On Dec 4, 2020, the Monetary Authority of Singapore (MAS) announced the successful applicants for two digital full bank (DFB) licenses are a joint-venture comprising a duo, Grab Holdings and Singapore Telecommunications (Singtel), and Sea (formerly known as Garena, which is now the name of its gaming unit).
The conditions that MAS had outlined to qualify included a five-year financial projection which must show a path towards profitability. The assumptions of the financial projection must be reviewed by an external and independent expert, MAS added.
The initial paid-up capital for the entrants is $15 million, during which the two new digibanks will be known as restricted DFBs. The likes of Grab-Singtel and Sea can only be full DFBs after they comply with minimum capital requirements of $1.5 billion, and other requirements such as the net stable funding ratio, liquidity ratio and certain common equity tier-one ratios.
During the restricted phase, these restricted DFBs have a cap placed on the total deposits they can collect, limited to $50 million in aggregate. However, restricted DFBs can offer unsecured credit to individuals of up to two months the individual’s monthly income. Only simple capital market products can be offered as investment products to individuals. DFBs are also likely to be restricted to banking operations in — at most — two overseas markets initially.
The restrictions may spur the restricted DFBs to comply with regulations to get them to DFBs sooner rather than later. According to an investor presentation, Grab’s financial services stretch across six Asean countries Singapore, Malaysia, Indonesia, Thailand, Vietnam and the Philippines.
Grab’s financial services on its ‘super app’ comes in four buckets — payments and rewards, lending, insurance and wealth. The more fee-based services that Grab’s DFB can offer, the quicker it can increase its fee-based income which is less capital-intensive than lending.
Loss-making
Based on the presentation, Grab’s digibank is part of its financial services platform. The entire financial services offering — which includes vehicle financing and insurance for its drivers — reported Ebtida losses in 2018, 2019 and 2020 of US$200 million, US$500 million and US$400 million ($535.9 million) respectively.
At the same time, the company reported net losses of US$2.5 billion, US$4 billion and US$2.7 billion in 2018, 2019 and 2020 respectively.
Financial services are likely to continue making Ebitda losses for this year, 2022 and 2023. These losses are projected to be US$500 million, US$400 million and US$300 million in 2021, 2022 and 2023 respectively. Grab has warned that these financials are subject to a Public Company Accounting Oversight Board (PCAOB) audit.
In contrast, Sea’s Ebitda losses for its digital financial services sector in FY2019 and FY2020, both for the 12 months to Dec 31, stood at US$113.4 million and US$511 million respectively. Sea’s FY2020 digital financial services GAAP revenue was US$24.4 million in 4Q2020 and US$60.8 million for the full year of 2020. Total net losses at the Nasdaq-listed company were smaller than Grab’s, at US$1.46 billion and US$1.62 billion respectively.
Grab’s balance sheet is so weak that it cannot be looked at in the terms of a weak capital structure, with accumulated losses, and negative equity. The potential balance sheet could be a lot stronger.
IPO to raise US$4 billion
An IPO is now on the horizon. On April 13, Grab announced it intends to go public in the US in partnership with Altimeter Growth Corp, a special purpose acquisition company (SPAC). “The proposed transactions value Grab at an initial pro-forma equity value of approximately US$39.6 billion at a private investment in public entity (PIPE) size of more than US$4 billion and will provide Grab with approximately US$4.5 billion in cash proceeds,” Grab said in its announcement.
This should be sufficient for Grab to fund its share of bank capital of $1.5 billion in Singapore as a DFB. This would in turn allow Grab to raise its deposit ceiling, and offer simple loan products as well. With Grab’s ability to use artificial intelligence for credit scoring from the data it has collected since it started operations in Singapore and Malaysia in 2012, it should be able to manage risks associated with its nascent lending business.
In addition to funding its restricted DFB, Grab needs capital to shore up its balance sheet. As at Dec 31, 2020, the group had negative equity to the tune of US$6.26 billion, a result of accumulated losses of some US$10.4 billion. On the other hand, Grab also has convertible redeemable preference shares of around US$10.7 billion. Since the preference shares are convertible and redeemable, they are classified as debt rather than equity.
While the balance sheet of Grab is weak, it is not as weak as the negative equity amount suggests. If the preference shares are converted to equity, Grab’s shareholders’ funds would top US$4 billion, excluding the IPO.
Sea boosted its shareholders equity just recently. Interestingly, on Dec 10, shortly after the award of a restricted DFB license by MAS, Sea announced it planned an equity fund raising which it upsized on Dec 11. In all, Sea raised US$2.7 billion from an issue of 13.2 million American Depository Shares (ADS) at US$195 apiece, boosting paid-up capital to US$8.5 billion as at Dec 31, 2020, and total shareholders’ funds of US$3.4 billion.
The fund raising shored up Sea’s equity following four years of straight losses since it was listed on Nasdaq in 2017, with more than US$5 billion in accumulated losses. In May 2020, Sea raised US$1 billion through an issue of 2.375% senior convertible notes maturing in 2025.
Valuation yardsticks
If a market value of US$40 billion for Grab at IPO is considered overvalued for a loss-making company, consider Sea, which remains loss-making four years after listing on Nasdaq (in 2017). Its market cap is US$124 billion.
Traditional investors who follow century old investment methods — think Benjamin Graham — may need to rethink valuation yardsticks using sales and revenue in addition to net profit, earnings per share and cash flow metrics. Over and above the P&L and cash flow statements, balance sheets need to be viewed in a forward-looking manner.
For instance, converting Grab’s convertible redeemable preference shares to equity changes the construct of its shareholders fund, and strengthens its balance sheet. Debt becomes equity and accumulated losses are erased.
On the other hand, warning shots are already being fired over the valuation of stocks like Coinbase which listed directly on Nasdaq on April 14, and Tesla which turned profitable only last year, and after almost a decade of US government grants and aid.
On April 8, the US Securities and Exchange Commission gave a fresh warning to companies looking to list via a SPAC. According to Bloomberg, acting director of SEC’s finance division John Coates warned that “a de-SPAC transaction gives no one a free pass for material misstatements or omissions. All involved in promoting, advising, processing, and investing in SPACs should understand the limits on any alleged liability difference between SPACs and conventional IPOs”.
About 300 SPACs were launched on US exchanges in 1Q2021, raising almost US$100 billion. It is also fueling market warnings that the bubble is about to burst, Bloomberg said.
Some market observers reckon that Grab and Sea could turn into Asean’s versions of Amazon, Alphabet, Facebook and Tesla. Instead of social networking, e-commerce, search engines and expensive electric vehicles, Grab and Sea are offering different services, through ‘super apps’ tailored to an Asian population. This, they say, may imply a lot more upside in the longer-term as jargon such as addressable market, gross merchandise value and total payment value become commonplace.
