Nasdaq-listed Grab Holdings is reinvesting to drive growth, and muted earnings growth in 2QFY2024 ended June 30 has forced some analysts to lower their price targets for the delivery and mobility services app operator.
Grab’s 2QFY2024 gross merchandise value (GMV) of US$4.4 billion ($5.78 billion) was up 5% q-o-q and 13% y-o-y, while adjusted ebitda of US$64 million was up 3% q-o-q. These were in line with estimates by CGS International analysts Ong Khang Chuen and Kenneth Tan.
However, reinvestments to grow the total addressable market for its on-demand services led to net revenue and adjusted ebitda for both the mobility and deliveries segments missing expectations, write Ong and Tan in an Aug 15 note.
Grab expects both on-demand segments to show sequential growth in GMV and adjusted ebitda in 2HFY2024, and it has kept its FY2024 revenue and adjusted ebitda guidance range unchanged.
Adjusted free cash flow stood at US$36 million in 2QFY2024. Grab now expects to achieve positive adjusted free cash flow for FY2024.
While Ong and Tan have maintained their “add” call on Grab, they have slashed their target price to US$4 from US$4.30 previously, citing the company’s reinvestment plans.
See also: CGS International maintains ‘add’ call on Grab amidst slower ebitda growth in 2QFY2024
“Despite more muted earnings growth in 2QFY2024, we think the competitive landscape in Asean remains healthy,” they add. “We continue to like Grab for its ability to balance market share expansion and profit growth.”
Meanwhile, HSBC Global Research analysts Piyush Choudhary and Rishabh Dhancholia say Grab’s 2QFY2024 results missed their expectations. In an Aug 16 note, the HSBC analysts maintained their “buy” call while trimming their target price to US$4.25 from US$4.30 previously.
“Though 2QFY2024 results were a miss, we expect these investments on new product initiatives to help to expand the total addressable market and fuel higher revenue growth in the future. We think Grab should be able to strengthen its leadership position in key categories (ride-hailing and food delivery) due to its ability to continuously roll out innovative and affordable products, like ride-sharing, subscription plans, saver delivery [and] group orders,” they add.
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The HSBC analysts expect Grab’s adjusted ebitda to improve to US$289 million in FY2024, compared to a loss of US$22 million in FY2023.
DBS raises TP
DBS Group Research analyst Sachin Mittal calls Grab a “dominant on-demand services player”, raising his target price to US$4.50 from $4.08 previously.
“The higher target price stems from rolling forward our valuation by six months to an average of FY2024-2025. We also revised our adjusted ebitda in FY2024/2025 by 25%/27%,” writes Mittal in an Aug 16 note.
Mittal’s “bear-case” target price is US$3.43. “This assumes EV-to-12-month forward adjusted ebitda of 15x, compared to 20x under the base case, on an adjusted ebitda of US$491 million, excluding fintech and others, on irrational competitive challenges.” This is lower than base-case adjusted ebitda of US$578 million.
Grab has a “long way to go” to achieve positive adjusted ebitda in its fintech services, according to Mittal. “We project a sharp reduction in fintech losses in FY2025 and for it to achieve breakeven by FY2026, which could be a risk.”
Grab has bought back shares worth US$131 million by 1HFY2024, leaving 74% of its US$500 million buyback program to be completed in 2HFY2024. The number of repurchased shares represent 1.3% of its total shares.
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‘Attractive entry point’
Finally, Morningstar Equity Research analyst Kai Wang maintained a $4.60 fair value estimate despite Grab’s revenue of $664 million falling 1.5% below estimates. Wang's fair value estimate is unchanged from a previous report in May.
Wang also maintained Grab’s four-star rating against Morningstar’s five-tier scale, which means “appreciation beyond a fair risk-adjusted return is likely”.
“The stock dropped sharply given the slight miss, but we believe this was a vast overreaction and concerns are overblown,” says Wang. “The revenue miss was due to foreign exchange translation resulting from weakened Asian currencies against the US dollar and not because of any structural changes or operational issues. Without the translation and on a constant-currency basis, revenue rose 23% y-o-y, which would've beaten the consensus estimate by 4%.”
The weakening currency is temporary, Wang adds, and investors are overlooking that gross transaction value (GTV) would have increased 18% y-o-y under constant currency. “Given the robust growth, we do not believe there are any operational issues with Grab and the firm should continue to expand scale as it added 2.4 million users to its platform sequentially and 6 million year on year to 40.9 million total users. The user growth reflects continued momentum for the platform.”
Grab also lowered corporate costs by 14% y-o-y to $84 million, and Wang says it “continues to progress toward breakeven” by narrowing its adjusted operating loss to $37 million this quarter from $100 million a year ago. “We believe investors are overly fixated on the slight revenue miss and also overlook that Grab should be operating profit positive in 2025, which would likely rerate the stock toward higher multiples as well.”
Wang’s long-term view holds that Grab has “other catalysts” for greater monetisation and profit, including raising its take rate of 16%, which is lower than global peers’ 25%-30%, as well as partnerships with social media giants in Southeast Asia. “Given the pullback in shares, we believe now is an attractive entry point with 47% upside to gain exposure to a dominant market-share, highly scalable company. Grab remains our top pick for the Asia internet space.”
Shares in Grab closed 0.5 US cents higher, or 1.6% up, at US$3.17 on Aug 16. Grab shares shed some 10% in price following the release of its results after trading hours on Aug 14.
