Grab Earnings: Raising Fair Value Estimate by 16% to $4.40 As New Long-Term Catalysts Are Emerging

We raise our fair value estimate for no-moat Grab GRAB to $4.40 from $3.80 after it reported second-quarter 2023 revenue of $567 million, which was 4% better than our estimates, but more importantly, we expect two new catalysts that are likely to provide incremental long-term revenue to our estimates. The first catalyst is the emergence of its advertising business, which could incrementally add 1.5%-2% of the delivery gross transactional value, or GTV, to its revenue and contributes to the bulk—about 10%—of our valuation increase. The other is the revenue reacceleration of its delivery unit, which was stagnant during the pandemic. We view that Grab has a valuation floor based on the dominant position of its mobility unit in Southeast Asia. Coupled with its incremental catalysts, we think that Grab should see upward revisions to its long-term estimates and revenue trajectory.

The advertising business was viewed as a minimal business for Grab previously, but we believe with the addition of Amazon.com and Lotteria, a fast-food leader in Vietnam, the business is developing faster than expected. Given that peer internet platforms such as Uber and Delivery Hero generate advertising revenue that accounts for a similar percentage to overall revenue, we believe that Grab should see a similar contribution from ads.

We expect the delivery business to achieve normalized GTV growth in the high single digits to low teens in the medium term. Previously, Grab was uncertain about post-COVID-19 growth, with a conservative expectation of mid-single-digit growth, but it is seeing renewed strength. While we saw macroeconomic headwinds for its peers concentrated in Indonesia, Grab is seeing strength in other markets such as Singapore, Malaysia, and Vietnam. In addition, management indicated that it could raise its long-term steady-state EBITDA margins of 3% in the medium term by increasing monetization, given that peer platforms are generating 5%-6%.