Time to take a Grab
- The ASEAN leader of ride hailing (71% market share) and food delivery (51%), Grab has solid potential with TAM set to triple to US$185bn by 2025F.
- Grab is at a fundamental inflection point; we see easing competition enabling rapid margin improvement across segments (esp. Mobility) starting 2Q22F.
- Equity market weakness lowers risks of aggressive new entrants; we think Grab can reach adj. EBITDA breakeven by FY24F, ahead of street (FY25F).
- Initiate coverage with an Add rating and SOP-based TP of US$3.60.
The regional leader in ride hailing and food delivery
Grab offers an ecosystem of services (ride-hailing, food delivery and financial services) addressing everyday needs via a single app. Operating in 480 cities across 8 countries, Grab commands a 71% market share for ride-hailing and a 51% market share for online food delivery in Southeast Asia (2021), according to Euromonitor. With low penetration rates of on-demand food delivery and mobility currently, the rapid digitalisation of Southeast Asia presents large growth opportunities. Grab’s total addressable market (TAM) is set to hit US$185bn by 2025F (29% CAGR), according to Euromonitor.
Easing competition could accelerate Grab’s path to profitability
In 2Q22F, we observed a visible shift in strategy, with ASEAN new economy players balancing growth and profitability. Our channel checks indicate easing competition across segments. We observed higher ride-hailing fares across markets YTD. In 2Q22F, fares are up 22-42% yoy in Singapore, while promotional levels reduced meaningfully (intense competition since 2H21 due to aggressive marketing by Gojek). In food delivery, we also observed lower discounting, especially in Indonesia since 1Q22 (previously saw keen competition in 2021 due to ShopeeFood entry). We believe Grab is at an inflection point with strong margin improvement potential starting 2Q22F. We forecast Grab’s 2Q22F mobility GMV (+49% yoy) and segment profitability (adj. EBITDA to GMV ratio: 10.9%) to surprise on the upside, aiding the group further narrow losses qoq. Equity market weakness also minimizes risks of aggressive new entrants; we think Mobility segment can outperform Grab’s longer-term target of 12% EBITDA to GMV ratio (FY23F: 13.2%), allowing Grab to achieve group-level EBITDA breakeven by FY24F, ahead of consensus.
All eyes on Grab’s 2Q results; Initiate with Add
We like Grab for its super-app strategy to tap on rapid SEA digitalisation, and strong regional presence with market leadership across key segments. Initiate coverage with an Add rating and a SOP-based TP of US$3.60 – attributing US$1.6 valuation to on-demand services (2.5x FY23F EV/Adj. Sales), US$0.5 to financial services (0.1x FY23F EV/TPV), US$0.4 to enterprise segment (20x FY23F EV/EBITDA) and US$1.1 to its end-FY22F net cash position. Other potential re-rating catalysts include earlier-than-expected profitability on the back of easing competition. Key downside risks include 1) macroeconomic shocks resulting in weaker demand for Grab’s services, and 2) regulatory changes, especially related to protection for gig workers.
