Grab's latest 1Q results paint a negative picture. Most investors had the same conclusion and after its financial results, share prices fell more than 10%. So what is worrying about Grab's results?
Slowing Growth but Far from Profitability
The header sums it. GMV only grew by 3% while losses for the quarterly period, year on year (YoY), has halved from -440 million to -235 million. Grab did not turn profitable unlike Sea which had about the same growth trajectory; the latter's reduction to 1 ply toilet papers, removal of pantry food and retrenchements made it profitable across all segments.
Grab has been cost cutting by reducing the incentives it gives to its gig workers and consumers but this is definitely not enough.
Slowing GMV Growth In Deliveries but Positive EBITDA
One of the surprises was how the company is starting to deliver positive profits in deliveries. This came at a reduced GMV despite inflation being rampant in South East Asia. This shows many of Grab's delivery orders were negative margins. Incentives for deliveries were also reduced by 40% year on year.
Grab should continue cutting its incentives and I believe this segment may turn profitable on an operating accounting.
Financial Services- Black Hole
TPV growth is very slow, YoY growth was only 2% and a decline in payment processed outside of Grab is observed. While Grab has been removing low margin transactions like removing Grabpay on AXS, I do not think its enough.
A good move by Grab is to launch its flexi loan which charges about 6-7% per annum (in Singapore) with early repayment. It seems to target the less well off segments who are unable to obtain a credit card (in Singapore, if one can get a credit card, a similar loan product can be obtained for 4-5% interest, which is 2% lower than Grab's)
As an investor, grab is doing things right by offering new products which is profitable and will improve margins. As a consumer, if you are forced to borrow at this rate, it is worrying and I will not recommend to take it from a personal financial point of view; but well beggars cant be choosers. I expect Grab to report larger loan provisions as the credit profiles of borrowers on this flexiloans are not good.
Results wise, an EBIDTA of -70 million is not great because it points to operating losses of at least -$100 million. For now, this segment is better off being closed as I dont see much scaling and incentives have been cut to the bare bones. I expect TPV to remain flattish until 2024 (likely peaking at US$3.8 billion). It depends on how well can Grab maintain its margin.
Conclusion
Grab is still using EBITDA metrics to determine its profitability unlike Sea Group which has moved to reporting income/losses according to general accounting practices. Grab has not even crossed the first hurdle of EBITDA profitability. At EBITDA outlook of losses of $195-235 million for the full year, this points to operating losses of $600-900 million.
On the other hand, Sea Group is profitable with $125 million and EBITDA profits of $500 million. This shows how far behind Grab is during Financial Year 2023.
Grab's cash holdings has continued to shrink albeit at a smaller cash burn rate of $200 million this quarter. On the contrary, its share based compensation has seen the amount of shares issued to increase by 3% (3.71 billion shares grown to 3.85 billion shares).
With a net liquidity balance of US$5 billion and a share base of 3.85 billion (which grows by 3% annually), I expect $1.30 to be a decent entry price and value the company at about $2 per share. The price difference is dependent on my expectations of how well Grab continues to grow its margins and turn around the sinking ship. The company is doing badly in cost controls and definitely has to learn from Sea Group who did it wonderfully and rather brutally to its employees.
To repeat, $1.30 is a good entry price.
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Disclaimer: The publication of my posts is solely for informational purposes and is not to be construed as a solicitation or financial advice as I am not a certified financial adviser. My analysis on companies covered are not an offer to buy or sell any stocks and I encourage readers to do your own due diligence before investing.
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