Initial Memo: Grab (NASDAQ:GRAB), 14% 3-Year Potential Upside (Clive TAN, EIP)
Clive presents a 'BUY' recommendation due to its well-managed ESG risks and dominant economic moat in its operating region.
Linkedin | Clive Tan
Company Background
Grab (NASDAQ:GRAB), which was founded in 2012, offers financial services (payments, consumer loans, and enterprise products) as well as ride-sharing and food and grocery delivery in eight Southeast Asian nations. The business connects merchants and riders with customers on their behalf, charging a fee to each party. With a dominant market position, 89% of Grab's income comes from its two main businesses: food delivery and ride-sharing. As of the end of 2021, 58% of income came from Singapore and Malaysia.
Revenue Segments
Grab’s revenue segments are categorized into four segments: Deliveries, Mobility, Financial Services, and Enterprise & New Initiatives.
Deliveries
Grab’s Delivery sub-segments - GrabExpress, GrabFood, GrabKitchen, GrabMart, GrabMerchant and GrabSupermarket. These sub-segments focused on fulfilling the needs of on-demand delivery, maximizing convenience for both businesses and consumers. In 2022, Grab acquired a majority equity interest in Jaya Grocer, a Malaysian mass-premium supermarket chain. Given Jaya Grocer’s strong retail presence and supplier network, this move was expected to accelerate the growth of GrabMart and provide consumers with more options and better convenience. This business model allows Grab to collect delivery fees from users, and also take a share of revenue from restaurants and grocers through ‘service fees’, usually about 25 - 30% of the total bill (Jugnoo, 2022).
Mobility
Grab’s mobility business consists of on-demand GrabTaxi, GrabCar, GrabHitch and GrabBike. Within each segment, Grab allows customers of different segments to attain ride-sharing services catered to their needs. Similar to its Deliveries segment, Grab works on a commission model - taking about an average of 25% cut per ride. In 2018, Grab completed its acquisition of Uber’s Southeast Asia business, following which Uber became a major strategic shareholder in Grab. This allowed Grab to cement its position as the leading ride-hailing super-app in the region.
Financial Services
Grab’s financial services include GrabPay, GrabRewards, GrabFinance, GrabInvest, and GrabInsure. These sub-segments were implemented through a series of acquisitions and strategic partnerships between complementary companies. In August 2022, GXS, a digital bank consortium backed by Grab Holdings and Singtel started offering banking services in Singapore. This consortium reportedly allowed GXS to have a potential market size of roughly 3 million customers across both Grab and Singtel ecosystems.
Enterprise & New Initiatives
Last but not least, Grab’s solutions in these sub-segments consist of GrabAds, GrabDefence, GrabHealth as well as GrabMaps
Industry Overview
As Southeast Asia’s market leader in delivery and mobility, Grab faces strong competition from a few key on-demand competitors across its segments:
Superapp: Gojek offers a multi-service platform completing an average of 100 million monthly transactions, Gojek and Grab compete against each other in Singapore, Indonesia, Vietnam, Thailand, and the Philippines. Gojek is a business arm of Indonesian technology company GoTo Group where Gojek merged with marketplace Tokopedia. Posing direct competition with Grab across various segments, Gojek’s key business segments include food delivery, ride-hailing, grocery deliveries, payment solutions, and mechanic services. Currently, the Indonesian brand boasts an average of 170 million users (Gojek, n.d.).
Secondly, Airasia super app was a product produced by Airasia as the pandemic caused setbacks as an opportunity to speed up its digital transformation (Kaur, 2022). The app was formed in several SEA markets including Indonesia, Malaysia, Singapore, and Thailand. In addition, AirAsia offers food delivery, ride-hailing, flight tickets, accommodation booking, grocery shopping, financial services, and e-commerce platforms. With 51 million users across its services, AirAsia aims to focus on providing low-cost, value, travel options for people in the ASEAN region through innovative pricing and deals (airasia, n.d.).
Deliveries: Foodpanda remains as Grab’s strongest competitor in this space. In 2021 alone, the total Gross Merchandise Value (GMV) provided by the food delivery space in SEA topped US$11.9 billion, where Foodpanda generated US$3.4 billion, after Grab’s $7.6 billion. While Grab has been able to stay as the food delivery leader in Indonesia, Thailand, Singapore, Vietnam, and the Phillippines, Foodpanda grabbed 49% of the Malaysia market share compared to Grab’s 48% (Cordon, 2022).
