We initiate coverage on Grab Holdings Ltd with a Buy recommendation and a target price of US$13.0, implying 46% upside on the basis of our DCF valuation.
Grab Holdings Ltd provides unique exposure to the explosion of food delivery, ride-hailing, and mobile money. Covid-19 has accelerated the growth of the digital economy in ASEAN, and Grab has been foremost among the ASEAN digital giants. The following pillars drive Grab Holding Ltd’s value proposition:
ASEAN’s super app Grab has huge prospects in all three of its segments – ride-hailing, food delivery, and digital banking.
The pandemic has transformed consumer behaviour in ASEAN and driven growth in digital consumption. Many of the region's population have adopted digital services (like food delivery and digital payments) for the first time. There were 40mn new digital users in ASEAN in 2020 alone (and a total of 400mn users out of a population of 600mn).
Grab has emerged as the super app for ASEAN, along the lines of Alibaba in China. Grab is active in 400 cities across 8 countries including Indonesia, which has a population of over 270mn on its own. Grab currently has 25mn users and 2mn merchant partners.
Grab’s super app status has not been fully valued by the market, in our view. Its adjusted net revenue as a percentage of GMV is 12%, while its take rate has risen threefold since 2018. This is better than Alibaba.
Grab has the potential to be re-rated as an all-encompassing super app like Alibaba. It is becoming a one-stop-shop for ride-hailing, food delivery, payments and other services. The current valuation does not reflect its potential as a super-app.
We value Grab Holdings Ltd on a DCF-basis. We value the ride-hailing and food delivery businesses on a P/GMV basis of 1.3x. The digital banking business is valued on a P/TPV multiple of 1.2x. On a comparative basis, Grab is close to par on an EV/Sales basis compared to its peers.
DCF is our principal valuation methodology. We assume an equity risk premium of 4.72%, a risk-free rate of 1.52% and a beta of 1.5 to arrive at a cost of equity of 8.6%. This leads us to a WACC of 8.60%. Our valuation assumes a terminal growth rate of 2.5% into perpetuity. We arrive at a target price of US$13, implying 46% upside.
Forecasts and assumptions
Grab has three main segments:
Deliveries. The revenues from the Deliveries segment are mainly generated from final value fees, as well as shipping fees net of third-party carrier costs.
Mobility. Revenue is generated from ride-hailing.
Financial Services. Raises revenue from the fee earned on money transfer services provided.
We provide an adjusted net sales breakdown below:
Delivery revenue is a function of Gross Market Value (GMV) monetisation. We expect the company’s GMV to rise by a CAGR of 42% in FY20-24. We assume the ratio of GMV monetisation to be 15% (FY20: 15%).
Similarly, Mobility revenue is also driven by GMV monetisation. We expect the company’s GMV to rise by a CAGR of 32% in FY20-24. We assume the ratio of GMV monetisation to gradually increase from 18% in FY20 to 24% by FY24.
Financial services revenue is created by Total Payment Volume (TPV). We expect TPV to grow at a CAGR of 43% in FY20-24.
Operating expenses include sales and marketing, general & administration. We assume operating expenses to gradually decline by FY24, and then increase slightly.
Operating margins: Operating margins for FY20 were -298.3%, and we estimate the operating margins to improve during our forecast period and turn positive. We expect the operating margin to reach 30% by FY24.
Dividends: Grab has not paid any dividend in the past three years. We assume no dividend payout in the forecast period.
Capital expenditure: We assume capital expenditure to be 40% of the tangible assets due to the nature of the business. There are heavy capex requirements in all three segments.
Working capital requirements: Grab has been in a negative cash conversion cycle, and we expect the trend to continue.
Balance sheet and gearing
The debt profile of the company mainly consists of convertible redeemable preference share notes. We provide a breakdown of the entire financial liabilities of US$10.9bn in the pie chart below.
Grab’s business segments are still in the early stages of growth. They may face serious business risks. For instance, the food delivery business is in its infancy and major international food delivery players such as Meituan Dianping may enter the market and undercut Grab. Also, the end of the pandemic may weaken the demand for food delivery and therefore the company's growth trajectory.
Highly competitive and evolving environment
Grab faces strong competition across the segments and markets it serves. Competition could come from local players, as well as foreign entrants.
Prolonged Covid-19 crisis
Covid-19 is still disrupting economies. Though vaccination is progressing, there have been renewed restrictions in some ASEAN countries including Singapore, Malaysia and Indonesia. This could adversely affect Grab’s business, financial condition, results of operations, and prospects.
Vastly disproportionate voting share of its founder Anthony Tan
Tan holds 3.7% of the shares in the company by virtue of his 183mn Class B Shares. This includes 28mn shares from co-founder Tan Hooi Ling and 18mn shares from Grab President Ming Ma – these shares are beneficially owned by Tan. Each Class B share equals 45 votes, while each Class A share is equal to one vote. Accordingly, Tan controls more than 60% of the voting shares after the merger with Altimeter.
This disproportionate voting share for the founder is familiar to many tech companies, including Facebook and Alphabet (Google).
Grab Holdings, also known as Grab, has the potential to become the super app of Southeast Asia.
Grab Holdings was founded in 2012 by two graduates of Harvard Business School, Anthony Tan and Tan Hooi Lng. The company is headquartered in Singapore and has additional offices in Seattle, Beijing, Bangalore, Jakarta and Vietnam. Grab operates a mobile technology platform that integrates city transportation for driver-partners and customers in South East Asia.
The company also offers food delivery and digital payment services via a mobile app. Grab offers services in Malaysia, Singapore, Philippines, Thailand, Indonesia, Vietnam, Cambodia and Myanmar. Its full array of services includes GrabCar, GrabBike, GrabExpress, GrabShare, GrabPay, GrabFood, GrabAds, GrabKitchen, GrabMart, GrabFinance, GrabInsure, GrabInvest, and GrabDefence.
Grab’s ownership structure can be summarised as follows: