We cut our target price for Indonesian tech company GoTo by 9%, due to increased risk of cash burn. Our new target price of IDR202 implies 50% downside, hence we reiterate our Sell recommendation. (see our initiation report here).
There are three key reasons for our pessimism:
1) BNPL will worsen GoTo's cash burn
GoTo has announced that it intends to expand into "buy now, pay later" (BNPL) loans. GoTo is planning to introduce BNPL services because of the demand for alternative sources of credit. Credit card penetration in Indonesia is below 6%, which is a fraction of the level in the more developed markets in Asia.
The experience of BNPL players in the West such as Klarna suggests that BNPL can be intrinsically cash-destructive and loss-making. For instance, Klarna's net losses in Q1 22 have risen 295% yoy to SEK2.57bn. The rise in net operating income was only 20% in that period.
A foray into BNPL would only worsen GoTo's stretched financial situation. We expect EBITDA losses of IDR31,972bn (US$2.20bn) in FY22 and IDR32,140bn (US$2.22bn) in FY23. We have not quantified the BNPL business in our forecasts as the terms have not yet been spelt out. However, we are concerned at the development.
2) Still heavily loss-making
GoTo recently released its Q1 22 results. Revenue rose 65% yoy in Q1 22, but at the expense of widening losses. Pre-tax losses rose almost a third to US$1.5bn, worsening its cash burn.
Note that e-commerce was not recorded separately in Q1 21, as that was prior to the merger of Gojek and Tokopedia.
3) Lower net cash than its ASEAN peers
GoTo's cash position is precarious compared to its ASEAN peers Grab and Sea.
In FY22, the cash burn will be onerous due to high operating expenses.