Financial Services: In Singapore, Grab’s digital bank GXS faces intense competition in a saturated market against other players like Trust Bank, and Sea Group’s MariBank. While they operate in the same fintech space, GXS focuses more on the unbanked and underserved segments, while Trust hinges on its strong union backing to provide for the needs of workers and families (Kumar, 2023). Maribank is deeply integrated into the digital economy through its three platforms: Shopee, Garena, and SeaMoney.
Thesis: A market leader in on-demand services
Grab’s current position as the market leader can be attributed strongly to its ability to deeply integrate its services within its Superapp ecosystem, further increasing consumer engagement and loyalty. Grab has also spent heavily on incentives for consumers, drivers, and merchant partners. As a result, the company can capitalize on strong brand loyalty to narrow its incentive spending in the current year. In Q3 2023, Grab was able to streamline operating expenses by reducing consumer and partner incentives by 22% and 17% on a y-o-y basis. Reducing incentives has allowed Grab’s mobility and delivery segments to pose adjusted positive EBITDA, and will likely see greater margins as the super app shifts its strategy to a more sustainable one, balancing both growth and profitability. The results are evident - in Q3 2023, Grab generated a 3.4% adj. EBITDA margin from deliveries, and 13% from its mobility segment. In addition, its Financial Services’ adj. EBITDA narrowed its losses from USD$105 million to $68 million. This move, coupled with its ability to implement hyperlocal approaches has allowed the company to cement a dominant position. Grab was able to capture 54% of the SEA market share in the food delivery market, and 75% of the ride-hailing market (Vektor Research, 2023).
In the near future, Grab’s biggest food delivery competitor Foodpanda is reportedly looking to exit a few SEA countries, with Grab and Meituan looking to acquire its stakes in Singapore, Malaysia, the Philippines, Thailand, Cambodia, Myanmar, and Laos (Tay, 2023). I am confident that this move will further allow Grab to cement its moat in SEA.
Valuation
As such, EV will be used to value Grab. We will use a conservative 20x EV to the mean normalized EBITDA FY2025 estimate of $528.9 million. Currently, Grab’s publicly listed competitors Uber and DIDI in the sector have a forward EV/EBITDA multiple of 23.22 and 18.97.
● EV / EBITDA x EBITDA = Enterprise Value (EV)
20x $528,840,000 = $10,976,800,000
● EV - Net Debt = Equity Value.
$10,976,800,000 - $1,365,000,000 + $4,912,000,000 = $14,523,800,000
● Equity Value / TSO = Target Price.
$14,523,800,000 / 3,912,000,000 = $3.71
This presents a 14.15% upside from the current share price of $3.25 based on my conservative EV multiple.
Risk and Mitigation
Grab’s strongest risk still revolves around maintaining its market share due to strong competition from Gojek in the SEA region. The two companies have been known to engage in price wars in the past, with the latter’s strategy being infamously known for undercutting Grab’s mobility services pricing in order to gain market share (Cheok, 2018). This strategy is not uncommon in this sector. Grab and Uber have been competing fiercely for market share through price wars since 2013 when Uber decided to offload its SEA operations to Grab in exchange for partial ownership of Grab.
After cementing its position in the SEA market through competitive pricing strategies, Grab executives announced a change in its operating strategy to reduce incentives in order to ensure sustainable long-term growth. With a market-leader position and an all-encompassing ecosystem to constantly engage its customers, this will likely allow Grab to retain its customer loyalty. Hence, I am confident that this will allow Grab to continue dominating in the region where there are many smaller players.
Grab’s Fintech business will likely not see profitability within the next 2-4 years as the company faces strong competition and high operating expenses across its services. GrabPay has been facing new entrants in the payment services sector with smaller companies like Shopback and Fave, as well as bigger companies like GooglePay, AliPay, ApplePay, and Huawei Pay. In Grab's digital banking service, GXS will face very stiff competition in the upcoming FY as Trust Bank and Shopee’s Maribank will compete for consumer market share. While these 3 banks have supposedly different target customer segments, I expect the segments to cannibalize each other as the banks will likely continue to offer good incentives (i.e. attractive interest rates) while trying to gain a foothold in the SEA market. While fintech losses are expected to peak in FY23F according to management expectations, the climate will remain competitive and uncertain for the time being (DBS Insights Direct, n.d.). We should expect to see higher volatility in the share price in the near to medium term as all eyes are on the fintech services segment.
ESG Assessment
In conducting ESG analysis for Grab, these two were signaled as the most important material ESG factors:
Data Privacy and Security
With over 180 million users and 10 million partners registered (Wise, 2023), data privacy and security are of paramount importance. While Grab has made strides in this aspect, relevant cybersecurity certifications can be improved. In 2022, only Grab Indonesia has achieved ISO 27001 certification for its information security management systems. Grab Singapore achieved Data Protection Trustmark Certification for all of its services that deal with consumer data, a step up from having only 1 certification in 2021. Overall, Grab has come a long way in its row of data breaches in 2020, with zero substantiated complaints made in 2022 (Wong, 2020).
