This article first appeared in The Edge Malaysia Weekly on September 5, 2022 - September 11, 2022

DESPITE posting an improved set of financials for the second quarter ended June 30, 2022 (2QFY2022), Grab Holdings Ltd may still have some way to go before becoming profitable — if analysts are proven right — as it streamlines its cost structure and navigates new headwinds in a challenging operating landscape.

Grab, which debuted on the US’ Nasdaq stock exchange on Dec 2, 2021 via a special purpose acquisition company or SPAC, has been reinventing itself as an early-stage super app in Southeast Asia with core businesses in on-demand delivery, mobility (ride-hailing), digital financial services, and enterprise and new initiatives. It has added product innovations such as GrabMaps, providing location-based intelligence and services touted to be Grab’s key competitive edge for its verticals under its enterprise and new initiatives segment.

For 2QFY2022, the Singapore-based group posted a net loss of US$547 million (RM2.45 billion), a nearly 30% lower net loss from US$768 million last year. Revenue rose 79% to US$321 million from US$179 million previously, bolstered by a recovery in demand for ride-hailing amid the lifting of travel and movement curbs. Gross merchandise value (GMV) grew 30% year on year (34% y-o-y on a constant currency basis), thanks to the recovery in its mobility segment.

GMV is an operating metric representing the sum of the total dollar value of transactions from Grab’s services, which include applicable taxes, tips, and tolls and fees, over the period of measurement.

“The 79% hike in revenue came on the back of GMV growth, a 34-basis-point improvement in total incentives as a percentage of GMV, and Jaya Grocer contributions,” its founder and CEO Anthony Tan said in a virtual conference following the results announcement. Grab had in January completed its acquisition of a majority stake in the mass premium supermarket chain in Malaysia as part of its expansion into the grocery segment. The deal was estimated to be worth up to RM1.8 billion.

He added, however, that Grab has now decided to shut its dark-store operations in Singapore, Vietnam and the Philippines to cut costs and streamline its deliveries operations, withdrawing an earlier strategy to open more such stores.

“[Instead], we will drive the customer experience of receiving groceries through partnerships in certain markets; and in the case of Malaysia, owning Jaya Grocer [the reason being] the infrastructure of the supply chain and points of presence around the cities are already there for us. This is a better cost structure for delivering groceries,” explained Grab chief financial officer Peter Oey, who was in the same conference call.

Grab’s mobility segment’s adjusted earnings before interest, taxes, depreciation and amortisation (Ebitda) margin recovered to 12.1% in 2QFY2022, contributing to 30% total GMV growth as countries reopened and domestic travel resumed. The segment’s Ebitda of US$125 million is a 52% improvement from the immediate preceding quarter and 40% from a year ago.

Deliveries GMV of US$2.5 billion increased 19% y-o-y but declined 3% quarter on quarter, dragged by forex headwinds and near-term softening of food delivery demand with the resumption of dine-in. Adjusted Ebitda was a negative US$34 million compared with -US$56 million in 1QFY2022 and -US$20 million in 2QFY2021.

Grab, in anticipation of further softening of food delivery demand, lowered its GMV growth estimates to 25% to 29% this year, from 30% to 35% previously.

Grab’s share price had rallied in the weeks leading up to the release of its 2Q results, with analysts telling investors to take profit as improvements in earnings “appeared to be priced in”. The stock, which closed at US$3.60 the Wednesday before the announcement, fell 12.2% to US$3.16 the next day as the group reported wider losses than expected.

According to Grab’s 2021 annual report, Singapore is the group’s biggest revenue contributor, followed by Malaysia, the Philippines, Thailand and the rest of Southeast Asia.

Responding to The Edge’s emailed queries as to when Grab is expected to be profitable as well as which countries in Grab’s Asean market are the biggest contributors for each of its four segments, the company replied that it does not comment on profitability timelines nor break down contributions in that manner.

In an Aug 26 report, JPMorgan Asia Pacific Equity Research analyst Ranjan Sharma commented that Grab’s improved on-demand margins come with elevated corporate HQ costs and higher-than-expected GMV slowdown. “This dynamic, along with fintech losses over the mid-term, is likely to weigh on group profitability, in our view,” he wrote.

Analysts generally view Grab favourably, acknowledging “robust top line momentum, fast narrowing of adjusted Ebitda loss and potential market consolidation” as potential catalysts for strong recovery prospects. As at Sept 1, 15 analysts had a “buy” call on the stock, five “hold” and three “sell”, and a consensus target price of US$4.51.

However, analysts have forecast losses for up to 2027, according to Bloomberg data.

To drive customer loyalty, Grab expanded GrabUnlimited, its pilot subscription programme, to five of its eight markets where users can pay a flat monthly fee to enjoy deals across Grab’s ecosystem. The group explained it would expand cross-sell opportunities and grow order size and frequency, thereby growing profit per user and further differentiating Grab from pure-play food delivery or mobility companies.

“We have seen early encouraging metrics from the pilot. In 2Q, the average number of transactions by GrabUnlimited subscribers was more than double that of non-subscribers in food delivery and mobility,” Tan said.

To reduce its incentives spend, Grab has progressively reduced its incentives in 2QFY2022 to 10.3% as a percentage of GMV from 11.6% and 13% in the last two quarters.

