Ex-Grabber on Grab

A few weeks ago, Grab, Southeast Asia’s ride-hailing, food delivery, and financial services giant, announced it would go public via a merger with the Altimeter Growth Corporation SPAC. As an ex-Grab employee or “Grabber,” I couldn’t help but comment on the deal. The analysis below is our take on what we think about the company, its prospects, and the deal valuation. Now do note, though I am an ex-Grabber, besides a few personal comments on management, I will be basing the analysis purely on publicly available information and my observations as a power Grab user. In any case, I left 3 years ago, so any info I would have would be outdated. As usual, this is a blog post, not one of our long-form business write-ups, so we’re going to keep this quite high-level (don’t expect a buy, hold, sell recommendation!).

A quick word on the past:

None of the below analysis reflects my personal feelings about the company or what it has achieved (which is nothing short of amazing). My year and a half of Grab left me with many friends, who will reap the fruits of their labour when they can monetize their hard work in a few months, and I am thrilled for them. My time at Grab was during some of the most competitive periods when the company was battling Uber, Gojek, and several local players, and at times the day-to-day felt like trench warfare. So I can’t help but feel a bit of pride to see the company get listed via the largest SPAC deal ever.

However, investing is not based on a story of the past, but rather a story about the future, so for this blog post I must put down my ex-Grabber hat and put my analyst one on…

(Full disclosure: Farrer Wealth’s principals and clients do own shares in Grab)

A quick description of Grab:

Most readers will be familiar with Grab but in case you’re not I would recommend you take a quick scan of their investor presentation filed with the SEC upon the merger announcement, as it will give you a great overview.

Grab is a ‘superapp’ operating in Southeast Asia that offers ride-hailing, food and package delivery, payments, and financial services. In our opinion, qualitatively, Grab is most synonymous with ride-hailing (four and two-wheel) and food delivery.

According to the investor presentation, Grab has a number one position in each of the categories it operates in, which is impressive given some of its well-funded competitors such as GoJek, Deliveroo, Food Panda, and Shopee Money. This illustrates that Grab’s ability to execute should not be taken for granted.

The price of victory:

However, this market dominance has come at a cost with nearly $10bn in funding raised (till Series H as per presentation) and all of that has been spent with $10.4bn in accumulated losses showing up on the balances as of the end of the 2020. So the first place prize has not come cheap, and going forward, the market will expect more maturity in the financials, and the $8bn+ (by new fund raising in 2020 as well as PIPE money from the SPAC deal) on the balance sheet would be expected to be spent towards new products/initiatives/acquisitions rather than to fund losses of the current businesses.

It seems like Grab understands this well and is projecting turning EBITDA positive in 2023, meaning that they only need to fund $1-1.5bn worth of losses over the next two years. However, this could be a fundamental risk to the model, because as of now, the market share in several businesses had been aided by cash-burn. For now, this seems fine, as the cash-burning wars against Gojek and Uber seem to have significantly simmered down, with Grab winning. That said, should new entrants arrive into the market, this could cause Grab to have to go into spending mode again. In the past, this wasn’t an issue as they could raise money via the private markets, however, the difference this time is that they will be a public company and the one thing public markets investors generally hate is getting diluted.

A quick example of how this might play out is if Grab were to go up against Southeast Asia’s most successful start-up, Sea Limited. Sea is entirely self-funded through its highly profitable (50%+ EBITDA margins) gaming business, Garena. Thus, Sea is unabashed in its cash-burning to win market share, and while for now they have aimed this spending spree to dominate ecommerce, they are entering financial services (via Shopee Money and a banking license in Singapore) and food delivery, where they will compete head on with Grab.

Thus, Grab’s success relies on two things – maintaining what I call its core businesses, and really ramping up Grab Financial, both of which we will discuss below.

The Core Businesses:

Mobility:

The first of the core businesses is Grab’s mobility business, namely ride-hailing. In this, I find Grab has done an excellent job that cannot be easily replicated, no matter how well-funded a competitor might be. If we consider ride-hailing a marketplace that matches drivers and riders, Grab has built up each marketplace from the bottom up, with significant hard-fought on-the-ground work. Convincing drivers to sign up, keeping them on the platform, and maintaining service standards are no easy tasks. Further, ride-hailing is not a regional marketplace, but instead several local ones, i.e a driver in Malaysia is no use to a rider in the Philippines (but not necessarily vice versa – see below). So not only has Grab had to win the market once, but has had to do it in every country they’ve entered. Further, this has been done with a lot of care and heart. During my time at Grab, there was some negative press insinuating that Grab was taking advantage of drivers and hoarding money. This was very far from the internal truth where the dialogue was always, “Let’s do right by the drivers, let’s do right by the riders, but let’s try and stay in business.” This was a refreshing change from the finance industry where dialogue can be a lot about lining your own pockets rather than those of your clients.

