Toyota's US$1b investment in Grab is credit positive for both: Moody's

TOYOTA'S US$1 billion investment into Singapore-based ride hailing platform Grab is credit positive for both companies, Moody's Investors Service said in a note released on Monday.

The deal will enhance Toyota's foothold and capability in ridehailing services, a "fast-growing business that could alter automakers' traditional business models", said Moody's, a credit-ratings agency.

Meanwhile, Grab will benefit from Toyota's technological capability. For instance, Toyota's driving recorder, which collects driving data and stores it in a central platform, will expand connectivity among Grab's rental car fleet across South-east Asia, said Moody's. This data will help both companies to roll out new services for drivers, including automotive insurance, auto leasing and vehicle maintenance.

Last week, Grab announced that Toyota will pump in US$1 billion into the ridehailing company as a lead investor in Grab's ongoing financing round, in what is said to be the largest investment by a carmaker in the global ridehailing sector.

In the note, Moody's added that the collaboration complements Toyota's existing alliances with global ridehailing providers, including Uber and JapanTaxi, a Japan-based taxi ride-hailing platform. Grab strengthened its leading position in South-east Asia after acquiring Uber's assets in the region in March 2018, Moody's noted.

"Led by young users, ride-hailing services have gained popularity in South-east Asia. We expect Toyota to benefit from its growing presence in this business because new car sales in the region could fall amid changing consumer preferences and increasing acceptance of the app-enabled sharing economy."

Moody's said that it estimates that Toyota has more than a 25 per cent market share and a leading position in South-east Asia, making the region an important market for Toyota.

"For Toyota, the US$1 billion investment is small relative to its annual cash flow from operations for the automotive business, which we expect will exceed 2.5 trillion yen (S$30.6 billion) for fiscal 2018, which ends in March 2019. We also expect the auto segment's cash to exceed 2.4 trillion yen for the period, limiting the investment's effect on Toyota's key credit metrics."

Moody's also said that Toyota's larger size relative to some of its global competitors gives it capacity to invest in new businesses and research and development (R&D), including connectivity, auto-drive, mobility as a service and electrification.

But returns on investments in new areas are "uncertain amid disruptive technological changes", Moody's cautioned in the note.

"We expect Toyota to focus on its cost efficiency to accommodate the new investments. Improving cost efficiency is important as Toyota struggles to improve its automotive segment's margin. We expect this margin, measured by adjusted Ebita (earnings before interest, taxes, depreciation and amortisation), to remain around 8 per cent for the year to March 2019, similar to the previous two years but lower than 10.9 per cent for the year to March 2016.

"Weak profitability in North America is hurting Toyota's auto-segment margin largely because of lower demand for passenger cars relative to sport utility vehicles."