Summary

• Recent share price weakness for Grab offers a good buying opportunity for the upcoming growth, profitability enhancement and FCF improvement.

• While the company is growing its user base, its strategy of bringing annual transacting users to monthly or even daily through enhanced product offerings and cross-selling drives secular growth.

• Grab will report its 4Q24 results on 21 Feb. I expect another strong set of results, with its first positive operating profit and further growth in FCF.

• The current share price of $4.8 appears undervalued; DCF purely based on Mobility and Deliveries suggests a fair value of $5.5/share on conservative assumptions. Strong Buy.

Kokkai Ng

Grab (NASDAQ:GRAB) has been moving sideways YTD after a fantastic run in 4Q24. Compared to Uber (UBER), the closest peer to Grab, Uber has significantly outperformed Grab YTD with share price surging 23.7%. While there doesn’t appear to be any Grab-specific news driving the underperformance, the recent cyber scam incident in Myanmar with a Chinese celebrity and other individuals being kidnapped in Thailand and hustled across the border could be a possible reason. In this article, besides assessing the potential impact of cyber scam in Myanmar/Thailand on Grab, I will also look into Grab's growth strategies and valuation to see if it is a good entry point at the current share price level of $4.8.

Negligible impact of the Myanmar/Thailand’s cyber scam incident

Following widespread reports of a cyber scam in Myanmar involving trafficking of Chinese actor Xing Wang and a few Chinese individuals going missing and being kidnapped in Thailand, thousands of Chinese tourists have cancelled their travel plan to Thailand for CNY holiday amid growing safety concerns. The Association of Thai Travel Agents (ATTA) estimates Chinese tourists could drop 10-20% in the CNY holiday.

There is no doubt that Thailand is one of the key growing markets for Grab. As CEO Anthony Tan highlighted during 3Q24 result conference call, “…it's like the movie, Everybody Loves Raymond. This one is everybody loves Thailand. And there's a lot of people coming in, and we are really blessed to see that strengthening of inbound tourism that's supporting our growth”. In 2023, revenue from Thailand jumped 88% to $205 million, taking up 8.7% of total revenue. While growth in Thailand is remarkable, its importance is significantly lower than Malaysia, Indonesia and Singapore, each taking up >20% of total revenue.

Grab's revenue by geographies (Grab)

If I assume a worst-case scenario where Thai revenue to fall 20% as suggested by ATTA, this would translate into 1.7% impact on Grab’s total revenue. In reality, the impact will be less than 1.7% as the decline in visitors is unlikely to last for the whole year. In addition, the disclosed geographical revenue ($205m in 2023) includes all business segments. Food deliveries and financial services are theoretically less dependent on tourism. Therefore, the cyber scam in Myanmar and Thailand should not have material impact on Grab’s financial.

Strategically paving the way for Growth

Grab’s share price had skyrocketed after releasing a strong 3Q24 result. A quick recap: Grab’s revenue was up 20% YoY (constant currency basis) on the back of an 18% YoY increase in on-demand GMV. This drove Grab’s adjusted EBITDA to hit a quarterly record high of $90m from just $15m in 3Q23. So, what’s driving the exceptional growth for Grab despite keen competition in the market? I think company’s sales strategies play a big role.

Mobility – Strong GMV growth plus margin expansion through High-Value Mobility Service

Grab’s product offerings cover customers from all tiers. Grab’s Saver Delivery and Saver Ride-hailing are the more affordable options for customers who are price sensitive or looking for value. These affordable options helped boost Grab’s Monthly Transacting Users (MTUs) significantly. The 16% YoY growth in Grab’s MTUs in 3Q24 was partly driven by these affordability initiatives.