On the demand side, Grab has become quite synonymous with “taxi” and has taken up the mindshare of the consumer, whereas the brand has become the noun. People in this part of the world don’t usually say let’s call a “cab” or “taxi” bur rather they say “let’s call a Grab.” With this, Grab has entered an illustrious space shared by brands such as AirBnB, Google, Xerox, and Kleenex. Further, while we noted above a driver in one country is not useful to a rider in another, Grab has made it so that a rider in one country is useful to a driver in another (yes we know that sounds confusing, read it twice, it’ll make sense, promise). They’ve done this by including tools in the app such as commonly used phrases, and auto translation that for example, allows a Thai-speaking rider traveling to Singapore to communicate with a Chinese-speaking driver.

Given all this, it’s no surprise Grab has reached market dominance in the ride-hailing space in SEA, and it’s great to see that this business is throwing up 8% EBITDA margins. This business however could run into two problems:

1)      Lack of pricing power: This is quite obvious, but Grab cannot continually raise prices or charge more commissions because of the political and public relations nature of the business. It seems like Grab agrees with this as in its own projections it shows that EBITDA will cap out at around 12%. So really the drive to the bottom line has to be in growth, but if we take a normalized 2019 GMV number for mobility and compare that to their 2023 projection, we’re looking at a growth rate of just 8.5% p.a over the 2019-2023 period.

2)      Driver employment status: I think this is a low risk for now, but in a majority of the conversations I have with Grab drivers (just in Singapore, so small sample size) I have noticed a desire for Grab drivers to want to be employed by the company so they get benefits (especially medical). They are keeping a keen eye on what’s happening in the UK and are noticing how it might benefit them. For now, this doesn’t seem like a big risk, but we all know how political this topic can become very quickly.

Delivery:

Grab’s delivery business, especially its food delivery business, has been a huge success, with going from nothing a few years ago to a $5.5bn GMV business in just three years. Granted some of this was due to the Uber acquisition rather than organic growth, but it took sharp execution to transfer all merchants over and integrate the apps (some of you might remember GrabFood was a separate app for quite a while when it launched!).

Growth should continue nicely unless we can see some sort of pullback post-pandemic as customers return to restaurant dining. That said, there are a number of issues related to delivery, these are known issues, and not specific to Grab, but food delivery in general. These issues include a pushback from restaurants who do not want to pay high take rates and want to own the customer (giving rise to businesses such as Olo), a pushback from customers who don’t want to be paying a $4-$6 delivery fee on a $20 order, and a pushback from riders who are feel like they’re not getting paid enough. So the risk I see here is how the market will value this business, and given the recent Deliveroo IPO debacle, delivery company valuations are a moving target. Further, I really don’t think the market should underestimate the competition in this space, as restaurants are not typically too loyal to any one-provider (and nor are consumers), and while dominant market share helps to deal with this use, as stated above, there are aggressive competitors in the region who have no problem burning cash, looking to enter the space.

Overall though, I think Grab’s core business should be relatively stable and delivery should grow at a nice clip. After a few years we may see growth might taper off (or grow accordingly with general economic trends of the region) and these businesses will be relied on to generate cash and the market may value them less. If this happens, focus on what’s driving growth will shift, which brings us to the next discussion point.

Grab Financial Group:

What started as just a payments function in the app has morphed into quite a plethora of offerings. From almost nothing during the time when I left Grab, GFG has built itself into a $9bn TPV (total payment volume) business, which is really quite impressive (although a majority of this is inter-company transactions, and adjust for that TPV is $3.8bn).

There are immense benefits to these offerings as it makes the ecosystem far stronger, increases life-time-value for the customer, and can be sold to the customer at essentially no customer-acquisition-cost as they would have already been acquired by the ride-hailing or delivery services. That said, anyone who has studied financial businesses realizes it’s a very low net revenue margin business, and volumes are key. For example, even in its 2023 projections, GFC will only have about a 3% take rate. Again, this isn’t a problem if volumes grow, but this is where we run into an odd set of numbers in the company presentation.

This table implies that while GMV will go up, it will predominantly be through Interco services (i.e. someone using GrabPay to pay for their Grab ride), thus net revenue for GFG will remain flat in 2021 and even by 2023 account for only less than 10% of post-InterCo revenues. Now perhaps this is all part of the plan, and the goal is to increase TPV, but it is a bit odd that the impact to the top line will remain muted.

Thus, to fundamentally see a next level of growth, we need to see something special from GFG, and perhaps the banking license they landed in Singapore (with SingTel as a partner) will be the optionality that should be baked into a company like Grab. But this is difficult to underwrite, and this is where faith in management comes into play.

Management

Grab is led by CEO Anthony Tan (“AT”), and here I will give my opinion based on the experience in the company. My time at Grab left me thinking very highly of AT. He has a unique ability to be able to motivate the troops though a healthy balance of vision, passion, and old-fashioned pushing. On several occasions, I observed him come into meetings and convince the group that something they deemed impossible was indeed possible, or at the very least to give it a try. Further, his ability to raise money was unreal, and frankly, this was the ultimate weapon in winning the war against Uber. Not to mention, Grab has an innate ability of working with governments (see here) whereas Uber has a tendency to antagonize them, and a lot of this was driven by the culture of Grab, which came from the top.

