Maybank Securities analyst Samuel Tan has downgraded Grab Holdings to “sell” from “buy” with a slashed target price of US$2.29 ($3.22) from US$4.25 previously.
The downgrade comes as recession and macro risks mount, says the analyst.
“With our macro team projecting a further +175 basis point (bps) hike in the Fed funds rate (FFR), we believe that capital market expectations have changed, rationalising a mark-to-market exercise,” he writes.
Tan’s new target price estimate represents a 9% downside to Grab’s share price of US$2.51 as at his report dated July 7.
The lower target price reflects a lower multiple for Grab’s delivery business to 0.9x FY2023 EV/S, which is in line with regional competitors DeliveryHero and Deliveroo’s valuation.
Tan has also lowered the valuation on Grab’s mobility business to 1.1x FY2023 EV/S, maintaining his anchor with Lyft.
To Tan, Grab’s pivot to becoming a software as a service (SaaS) business is a “desperate wringing for cash flows”, since the company’s mapping capability is one of its core competitive advantages behind the delivery and mobility segments. Both segments make up some 89% of Grab’s revenue for the 1QFY2022.
“We remain sceptical of Grab’s target 10% of the US$1 billion mapping market by 2025, given the more challenging capex situation faced by other technology platforms, a key customer segment for GrabMaps,” the analyst says.
“Exposing its APIs could make Grab vulnerable to IP risks, such as scraping and copying by other technology rivals, eroding its edge over time,” he adds.
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Furthermore, notable SaaS and superapp names have fallen less in relative terms compared to Grab’s 78% plunge in share price since the start of 3Q2021.
For instance, apps like Salesforce and Tencent have both fallen a respective 28% in the same period.
The way Tan sees it, this demonstrates “investors’ favour mature SaaS and superapps with earnings and sustained positive cash flows thanks to their superior business models”.
“We see Grab as still being in a transitionary phase, having neither a mini-apps ecosystem nor a meaningful recurring SaaS revenue stream, and therefore, increasingly disfavoured by investors,” he adds.
That said, all is not lost for Grab. Tan is seeing Grab to become free cash flow (FCF) positive in the FY2024.
To him, the private investment in public equity (PIPE) cash injection of US$4.3 billion in the 4QFY2021 was “well-timed”, shoring up Grab’s finances, as it seeks to “weather the forecast period without further capital raises as it aims to improve its unit economics and restructure the business for profitability”.
The move is similar to Amazon before the 2000 Dotcom Bubble crash, Tan points out.
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“The cash balance and investments provide a price floor of US$1.35 to Grab’s share price,” he writes.
Further to his report, Tan is also projecting Grab reach EBITDA breakeven in FY2024 and PATMI breakeven in FY2025. The company is also expected to be in a net cash position by FY2025.
Tan has also forecast a gross merchandise value (GMV) compound annual growth rate (CAGR) of 28% from FY2021 to FY2025 to US$45 billion. Grab’s adjusted net revenue CAGR is also expected to be at 31% to US$6.8 billion
“Faster growth in adjusted net revenue is partially due to improving mix,” says Tan.
In addition, the analyst sees Grab’s FCF coming in at US$1.18 billion in FY2022 and narrowing to US$266 million by the FY2024.
