Equity Analysis /
Singapore

Grab Holdings: Watch out for a turnaround quarter

  • We cut our target price for Grab due to the higher risk profile on EM Tech, but reiterate our Buy recommendation

  • Investors should brace themselves for a blowout quarter in Q2 22 – results are expected in August

  • We expect Q2 to signal a rise in GMV in mobility, deliveries & financial services while customer incentives have peaked

Grab Holdings: Watch out for a turnaround quarter
Nirgunan Tiruchelvam
Nirgunan Tiruchelvam

Head of Consumers Equity Research

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Tellimer Research
15 July 2022
Published byTellimer Research

We cut our target price for Grab due to the heightened risk perception on EM Tech – the series of US Fed hikes have altered the cost of capital in the sector. Our DCF-based valuation for Grab falls 27% to US$4.5 due to higher weighted average cost of capital (WACC).

Grab: FCFF valuation
WACC assumptions

Our revenue estimate for FY 22, however, remains higher than the consensus.

Forecast vs Consensus (US$ mn)

Nevertheless, we reiterate our Buy recommendation on Grab ahead of the Q2 22 results (our new target price implies an upside of 79%) – we see the quarter as a potential turning point for ASEAN’s premier super app. We are bullish on Grab for the following reasons:

1. We expect Q2 22 to signal a rise in GMV in the mobility, deliveries and financial services segments. The quarter could see GMV reaching US$5bn, which would represent a yoy rise of 30% (see our full year forecasts in the table below).

GMV projection

In particular, the reopening of the key ASEAN markets of Singapore and Indonesia will boost the company's delivery segment. We note that Grab's mobility traffic in Singapore has been higher in Q2 22 than in any previous quarter since the reopening.

2. The main issue that Grab has faced since its listing has been consumer and partner incentives. The higher-than-expected incentives – deducted from the revenue figure – were a dampener on the stock after the previous quarterly results. Consumer incentives is an operating metric representing the discounts and promotions offered to consumers due to the intense competition in the ride-hailing and food delivery segments. Grab has been offering higher-than-expected cash incentives to drivers and consumers because of intense competition and driver shortages. However, we feel that incentives have now peaked as a percentage of GMV and Grab has decidedly shifted to improving unit economics, as opposed to battling for market share.

Incentives as a % of GMV

3. We note that Grab is trading at a discount to its SOTP.

Grab: SOTP

Grab: Income Statement (US$ mn)

Grab: Balance Sheet (US$ mn)

Grab: Cash Flow Statement (US$ mn)