeast Asia's premier application for ride sharing, food delivery and mobile financial services. Grab is the most downloaded smartphone application in the region.
The firm launched as a ride sharing app in 2013 in Singapore under the banner of GrabTaxi Holdings. After expanding into the Philippines, Thailand, Indonesia, Vietnam, and Myanmar, it was incorporated in 2015 in the Cayman Islands as Grab Holdings Inc. In 2018 the firm acquired Uber's business in Southeast Asia in an all-share deal, which led to Uber being a major strategic shareholder (14.5% of shares). In 2019 the firm launched food delivery services, and in 2020 it was selected for a digital banking licence in Singapore. Grab Holdings listed in December 2021.
One in 20 people in Southeast Asia eat, ride, or pay with Grab each month. The super app encourages use of more than one service (currently 68% of users utilise more than one service on the app).
Downside price momentum according to the to the Moving Average Convergence Divergence (MACD) histogram remains a concern, but early signs indicate this momentum might be fading.
We suggest a medium capital at-risk allocation to this trade. Increase exposure for a break above R93.00.
Financial considerations
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Management has guided for 45% to 55% constant currency sales growth for 2023.
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Mobility is currently the only profitable segment on an annual basis. Here, the company believes that 12% EBITDA margins (on gross merchandise value) are sustainable (12%).
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In Delivery, the company initially expected delivery to turn margin positive by June 2023 - this occurred nine months earlier in 3Q22. Recently, competitors have become more responsible from a pricing perspective, which could result in an improvement in margins across the sector. The company believes it can reach an EBITDA margin of >3% in this segment - in-line with what it is currently achieving in Malaysia, where it has been operating the longest. Efforts to improve margins have been focused on improved driver utilisation of using AI to better plan routes in conjunction with the company's proprietary mapping software. This encourages drivers to stay with the company and helps to ensure a delivery cost advantage to peers.
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Financial Services is expected to reach breakeven levels in 2026.
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Having gone public via a SPAC in December 2021, the company currently enjoys a sizeable net cash balance of over $6 billion. However, cash burn is running at ~$2 billion per year. It is expected that the company will break even in 4Q23 and there should be ample debt capacity as it executes on its path to profitability.
Investment case
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Grab is set to become a major financial services player with a generation skipping PC based banking and moving to smartphones. Furthermore, Southeast Asia enjoys positive demographics (high population growth, large youth population) and 60% of the population do not have bank accounts. The firm is one of only a few companies to have been granted a digital banking licence in Singapore and Malaysia.
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The addressable market in the more mature businesses is still significant - the company has noted that mobility penetration in ASEAN is 3% of the population, grocery delivery penetration is 1% and food delivery is in the low-teen percentages.
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Grab recently noted that it will become profitable a lot earlier than initially expected. In September, the company said it would become profitable in 2H24. This has now been moved forward to 4Q23.
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The company has mapped the geographies they service to increase efficiencies. It is possible that they come up with some way to monetise their mapping services which could include advertising. In September, the company announced that Microsoft has become a partner in this business.
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Like its peers, the company has experienced a gradual increase in sales per customer. This means that as the company matures it will benefit further as users utilise the app more often.
Risks
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There is substantial execution risk attached to the name given the current lack of profitability, and its aggressive investment in adjacent business areas.
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While demographics and customer demand are more or less certain, success will breed competition and probably increased regulatory focus.
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Competition has also been significant - particularly in food delivery where predatory pricing has been a feature from time to time.
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If regional economic growth disappoints, it could have a negative impact on sentiment or the growth outlook for the company if the disappointment is structural.
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The company has substantial shareholders in the form of Softbank (19%), Uber (14.4%) and Toyota (7.5%) - this may create an overhang should any of them plan to exit their investments.
Consensus and Outlook
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Consensus forecasts sales growth of 52% this year and breakeven by 2026 (after EBITDA breakeven in 2024).
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Consensus is positive on Grab stock, with 74% of sell-side analysts maintaining a “Buy” on the stock.
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The consensus 12-month target price is $4.25, representing possible upside of 46%.
Valuation
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The company trades on a similar price to GMV as regional fast growth peers such as Sea Ltd.
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Our discounted cash flow model values the stock at $3.8, suggesting 31% upside to the share price. This is based on an expectation of breakeven and positive cash generation in 2025, and a similar relationship of free cash flow to revenue as experienced by Uber Technologies.
