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Grab unlikely to break even until 2022

The company registered a negative EBITDA in 2019, and is expected to do the same in its 2020 results.

Amidst its strong market position, the earnings before interest, taxes, depreciation, and amortisation (EBITDA) of Grab Holdings is unlikely to break even until at least 2022, at least one analyst has advised its clients. This is due to uncertainties around Grab's ability to achieve sustained profitability.

The company registered negative free operating cash flow (FOCF) and EBITDA in 2019. According to a Standard and Poor'sresearch note, Grab’s free operating cash flow (FOCF) and EBITDA will remain materially negative until 2022.

Driven by a growing number of active users, normalisation of the regional economy from COVID-19, and greater awareness of brand value, Grab’s net revenue is also likely to rise 18% compounded annually over 2020 to 2023.

“Concurrently, we expect the company's growing scale and user awareness to allow it to transfer a part of customer retention costs to merchants, as online platforms become a more prominent mode of marketing and advertisement. The pandemic has accelerated this trend, with merchants keen on joining online platforms as offline traffic remains soft,” S&P said.

With this, they forecast that Grab’s total operating cost would decline by around 25% over the coming years.

“We expect Grab's disciplined spending amid top line growth to continue, resulting in a turnaround in EBITDA and FOCF by 2023,” it added.

S&P assigned its B- long-term issuer credit rating to Grab

Meanwhile, Moody’s Investors Service has assigned a first-time “B3” corporate family rating (CFR) to Grab.

"The B3 CFR reflects Grab's leading position in key ride-hailing and food delivery markets across Southeast Asia, good long-term growth prospects, commitment to exercising cost discipline, as well as its substantial cash holdings which should be sufficient to fund sizeable operating losses and cash burn over at least the next two to three years," Moody’s analyst Stephanie Cheong said.

"At the same time, the rating reflects uncertainties around Grab's ability to achieve sustained profitability as low switching costs for customers, drivers and merchants, as well as higher competitive intensity from existing and new players, could disrupt the company's path to profitability," Cheong added.

Grab faces strong competition from Gojek in Indonesia, the company's largest market based on gross revenue, as well as from pure play food delivery companies like Foodpanda and Deliveroo.

Moody’s note that the low switching costs for customers, drivers and merchants, leave its business susceptible to intense competition.

Whilst demand for ride-hailing services has significantly declined due to COVID-19, Grab’s food delivery segment is expected to continue expanding due to under-penetration in many Southeast Asian countries.

Such pace of growth will decelerate in 2021 from a high base as social distancing measures gradually ease.

Moody's expects the company's cash burn (cash flow from operations less capital expenditures) to remain elevated in 2020 but to narrow gradually thereafter as the company continues to rationalize costs.
 

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