2023-09-27 03:42:57 ET
Summary
- Grab continues to execute well on the top and bottom lines.
- Backed by a massive net cash balance, the company is also opportunistically consolidating its key markets.
- The stock isn’t pricey at all when you consider its underlying growth potential.
It's been full steam ahead since I last covered Southeast Asian consumer service super app Grab Holdings Limited ( GRAB ). Most notably, the company posted a solid Q2 beat and raise which saw its EBITDA break-even target pulled forward yet again. Helped by a massive restructuring effort in Q2, these near-term targets seem well within reach and shouldn’t hinder Grab from consolidating its leadership in its two key categories (ride-hailing and food delivery). The recent acquisition of Singaporean taxi operator Trans-cab is a case in point, adding strategic benefits on the supply (alleviating persistent driver supply constraints) and demand sides (penetrating street hailing vs. solely e-hailing before). Similarly, a potential ~EUR1bn acquisition of Delivery Hero’s ( DLVHF ) Southeast Asian food delivery business, foodpanda, is in the pipeline, marking a major step in consolidating the category.
Given the company remains well capitalized (>35% of its market cap is net cash), I see no issue with funding, a key advantage at a time when the rest of the industry is grappling with narrowing runways. Relative to the accelerated break-even guide and consensus estimates to double or triple revenues through 2025, the current ~4x EV/Revenue valuation doesn’t seem all that demanding. Upcoming catalysts to keep an eye out for include news flow around further consolidation in its key markets and the H2 digital banking launches.
Q2 Beat and Raise; Accelerated Path to Break-even
Despite Q2 outpacing expectations across the board, Grab kept its 2023 total revenue guidance of $2.2-2.3bn (+54-60% YoY). Given the traction its subscription offering, GrabUnlimited, has been gaining in recent quarters (3.8x higher spend vs. non-subscribers), along with the ongoing post-COVID mobility recovery (now at 84% of pre-COVID levels), this came as a slight surprise. But management did also note July was trending strongly, so I wouldn’t be surprised if Grab ends up at the upper end of its top-line guidance range. In the meantime, the resilience of Southeast Asia in the face of an external slowdown, as well as rising mobile penetration and digitization, should ensure growth rates remain elevated for the years to come.
Perhaps more importantly, management upgraded its adj EBITDA loss guidance range by a wide margin to -$30m to - $40m (vs. the -$195mn to -$235m previously) and brought forward group adj EBITDA break-even to Q3 2023 (one quarter ahead of the prior Q4 target). The improved profit outlook likely incorporates Grab’s restructuring exercise , amounting to a 1k headcount reduction (~10% of the workforce). What it doesn’t incorporate is the acquisition of Singapore-based Trans-cab (via Grab Rentals), which strategically adds to driver supply and also adds EBITDA-level accretion. Assuming regulatory approval goes as planned, though, the upside should come through in 2024.
Consolidating the Food Delivery Market; Delivery Hero Capitulates
With interest rates on the rise (and staying high), many of Grab’s Southeast Asian peers are seeing their cash runways narrowing. This entails consolidation opportunities for well-capitalized players like Grab and a more rational competitive backdrop as a higher cost of money pushes investors to prioritize profitability. In line with this view, reports have emerged recently suggesting that rival online food delivery platform operator Delivery Hero is in discussions to sell foodpanda’s Southeast Asian operations. No confirmation of the purchase consideration yet (“under negotiation“), though news reports indicate a ~EUR1bn price tag, with Grab, unsurprisingly given its strategic fit, listed as the frontrunner.
Food delivery in Southeast Asia has been extremely competitive in the past, but higher rates have consolidated the markets around Grab/foodpanda and forced a more disciplined backdrop with regard to incentives. Acquiring foodpanda marks a big step toward consolidating the market around Grab and, if approved, will move the company even closer to profitability. The key hurdle will be the valuation – given the massive strategic benefit from acquiring the #2 player, a deal won’t come cheap. The current ~EUR1bn valuation implies an >1x EV/Revenue multiple, a premium to food deliver peers Deliveroo plc ( DROOF ) and Just Eat Takeaway.com N.V. ( TKAYF ) (both <1x EV/Revenue), and will likely prove dilutive to the P&L initially (foodpanda is currently loss-making at the EBITDA level). Backed by a $4.9bn net cash position, though, the company shouldn’t run into funding issues post-deal. Nor will it compromise Grab’s ability to capitalize on further consolidation opportunities ahead.
Inching Closer to Sustained Profitability
There remains plenty of upside left in the Grab story, as the substantial 2023 guidance revision showed. The next milestone will be Q3, when the company plans to finally hit EBITDA break-even, bringing its total EBITDA losses for the full year to -$30-40m (down from -$195-235m prior). Having already tapped into its cost base (the June restructuring exercise shed ~10% of its workforce), though, all eyes will be on Grab’s ability to build on its leadership position across the Southeast Asian ride-hailing and food delivery markets.
From here, consolidation is on the agenda - backed by a robust net cash balance sheet, the company has made significant inroads into consolidating its key markets (MOVE IT and Trans-cab for mobility and potentially foodpanda for food delivery). With most competitors facing capital shortfalls, Grab has a clear opportunity to not only extend its growth runway but also unlock margin gains in a more disciplined market. Also gaining momentum are new initiatives on the subscription (GrabUnlimited) and advertising fronts, with digital banking set to unlock another new income stream as well. The ~4x EV/Revenue might stand out in a ‘higher for longer’ interest rate environment, but given the top and bottom-line growth potential here, I see ample room for Grab to grow into its valuation over time.
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Grab Holdings: Inching Closer To Sustained Profitability