Grab's quarterly MTU growth (Grab)

On the other hand, Grab also provides premium services to customers who are willing to pay more for additional comfort or luxury, such as Grab Premium and Grab Executive. GMV growth for high-value mobility ride was impressive at 30% in 3Q24 vs overall mobility GMV growth of 24%. The GMV per ride on high-value mobility ride was 2.4x higher than that of standard, as highlighted by management. Its revenue margin also came in at 1.2x higher, fueling the profit growth of the mobility segment. While the adjusted EBITDA margin was marginally lower at 8.8% in 3Q24 vs 9% in 3Q23 due to rising Saver Mobility offerings, a sequential improvement has been seen vs 8.2% in 2Q24 as contribution from High-Value Mobility offerings increased.

Luxury Ride with GrabExecutive (Grab)

Deliveries – Accelerating growth driven by Savers Deliveries; Food x Mart Cross-selling to boost Frequency and Retention

Growth in deliveries GMV has been accelerating from 14% in 2Q24 to 16% in 3Q24 on a constant currency basis. Similar to Mobility, Grab has a balanced approach in growing Saver and Priority Deliveries services. While Savers are more price sensitive, they are more active in re-ordering, with a frequency level nearly double that of non-Savers. Saver Deliveries also sets a lower bar to attract new customers using Grab’s services, boosting growth in Grab’s delivery services. Saver Deliveries took up 32% of total deliveries transactions in 3Q24, from 14% in 3Q23.

Grab's Deliveries GMV growth (Grab)

As highlighted by management, frequency is important for Deliveries business. And 1/3 of the deliveries today are coming from subscribers. To capture more subscribers, Grab scaled its GrabUnlimited in 3Q24 by launching long-term plans across the six core markets. Management revealed that a GrabUnlimited subscriber is spending 4x more and 3x higher in frequency, driving growth for Grab’s Deliveries. Moreover, Grab is also pushing hard to cross-sell between GrabFood and GrabMart to boost frequency. According to Management, order frequency for a user in both Food and Mart is 4.9x higher than a food-only user. More importantly, this also suggests higher stickiness to the platform, which, I think, is crucial for the success of Grab.

GrabFood cross-sells with GrabMart (Grab)

Deliveries’ adjusted EBITDA margin increased 0.2ppts YoY to 1.8% in 3Q24 on improved monetization of the Food business and increased contribution from advertising. While adverting revenue only accounted for 1.6% of Grab’s Deliveries GMV in 3Q24 vs 1.4% in 2Q24 and 1.1% in 3Q23, I believe Grab has taken a right step to enhance the profitability of its Deliveries business as advertising margins are high. Management is committed to achieve the long term adjusted EBITDA margin target of 4%+ for its Deliveries business, suggesting margins upside in the next couple of quarters.

Grab's long-term adjusted EBITDA margin guidance (Grab)

Financial services – Deal with BYD fuels the growth of the segment

Grab’s financial business has been growing robustly, with loan disbursal rising 38% YoY in 3Q24 to a record high of $567 million. Netting expected credit loss allowances, Grab’s loan portfolio jumped 81% YoY to $498 million. Unlike traditional banks targeting individuals with strong credit history, Grab’s leading business primarily serves the users and merchants on the platform. With the launch of digital banks (GXBank, GSX Bank and Superbank in Malaysia, Singapore and Indonesia respectively) since 2023, it has also started to focus on people who are underbanked or unbanked. Management estimates that 2/3 of the population in SE Asia are either unbanked or underbanked suggesting enormous growth potential.

Grab's robust loan & deposit growth (Grab)

While the financial services business segment is still loss-making, its adjustment EBITDA losses narrowed 27% YoY to $26 million in 3Q24 on rising revenue base and operating leverage. The rising bank deposits across the three digital banks, surpassing $1bn in 3Q24, also provides Grab with a low cost of funding.

Loan growth momentum has been strong, but do we need to concern about non-performing loans (NPLs)? Management revealed that its 90-days NPLs were stable at 2% which is surprisingly low for a fintech lender. Global banks typically have NPL ratios around 1-2% while emerging market banks, fintech & alternative lenders could have NPL ratios of 3-7%. This reflects Grab’s strong ability in assessing its users’ or merchants’ credibility through their order and sales data on the platform.

