SINGAPORE – Investors will be watching closely when Grab turns profitable after its record breaking SPAC listing, according to Tom White, senior research analyst at DA Davidson.
“There is obviously increasing investor control over a path to profitability,” White told CNBC’s Squawk Box Asia on Wednesday. However, investor sentiment has shifted from a unique focus on growth and market share gains to a more balanced approach, he said.
Investors were still focused on break even will also likely give the Southeast Asian hail shipping company more leeway to invest in new product categories, White said.
The Grab Holdings Inc. app is displayed on a smartphone in an arranged photo taken in Singapore on Friday, September 25, 2020.
Ore Huiying | Bloomberg | Getty Images
Singapore-headquartered Grab announced Tuesday that it had acquired through a SPAC merger with Altimeter Growth Corp. will go public – a deal that is said to value the hail shipping company at $ 39.6 billion. It was the world’s largest blank check merger that involved special-purpose acquisition companies that were formed to raise funds for purchase across from private companies like Grab.
Path to profitability
Grab as a whole is still not profitable. In 2020, the company lost $ 800 million on an EBITDA basis and was forecasting a loss of $ 600 million that year.
EBITDA – a measure of a company’s financial health – stands for earnings before interest, taxes, depreciation and amortization. It’s a common earnings metric used by technology companies, though seasoned investors are skeptical about it.
Grab said EBITDA for its transportation segment had turned positive since the fourth quarter of 2019. Adjusted net sales were $ 1.6 billion last year and are projected to increase to $ 4.5 billion in 2023. Grab predicted that EBITDA could be $ 500 million in two years.
“I think they have a nice story to tell when you look at the two core segments,” said White, who also covers other online hail and delivery apps like Uber and DoorDash.
“All of their ridesharing markets are at least EBITDA profitable, so probably no cash will be burned. Five of the six grocery delivery markets are also EBITDA profitable,” he said.
“I think Grab will get a fair bit of headroom from the marketplace to invest in new neighborhoods, new categories, and new products, given how well they did on the two legacy offerings,” added White.
Build up scaling
Loss is a function of trying to gain market share, said Sachin Mittal, senior vice president at DBS Bank in Singapore. This is especially true given the current market environment where cheap capital is readily available and can help companies achieve economies of scale and reduce costs, he added.
“So you have to be the player who wins leadership, builds economies of scale, cuts costs – and ultimately, if the money isn’t that cheap, you can be profitable right away because you built that scale,” he told CNBCs ” Street Signs Asia “.
Mittal added that investors may also be attracted enough to pay a premium for Grab’s dominance in areas such as grocery delivery. Investing in the stock would also expose it to the financial technology scene in Southeast Asia, he said.
One of Grab’s primary businesses is the financial services segment, which includes digital payments, loans, insurance, digital banking, and wealth management.
The company has yet to prove its leadership in fintech – as opposed to ridesharing and grocery delivery – and that segment is likely to be a high-growth cash-burning business in the near future, according to Mittal.
“Hence, this entire collection will raise funds and these funds can be used for fintech,” he said.
As part of the SPAC merger, SoftBank-Backed Grab will receive approximately $ 4.5 billion in cash, including $ 4 billion for a private investment in a public equity arrangement signed by BlackRock, Fidelity, T. Rowe Price , the Counterpoint Global Fund is managed by Morgan Stanley and Singapore, state investor Temasek.