Thursday 9 November 2023

Grab 3Q Results: Profitability in Sight but It is Still Too Far Away

Grab has released its Q3 results. I would say the company is moving in the right track of making itself profitable. It has crossed the first hurdle of being EBITDA positive by its own metrics. However, with revenue growth slowing, how Grab is likely to achieve accounting profits is to efficiense operations to gain better margins.


The best performing sector. Year on Year, GMV grew by 30%. Even factoring in inflation, it can be inferred it's ridership volume in South East Asia grew double digits. For future presentations, it would be good if Grab could publish its mobility and delivery division figures similar to Uber's, which is more informative. 

In terms of efficiency, Grab has improved the margins in this division which contributed to EBITDA forming 12.8% of GMV. Personally, adjusted EBITDA is not a good metric and I am more interested in accounting profits. With growing scale and eventually a plateau like every maturing company, I am confident the mobility division will become profitable, yielding a few hundred million in profits a year.


While GMV grew by 7%, I would caveat South East Asia experienced inflation on a full year basis, by about 4-5%. This means Grab's real delivery growth is small. This is likely due to many competitors springing up and that the food delivery business has matured with Foodpanda being a strong competitor. This is why acquiring Foodpanda is important because it eliminates a key competitor.

Due to competition, delivery is unable to grow. Efficiency is the game now and Grab has been good in that. However, adjusted EBITDA is only US$88 million. It is too far from accounting breakeven levels unless Grab decides to cut the share compensation/ pay of its delivery division staff. All in all, unless more efforts are put in, Grab's Delivery division has matured with little growth left. With no growth and inability to scale (unless Foodpanda etc leaves South East Asia), the delivery segment is going to be accounting breakeven at best, aka a zero profit division.

Financial Services

If we account for inflation, the TPV of Grab's FS is likely to have fallen. Looking at the breakdown, more and more of Grab's TPV belongs to on-grab services such as from the delivery and mobility. However, one thing worries me- the growth of on-grab TPV is only 12% which does not tally to the growth of both the mobility and delivery segment (about 14%).

Secondly, off-grab TPV has shrunk. Personally, I expect it to shrink further becaue Grab Pay's attractivness outside of the Grab eco-system is shrinking. Grab's Q4 TPV for off-grab will be a repeat of only a 1,200 Million; with no overall growth. 

To investors, this means the growth of the FS is gone and Grab is still unable to turn this segment into a profit generator unlike Sea Group's FS. Grab's FS division is a definite goner in my view with no chance of reporting a strong full year accounting profit. It will be a segment which serves only the Grab ecosystem. Grab needs a severe revamp of how it allows users to earn Grabreward points, otherwise the decline will continue. This segment is now a zombie division to be written off.


Grab is still growing in the delivery and mobility services. If there is any similarity, it is that it is in the same stage as Uber- Growth is slowing, time to efficiense to improve margins. 

I am hopeful the mobility divison can drive a good turnaround and become a cash cow. It will take a few more years before we see a few hundred million profit generator. The service it provides is a definite need in South East Asia due to the touting and insecurity of rides. Of course breaking into Indonesia would be ideal, but local player Gojek is there; the rest of South East Asia should suffice for its scale.

Same too for its delivery, but there are too many competitors in both the food and logistics side. Foodpanda has to disappear before a meaningful accounting profit can be booked. This might be happening, but I am worried Sea Group may step in to fill the void. Sea Group is a cash cow and if it aims to engage with Grab in a cash burning war in the delivery, Grab will be in serious trouble.

I am happy Grab has started to grow its cash pile which now stands at US$5 billion. This means overall, the 3 segments are able to support one another and if I were to venture a guess, the mobility division is the one supporting the other 2 with its positive cash flow generation ability.

However to achieve the above, a lot more cost cuttings has to happen. Grab may have crossed the first hurdle of EBITDA profitability by its own metrics; but it is still a long way to being profitable on an accounting basis. This is the standard all companies should adhere to because it is the gold standard for all companies

Even then, a future state of a few hundred million in profits does not justify its US$13 billion valuation. Personally, I would abscribe Grab to be about US$9 billion in fair value. With a needed return + margin of safety, I would consider investing in Grab at the US$6 billion market cap (Share price of $1.50); until then it will be left in my "not to look" pile while the company continues its efforts to efficiense and improve margins.

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