Brokers’ take: DBS downgrades Grab to ‘fully valued’ on fintech losses

DBS Group Research has downgraded its call on Grab to “fully valued” from “hold” as it expects the transport and delivery provider to incur significant losses before interest, taxes, depreciation and amortisation in the financial services segment.

In a report on Monday (Jan 30), analyst Sachin Mittal said he believes the losses will be “quite significant” and may even be widened by the group’s plans to launch its digital bank in Malaysia and Indonesia by end-2023. 

Despite Grab’s target to break even for all three banks in 2026, Mittal said the financial services segment’s Ebitda (earnings before interest, taxes, depreciation and amortisation) losses may only narrow gradually. 

DBS’ target price for Grab remains unchanged at US$2.93 as the brokerage continues to assume a 12 per cent adjusted Ebitda margin in FY2027, leading to a US$1.1 billion adjusted group Ebitda.

The current valuation for Grab implies a long-term Ebitda margin of 16 per cent.

Although Mittal believes the mobility and deliveries segments will deliver higher Ebitda in the future, he notes their businesses have lower margins. 

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This is because the instant delivery nature of mobility and food delivery does not allow optimisation of the last mile resource to serve multiple customers, he said.

“This is unlike e-commerce where customers are willing to wait for a few days and multiple deliveries are bundled together on a given route reducing the cost of delivery.”

Furthermore, he said that there is limited room to cut incentives across the mobility segment.

“There are some incentives which will always remain in place for rewarding high-performance drivers, encouraging drivers to pick up passengers in high traffic areas and general retention purposes,” he added.

The transport and delivery provider aims to achieve adjusted Ebitda breakeven in the second half-year of 2024.

Therefore, Mittal projects gross merchandise volume (GMV) compound annual growth rate to be 19 per cent over FY2022 to FY2025 with flattish take-rates.

“Grab has big room to reduce its incentives as a percentage of GMV from the current 14 per cent in its delivery segment compared to its mobility segment,” noted the analyst. 

He also expects group adjusted Ebitda to break even in Q3 2024 as a result of a sharp reduction in incentives across the deliveries segment, which he projects to be reduced as a percentage of GMV to 12 per cent in FY2023, and to 5 per cent in FY2027.