Brokers’ take: Maybank upgrades Grab to ‘buy’; raises target price on recovery prospects

MAYBANK Securities has upgraded Grab to “buy” from “hold”. This is based on expectations that the transport and delivery provider could return to profit “sooner than expected” due to easing competition, recovery in ride demand, and an earlier breakeven guidance. 

The research house also raised its sum-of-the-parts target price to US$3.80 from US$3.40 with FY2024 as its valuation base year. 

This reflects a higher enterprise value-to-sales (EV/S) multiple for the deliveries segment, based on FY2024 estimates, of 2.2 times versus 2.1 times previously. 

The mobility segment has been benchmarked to a 2.1 times EV/S multiple, similar to Grab’s competitor Uber, due to consistently-better adjusted Ebitda (earnings before interest, taxes, depreciation and amortisation) as a percentage of gross margin value. 

Maybank’s upgrade and higher price target come after the company’s net loss for FY2022 was narrower than both consensus and the research house’s estimates. 

In a Feb 24 note, analyst Kelvin Tan raised the company’s revenue forecasts for FY2023 to FY2025 by 5 per cent to 15 per cent on a resilient showing of Grab’s gross merchandise value (GMV) despite a pullback on subsidies offered to drivers and consumers. 

In Tan’s view, the company’s market leadership – as evident in its focus on profitability – allowed it to slow down incentive spending without compromising user retention, even at the expense of top-line growth. 

From FY2023 to FY2024, Tan projects food delivery, mobility-adjusted Ebitda, and financial services in the region to grow year on year by 352 per cent, 65.5 per cent, and 8.7 per cent respectively. 

The analyst is expecting Grab’s delivery segment to deliver Ebitda of US$183 million for FY2023, or an Ebitda-to-GMV ratio of 1.8 per cent. However, he cautioned that GMV growth for deliveries is still expected to be slower in the first half of FY2023 due to tougher competition and post-Covid normalisation trends.

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Tan nonetheless highlighted the potential for the delivery segment to benefit from an expansion in margins in H2 FY2023, as he believes the company should be able to scale up grocery and quick commerce deliveries to meet increasing demand, and offset any slowdown in food delivery. 

Grab’s initiatives to improve its algorithm and enhance driver efficiencies while introducing affordable pricing for meals and tiered-pricing for food deliveries, should also grow its order density and further improve unit economics, Tan added.

Meanwhile, the mobility segment’s Ebitda is projected to grow by 45 per cent, driven by an estimated 29 per cent growth in GMV. 

This is because Tan expects the segment to be boosted by the recovery of tourism in the region, a resolution of the driver shortage issue, as well as a continued reduction in overall pricing and incentives by Grab to increase competitiveness. 

“Although the competitive landscape for ride hailing remains intense in the region, we think Grab would continue to reduce its overall pricing and incentives to increase its competitiveness,” said the analyst of Grab’s mobility business.