Grab is very much part of our life if you reside in South East Asia- be it hailing a Grab taxi, ordering food from Grab food, arranging a courier service and now even catering to our insurance and financial needs. They have the title of being the SuperApp in South East Asia.
Recently, they have just launched their stock listing in Nasdaq through the merger with Altimeter Growth Corp which is a special purpose acquisition company (SPAC) valuing the deal at $40 billion. Grab raised $4.5 billion with this merger.
Truth be told, we were never interested in Grab as an investment, especially so with headlines of them losing billions per year plastered through different media outlets. Nonetheless, with this stock listing, we decided to understand the company better and see if a turnaround is in sight.
Grab Business Model
Source: Form 8k- Altimeter Growth Corp
Grab was started in Malaysia as MyTeksi in 2012 and within a span of 9 years, their business has now expanded tremendously to include 4 main categories. They are namely:
- Mobile (Transport)
- Deliveries (Food and Groceries)
- Courier ExpressÂ
- Financial Services (Fintech)
Their coverage now covers the 8 countries in South East Asia as illustrated from the diagram above.
Profitability Track Record
Source: Form 8-K- Altimeter Growth Corp
The investor presentation has been hyping about the huge growth in topline and bright outlook. However, huge sales without visible profits would not be a sustainable business model. It has been bleeding from huge cash burn since its inception. Over the period from 2018-2020, it has a total net loss of 9.2 billion dollars. It would be over 10 billion if we factor in 2021.Â
The only division that is turning profitable would be their mobility business but it is only on an Ebita basis- net profit is still negative. Grab guidance is for the overall business to be Ebita positive in 2023.
Top Class Investors- Convertible Preference Shares
Source: Form 8-k-Altimeter Growth Corp
Grab have an illustrious world-class blue-chip base of investors since its incorporation. The investors have put in slightly over 10 billion dollars and most of it is in redeemable convertible preference shares.
Grab has almost fully utilised the funds for their business. This gives it the need for them to do up the stock listing as the redeemable date for the preference shares would be in 2023. With the stock listing, the preference shares would all be converted to equity. Hence, it fully eliminates the redemption risk associated with its convertible redeemable preference shares.
Moreover, the listing would aid their profitability. The interest expenses associated with these preference shares was 1.4 billion dollars in 2020 which would not be a drag to profitability going forward.
Obstacles Ahead
Grab is in a tough businesses environment such as food/groceries delivery and ride-hailing. Didi with a 90% share of the China market is not able to turn in a profit. This gives us perspectives on the challenges ahead. Also, major food delivery companies such as Delivery Hero (Food Panda Parent) and Deliveroo, are still burning cash despite Covid 19 being a positive catalyst for the sector.Â
Adding on, these companies have been loss-making since day 1 and some have been around for more than a decade. The conclusion we can come to would be the industry is tough which is akin to Berkshire Hathaway when Buffet first invested in it.
Nonetheless, with a super-app concept, you will need recurring clients that would access your app on a daily basis. With that, Grab could try to pitch higher-margin products to them that will balance out the profitability profile for the whole business.
Lastly, the fragmentation of SEA would be a hindrance to scaling the business. Every country will need separate clearance and the rule of law is different. So for a product launch, it will be more tedious across the region. For a super-app like Meituan, they could definitely scale up their business more efficiently in China than Grab in SEA.
However, if Grab is able to overcome this limitation effectively, it will be a great moat for them.
Bright SparksÂ
The venture into Fintech which could potentially crave out higher margins would be Grab’s answer to a path towards profitability. They are into microloans, peddling insurance and remittance services to their clients’ and drivers’ bases.Â
From their guidance, the next few sectors Grab would likely add to their super app would be e-commerce and travel.Â
They have clinch a digital banking license in Singapore through a joint venture with Singtel. However, it is prudent to note that Singtel’s track record on the digital front has been lacklustre. Also, the incumbents would not let their eyes off the ball in the digital banking arena.
The advancement of AI Machines such as drones could also provide a path to sustained profitability if things pan out well. We believe they could greatly reduce their operating cost with drones being their main delivery mode.Â
Summing Up
Grab is one of the iconic names that have been part of everyone’s life over the past 9 years. The completion of a successful listing in Nasdaq gives investors an opportunity to partake and participate in this growth story.
However, given the lack of financial metrics in terms of positive operating cash flow and likely further huge cash burns ahead before brighter days. It is investing with a vision that things would pan out well. There will only be the first dose of EBITA positive results in 2023 based on management’s guidance, this is a tall order from an investor point of view.
We have no doubt there will be good growth in terms of revenue through their business plan but it is very likely they are going to be in the red of at least a billion dollars per year for the near term outlook.
This is after considering the savings in interest paid to convertible preference shares holders who would have their shares converted to common equity.
We have to monitor their business performance and execution going forward and hope to see progressive improvement in their financial metrics.Â
Their latest round of infusion of capital in 2019 valued the company at 16 billion dollars but their recent stock issuance is at a valuation of 40 billion dollars, which is a 2.5 x jump in valuation in just two years. It is no surprise it drops almost 20% at the close of the first trading day.
With growth stocks not being the theme of the moment- with across the broad substantial correction- we will give Grab a miss for now and revisit their investing merits once they see improvement in the profitability front.
UPDATE (24th Dec 21): Grab has the intention to acquire Jaya Grocers which is at a premium but it could be a good move to establish positive cash flows and sustainable earnings. From the influx of 4.5 billion dollars, acquiring profitable businesses that have synergies with their network would be the right path forward in our view.
Disclaimer:
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