Deal with BYD fuels additional growth for Grab’s loan business

BYD (OTCPK:BYDDY) announced on 15 Jan 2025 that it entered into an EV supply partnership with Grab, supplying up to 50,000 BYD’s EV for Grab’s driver partners across SE Asia. According to the announcement, drivers will have the option of renting the EVs from Grab or opting for financing supporting through Grab’s car ownership scheme. While it didn’t specify who will provide the financing, it is very likely that Grab’s financial services unit will underwrite loans to drivers who would like to join the ownership scheme. To Grab, this generates additional loan interest income on top of the mobility revenue, demonstrating strong synergy between business segments.

Grab and BYD partnership on 50,000 BYD EV Supply in SE Asia (BYD/Grab)

BYD has agreed to supply vehicles at the most competitive rates. I have made a guesstimate by digging out the price range of the mentioned models including Denza D9, BYD Atto3, BYD Seal, and BYD M6. Assuming BYD will supply 50,000 vehicles, total value could be $2.1bn. While not some drivers would opt for renting from Grab, the potential size of car loan opportunity for Grab could still be over $400m if I conservatively assume 20% of the driver would opt for car ownership program. This is already comparable to Grab’s loan portfolio of $498m in 3Q24, suggesting significant room for loan growth.

Loan growth potential from BYD partnership (Analyst's estimate)

Grab’s MTUs have room for further upside

Despite being a leader in ride-hailing and food delivery in SE Asia, Grab’s MTUs as a percentage of total population in SE Asia was only 5 (41.9m users) in 3Q24. Management revealed on a results conference call that its annual transacting users (ATUs) was much higher at 15% (approx. 105m users). This suggests that many new users are just occasionally using Grab’s services instead of using it every month. I believe the new initiatives implemented by Grab’s management, such as Saver Ride-hailing, Food x Mart cross-selling, FlexiLoan and GrabPay, are all with the same goal to increase transaction frequency. This should drive tremendous upside to Grab’s MTUs/revenue as users ride up the frequency curve.

Grab's ATUs is 3x higher than its MTUs (Grab)

Incentives moving sideways with positive OP around the corner and Growing FCF

Grab has been loss making at operating level since debuted on Nasdaq in 2021. This was mainly due to ample incentives offered to partners, like drivers and merchants, and consumers, to enhance stickiness. While Grab was still in red in 3Q24, the good news was that Grab’s operating losses have been narrowing with its increased scale and improved synergies.

Grab's operating profit trend (Seeking Alpha)

Absolute incentives came off from the peak of $583m in 4Q21 to a recent low of $381 million in 3Q23, but it has been rising slowly in the last couple of quarters, driven by new initiatives like affordability push, advanced booking and GrabExecutive. I don’t foresee a big decline in incentives in near term as management focuses a lot on topline and frequency growth, but it has stated clearly during the result conference call that a very balanced approach will be taken in growing the topline/frequency but also driving profitability at the same time.

Grab's incentives is growing less than GMV (Grab)

For a long-term investor, free cash flow (FCF) is an important matrix when evaluating a company. Grab had not been generating positive adjusted FCF (mobility + deliveries) until 4Q23, where $4 million was recorded. Adjusted FCF continued to improve thereafter, with $76 million in 9M24. Management is guided to achieve positive adjusted FCF for the full year 2024 likely suggesting another positive FCF in 4Q24.

Grab's FCF (GAAP) trend (Grab)

Valuation: DCF value of Mobility and Deliveries are already higher than current market cap

I am not an expert in valuing financials or banks. Therefore, the DCF below is purely based on Grab’s Mobility and Deliveries segment and DCF is obviously not an appropriate valuation method for banks and financials. Grab discloses adjusted FCF, a non-GAAP financial matrix that excludes the changes in working capital in relation to loans and deposits in digital banking business. Grab’s adjusted FCF has started picking up since 2Q24 on the back of improving profitability, especially the big earnings beat in 3Q24.

