Brokers' take: Why DBS thinks Grab could be a better 'buy' than Sea
DIGITAL services player Grab may have more catalysts in place compared to its peer Sea given current market conditions, according to DBS Research.
In a report on Tuesday (Jan 25), the research house noted that both Asean Internet companies have corrected about 50 per cent from their peaks over the last 2 months, due to a shift in the market's focus to profitability from market share gains.
It has a "buy" rating on both stocks, with a target price of US$9 for Grab and US$278 for Sea.
At their share prices of US$5.60 and US$154, Grab and Sea are trading near DBS's bear case valuations of US$5.60 and US$147, respectively. This implies "too-low margins" in the long term, said the research house, as Sea's current price suggests long-term group Ebitda (earnings before interest, tax, depreciation and amortisation) margins of 17 per cent versus its projection of about 26 per cent.
Grab's price suggests long-term group Ebitda margins of 11 per cent as opposed to DBS's projection of 20 per cent.
While DBS believes Grab will trade at a 25 to 30 per cent discount to Sea due to the latter's "superior margin potential", the research house is of the opinion that Grab's mobility business should benefit from economic reopening in the near term.
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"Grab is likely to benefit from synergies in the delivery of multiple services at a lower unit cost and customer acquisition and retention costs," the brokerage said. This comes with Grab's superapp feature and its position as the market leader for delivery and mobility services in South-east Asia.
Grab's delivery and mobility businesses are both able to benefit from its in-house mapping technology, said DBS. These segments are expected to comprise the bulk of Grab's adjusted FY2027 group Ebitda, with the mobility segment to contribute US$1.28 billion and delivery to add US$977 million in adjusted Ebitda.
In terms of customer acquisition cost, DBS thinks Grab can also cross-sell its delivery service to its mobility users easily without offering too much discount repeatedly.
On the other hand, it sees Shopee's entry into new markets as a key overhang on Sea due to a lack of clarity on the matter, and concerns over higher losses over the next 2-3 years.
"So far, Sea has confirmed entry into Brazil only and is testing waters in other new markets with cross-border e-commerce business. Sea is not hiring local sellers in these new markets. We have assumed Sea will have limited cross-border business in these countries," said DBS.
The research house is nonetheless expecting Shopee to record a 22 per cent Ebitda margin by FY2027 on the back of rising take rates, lower customer acquisition costs, and higher advertising revenue.
Shares of Grab closed on Monday US$0.04 or 0.7 per cent lower at US$5.56 on the Nasdaq, while Sea ended US$5.09 or 3.3 per cent down at US$149.32 on the New York Stock Exchange.
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