To The Moon

Summary

• Grab has been excessively beaten down since its listing in H2 2021.

• With the company moving toward break-even, however, there is a compelling investment case here.

• At a net cash balance of nearly 40% of its market cap, the market has likely penalized the stock too harshly.

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The recent departure of co-founder Tan Hooi Ling from Southeast Asian consumer service ‘super app’ Grab Holdings $Grab Holdings(GRAB)$ was a surprise, but should have a limited impact on the near-term outlook. Having begun the transition process last year with the appointment of a new Chief Operating Officer (Alex Hungate) in January 2022, followed by a new tech chief (Suthen Thomas) and product chief (Philipp Kandal), the reshuffle has likely been planned for some time now. More broadly, Grab’s leadership position in Southeast Asia across the ride-hailing and food delivery categories remains intact, with ample optionality available as it further unlocks ecosystem synergies. Accretive new product rollouts (e.g., the ‘Grab Unlimited’ subscription plan) should also unlock margin benefits as the company moves closer to its EBITDA break-even target. In the meantime, the company’s net cash position of ~$5bn as of Q1 2023 ensures limited funding risks to the growth plan. With the market likely placing a big haircut on the net cash balance as well (~37% of current market cap), faster-than-expected progress toward EBITDA break-even presents massive re-rating potential.

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Co-Founder Departs, Transition Impact Likely Limited

Since going public via a business combination with special purpose acquisition company Altimeter Growth Corp in 2021, Grab has announced its first major management reshuffle, with co-founder Tan Hooi Ling stepping down from her official duties as head of Grab’s tech organization and Grab’s Board of Directors (recall she had been a Board member since the IPO). After resigning from her directorship by the end of the year, she will be taking on an advisory role at the company. While the announcement was somewhat surprising given Ms. Tan’s tenure at the company, I don’t expect any operational disruption over the coming months. The appointments of Alex Hungate as COO in 2022 (taking over Ms. Tan’s main role pre-2022), as well as Suthen Thomas (Group Chief Tech Officer) and Philipp Kandal (Chief Product Officer), were signs that a leadership transition was underway. Her Board replacement remains uncertain, though, with the press release citing that the Nominating Committee is in the midst of reviewing potential candidates to take her position.

Growth Potential Intact as Grab Continues to Leverage its Market Leadership

Grab kicked off the year on a promising note, with Q1 2023 gross merchandise value (GMV) of deliveries at a resilient $2.3bn (down ~4% YoY on an FX-neutral basis) following the post-COVID reopening normalization. Heading into Q2, management has guided for more sequential improvement across both key businesses (deliveries and mobility, i.e., ride-hailing), underpinning a +54-60% YoY top-line growth guidance (unchanged). In the near term, all eyes will be on the pace of the mobility segment recovery, particularly with tourist arrivals set to rise strongly across the Southeast Asian region (led by tourism-focused Thailand). Latest tourist arrival data in Thailand have far outpaced expectations (+11.4m YTD vs. 11.2m in 2022 per Bangkok Post), so continued momentum here likely entails upside to near-term GMV and revenue growth targets.

Grab Holdings

The mid to long-term growth runway is also compelling – not only in Grab’s core ride-hailing and food delivery businesses, but also in its ability to leverage ecosystem synergies to expand into new categories (e.g., the pending digibank launches in Malaysia and Indonesia). Rather than geographic expansion, the company’s focus on building out its new product pipeline offers good greenfield optionality as well, particularly in a fast-growing Southeast Asian market. The success of its ‘Unlimited’ subscription plan (higher customer ‘stickiness’ and in-platform spending), as well as the new on-demand delivery service ‘GrabExpress,’ are a testament to the untapped growth opportunities here. And at a time when funding has dried up for many of its smaller competitors, Grab’s ~$5bn net cash balance adds M&A optionality.

Grab Holdings

Improving Unit Economics Accelerate the Path to EBITDA Break-even

On the margin side, Grab made surprisingly strong progress toward break-even, led by a significant adj EBITDA margin turnaround in deliveries to +2.6% in Q1 2023 (up from -2% of GMV in Q1 2022). Key segment drivers include lower promotional spending as food delivery behaviors normalize and borders reopen post-COVID. While management has warned of some volatility on the adj EBITDA margin line near-term, its commitment to a >3% segment margin was a major positive. Only when Grab sustainably crosses the 3% margin threshold will management push for a higher mid to long-term target. Given the company’s success in cutting back on incentives, likely helped by the drop off in competition over the last year amid a tougher funding environment, I suspect the Q1 momentum could extend into the coming quarters as well. Adding to the potential P&L upside are market share gains in online grocery, as well as operating leverage benefits, as Grab continues to expand the user base organically and via adjacent use cases (e.g., financial services).

Grab Holdings

The economics of the mobility business have been the main P&L contributor, though, with adj EBITDA as a percentage of GMV now consistently above the 12% mark. While management expects some volatility quarter by quarter, its commitment to a ‘floor’ margin of 12% indicates, despite a modest increase in incentives in Q1 2023, favorable underlying economics. While Grab could well unlock more margin upside over time via internal restructuring (e.g., the headcount cuts last year), efficiency gains, and more disciplined marketing spending, management intends to reinvest any incremental profit, so I wouldn’t count on higher mobility margins anytime soon. Still, the progress toward break-even overall should more than offset any near-term funding needs in financial services; thus, I suspect Grab could surprise to the upside on its EBITDA estimates and potentially even its FCF break-even path (likely in 2024 vs. 2025 prior). With the market largely discounting Grab’s ~$5bn net cash position, good execution progress could pave the way for a significant expectations reset.

Grab Holdings

This De-SPAC is Different

The market has punished SPAC listings in recent years, and Grab, which went public in late 2021 via Altimeter Growth Corp, has not been spared. The latest management reshuffle adds to the uncertainty, though co-founder Tan Hooi Ling’s transition is likely to be a smooth one, given the recent CCO, CTO, and CPO hires. Fundamentally, Grab remains a cash burner, but as Q1 showed, the company is inching toward EBITDA break-even (albeit on an adjusted basis), helped by strong leadership positions in the Southeast Asian ride-hailing and food delivery categories. Backed by a ~$5bn net cash balance as well, the company is in a great place funding-wise, particularly with the path to P&L sustainability becoming increasingly clear. With the market still skeptical at ~3x EV/Revenue (ex-cash) for a company poised to double its revenue through 2024, there remains attractive re-rating potential here. Keep an eye out for Q2/Q3, as a post-COVID tourism boost in Southeast Asia could catalyze Grab reaching EBITDA break-even ahead of plan.

Source: Seeking Alpha