Partner Human Capital
As a superapp, human capital remains as the most important driver for a successful business. Grab is highly exposed to this factor, and management has taken laudable steps to provide opportunities and fair practices to its partners. In FY2022, the platform registered over 10 million partners, with Grab partners earning a total of US$10.6 billion, a 19% increase from the previous year. This increase can be attributed to partners being attracted to Grab’s flexibility and access to earning opportunities (Grab, 2022). Grab’s fintech businesses are also expected to provide partners with financial services when the digital banks are launched at a later time. With a sizable proportion of partners coming from lower education and income backgrounds, Grab has offered more than 2,500 upskilling and reskilling programs to help them in their current roles. In 2022, at least 1 million partners have taken >1 upskilling courses on GrabAcademy. These courses serve to empower their partners to provide better services, to be more digitally savvy as well as to build their financial literacy.
Moving forward, monitoring partner benefits is essential as Grab progresses with its incentives reduction strategy. A reduction of incentives for partners may translate to lower overall welfare and satisfaction.
Conclusion
With well-managed ESG risks and a dominant economic moat in its operating region, Grab is an attractive short-medium-term investment opportunity with a target price of $3.71 and a 14.15% upside from the current share price of $3.25.
References
Airasia. (2023, March 14). Next chapter of dynamic growth starts with leadership change at airasia Super App. https://newsroom.airasia.com/news/eng-next-chapter-of-dynamic-growth-starts-with-leadership-change-at-airasia-super-app#gsc.tab=0
Cheok, J. (2018, May 29). Another price war seen in ride-hailing market. The Business Times. https://www.businesstimes.com.sg/startups-tech/technology/another-price-war-seen-ride-hailing-market
Cordon, M. (2022, January 27). Grab still tops SEA’s food delivery market in 2021: report. Tech In Asia. https://www.techinasia.com/grab-tops-southeast-asias-food-delivery-scene-report-finds
DBS Insights Direct. (n.d.). Grab Holdings Ltd. https://www.dbs.com/insightsdirect/company/TR5080147763?source=search&sourceid=tmp
Grab. (2022). Grab ESG Report 2022. https://assets.grab.com/wp-content/uploads/media/si/reports/2022/Grab-ESG-Report-2022.pdf?grab_external=true#:~:text=As%20of%202022%2C%20Grab%20received%20an%20MSCI%20ESG%20Rating%20of%20AA.
Gojek. (n.d.) About Us. https://www.gojek.com/sg/about
Jugnoo. (2022, March 29). How Grab works: The on-demand business model. https://jugnoo.io/how-grab-works-the-on-demand-business-model/
Kaur, D. (2022, September 19). Grab vs Gojek vs AirAsia: Superapps compete for supremacy in Southeast Asia. Techwire Asia. https://techwireasia.com/09/2022/grab-vs-gojek-vs-airasia-superapps-reign-in-southeast-asia/
Kumar, S. (2023, November 1). GXS Bank Vs Trust Bank Vs MariBank: Which Digital Bank Should You Choose? Dollars and Sense. https://dollarsandsense.sg/gxs-bank-vs-trust-bank-digital-bank-choose/
Tay, N. E. V. (2023, September 22). Brokers’ take: DBS upgrades Grab to ‘buy’ on delivery, mobility segments’ market-share gain. The Business Times. https://www.businesstimes.com.sg/companies-markets/brokers-take-dbs-upgrades-grab-buy-delivery-mobility-segments-market-share-gain
Vektor Research (2023, November 29). Grab: Market Leader In Southeast Asia, Narrowing Losses, But Shares Remain Risky. Seeking Alpha. https://seekingalpha.com/article/4654925-grab-market-leader-narrowing-losses-but-shares-risky
Wise, J. (2023, April 8). HOW MANY PEOPLE USE GRAB IN 2024? (GRAB STATISTICS). Earthweb. https://earthweb.com/how-many-people-use-grab/
Wong, L. (2020, September 14). Grab fined $10,000 for fourth data privacy breach in S'pore in two years. The Straits Times. https://www.straitstimes.com/tech/grab-fined-10000-for-fourth-data-privacy-breach-in-two-years
*Do note that all of this is for information only and should not be taken as investment advice. If you should choose to invest in any of the stocks, you do so at your own risk