Target Price for Grab Holdings (2023): A sell with -50% downside

On 9 January 2022, I had initated coverage of Grab when its share price was at $6.80. My fair value estimate was a $2.25-$3.00 range.

A year has passed and we did see Grab's share price falling along with the US Tech bust and for a few months, the market value did trade at around my fair value range. Given that a year has passed, it is a good opportunity to update my fair value of Grab.

What has Changed

Grab has changed its focus from growing at all cost to one focused on profitability and margins. A few changes are:

(i) Reduction in commission given to its riders

(ii) Removal of low value financial transactions in Grabpay that was enabled for use as AXS transactions in Singapore.

All in all, the company expects continued improvement at the EBITDA level. To shareholders, this is good news as the company is now focused on profitability, however, this will come at the expense of a slow growth in GMV, TPV figures.

Digital banking/Fintech

On the fintech front, Grab has started its GXS bank. However, it seems that another online bank ("Trust" bank set up by NTUC/Standard Chartered) has turned up and is fighting GXS and Sea Group's Marin bank. From the looks of it, it is unlikely none of them will be the 'winner takes all' and it is safe to assume it will be a tie scenario. Thus the fair value of Grab's fintech is reduced from US$8 billion to US$3 billion (the scenario of a tie mentioned in my 2022 write up).

Delivery

Nothing has changed and I expect it to be worth US$4 billion.

Mobility

Margins for mobility has improved greatly with the latest quarterly loss standing at US$100 million. I feel Grab may be able to turn this around and be able to report a US$200 milllion in annual profits, hence I am abscribing a US$2 billion valuation. 

Valuation of Grab

Based on the above, on a sum of parts valuation, Grab's value should be US$9 billion.

Moving forth with Grab stopping its unprofitable expansion plans and focusing on margin improvements, I expect losses to be reduced to the US$1 billion range. With reported equity at US$6.6 billion, this means a an expected equity value at about US$5.6 billion. 

Grab's share price is currently at US$3.86 (Market Cap: US$14.85 billion); therefore the low range expectation is for Grab to trade at its end 2023 value of US$5.6 billion or at the high range of its sum of parts value. This places the fair value/share price to be at US$1.50 - US$2.40.

Portfoilo Update: US PRIME REIT and Alphabet Purchases

Following from my thoughts about my write up on the SGX Listed US office REITs and the subsequent drop in share price of PRIME, I have increased my stake in US PRIME.

Due to the large price decrease specifically for PRIME, the reit is now sporting an estimated dividend yield of 14% (provided there are no sudden large decrease in occupancy). Hence I have increased my stake 16k to 73k shares. As many of my other investments do not provide dividends (only share buybacks), it offers me a chance to have an overall portfolio with dividends. 

Do take note US office REITs have a certain degree of risk because they are teetering on breaching MAS's regulatory limit for leverage ratio due to a higher risk free rate and declining occupancy for their properties. Hence there is a need to keep cash aside in case there are rights, I will be using the upcoming USD 3 cents dividend per share for this contingency. 

Alphabet Purchase

I have started looking towards USA and my first purchase on the US tech is Alphabet at a price of USD$89.50. Alphabet was chosen as it is one of the rare companies with a strong moat in the online search engine which in turn fuels online advertising. I am awaiting the rise in Goggle's Pixel line of mobile phones as well. Should it be good enough to take away market share from the iPhone, it will increase Alphabet's market share in the mobile online search engine which will add runway to its revenue growth. 

I expect Alphabet to continue growing its profits over the long term, 17x P/E for a company with considerable runway for profit growth has some degree of undervalue.

Target Price for Alibaba in 2023

Alibaba is a core position in my portfoilo forming a 56% weightage. Given this, I thought it would be good to explain why I continue to invest in Alibaba for the year of 2023 and my expectations for it.

