We initiate coverage on Altimeter Growth Corp (AGC US) with a Buy recommendation, implying a 27% upside on the basis of our DCF valuation for its reverse acquisition in Grab.
AGC US 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 AGC US’s value proposition:
AGC US’s reverse acquisition of ASEAN’s super app Grab is a compelling opportunity. It 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 5%, while its take rate has risen threefold since 2018. This is better than Alibaba.
Grab should be rerated in 2021 as an all-encompassing super app like Alibaba. It will be a one-stop-shop for ride-hailing, food delivery, payments and other services. The valuation does not reflect its potential as a super-app.
We value Grab (and by extension Altimeter) on a DCF-basis. We value the ride-hailing and food delivery businesses on a P/GMV basis of 1.36x. The digital banking business is valued on a P/TPV multiple of 1.08x. On a comparative basis, Grab is close to par on an EV/Sales basis compared to its peers.
Altimeter is expected to complete the reverse takeover of Grab in July. The SPAC's share price has fallen 30% since the deal announced last month, which presents investors with an attractive opportunity to accumulate the Alibaba of ASEAN.
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 4% into perpetuity. We arrive at a target price of US$15, implying 27% upside.
We use EV/Sales as another yardstick. In the following table we present a list of the leading EM players in food delivery, ride-hailing, and digital financial services. We find that Grab is reasonably valued in terms of EV/Sales multiples.
We summarise our DCF valuation and target price as follows:
Forecasts and assumptions
Grab has three main segments:
Deliveries. The revenues from the Deliveries segment are mainly generated from final value fees and shipping fees net of the third-party carrier costs.
Mobility. Generates revenue from ride-hailing.
Financial Services. Raises revenue from the fee earned on money transfer services provided.
We provide a revenue 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 39% in FY20-24. We assume the ratio of GMV monetisation to be 15% (FY20: 14%).
Similarly, Mobility revenue is also driven by GMV monetisation. We expect the company’s GMV to rise by a CAGR of 33% in FY20-24. We assume the ratio of GMV monetisation to gradually increase from 17% in FY20 to 25% by FY24.
Financial services revenue is created by Total Payment Volume (TPV). We expect TPV to grow at a CAGR of 35% in FY20-24.
Operating expenses include sales and marketing, general & administration. We assume operating expenses to increase 13% in FY20 to grow at a CAGR of 10% by FY24. We assumed the growth in operating expenses will normalise.
Operating margins: Operating margins for FY20 were -92%, as Altimeter was not operational. We estimate the operating margins to improve during our forecast period and turn positive. We expect the operating margin to reach 33% 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 20% 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. We expect the ratio to improve and turn positive by FY23.
Balance sheet and gearing
The debt profile of the company mainly consists of convertible redeemable preference shares notes. We provide a breakdown of the entire financial liabilities of US$10.9bn in the pie chart below.
The SPAC boom has been relentless in the past year. Over US$100bn has been raised in SPAC IPOs so far in 2021 and more than 300 new SPACs have IPOed in total. At this rate, the number of SPACs issued in 2021 will dwarf the 2020 figure by a factor of 4.
Bloomberg started tracking the SPAC asset class in August 2020. After a reality check in recent weeks the SPAC Index is now down 3% ytd. At the peak in February it was up 27% ytd.
SPACs are companies formed by investors with the aim of investing in deals in a sector. They raise funding through an IPO. The SPAC then acquires a target company.
The term blank-cheque company is used because the initial investors have no idea about the eventual target investments. The investors are taking a bet on the promoters of the SPAC.
They have a long history in the world of finance but have grown hugely in popularity in recent times.
The rise of SPACs focusing on Emerging Asia
At least 20% of the SPACs that have raised funding in the past two years are targeting EM Asia (see the table below for a selection), with c10-12 SPACs focusing on the Asian tech scene specifically.
Impact on e-commerce in Emerging Markets
The EM e-commerce space could receive a valuation boost from the SPAC trend. The prevailing valuation metric in the sector is price/sales, as many players are not operationally profitable. However, the wall of money that is pursuing the sector will drive up valuations. Companies will be assessed on their post-pandemic GMV growth potential.
Consolidation between e-commerce and other tech sectors could accelerate. For example, the Gojek-Tokopedia merger discussions were prompted by an approach from a SPAC.
We could see price/sales multiples rise as SPAC-generated mergers increase in the EM e-commerce space.
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. Major 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. There has been an upsurge in ASEAN in the past month. 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 would hold 2.2% of the shares in the company by virtue of his 163mn Class B Shares. This includes 25.6mn shares from co-founder Tan Hooi Ling and 14.4mn 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 would control 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. The company will go public by merging with a New York-listed Special Purpose Acquisition Company (SPAC) controlled by Altimeter Capital Management.
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. It offers an array of services including GrabCar, GrabBike, GrabExpress, GrabShare, GrabPay, GrabFood, GrabAds, GrabKitchen, GrabMart, GrabFinance, GrabInsure, GrabInvest, and GrabDefence (Source: Company).
Grab’s super-app snapshot
Grab’s ownership structure can be summarised as follows:
New Cayman ListCo (“PubCo”), SPAC Merger Sub, and Target Merger Sub are formed.
PubCo obtains listing approval
SPAC Merger Sub merges into SPAC (with SPAC Merger Sub surviving)
Outstanding SPAC stock and warrants are cancelled in exchange for PubCo stock and warrants
PIPE investors purchase PubCo shares
Target Merger Sub merges into Target, with Target surviving
Outstanding Target stock canceled in exchange for PubCo stock