Given the above, it would not be a stretch at all to say that AT leaving the company would be a huge negative. If I didn’t know any better, I would consider this a serious risk given his only 2.2% stake in the company post-SPAC merger. The war with Uber and Gojek has taken a heavy toll in the form of dilution, and one might wonder if a 2.2% stake would be enough to keep him motivated.

However, in my humble opinion, I really don’t think it’s about the money for him. It’s no secret that AT comes from one of the wealthiest families in Malaysia, and thus probably didn’t start Grab for financial reasons, and I believe that his social purpose behind the company to be very genuine. This is also reflected in Grab and Altimeter’s social pledge to the GrabforGood fund. There is a real desire to uplift the drivers and their families, to give loans to those who have no access to financial services, and to lift the general wellbeing of the people who interact with the Grab ecosystem, and in these goals, I feel AT’s work is far from over.

Southeast Asia:

During the earlier days, Grab’s tagline used to be “driving Southeast Asia forward” so it’s clear that a big part of Grab succeeding relies on Southeast Asia succeeding. I won’t dwell into the dynamics and opportunity in SEA because this post is already getting quite long and there is a lot of great info available in the Grab presentation. However, there’s a reason I live in SEA, have started a business here, and will raise my family here. I am very bullish on the potential of the region.

Now that said, I will caution investors who may not be as familiar with this region on one part of the Grab presentation (actually in the infographic here). In it, it shows that SEA has twice the population of the United States, and a simple read of this would imply twice the opportunity. But one must remember the US is a relatively homogenous market, whereas SEA is anything but. Each country has its own forms of government, competence in administration, and views on capitalism. Secondly, parts of SEA are still extremely poor, so investors should not expect the SEA story to be played out in a few years; we’re looking at a multi-decade story here.

Superapp:

Ok I’m probably going to get skewered by my ex-colleagues on this one, but I’m a bit skeptical of the “superapp” title. It’s not that I don’t think that Grab will get there, it’s just I don’t think they’re there yet. It’s a bit ironic considering I use 3 Grab services (ride-hailing, food delivery, and payments) regularly, but the average user uses only 1.8 services on the Grab app (do weighted average of chart figures below). Also, if we’re reading one of the appendix slides correctly, this may only apply to GrabPay users, implying that if you add cash-only users, the service multiple could be lower. This figure is significantly lower than other regional supper apps. For example some data from 2018 (so it’s a bit dated) shows that the average WeChat user used ~5 services.

Again, I do think Grab can get there, and they’ve already seen significant success in upping LTV (both through time and value) as cohorts mature, improving driver efficiency, and generally get a fly-wheel going. Do checkout slides 23-27 in the presentation for more info. One way to increase the ‘superapp’ status would be to allow third-parties to develop apps for the Grab ecosystem (ie WeChat mini-app program), but we are yet to see Management talk in detail about this. (A dated but interesting discussion of this concept can be found here)

Valuation:

This will be very high level as we really want to run far away from anything that can be construed as investment advice (do your own diligence people!), but we can’t help at least touch on valuation.

Lazy valuation:

To take a lazy look at valuations, the easiest way would be to compare Enterprise Value/Sales ratios (EV/S), and for that we’ve compared Grab’s valuation to that of Sea Limited (a somewhat comparable company in SEA) and Uber (a very comparable company, but in another region).

Do note that this valuation comparison is done taking 23rd April 2021 close numbers. 

Sum of the Parts (still sort of lazy):

Another way to look at the business is to do a sum of the parts valuation.

Food-Delivery 2021 Revenue Comps (EV/S):

• Just Eat: 3.38x

• Deliveroo: 2.63x

• DoorDash: 11.28x

Pure-play ride-hailing:

• Lyft: 6.61x

If the above are to be taken as reasonably comparable, then it appears the market is assuming that growth rates are going to be a lot higher for Grab than the comparable. This has some truth to it. In fact, Lyft and Deliveroo for example are likely to grow at 20-26% this year whereas Grab Delivery is expected to grow at 36%. However, this still doesn’t quite explain the multiple mismatch, which must mean that the market is assuming big things of Grab Financial Group, and relies on it to give Grab its overall multiple of 17.8x 2021 sales. Considering our above point about the contribution of GFG to sales going well into 2023, this is a bit hard to reconcile.

Grab does offer justification to its valuation in its presentation (see image below), however this is when AGC was priced at $10, not its current price.

Overall, it does appear to me that Grab will have to execute flawlessly to meet the multiples it’s commanding in the market, and perhaps it will, but we would love to see more info about GFG. That said the stock could see a lot of resilience from retail buying considering the branding it has here, even if it appears expensive.

In Conclusion:

Overall, we’re excited to see what Grab will achieve in the next several years, and are as always, very bullish on Southeast Asia. The future by no means guaranteed to Grab so they will have to work hard to maintain and grow their positions. But whether the stock does well or not, Grab is a true SEA success story, and the management, employees, and shareholders should be very proud of the fact.

Thanks for reading, and as usual, happy investing.