Positive Core Earnings Growth Year on Year

Alibaba's core operations profitability grew by 10% from RMB 45 billion to RMB 50 billion using comparison of 1HFY2023 vs 1HFy2022 (Source: see Page 9, Line item 'Income from Operations'); thanks to the improved profitability from the international commerce business, local consumer services and cloud computing segments. Extrapolating from Alibaba's previous FY2022 core profits of RMB 69.6 billion, it is definitely possible that this year's profits will be RMB 77 billion or USD$11 billion.

Beyond this FY, it is likely Alibaba will continue to see earnings growth of 10% annually, a decrease from its annual 40-50% growth before COVID/Clamp down by China's government. At current P/E of 21.1, Alibaba is cheap.

China Reopening Theme

Unlike Pinduoduo which is an e commerce platform mainly for consumer staples and groceries, Alibaba positions itself as an e commerce that caters to all types of goods. Hence, it has a higher income senstiviety than Pinduoduo. With China reopening, I expect an improvement in economic conditions and in turn the affluence of the chinese consumer. Hence, Alibaba will be a beneficary.

Target Price for 2023

In my view, a P/E of 40 times for Alibaba based on this year's profits is definitely reasonable. Margins across its business segments are going to improve with an expectation of 10% annual growth in profits.

Hence, I expect to see Alibaba at around US$166 this year. However, should Alibaba outperform and clock in a larger than 10% profit growth in May 2023, a re-rating should happen (also applicable if the eventual "Income from operations" growth is less than 10%). 

ManuLife Valuation Loss, How about PRIME and Keppel Pac REIT?

Shortly after I had posted my previous write up, ManuLife announced a dreaded news that it has written down 10.9% of its asset value and is now at 49% leverage ratio, just shy of breaching the MAS regulatory limit of 50%.

The other 2 who has not announced the dreaded news are PRIME and Keppel (KORE). On context, the gearing for PRIME and KORE are 38.7% and 37.5% respectively. In my view, KORE is likely to report the larger of the writedowns and PRIME will become the least leveraged (and probably the safest US office REIT). Below is the main reason

Keppel has higher concentration risk in one city that is not doing well

Source: KORE AR (see page 65)

49% of KORE's asset value are concentrated in the city of Seattle. Among the cities, Seattle is not part of the sunbelt cities witnessing a resumption of return to office and increase in demand of office space (see Keppel Slides's page 17). What Keppel has omitted to present is that due to its property concentration in Seattle, their overall property valuation is affected adversely and probably to a larger extent than PRIME's.

Source: PRIME AR (see page 15)

Prime's portfoilo is more geographically diversified across USA with no city having a concentration of more than 20%. 

Hence I expect in the rounds of revaluation to come, barring any equity raising or private placement, PRIME REIT will become the lowest leveraged among the 3 US office REITs. All 3 REITs including ManuLife will be at the 43-50% leverage limit. As long as they don't buy more properties, PRIME and KORE unitholders should not see further equity raising. I reiterate among the 3, the risk of unitholders needing to fork out cash is as follows (from highest to lowest):

ManuLife > Keppel (KORE) > PRIME

What is Keppel's Advantage?

One thing advantegous to KORE is that its earliest debt maturity is end 2024 with only 13% of loans to renew by end 2024. PRIME on the other hand has 67% due in July 2024. Hence PRIME will have to pay a higher interest financing about 3 year earlier than KORE, assuming interest rates stay elevated in end July 2024 

This would affect the dividends unitholders receive but does not affect the event of requiring equity raising or private placement, which would dilute unitholders

<Author is vested in PRIME REIT>

Why buying US Reits like PRIME and ManuLife Could Be Dangerous

Currently, the SGX listed US REITs have been sold down terribly. In terms of dividends and price book, they are trading at very low valuations. Just look at the dividends and price to book ratio of PRIME and Manulife as of today (28 Dec 2022), these are distressed level pricing:

Prime REIT- P/B 0.47, Dividend Yield 17%

ManuLife REIT- P/B 0.43, Dividend Yield 15%

In the US exchange listed REITs, many are trading at price to book ratios of 0.9-1 times. This makes it baffling for the above 2 to be selling at such low values.... unless we retail investors are kept in the dark about some things.

