Deutsche Bank Research analyst ReenaVerma Bhasin has initiated a “buy” call on GoTo with a target price of IDR250 implying an estimated upside of more than 20% from its current trading price.
In her Oct 18 note, Bhasin wrote that the vagaries of rising interest rates have put the spotlight on GoTo’s cash burn and financing needs. However, she thinks that market worries about GoTo’s financing requirements are overdone.
“With roughly US$2.2 billion in net cash balance as of June and annual cash burn of about US$1 billion per annum based on 2QFY2022 performance, we see the possibility that GoTo will need some external financing over 2024-2025. Our forecasts indicate a peak financing requirement of about US$500 million.
“We believe this is a very manageable level of financing, given that the company already has underutilised credit lines of about US$500 million and also has in place shareholder approval for capital issuance (up to 10% dilution) via a non-preemptive rights issue or an international listing,” says Bhasin.
Deutsche Bank believes that GoTo’s efforts in improving its take-rates, especially in e-commerce, reflect a studied view of its financing situation. “Prima facie, recent investor nervousness appears to overestimate the external financing risks,” Bhasin opines.
In 1HFY2022, GoTo’s e-commerce take-rates went up 110 basis points versus 2021 levels, Bhasin points out. The full impact of various optimisation initiatives should provide further uplift in coming quarters.
See also: Test debug host entity
“We believe about 150 basis points improvement in take-rates through the next two to three years (2023-2025) is possible. Our discussions with GoTo point to long-term ambitions of high single-digit take-rates in e-commerce and a studied understanding of its impact on company finances,” says Bhasin.
Aside from initiating measures to improve take-rates in e-commerce, GoTo has also widened the ability of lending activities in financial services. Deutsche Bank expects these initiatives to grow gross revenues at a CAGR of about 38% and net revenues at a CAGR of 64% over 2022-2025. Thus, revenues are expected to outpace GTV growth of about 27% over the same period, reflecting higher take-rates.
Bhasin’s target price of IDR250 is based on discounted cash flow methodology with a weighted average cost of capital of 11.8% and a terminal growth rate of 4.5% (based on GDP growth expectations).
See also: Maybank downgrades ComfortDelGro in contrarian call over Addison Lee acquisition worries
At current share prices, GoTo is trading at an EV/GTV of 0.2x versus 0.2 for Grab and Sea, reflecting higher GTV growth for GoTo. “A rise in competitive intensity across the e-commerce industry is a key downside risk to our outlook,” Bhasin says.
As at 1.46pm, shares in GoTo are trading IDR2 higher or 0.98% up at IDR206.