Grab's adjusted FCF (Grab)

I expect Grab continues to deliver a strong FCF in 4Q24E, taking full year adjusted FCF to $220m. Management has committed to deliver its first positive adjusted FCF since listed. As I believe Grab’s profitability will keep improving in 2025E, I assume Grab’s adjusted FCF to reach $552m ($138 x 4) based on the latest quarterly FCF in 3Q24. From 2026E onwards, I assume Grab’s adjusted FCF to grow 14% every year till 2034. I believe this growth assumption is on the conservative side as Grab’s revenue growth in 9M24 was approximately 19% YoY, and it should accelerate in 2025E. If margin expansion is taken into account, Grab’s adjusted FCF should be growing at >14% growth. In terms of discount rate, Alpha Spread suggests a WACC of 7.8% based on 13.7% cost of debt and 7.7% cost of equity. Considering the higher operational risks in Southeast Asia, such as currency risks, I conservatively use a slightly higher WACC of 10% to reflect the higher risks. With these assumptions, my DCF model suggests a fair value of $5.5/share for Grab or 15% upside from last closing. Bear in mind that this DCF value has not taken into account of the value of Grab’s financial services business, which creates strong synergies with the Mobility and Deliveries business, and it is currently growing rapidly. Therefore, I believe Grab is being undervalued by the market.

Grab's DCF based on Mobility and Deliveries FCF (Grab & Analyst's estimates)

Is Grab substantially more expensive than Uber?

Many other analysts look at Price-to-Sales ratio for valuation comparison of Uber and Grab. It seems to be the only viable matrix given Grab is still loss-making at operating level. However, there is one big weakness of using Price-to-Sales on Uber and Grab, which is the lack of incentives disclosure in Uber where incentives are deducted directly from revenue. Hence, the claim of Grab trading at 7.1x vs 3.6x P/S TTM might be inaccurate. I think a slight tweak to use Price-to-GMV could be a fairer valuation matrix when making the comparison. The below table shows the calculated P/GMV ratio. While Grab is trading at a premium to Uber, the valuation premium is not as high as what has been suggested by P/S ratio. If you consider that SE Asia is an under-penetrated market, a lot more room for Grab to grow vs the matured market where Uber is operating, the slight valuation gab looks negligible.

Grab vs Uber on P/GMV (Grab & Analyst estimate)

Further multiple expansion is around the corner if Grab beats consensus again

Grab is near the tipping point where its operating profit and full year FCF are about to turn positive. If Grab also manages to beat consensus estimate in 4Q24E (to be released on 21 Feb 2025), I would expect to see valuation multiple re-rating, taking Grab’s share price to a new high. Multiple expansion is always the strongest at inflection point.

Downside Risks to my Strong Buy recommendation

Faster-than-expected development in Robotaxi – While I don’t foresee Robotaxi or driverless taxi to pose an immediate threat to Grab due to the less developed road infrastructure in SE Asia, it could be a medium-term threat if Grab is not embracing the technology advancement in time. Uber is a very good example. With its large exposure in the US, Uber’s share price was under pressure in 4Q24 after Tesla announcing its plan in Robotaxi. After that Uber has announced several partnerships including Waymo, WeRide and Cruise to offer autonomous taxis.

Rising competition in the region –Grab has a strong presence in SE Asia, but it doesn’t mean there is no competition. Competitors like Gojek and Bolt have their eyes on Grab’s market share. Malicious competition or price war could adversely impact the profitability of Grab.

Weaker-than-expected economy – People using Grab for ride-hailing and deliveries are mainly the middle to high-income group. They might cut down spending on taxis and take public transport if they see their jobs at risk due to economic uncertainty.

Conclusion

Grab, as the Uber in SE Asia, is now at the pivotal moment with operating profit and FCF about to turn positive. I expect valuation multiple to expand when the market sees profits and FCF sustainability in Grab. My DCF model suggests Grab is currently being undervalued as Mobility and Deliveries, without considering the value of Financial Services business, are already worth $5.5/share vs last closing of $4.8. Strong Buy.