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Alētheia Capital initiates coverage on GoTo with call to 'sell', cites cash crunch ahead

Bryan Wu
Bryan Wu12/8/2022 04:18 PM GMT+08  • 4 min read
Alētheia Capital initiates coverage on GoTo with call to 'sell', cites cash crunch ahead
GoTo, formed from the 2021 merger between Gojek and Tokopedia, is down over 70% YTD after its IPO in March. Photo: Bloomberg
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Alētheia Capital equities analyst Nirgunan Tiruchelvam has initiated the investment firm’s coverage on GoTo with a recommendation of “sell” and a target price of IDR80 (0.69 cents), calling the company a “cash-burning machine”.

In his report, Alētheia’s head of consumer and internet writes that Jakarta-listed Goto, formed from the 2021 merger between Gojek and Tokopedia, is about six quarters away from a cash crunch. GoTo has lost more than half its initial public offering (IPO) value since it listed on the Jakarta Stock Exchange in March.

Tiruchelvam says that GoTo — which provides 100 million users with e-commerce, ride-sharing and fintech, with 2.5 million drivers on its ride-hailing platform in Asean and 12 million merchants on its e-commerce network — has been priced 69% higher than Grab's valuation in terms of enterprise value-to-sales (EV/Sales).

He says that GoTo’s pricing has followed an “extravagant methodology” that is potentially detrimental to investors. “GoTo's 12-plus forward EV/Sales multiple, based on Bloomberg data, is higher than both Grab and Sea by a wide mark. The premium cannot be defended in a market that values cash generation over revenue growth.”

Following the end of GoTo’s lock-up last month, Tiruchelvam says the company’s direction is “ominous”.

Early investors in GoTo including Alibaba and SoftBank had consented to a lock-up that would end on Nov 30. The end of the lock-up applied to 90% of the shares in issue, with provisions intended to support the stock’s valuation.

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With the deadline nearing, Tiruchelvam says that shareholders and parent entities were under pressure to divest the stock. GoTo reportedly looked to arrange a coordinated secondary sale to ensure that its shares would not collapse. However, the secondary sale did not materialise as the buyers were asking for a 30% discount to GoTo’s price of IDR130 to IDR160, he notes.

According to him, the failure of the coordinated secondary sale after the end of the lock-up is a serious indictment on the company. He believes the weakness in GoTo’s share price will continue beyond Nov 30. “It suggests that the true valuation of the company is at least at 30% discount to the last trading price. It also suggests that an equity issue next year will be dilutive and challenging,” says Tiruchelvam. “The end of the lock up exposes [GoTo’s] valuation and financial frailties.”

He points out that there are recent precedents of tech companies derating after ending a lock-up. For example, SenseTime Group, a Chinese artificial intelligence (AI) maker, lost more than 51% in June after its lock-up ended after its IPO in December last year.

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Tiruchelvam also believes that GoTo’s sell-off suggests that the chances of an equity fund raising are slim. “The market is unforgiving towards loss-making and cash burning companies,” he says. “We have serious concerns about the financial situation of this company.”

The analyst says he expects GoTo to generate free cash flow (FCF) losses of IDR66,647 billion ($5.8 billion) in FY2022 to FY2024, with no “realistic prospect” of FCF positivity. Tiruchelvam is projecting total FCF losses to average US$1.4 billion ($1.9 billion) per FY between FY2022 to FY2024, due to the high working capital requirements.

According to his estimates, with FCF losses of US$1.5 billion and US$1.6 billion in FY2022 and FY2023 respectively, the current burn rate means that GoTo’s cashew will be depleted by FY2023.

“In contrast, Grab has US$4.6 billion in net cash, which will fund its cash burn for at least another six years, while Sea Limited has enough cash to fund three years of cash burn,” says Tiruchelvam. “GoTo seems likely to run out of steam in the three-way Asean tech battle.”

As at 4.02pm, shares in GoTo were trading IDR7 or 6.54% down at IDR100 — 73.82% down year-to-date (YTD).

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