Singapore-based, US-listed Grab Holdings, is "undervalued" despite multiple catalysts and levels for greater profitability and revenue growth, according to Morningstar in its July stock pitch.
"We believe profitability and user concerns are overblown," says analyst Kai Wang.
Although Grab’s share price has fallen over 65% since its IPO in December 2021 due to investor concerns over heavy cash burn, Wang sees that the company has currently reached an inflection point where multi-year revenue growth is due.
His fair value estimate for Grab at $4.60, represents a 30% upside based on multiple long-term tailwinds and catalysts.
In his report, Wang notes that Grab’s share price is on a recovery path in the past two months, alongside an improving outlook.
That said, shares in Grab are currently trading well below its $11 listing level in 2021, at $3.55.
See also: RHB still upbeat on ST Engineering but trims target price by 2.3%
Despite Grab’s mobility and on-demand take rate sitting lower than other global peers, the company has room to increase take rates which could boost profitability and revenue growth, as per the team’s view.
Grab’s 2023 mobility take rate currently stands at 16.1%, compared with 28.8% for Uber and 32.0% for Lyft, while the on-demand delivery take rate is 12.6% for Grab compared with 14.5% for Meituan, 19.2% for Uber, and 12.9% for DoorDash.
Wang adds that management has since indicated it remains focused on customer experience first and wants the app to play a part in people’s everyday lives, not unlike the strategy adopted by its other global peers which have subsequently raised their take rates.
See also: UOBKH calls Centurion Corp a stock for ‘growth-minded investors’
“We believe that its mobility margin will determine much of the valuation increase for the company,” says Wang.
He notes that Grab has surpassed its original forecast for its mobility long-term ebitda margin at 12% of its gross transaction value in 2023.
While management indicated that this remains the long-term goal, Wang believes that margins are likely to tick up higher given that its take rate is still well below global peers such as Uber and Lyft.
Additionally, Grab’s high market share in the industry could provide stability and protect its profitability against smaller competitors due to the capital required to enter the industry.
In his report, Wang also adds that despite heavy operating losses during Grab’s initial year, the company has increased its profitability three years in a row following a strategy change and focus on higher-income consumers.
“Grab expects positive operating profit in 2025, and we believe that between the ability and room to charge a higher take rate, its forecast midteens gross transaction value growth, and the lack of heavy subsidy – these are long-term catalysts that will help Grab contribute to an even better outlook than its initial forecasts,” he writes.
Adding on to its core on-demand mobility and delivery businesses, Grab now offers financial services in several countries through its app, which provides digital lending and banking.
For more stories about where money flows, click here for Capital Section
As of now, the business is still emerging and only accounts for 10% of Grab’s revenue.
However, Wang forecasts a potential increase at a faster-than-companywide rate that accounts for 20% as it scales.
This comes on the back of the wide variety of services provided by Grab which caters to 70% of consumers in Southeast Asia who are underbanked or unbanked, suggesting a long runway for growth in the long term.
Morningstar’s fair value estimate follows Grab’s lift of the upper range of its adjusted ebitda guidance to US$270 million ($362 million) from US$200 million for 2024, driven by a reduction in operating costs.
Wang adds: “Grab has elected to keep its revenue guidance the same at US$2.70 billion - US$2.75 billion for the year, or 14%-17% growth y-o-y, as it believes that it can improve profitability without materially increasing monetisation rates—which, in our view, is an impetus for long-term organic growth.”
That said, with a strong gross transaction value and growth of 18% y-o-y in 2024, Wang believes this could reflect a long-term path for margin expansion.
His fair value estimate reflects an increment of 40 to 50 basis points of ebitda margin each year, which stood at 30 to 40 basis points previously.
“The company said it has no imminent plans to increase its take rate, but we believe Grab can pull this lever to increase margins beyond its stated three-year target, given that peer take rates are much higher,” concludes the analyst.
As at July 16, shares in Grab Holdings closed at an unchanged US$3.55 ($4.75).
