Brokers’ take: DBS downgrades Grab to ‘fully valued’ on structural challenges
Daphne Yow
DBS Group Research has downgraded its call on Grab to “fully valued” from “hold”, as it believes the Nasdaq-listed ride-hailing company’s future profitability may be affected by structural challenges.
The research house also views the stock as expensive compared with its peers, adding that its “significant” enterprise value (EV)-to-gross-profit premium compared with Sea at current levels will be “difficult to sustain”.
It, however, raised its target price on the stock to US$3.16 from US$3.07, to factor in a higher terminal EV to earnings before interest, taxes, depreciation and amortisation (Ebitda) ratio.
This is based on higher valuations on the back of projected margins of Grab’s mature peers Uber and Dash, which do not have Grab’s cross-selling benefits, said analyst Sachin Mittal in a report on Friday (Jul 21).
While Mittal expects the group’s gross merchandise value (GMV) compound annual growth rate to come in at around 15 per cent over FY2022 to FY2025, he warned of a potential decline in GMV.
This comes in the face of competition from Gojek, along with rising inflation which could potentially lead to a reduction in on-demand services, he said.
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The analyst is also expecting Grab’s fintech business to report Ebitda losses over the next few years.
He forecasts the group to deliver an adjusted Ebitda for FY2027 of US$837 million, about 8 per cent down from its previous US$907 million projection, assuming lower adjusted Ebitdas from the delivery and mobility segments.
Though group Ebitda is anticipated to break even in Q4 this year as Grab reduces its delivery incentives, the analyst thinks the company’s ability to do so may be limited due to structural challenges.
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In particular, Mittal highlighted the differences faced by Grab in terms of car ownership levels and the delivery tipping system in Singapore, compared with its peer Uber in the US.
Singapore’s reliance on daily rented cars due to low car ownership may limit Grab’s ability to cut commissions offered to its drivers, while the group would also have less room to reduce delivery incentives as the city-state’s tipping culture is not as prevalent as in the US, he said.
“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 adjusted Ebitda breakeven.”
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