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Is Grab still grabworthy?

Samantha Chiew
Samantha Chiew9/28/2022 01:09 PM GMT+08  • 6 min read
Is Grab still grabworthy?
Despite continuous losses and falling share price, analysts seem to be positive on Grab.
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On Sept 27, superapp Grab Holdings led its first investor day, which assured investors that it has a plan to reverse out of the red.


See: Grab CEO tries to reassure investors after market plunge

Amid its several years of losses and declining share price since it listing via spac, anlaysts are still somewhat positive on the stock.

CGS-CIMB Research is keeping its “add” recommendation on Grab with an unchanged target price of US$4.10, while Citi Research is reiterating its “buy” call on Grab but cautions “high risk”.

DBS Group Research on the other hand is less bullish as it keeps its “hold” recommendation with an unchanged target price of US$2.85.

Towards a more sustainable growth

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During its investor day, Grab announced that it expects slower revenue growth of 45% to 55% for FY2023 ending December 2023, as it adjusts to the market downturn and speeds up efforts to reverse several years of losses.

CEO Anthony Tan expects the group to break even in 2HFY2024 on its adjusted ebitda (excluding one-offs). Its group adjusted EBITDA loss is expected to be US$380 million for 2HFY2022, a 27% improvement compared with 1HFY2022.

It also intends to break even in its digital bank operations by FY2026.

See also: DBS prefers Sea over Grab in its Asean internet coverage

Grab will continue to maintain a strong balance sheet by preserving cash prudently. Investments will continue to be made in developing products and technological innovations. On the M&A front, Grab will remain selective and only consider targets which are earnings accretive and possess elements that support Grab’s current ecosystem.

According to CGS-CIMB analysts Ong Khang Chuen and Kenneth Tan, this would bring FY2022 adjusted ebitda loss to US$901 million, as compared to their expectations of US$900 million and Bloomberg’s consensus of US$980 million.

As the Grab’s guidance expects US$1.25 billion to US$1.30 billion in revenue for FY2022, which according to DBS Group Research, implies an average growth of 89%, compared to 106% in its model. DBS’ FY2023 projections imply a 77% revenue growth, hence even the high end of the guidance is much lower than the research house’s expectations.

Citi’s Alicia Yap and Nelson Cheung however has estimated FY2023 revenue to come in at US$1.77 billion, lower than the US$1.85 billion to US$1.98 billion Grab has expected for FY2023. “With a mix of higher margins revenues and improving operation efficiency with optimisation of discretionary spending, Grab targets to achieve group adjusted ebitda break even in 2HFY2024, compared to our forecast of FY2024 ebitda loss of US$324 million,” writes Yap and Cheung.

Strong proposition on core business

For its core business of ride-hailing, food deliveries and financial services, Grab intends to maximise users’ lifetime value while lowering the platform’s cost to serve. It has rolled out initiatives such as GrabUnlimited and GrabForBusiness to promote customer loyalty, usage frequency and promote cross-selling across services.

Meanwhile, technological advancements such as just-in-time driver allocation, order batching, route optimisation (through proprietary GrabMaps) are helping to increase drivers’ hourly earnings, and reduce subsidies. Grab is also scaling back on services with weaker unit economics (dark store formats for grocery deliveries, off-platform payment services that are contribution-negative).

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“The achievement in Grabmap and partnership traction from leading global brands demonstrate Grab’s technology and operation expertise,” says Citi’s Yap and Cheung.

CGS-CIMB’s Ong and Tan are positive on this aspect too as they believe that this is a key initiative to drive growth for the group.

Subsequently, Grab is working closely with regulators on gig worker protection policies, as it notes that governments have recognised the importance of the gig economy. Hence, Grab expects potential implementation of mandatory retirement benefits and insurance benefits to be carried out in a gradual manner, at a level playing field for all platform players. It has baked in the potential impact into its medium-term steady state margin guidance.

Upbeat on digital bank and advertising

On the other hand, the analysts see potential in Grab’s upcoming digital bank with Singapore Telecommunications (Singtel), GXS Bank.

The way CGS-CIMB’s Ong and Tan see it, Grab can leverage its partners’ ecosystem in Singapore, Malaysia and Indonesia and potentially reach 120 million micro, small & medium enterprises (MSME) upon launch.

Additionally, it will enjoy benefits such as lower costs, compared to peers on distribution and customer acquisition, as well as better credit scoring models. “Rollout will be done prudently, with digital bank operation losses peaking in FY2023 ending December 2023 and breakeven achieved by FY2026,” note the CGS-CIMB analysts.

“On ads, Grab is working on unifying its merchant marketing offerings into a self-service platform, which is expected to help the segment scale faster,” they add.

DBS Group Research on the other hend expect that there could be some slowdown in the financial services segment as ebitda losses have been rising due to more intense competition.

Grab for the first time has guided an adjusted ebitda for digital banking in FY2026, although adjusted ebitda losses are expected to worsen in FY2023 with new launches in Singapore and Malaysia. Grab does not expect the overall fintech segment, excluding digital banking to break even in FY2026.

Outlook

Overall, Citi is positive on Grab’s outlook, as Yap and Cheung writes: “We come away positively given management’s confidence in financial outlook, stable competitive landscape, and solid relationship with relevant authorities. More important, Grab does have an experienced and dedicated management team to execute and expand its superapp ecosystem to strengthen its reach in lower tier cities.”

CGS-CIMB Research shares the same sentiments as Ong and Tan say: “Grab will continue to maintain a strong balance sheet by preserving cash prudently. Investments will continue to be made in developing products and technological innovations. On the M&A front, Grab will remain selective and only consider targets which are earnings accretive and possess elements that support Grab’s current ecosystem.”

DBS on the other hand sees this as a right strategy for Grab to implement amid an impatient market. The research house expects revenue growth from the delivery segment to “take the hit” followed by fintech.

Shares in Grab last traded at US$2.72 on Sept 27.

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