Growth vs. profitability dilemma remains the same
- GRAB faces two structural challenges compared to UBER, which might affect its future profitability
- We lower FY27F normalised EBITDA by 8% to US$837m, due to reduction in Delivery and Mobility adjusted EBITDAs, keeping in line with the steady-state targets of GRAB
- Downgrade to FULLY VALUED with a revised TP of US$3.16, stemming from higher terminal EV/EBITDA multiple amidst lower FY27F EBITDA
Expensive at current valuation
Compared to UBER in North America, GRAB faces two key structural challenges, leaving less room to cut incentives offered to drivers. The US exhibits the highest percentage of households that own a car globally (at 92%) since owning and driving a car is a common phenomenon there. Some car owners are driving an UBER for an additional income while others are doing it full-time. An UBER driver can earn an average of US$20-30 per hour in the US, according to multiple sources. Assuming the driver works for 10 hours, his total earnings for a day would be US$200-300 per day, and the driver could rake in US$120-200 after expenses. As a result, it is possible for UBER to charge higher commissions. However, in a country like Singapore, where GRAB has a strong presence, most of the GRAB drivers do not own a car. Compared to the US, where car ownership is over 92%, in Singapore the percentage is 11% (SE Asia is less than 15%). Hence, GRAB drivers tend to rely on daily rented cars, for which they end up paying an additional S$70-100 per day, in addition to the 22%-24% commission fee and fuel expenses. This requires them to work full-time to make a decent living. The GRAB driver may be left with little income after paying the daily car rental charges and other expenses, hence limiting GRAB’s ability to cut the commissions offered to drivers.
For the delivery segment, in the US, it is customary to tip the UBER driver, which impacts the total income of the delivery person, thus functioning as an additional source of income for the drivers, on top of their base pay. However, in Singapore, the tipping culture may not be as prevalent. As a result, the effective income of GRAB delivery drivers may be solely dependent on their base pay and any additional incentives provided by GRAB. This also implies that UBER can afford to raise commission rates in its other major segments compared to GRAB. Hence, GRAB will not have any room to reduce the incentives offered to drivers and delivery people, which will thus adversely affect its future profitability.
GRAB is witnessing competition from GoTo in the on-demand services segment, especially in Indonesia, the largest market for both the platform companies. Furthermore, GRAB’s third segment, fintech, is expected to continue to make losses. GRAB expects fintech to experience peak losses in 2023 due to the launch of digibanks in Malaysia and Indonesia. This is a segment which is absent in UBER. Meanwhile, UBER’s freight segment continues to narrow its losses, thus benefitting its adj EBITDA growth.
GRAB’s growth vs. profitability dilemma. Like other internet platforms, GRAB too faces competitive pressures coupled with the need to achieve group-wise adj EBITDA breakeven. To narrow its adj EBITDA losses, GRAB has been reducing its incentives since 1Q22, eventually achieving adj EBITDA breakeven in its delivery segment in 3Q22. However, cutting incentives to drivers and delivery people hurt the driver supply resulting in higher prices for consumers, leading to a slowdown in GMV growth. Alternatively, to ensure smooth driver supply and affordable pricing for consumers, GRAB will have to consider not lowering incentives. However, this will eat into profitability, and thus delay the company from achieving adj EBITDA breakeven. Hence, we have reduced adj EBITDA as a percentage of GMV from 2025, as GRAB will attempt to defend its market share, while experiencing reduced adj EBITDA. Our forecasted adj EBITDA as a percentage of GMV is also in line with GRAB’s steady-state target, for both Deliveries and Mobility.
We use normalised long-term EBITDA margins to derive our TP of US$3.16 (prev US$3.07) for GRAB. We project a 12% (prev 13%) EBITDA margin leading to US$837m (prev US$907m) adj EBITDA in FY27F. We used global peer UBER’s 24m forward EV/EBITDA of 15.3x (previous: 13.5x) for FY27F EBITDA, discounted back by 15% each year to value GRAB, assuming investors seek an annual return of 15%. This is based on projected margins of 11%-12% for mature peers such as UBER and DASH in 2024, which do not have the cross-selling benefits of GRAB. We have also added US$4.8bn in net cash to the discounted FY23F EV, assuming a cash burn of ~US$200m out of its current ~US$5.0bn.
Our bear-case fair value for GRAB is US$2.50. This is based on a 10% EBITDA margin assumption in FY27F (vs. a 12% margin under the base case) and 12x EV/EBITDA multiple (vs. 15.3x under the base case).