DBS Group Research analyst Sachin Mittal has upgraded his call on Grab Holdings to “buy” from “fully valued” as he sees opportunities with the recent pullback in its share price. Mittal has also raised his target price to US$4.29 ($5.87) from US$3.16 previously
In his report dated Sept 21, Mittal notes that Grab is gaining market share from its competitors in the mobility and food delivery segment in Southeast Asia.
In the mobility segment, Grab looks poised to gain more market share due to GoTo’s weakness in Singapore and Indonesia. The latter’s on-demand segment has been declining for the past two quarters while Grab is seeing growth, notes Mittal.
“GoTo’s on-demand gross transaction value (GTV) in 2QFY2023 fell by 3.6% q-o-q (down 8.6% y-o-y) on rationalisation of incentives as part of the management’s ongoing profit-focused strategy,” he points out. “With the ongoing incentive rationalisation, total on-demand incentives spending declined by 35% y-o-y, equivalent to IDR1 trillion ($89,035.81) in savings for 2QFY2023. On the other hand, Grab’s on-demand segment (mobility + deliveries) recorded a 9.3% q-o-q growth (up 11% y-o-y) with the mobility segment rising by 8.4% q-o-q (up 28% y-o-y).”
Moreover, Gojek’s fares are comparable to Grab’s at times, giving the latter an advantage due to its much bigger fleet of cars. “We have also experienced that Grab’s fares are much lower than Gojek on the airport route,” writes the analyst.
“Gojek does not have additional features such as shared taxi option which is found in Grab such as GrabShare. Furthermore, Grab boasts numerous additional features such as kid-friendly, cyclist, pet friendly etc, not provided by Gojek,” he adds.
The upgrade also comes amid news that Foodpanda, Grab’s competitor in the food delivery space, could exit markets where it is not a top player.
Foodpanda is currently the third-largest food delivery company in Thailand, behind Grab and Line Man Wongnai with a collective market share of 75%. The company had exited Vietnam in December 2015 after being there for three years due to financial difficulties and a small and longer-term opportunity in Vietnam compared to other markets.
Besides, Foodpanda’s focus on margins is also enabling Grab to gain market share.
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“Foodpanda achieved an adjusted ebitda breakeven in the Asean region in 2HFY2022, and its FY2022 adjusted ebitda as a percentage of gross merchandise value (GMV) stood at 0.2%. In 1HFY2023, Foodpanda recorded EUR174 million ($253.69 million) in adj ebitda in Asia, translating to an adjusted ebitda as a percentage of GMV of 1.4%. However, its 1HFY2023 GMV in Asia fell by 5.9% y-o-y to EUR12.6 billion,” notes Mittal.
“Delivery Hero reiterated guidance for FY2023 with adjusted EBITDA as a percentage of GMV at more than 0.5% and over 1% of GMV in 2HFY2023. The company confirmed its long-term ambitions to achieve a 5% - 8% adjusted EBITDA/GMV margin on [an overall] level by FY2030 which includes both platform and integrated verticals,” he adds.
Grab itself is a dominant player in the Southeast Asian market providing delivery and mobility services as well as digital financial services.
That said, its fintech business is expected to incur ebitda losses over the next few years.
“[Grab’s] digibank investments [may] result in peak fintech losses in FY2023, with fintech’s ebitda turnaround projected in FY2027. Meanwhile, [the company’s] enterprise segment is supported by rising advertising penetration among merchant partners amid its growing market share,” says Mittal.
Excluding its fintech losses, the analyst is projecting a GMV compound annual growth rate (CAGR) of 9% over FY2023 – FY2025 led by mobility and deliveries with a 17% CAGR and 11% CAGR respectively.
“Besides, a steady improvement in deliveries margins, higher contribution of ad-revenue and a reduction in regional corporate costs support adjusted ebitda growth,” says the analyst.
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Mittal’s new target price is based on 20x enterprise value (EV) to Grab’s FY2024 adjusted ebitda of US$572 million excluding its fintech losses.
The analyst is valuing Grab’s fintech business at US$276 million using a “conservative” 1x gross FY2024 revenue.
“[Grab’s competitor] Uber is trading at 20x 12-month EV/adj ebitda while offering ebitda CAGR of 44% over FY2023 – FY2025. Grab offers much higher 70% ebitda CAGR over FY2023 – FY2025 excluding fintech losses, supported by reduction in regional corporate costs,” says Mittal.
Shares in Grab closed 3 US cents lower or 0.86% down at US$3.46 on Sept 20.