Potential Red Flag of the REIT Managers

One thing that worries me is how both managements are not doing a share buyback when they are valued at a 50% discount to their property valuations. The REITs are afterall a portfoilo of properties and at such a discount, REIT managers would have deemed it attractive to be a good buy.

The lack of action by the management shows that either the REITs are short on cash or that they are anticipating a large writedown in property value of a magnitude greater than 20%. These would be terrible situations that the managers are not revealing. For context, a smilar US REIT called Digital Core is buying back its shares during this sell down at the 0.6-0.7 Price book value. Hence, it is no surprise this particular REIT has outperformed the other 2.

REITs are generally asset-heavy, financially engineered and pay out most of their earnings, leaving little cash on the balance sheet. So it is interesting to see a REIT using precious cash to start a share buyback. It demonstrates the capbility of Digital Core REIT manager unlike PRIME and ManuLife who have been silent on the scene. 

I am particularly worried about the actions of both PRIME and ManuLife. The US REIT space was recently hit by a bad egg in 'Eagle Hospitality Trust' and people are afraid to invest in the space; yet these 2 REIT managers are not doing constructive actions to improve the sentiments, despite having better reputation and experience than the demised REIT manager.

The Magic Rate to use your CPF OA for Singapore T bills even if the Rates are Falling

As many people will know, T bills interest is falling due to its attractive returns and its bidding mechanism. People will say that below 4% is not good, but in fact it is still good. As long as T bills offer 3.45% and above, it is better than CPF OA rates.

Therefore, Singaporeans should put the maximum sum of their CPF OA avalaible into T bills because of its higher interest than OA and are backed by the same entity - the Singapore Government (CPF OA is only 2.5%). Readers may point out that the first 20k of CPF OA earns 3.5% but this point is moot because the first 20k of your CPF OA cannot be used for T bills (so this point is covered). 

Cut Off Point of T bills being Attractive

The magic number is 3.45%. This is because of the mechanism where CPF does not give you interest for the month you withdraw the amount for T bill application and the month which it is deposited. Hence, I have assumed the worst case scenario where you dont earn interest for a total of 8 months. 

In short, T bills which yields 3.45% or more is more attractive than CPF OA.

Therefore for those who are putting in under the competitive allocation for T bills, 3.45% is the lowest number you should key in; any lower, CPF OA is slightly ahead. However, the good thing is that if the cut off rate for T bills is higher, you enjoy the higher interest as well. So there is nothing to lose!

As a reminder, the current tranche of T bills is open for application. To make your CPF retirement work for you, remember to bid as much T bills as possible; for those who are bidding under the competitive allotment, the magic number is 3.45%. For those bidding under the non competitive allotment, put as much of your CPF OA as possible.

December Singapore Savings Bond Interest Falls!

While we hear about an environment of increasing interest rate, the surprise is that the Singapore Savings Bond (SSB) and pherhaps, T-bills interest are falling!

Just look at this month's SSB yield offer (3.26%) vs the previous month's (3.47%):

December SSB

November SSB

The magnitude of decrease is similar to what we saw in T bills in which it has fallen from 4% to 3.9%. For those who are still cash rich and have not been successful in T bills application, my personal feel is that we can try applying for the upcoming December T bills application; if bidding under the competitive allocation, the advice is to bid at about 3.5% (my gut feel is that the cut off rate for the December tranche of T bills will be at 3.8%)

After which whatever amount it fails, the fall back plan is to apply for December's SSB.

Will SSB and T bills rate continue to fall?

My suspicion is that most of the application we are observing for T bills are from CPF OA balance. As long as CPF OA maintains at 2.5%-3.0% interest, CPF members will continue to apply T bills. Due to the abritage, I suspect T bills rate will eventually be at 0.6% above the CPF OA rate (hence if CPF OA = 2.5%, T bills will be at 3.1%)

For SSB, as they are not CPF OA eligible, their rates are dependent on the excess cash that people have. Hence I suppose we will not see a much further decline in SSB rate. The Dec SSB rate is probably the equilibrium.