CGS International analysts Ong Khang Chuen and Kenneth Tan have kept their “add” call on Grab Holdings at an unchanged target price of US$4.30 ($5.76) amid slower ebitda growth in 1QFY2024.
Ahead of the release of Grab’s 2QFY2024 results in mid-August, the analysts estimate that the group has achieved a “healthy” on-demand gross merchandise value (GMV) of US$4.4 billion in the same period, reflecting a 4% q-o-q and 12% y-o-y increase.
Despite Grab’s deliveries segment GMV increasing by 6% q-o-q due to its rebound following the earlier timing of the Ramadan fasting period, its mobility segment GMV stood flattish q-o-q after major concerts in Singapore boosted growth in 1Q2024.
“However, we think Grab’s q-o-q ebitda growth likely slowed in 2QFY2024 (to US$65m, +4% q-o-q) due to mobility segment softness,” add Ong and Tan in their July 17 note.
Following Grab’s reinvestment into more product-led initiatives defending against higher spend by competition in earlier parts of the quarter, the analysts forecast slight margin compression for the group in 2QFY2024 for the mobility segment, signalling a 0.4 percentage point (ppt) decrease q-o-q.
That said, sustained irrational spend is unlikely, in the analysts’ view.
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They maintain their FY2024 ebitda forecast of US$272 million.
“In 2QFY2024, we expect continued profitability growth for deliveries (rising advertising penetration) and narrower losses from Fintech (further rollout of credit products), while headquarter costs remain well under control (flat q-o-q),” write the analysts.
Additionally, they also note that Competition and Consumer Commission Singapore (CCCS) has since provisionally decided that Grab's proposed acquisition of taxi operator Trans-Cab would likely reduce competition in Singapore's ride-hail market, as at July 11.
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The parties have been given 10 days to offer solutions, preceeding a 120-day phase two review.
“In our view, the driver shortage situation in Singapore has eased since the deal was proposed in July 2023, and Grab can still collaborate with Trans-Cab on driver supply (as seen in ComfortDelgro and Gojek’s tie-up) even if the deal does not go through,” say the analysts.
Alongside the increasing age of the Trans-Cab fleet, rationale for the acquisition may weaken over time.
This transaction has not been factored into the analysts’ forecast due to their expectation that a big share price reaction will not follow in the case of the abortion of the deal.
Despite more muted earnings growth in 2QFY2024, the analysts believe that the competitive landscape in Asean remains “healthy”, and like Grab for its ability to balance market share expansion and profit growth.
Grab’s on-demand segment is currently valued at 17.2 times FY2025 EV/ebitda and is in line with the average of its global peers.
Re-rating catalysts identified by the analysts include further acceleration in the group’s food deliveries segment GMV growth and stronger growth trajectory of its high-margin advertising business.
That said, macro headwinds dampening demand for its services, leading to weaker GMV, and intensifying competition leading to near-term margin squeeze are downside risks.
As at July 17, shares in Grab closed at 6 US cents lower or 1.69% down at US$3.49.
