[UPDATED] Moody’s, S&P project Grab’s losses, and cash burn to continue well into 2023

Grab president Ming Maa speaks at Asia PE-VC Summit 2018 organised by DEALSTREETASIA

Global rating agencies Moody’s and S&P Global have projected that Grab’s losses and cash burn will continue well into 2023 due to stiff competition from regional players such as Gojek and FoodPanda.

Moody’s and S&P Global assigned their first ratings on Grab on Monday – a B- and B3, respectively with a stable outlook.

In their research notes, Moody’s said it “does not expect the company’s EBITDA to breakeven on a consolidated basis before 2023,” while S&P Global said it “expects losses and protracted cash burn to continue over the next two to three years.”

Reuters had reported on Monday that Grab and one of its subsidiaries, Grab Technology LLC, are seeking a five-year loan of $750 million for general corporate purposes.

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Risks & Strengths

 Moody'sS&P Global
RisksLow switching costs for customers, drivers, and merchants makes Grab vulnerable to competition. In Indonesia, its largest market by revenue, Grab faces intense competition from Gojek.

Outstanding convertible redeemable preference shares (CRPS) which — without an IPO — will become redeemable any time after June 29, 2023.

Company's ownership by a consortium of financial investors who are likely to employ financial strategies that largely favour shareholders over creditors is risky.
Gojek viewed as a key competitor of Grab in both ride-hailing and food delivery segments in Indonesia, especially in the latter.

Heavily reliant on investor funding in the form of CRPS, which is debt-like. Estimated redemption value of CRPS is 5x-6x GHI's current cash holdings as of June 30, 2020.

Regulatory risks pose uncertainty given industry's infancy. A regulator-mandated change in the status of drivers to employees could result in increased compliance costs.
StrengthsThe $3.2b of unrestricted cash and cash equivalents as on Sept 30, 2020 is sufficient to cover negative operating cash flow, capital spending on transport, food delivery, and scheduled debt maturities for 2-3 years.

Committed to fund the growth of its financial services arm wholly with equity.

Cash burn will remain elevated in 2020 but will narrow gradually thereafter.
GrabFood's gross revenue is forecast to grow nearly 3x in 2020. This will offset the decline in contribution from ride-hailing.

Grab has raised almost $10b since 2014. Grab received $1.4b of funding in 2020, and is slated to receive another $450m over the next 18 months.
OutlookDo not expect the company's EBITDA to break even on a consolidated basis before 2023.

Growth plans for financial services will temper overall profitability over next 2-3 years.

Cash will be needed to ramp up new businesses and potential acquisitions to grow this segment, which includes insurance, lending and wealth management.
Expect losses and protracted cash burn to continue over 2-3 years.

Improved scale and disciplined spending to result in positive EBITDA and cashflows by 2023.

Grab's net revenue is likely to rise at 18% CAGR over 2020–23.
RatingB3 rating, outlook stable.B- rating, outlook stable.

The two firms also named Grab’s outstanding convertible redeemable preference shares (CRPS) as a key sticking point.

According to S&P Global, CRPS accounted for almost all of Grab’s total debt as of 31 December 2019, with an estimated value of 5-6x its cash holdings as of 30 June 2020. If Grab falls short of a public listing by then, the company’s ability to refinance those shares will become an issue – unless it manages to extend those redemption dates with board approval.

Both rating agencies, however, expressed confidence in Grab’s ability to resolve these issues. They also noted significant liquidity in Grab’s coffers, amounting to some $3.2 billion in unrestricted cash and cash equivalents at 30 September 2020, according to Moody’s.

“Moody’s expects this to be sufficient to cover negative operating cash flow, capital spending at its transport and food delivery businesses and scheduled debt maturities over at least the next 2-3 years. (Grab) has committed to funding the growth of its financial services arm wholly with equity,” wrote Moody’s analyst Stephanie Cheong.

She added that further cash will be needed to ramp up new businesses and potential acquisitions to grow this segment, which offers cashless payment solutions, and products and services like insurance, lending and wealth management.

Grab weighed in further in an email newsletter released on the same day.

Its president Ming Maa wrote that group revenues have returned to “well over 100 per cent” of pre-COVID levels. This includes growing group net revenues 70% on-year in 2020, reducing monthly EBITDA spend by 80% in the last 12 months, and hitting segment breakeven for ride-hailing across all its eight markets including Indonesia.

“As we look back on a challenging year, we’re thankful for the resilience and of the groundwork laid over prior years which helped us weather the storm,” wrote Maa. “The key to these milestones and the resilience reflected in our results is centred around disciplined diversification.”

These milestones were achieved against the shadowy backdrop of COVID-19 which plagued most of 2020 and severely affected gig economy businesses like Grab’s, especially the ride-hailing vertical.

On the flip side, other verticals within Grab’s suite of superapp services saw a tremendous upswing in demand. In Q3 last year, food delivery net revenues nearly tripled year-on-year, according to Maa. GrabFood more than doubled the number of new merchants to nearly 600,000 across Southeast Asia in 2020, giving the firm the confidence to project breakeven for its food delivery unit by the end of 2021.

These giant leaps forward were also happening in conjunction with other major developments, including presiding merger talks with its Indonesia-based archrival Gojek. According to reports by DealStreetAsia and Nikkei Asia, the two firms are in the early throes of ironing out crucial kinks, such as shareholder structure in the combined entity, as well as the amount of voting and veto power granted to Grab founder Anthony Tan.

Grab was also reportedly in talks to raise $3 billion from Chinese internet behemoth Alibaba. That fundraising has yet to be announced and since then, Alibaba has only been increasingly embroiled in placating irate Chinese regulators who had pulled the plug on its financial services arm Ant Group’s $34.5 billion IPO listing in November.

Grab’s own IPO considerations continue to hang in the balance. The Southeast Asian decacorn has a deadline to list by 2023 in order to avoid a hefty payout to Uber, which last took a 27.5% stake in the company in exchange for its exit from Southeast Asia back in 2018.

Competition mounts in SE Asia

Competition among Southeast Asia’s tech unicorns is escalating quickly.

On Tuesday, Bloomberg reported that Gojek was in advanced talks to merge with Tokopedia ahead of a planned IPO of the combined entity. If successful, the merged entity will create an Indonesian internet powerhouse with a combined valuation of over $18 billion, spanning across e-commerce, last-mile logistics and transportation.

Sea Group’s Shopee, another regional e-commerce heavyweight, has already begun tapping into US public markets for extra funding in its battle for market share.

In December, NYSE-listed Shopee announced plans to raise $2.6 billion in share offerings to double down on Southeast Asia. Financial services in particular will be hotly contested between Shopee and Grab. In December, Grab scored a digital banking licence (in a joint bid with Singtel) from the Monetary Authority of Singapore (MAS). Sea Group’s Shopee did so too.

“I do believe that competition will increase quite a bit over time. We’re seeing a lot of digital platforms start to focus on local services, like transportation, like food delivery because what’s abundantly clear is just how attractive these markets can be, and what value we can provide to our customers,” shared Maa during DealStreetAsia’s PE-VC Summit 2020 in November.

Maa added that Grab has a three-pronged focus in 2021: last-mile logistics, fintech and merchant services. Gearing up across these fronts will help solidify Grab’s super app strategy to be what he calls the “platform of choice” in Southeast Asia — something Maa confidently believes Grab already is today.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.