Grab to explore new growth opportunities although geographical expansion unlikely

Heading into 2QFY2023, Grab has seen stronger sequential improvement for both food and ride-hailing businesses.

Grab, the Southeast Asian ride-hailing and food delivery giant, is focusing on seeking new avenues for growth within its existing market rather than expanding geographically, according to analysts Alicia Yap and Nelson Cheung from Citi Investment Research. The analysts noted this in their recent report on May 26, following the Pan-Asian Regional Investor Conference hosted by Citi, where Grab’s head of strategic finance, Ken Lek, provided updates on the company’s latest business developments.

During the conference, Lek mentioned the possibility of Grab expanding its food technology offerings across both online and offline channels by introducing dining restaurant deals and loyalty programs. This strategic move would involve strengthening relationships with food and grocery merchants to enhance Grab’s presence in the food delivery sector.

While Grab is well-positioned as an instant on-demand platform, the company does not intend to venture into non-instant services like same-day or next-day delivery. This decision is based on the potential additional capital expenditure investment and the need to build up warehouse capabilities.

On May 25th, Grab announced that its co-founder, Tan Hooi Ling, would be stepping down from her official position and transitioning into an advisory role. Citi analysts believe that this transition has likely been planned for some time, and they anticipate a smooth handover due to the presence of suitable leadership within the company.

Looking ahead to the second quarter of the fiscal year 2023, Grab has observed a stronger sequential improvement in both its food delivery and ride-hailing businesses. The company remains confident in maintaining its growth outlook, margin target, and market share expansion.

In the food delivery segment, Grab’s adjusted EBITDA margin reached 2.6% of gross merchandise value (GMV) in the first quarter of fiscal year 2023. This was primarily driven by a significant reduction in consumer promotion spending as the region reopened its borders, leading to the normalization of food delivery behaviors.

Furthermore, Grab is expected to launch its digital banking services, known as digibank, in Malaysia and Indonesia in the second half of the year. The company is actively engaging in discussions with regulators to lift the deposit cap, enabling faster expansion of its loan business.

Grab anticipates that the revenue contribution from its digibank services will be limited in the near term, with a target to achieve long-term breakeven by 2026.

The company aims to optimize unit economics from both the driver and consumer perspectives. From a driver’s standpoint, Grab plans to improve cost efficiency through better routing and order matching mechanisms. For consumers, optimization can be achieved by increasing the penetration of GrabUnlimited, a subscription model that aims to enhance user loyalty, increase transaction frequency, and establish a minimum floor for order size. Currently, GrabUnlimited users place orders 3.7 times higher than regular consumers, with more than a quarter of the deliveries’ GMV attributed to GrabUnlimited subscriptions.

Citi maintains a “buy” rating on Grab, with a target price of US$4.80 ($6.50). The analysts believe that Grab is gradually establishing a track record of successful execution and may potentially surprise investors by achieving EBITDA breakeven ahead of schedule.

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