“As we make product enhancements [amid] rationalisation in the market, this makes our incentives spend a lot more efficient and enables us to continue to bring it down, and we will continue to [reduce it] in the second half of the year,” Oey said.

He added that since the beginning of the year, Grab has been targeting consumers who are less sensitive to incentives as it sees better opportunities to cross-sell to those users.

“The data shows that such users have higher retention and higher spend. In 2Q, 62% of our users used two or more offerings, which is up from 56% at the end of last year. Therefore, we’re very specific in targeting what we call high-quality GMV users. [Also], we will drive greater engagement with these users via GrabUnlimited,” Oey explained.

The company maintains its optimism on the long-term potential of its diversified deliveries business based on the huge market potential it sees for its relatively young groceries segment.

“Our online mart business is only about two years old, yet it has grown 200% y-o-y. One lever that we have been acting on is diversification. [As] customers want to save money, they may show a preference to order groceries to cook for themselves. We have that [option] on our platform,” Tan said.

To cater to other changes in consumer behaviour, Grab introduced differentiated delivery time windows to let users chose a time with a cheaper delivery fee where there is cheaper off-peak supply.

“Because of all the product innovations we’ve made, we see fulfilment rates trend higher than pre-pandemic levels. As Southeast Asia lifted its movements and travel restrictions, we expect further rebound in 2H. In terms of mobility supply, we expect further stabilisation with average driver earnings up 12% q-o-q as we [introduce] improvements to reduce cost,” Tan said.

He added that the group has added more than 50,000 drivers in 2Q and focused on a more efficient onboarding process to improve the supply and demand dynamics of its mobility and delivery segments.

“As we improve these fulfilment rates and onboard more drivers, we drove down incentives simultaneously by focusing on a much more efficient onboarding process, while enhancing our platform to allow our drivers to make more trips and maximise their earnings potential. In 2Q, the average driver earnings per online hour was up by 12% q-o-q and 31% y-o-y,” Tan explained.

JPMorgan’s Ranjan highlighted that Grab’s enhanced focus on profitability and its efforts in targeting higher quality GMV have resulted in the group guiding for FY2022 revenues at the US$1.25 billion to US$1.3 billion range and adjusted Ebitda for the deliveries segment.

“Grab has pulled forward its core food deliveries and our overall deliveries segment Ebitda break-even expectation to 1Q2023 and 2Q2023, respectively,” he added.

However, he raised concerns over high HQ costs for the group, noting that if they remained elevated, “they are likely to weigh on group profitability while on-demand GMV growth is slowing down and financial services is a few years from profitability”. However, he sees consolidation in the deliveries industry as a rerating catalyst in the near term.

The bank has a “neutral” call on Grab and target price of US$3.30.

Meanwhile, Grab’s rapidly expanding financial services will become a key component of its growth strategy. Last Wednesday, Grab launched GXS Bank in Singapore, its digital bank joint venture with Singapore Telecommunications, the nation’s first digital bank for the retail market.

In Malaysia, the joint venture and a consortium of Malaysian investors, including Kuok Brothers Sdn Bhd, have yet to announce the date on which their digital bank will be launched.

“With [our] digital bank [launches] in Malaysia and Indonesia coming up, it is important to us that we have enough resources allocated for them. Our lending business is scaling up and we are watching out for credit risks. It’s been very encouraging for us and our non-performing loans stand at a single-digit low, therefore we have taken a cautious stance on lending. We love lending to our own ecosystem because the risk is much lower,” Oey explained.

On Aug 5, food delivery riders in Malaysia reportedly went on a 24-hour strike in protest of low compensation rates. Riders, who currently earn a flat rate per delivery, complained of inappropriate compensation for longer trips and their struggle to cope with the rising costs of living.

When asked about the blackout’s impact on the company’s top line as well as other effects on ridership, Grab Malaysia reiterated its response on Aug 4 prior to the strike that there was no reduction in base fares for its delivery services, clarifying that the concern raised by a delivery partner was due to a glitch in the company’s system causing the discrepancy in his earnings.

“We have since rectified the issue, and have transferred the shortfall to all affected partners, and clarified the matter via our official communication channel to our partners on July 21,” Grab Malaysia said.

It added that over the years, it had introduced various efforts to support its “delivery partners”, Grab’s term for its drivers, such as on-the-job protection with free personal accident coverage and a partnership with the Employees Provident Fund to ease contribution, and up to 10% additional incentives for those eligible.

“We are also assisting our partners to save on their operational expenses such as discounts on petrol, vehicle maintenance, daily necessities and more,” Grab Malaysia said, adding that the subscription pack from GrabUnlimited containing more than 50 different discount vouchers not only increased merchant sales, but also provided more jobs for delivery partners.

In the US, California had in 2019 passed a law requiring gig companies like Uber, Lyft and Doordash to employ their drivers so they could receive the full suite of employment benefits such as health insurance and sick leave. While the state’s decision has received backlash from gig companies including a US$200 million proposition fight in 2020, similar rights are reportedly being fought in other states such as Massachusetts, where gig worker treatment is also facing close scrutiny.

Currently, Grab Malaysia says it has a collaboration with DRB-Hicom Bhd, under which Grab partners are eligible for specific courses so that they can receive tertiary education, and a partnership with the EPF which helps drivers contribute to their pension fund more seamlessly, as well as additional contributions from Grab for eligible drivers.

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