What is Southeast Asian ride hailing giant Grab really worth as a listed firm? In April, the Singapore-based taxi disruptor which undergoing an extreme makeover as a SuperApp announced that it was seeking to merge with prominent Silicon Valley venture capitalist Brad Gerstner’s Altimeter Growth Corp, a Nasdaq-listed special-purpose acquisition company or SPAC, in a deal that valued it over US$40 billion ($54 billion).
The blank cheque shell listed firm was supposed to have completed its merger last month and changed its name to Grab, but the US Securities and Exchange Commission threw a spanner in the works by asking the ride hailing firm to re-audit its financial statements in accordance with US Public Company Accounting Oversight Board standards. The listing of the merged firm is now expected before the year-end.
Last week, I spoke to Rolf Bulk, a London-based analyst for tech-focused NewStreet Research. He who will soon be relocating to Singapore has been covering ride hailing and meal delivery firms globally over the past two years including Uber Technologies, Didi Global, DoorDash and others.
“Of all the companies I have looked at, Grab is unique in the sense that it is not only in high growth Southeast Asian ride hailing and delivery markets but has a coherent SuperApp strategy and a focus on digital financial services,” he told me. “I think it is worth US$13”, he said. That’s nearly 29% upside for investors who are brave enough to buy Altimeter Growth Corp.
On Oct 6, stock of AGC — the SPAC that will take over Grab — closed at US$10.11. The stock is down 44% from a high of US$18.11, it touched days after Grab deal was announced. I wrote about SPACs in this column 15 months ago, just as they were beginning to gain traction on Wall Street. SPACs list on a stock market on the promise that they will merge with a “real” company over the next 18 months or two years or liquidate itself and delist, returning funds to investors.
One key set of investments in SPACs are the PIPEs — or private investment in public equity — a supplementary pot of cash typically raised as part of a SPAC merger. PIPEs provide a guaranteed financial backstop so the target receives at least some cash. PIPEs play another role. They help validate the value that the SPAC ascribes to the target firm.
At the start of the year, SPACs were the hottest thing investors could chase. They are having a rough time right now. As of last week, a record 439 SPACs had raised over US$128 billion this year (in comparison, 248 SPACs raised US$83.4 billion last year).
Of the 130 SPACs that have completed merger with their target companies so far, 62% currently trade under their US$10 IPO price. That means if you buy into a SPAC at its IPO price, there is less than 38% chance you will make money when it merges with the target company. If you buy into SPAC at a price above US$10, your odds of making any money dramatically decrease.
Investor demands
Little wonder, then, that investors — mostly hedge funds — are increasingly demanding their money back instead of risking losses if the stock price dives. The ones that are staying the course and holding on to their stakes in SPACs are mostly retail investors who get clobbered once the merger is completed. SEC Chairman Gary Gensler recently said that he was looking to tighten the rules to protect retail investors who are left holding the bag in the aftermath of a SPAC merger.
Grab’s Nasdaq listing through a reverse merger with a SPAC couldn’t have been timed better. Southeast Asia is seen as a clear beneficiary of global investors switch as they trim their China exposure in the wake of President Xi Jinping’s regulatory crackdown on tech giants like Alibaba Holdings and Tencent Holdings to private education firms and property companies in an attempt to tighten his grip ahead of Communist Party’s 20th National Congress late next year, which will appoint him as President for life.
Investors are re-focusing on other higher growth emerging markets like Southeast Asia, India and Latin America. Over the past year, since President Xi ordered regulators to pull the plug on the IPO of Alibaba’s FinTech affiliate Ant Group, among the big gainers have been high growth stocks like Latin American e-commerce and payment giant MercadoLibre and Southeast Asian e-commerce leader Sea Ltd. Indian food delivery giant Zomato, which listed in July, has also seen its stock double.
NewStreet Research expects Grab to lose US$2.71 billion this year, up from US$ 2.67 billion loss last year. It expects the region’s dominant ride-hailing firm-turned-SuperApp to cut its losses to US$647 million in 2022 and report a slight profit in 2023. Analyst Bulk forecasts Grab’s gross merchandise value or GMV to grow 47% next year from 24% growth this year and grow 41% again in 2023 steadying to 30% growth in 2024.
The main drivers of the growth is likely to be the financial services business through its SuperApp. Grab’s take rate, or its adjusted net revenue as a percentage of gross bookings, is expected to grow from 13.9% this year 14.1% next year to 14.3% in 2023. “We don’t think our estimates are aggressive,” says Bulk. Indeed, he believes, if Grab can get better traction on its SuperApp they might actually turn out to be conservative.
