Grab is a leading super-app in Southeast Asia (SEA), where it's services are highly relied on.
You can book a ride, order food delivery and make payments through its digital wallet, all in one app.
It has announced plans to go public in the US (Nasdaq), in partnership with a Special Purpose Acquisition Company (SPAC) Altimeter Growth Corp.
Upon completion of the merger, the ticker will change from AGC to GRAB.
How does Grab’s SPAC IPO work?
To understand how the whole process works, we need to understand what exactly is a SPAC.
SPAC is a "blank-cheque company" with no commercial operations. It is formed with the sole purpose of raising funds to acquire a company, enabling it to be listed on an exchange.
A merger through SPAC enables GRAB to by-pass bureaucratic red tapes in traditional IPO, which significantly reduces the time it takes for it to list on Nasdaq.
According to CNBC, the deal will raise $4.5Bn in cash and will value the combined entity at nearly $40B, making it the largest SPAC merger.
The summarised process is as follows :
1. SPAC goes public as a shell company
2. Once public, it hunts for a merger (GRAB)
3. At merger, SPACs shares maintain their $10 nominal value.
An infographic below by PWC shows the process in details.
Grab's prospects and where growth is coming
Grab has been the category leader for Mobility, Deliveries and Financial Services across Southeast Asia. Its operations in less developed countries such as Indonesia, Malaysia and Philippines has seen tremendous growth. This could be attributed to poor transport infrastructures and poor economic system.
According to Grab's FY 2020 financial report, deliveries grew by 300%
This could be attributed to COVID lock-down measures, causing people to order more deliveries. This growth may not be sustainable with the relaxation of measures. Grab will likely see growth from less developed countries, with under developed transportation networks.
Mobility performance declined by 20% due to the pandemic.
With the merger with Uber in 2018 and a monopoly/duopoly in many south-east asian countries, mobility remain a key growth driver for Grab.
However, a report from Global Digital revealed that the use of ride-hailing apps is already extremely prevalent in SEA countries. I'm unsure how much more growth there can be.
Lastly, it is our view that the Grab Financial Group (GFG) could be the future crown jewel for the group where it grew 200% in 2018.
It has been building its Financial Group, where it provides a myriad of services such as GrabPay, GrabFinance and GrabInsure. Grab financial group has partnered with governments throughout Southeast Asia.
Grab financial group is a Fin-Tech arm under Grab that provides loans, insurance and digital wallet.
In Malaysia, the government leveraged on GrabPay to distribute monetary aid when COVID-19 struck. Similarly in Indonesia, the government gave out COVID relief cheque through Grab's digital wallets. When such monetary aid are transferred to digital wallets, it gets used for consumption.
In addition, it won the digital bank license in Singapore. Digital banks could potentially disrupt the banking sector. However, it may not be profitable despite revenue growth due to immense competition with incumbent banks.
It is noteworthy that the insurance arm under the group has sold a whopping 100Million policies, in less than 2 years. Neighbouring countries with huge population has been keen to adopt insurance from Grab.
Hence, Grab financial group has been growing rapidly and it conducted a fund raising round in Jan2021, at a $300M valuation.
In addition, it will be setting up a digital bank in Singapore with Singtel which will start in 2022.
Grab’s SPAC IPO Valuations now
There are a multitude of ways to value a company. For a non-profitable company we commonly compare the Price to Sales ratio (P/S).
If we compare Grab to other ride-hailing or food delivery companies such as Uber and Deliveroo. The P/S ratio of Grab, Uber and Deliveroo are 24.75, 9.32 and 5.9 respectively.
It is evident Grab has a significantly higher valuation and hence can be considered expensive.
On the other hand, if we consider Grab's market cap to that of Singtel (since both are awarded the digital bank license), they both have approximately the same market cap. But Grab's prospects seem better.
Furthermore, when we compare Grab's market cap (40Bn) to that of SEA limited ($129Bn), it may not seem that expensive as both are involved in the Fin-Tech space.
Can You Invest in Grab Now via AGC?
For retail investors, you can invest in Grab by buying into AGC on the stock exchange. At this time of writing, the price of AGC is $13.16
Since the nominal of a SPAC share is $10, you are considered "over-paying" and allowing institutional investors and insiders to dilute your equity.
This is because institutional investors and insiders can exercise a warrant to purchase or subscribe to the PIPE.
PIPE is a private investment in public equity, where funds (institutions) such as BlackRock, Fidelity International and Temasek can buy into the SPAC at a discounted price before it trades on the stock exchange.
If you are keen to get invested via AGC, AGCWW or AGCUU, below has a summary table on the exercise price of the warrants and what the units own.
RISK of buying AGC now
SPACs listings causes much controversy due to the "short-cut" it takes compared to a traditional IPO. Critics argue that retail investors are disproportionately rewarded as SPACs tend to underperform after being listed.
Investors should also note that there is a possibility that the deal may fall through if negotiations don't end up well. In such case, the SPAC may acquire another company or liquidate the IPO. Proceeds will then be returned to public shareholders.
A Harvard article further states that the cost of buying into a SPAC is being diluted by the sponsor.
According to Grab's investors presentation, the SEA market is under-penetrated.
There is more room to grow in SEA especially, in less developed countries with poor infrastructure.
Being a categorical leader in the 3 spaces enable them to scale up operations in SEA. Grab incentivises customers through a loyalty programme. If they are able to gain new and loyal customers, the growth potential is huge.
However, there are many companies vying for market share and newer companies are emerging. Hence, immense competition may lead to price undercutting and profitability of firms to drop.
In my opinion, Grab's 40Bn valuation seems reasonable and I am confident in its execution.
With that said, I would rather prefer to wait post merger before investing into Grab.
- https://fortune.com/2021/04/14/grab-spac-ipo-altimeter-going-public-why/- https://assets.grab.com/wp-content/uploads/media/ir/investor-presentation.pdf
Last updated on May 3rd, 2021 at 08:56 am