Brokers' take: DBS initiates 'buy' on Grab, cites opening of Asean economies as potential catalyst

DBS Group Research has initiated coverage on Grab with a "buy" call and a 12-month target price of US$9, a 25 per cent upside from its last traded price of US$7.22.

In a regional company focus report on Tuesday (Jan 4), the brokerage's analyst Sachin Mittal cited the opening up of Asean economies and the Nasdaq-listed counter's potential inclusion into the MSCI Singapore Index as possible catalysts.

Mittal noted, in particular, that online food spend in South-east Asia is expected to rise at a compound annual growth rate (CAGR) of 24.4 per cent between 2020 and 2025, and reach US$28 billion in gross merchandise value. This is supported by a rising middle class and increasing smartphone adoption in Tier 2 cities, he said.

Online grocery delivery in the region is expected to reach US$11.9 billion by 2025, at a CAGR of 23.8 per cent, while the fintech industry in South-east Asia is expected to reach US$37.6 billion in revenue by 2025, at a CAGR of 23 per cent over 2019 to 2025, he added.

The US$9 target price translates to 6.5 times the adjusted revenue which the brokerage has estimated for Grab in FY2023. The revenue multiple is to "reflect Grab's dominance and margin profile" in these areas, Mittal said.

However, the analyst stated that rising competition and macro weakness could lead to the brokerage's bear target price of US$6 for the stock, which is based on 5 times its adjusted revenue estimated for FY2023.

For the US$9 target price, Mittal said he had assigned a 30 per cent premium to Grab for its multi-sector leadership, cross-selling synergies and higher growth potential compared to various leaders in the sectors which it is in, namely DoorDash, Uber and PayPal.

He also assigned a 7.8 times enterprise value to the company's forecasted FY2023 adjusted revenue for its delivery business, 3.2 times for its mobility business, and 7.8 times for its fintech and enterprise segment.

Elaborating on the "buy" call, he pointed out that Grab dominates mobility and food delivery with a market share of about 80 per cent and 50 per cent respectively.

The 80 per cent mobility market share exceeds Uber's share of 69 per cent in the United States, while the 50 per cent food delivery market share is comparable to DoorDash's share in the US.

Mittal also pointed out that Grab is now "prominent in fintech", although its transaction procession volume was still 29 per cent lower than Sea's in the third quarter of 2021.

But he noted that rising fintech competition could delay the group's earnings before interest, taxes, depreciation, and amortisation (EBITDA) breakeven to FY2024, instead of FY2023, which the company had projected.

At this point, Sea "seems to be the new market leader in South-east Asia" with 39 million users for fintech services alone, much higher than Grab's total monthly transacting users of 22.1 million in the third quarter of 2021 for the whole group, he pointed out.

Mittal also noted that Grab's fintech user base is likely to be much smaller than 22.1 million, given that Sea's adjusted fintech revenue of US$132 million in the third quarter is more than 5 times Grab's fintech revenue.

Overall, he projects a group EBITDA of US$420 million for FY2022 and US$200 million for FY2023, compared to Grab's projections of US$200 million in FY2022 and a positive EBITDA of US$500 million in FY2023.

Mittal, meanwhile, said that he had factored in a slight valuation discount for Grab compared to its e-commerce peers, given that its mobility and delivery businesses come with a smaller lucrative margin potential than what e-commerce offers.

He pointed out that the e-commerce ecosystem is 5 times the combined size of food delivery and mobility, adding that batch processing makes the e-commerce delivery network more efficient than quick delivery businesses.

He also noted that e-commerce merchants advertise on their respective platforms, while Grab incurs sales and marketing costs for its drivers and merchants.

Grab, however, offers higher growth than its Internet peers, citing a projected annual adjusted revenue growth of 39 per cent over FY2021 to FY2023, similar to 41 per cent growth at Sea, which owns e-commerce platform Shopee, Mittal said.

He noted that Grab is trading at about 5 times enterprise value to its projected adjusted revenue for FY2023, compared to about 6 times for Sea and DoorDash. "We expect Grab and Sea to rerate to reflect their exceptional growth potential," he added.