Analyst Bulk expects Grab’s mobility to grow 30% per year until end 2025, when it will reach US$11.2 billion in total bookings as Grab’s ride hailing penetration among adult urban Southeast Asians grows from 8% to 11%. Meanwhile, the food and grocery delivery business post-Covid-19 boom will grow 33% per year over the same period to US$22.7 billion. In ride hailing, Indonesia and Singapore will be the main geographic growth drivers.
Challenges ahead
Grab’s biggest challenge is to execute on its audacious FinTech SuperApp strategy. Almost every other tech company wants to be a SuperApp like Tencent’s WeChat in China. WeChat’s stickiest feature is messaging. Users stay inside the WeChat app because messaging makes it their primary communications tool.
Whether an app run by a ride hailing firm, a low cost airline, a food delivery company or— for that matter — even a bank can become a permanent sticky communications tool of choice for Southeast Asians that actually makes money for its operator, only time will tell.
NewStreet’s Bulk says Grab already has a formidable business that it can grow into a profitable franchise. The ride hailing giant is already the top e-wallet player in the region. Grab also uses its payment platform to provide consumers and merchants with other value-added digital financial services like digital lending and insurance. Penetration of e-wallet payments, digital lending and digital insurance in Southeast Asia is just 2%, he notes.
He believes the region’s march towards digitalisation will help grow penetration levels to over 6% by 2025. That compares to 40% e-wallet penetration, 30% digital lending and 7% digital insurance penetration in China. Currently, Grab has 23% share of all e-wallet payments across the region and it has been aggressively growing that share. Just last week, Grab increased its stake in Indonesian e-wallet OVO to over 90%.
One big investor concern is that Grab could face a ton of challenges as it grows its core ride hailing and delivery business. In developed markets, regulators are forcing ride hailing and delivery firms to pay drivers more or treat them as full-time employees rather than contractors. Southeast Asian governments have talked about securing a fair share for gig economy workers and restaurant owners in some markets have lobbied to cap Grab’s gross take from food delivery to 15%.
Strategic changes unlikely
Though changes are unlikely in the foreseeable future, they could be disruptive to Grab’s business model over the long run, concedes Bulk. “To its credit, Grab has forged a strong partnership with its drivers from the very beginning,” he notes. As they grow, ride hailing and delivery firms around the world are increasing incentives for drivers and Grab is likely to do the same in its markets.
Another concern is that Softbank Group Corp and Uber Technologies, Grab’s two major shareholders, have indicated they are keen to reduce their exposure to Southeast Asian ride hailing firms. Though the two will be locked in for a period after the listing of the merged entity, there will still be a big overhang from that expected sale which could pressure Grab’s stock. “SoftBank’s stake in Grab is through its Vision Fund which has been very careful in the way it has sold stakes in Uber, DoorDash and (South Korean e-commerce leader) Coupang,” says Bulk.
One of the big fears of SPAC investors is that a year or so after the merger with the target firm, the combined entity comes back to investors for more money. A NewStreet analyst tells me Grab currently has US$5.3 billion cash. PIPE and other investors in its merger partner AGC will bring in another US$4.4 billion cash.
Bulk expects that Grab will be cash flow positive at some point in 2023. Even if profitability is pushed back another year or so, he says it is highly unlikely that Grab will ask investors to fork up more money over the next several years.
So, how will it all play out for Grab if and when the SEC finally gives it the go ahead and merge with AGC and list on Nasdaq? Assuming AGC investors follow the route other SPAC investors have taken, in the aftermath of SEC approval, the bulk of the original investors in the SPAC will head for the exit, leading to a plunge in its stock price. At that point, investors who believe in Grab’s long term story will step in and buy the stock.
NewStreet expects Grab will have a US$73 billion market capitalisation in 2024. That is equivalent to US$17 per share three years from now and Bulk’s US$13 price target for end of 2022.
Seriously, a US$73 billion valuation for a glorified taxi and meal delivery business in Southeast Asia? Analysts like Bulk points out that as the region’s number one player in ride hailing, food delivery and a growing FinTech business through its SuperApp, the Grab platform could eventually develop the economics of a software business. It clearly has its work cut out but with US$9.5 billion cash in hand, a Nasdaq listing and sitting in centre of a fast growing region, Grab now has a pathway to get there.
Assif Shameen is a technology and business writer based in North America
Photo: Albert Chua/The Edge Singapore
