Grab – Cash grab

An opportunistic cash grab.

• Grab is going public in one of the biggest SPAC transactions to date and while its valuation is not at the Tesla / electric vehicle-level of unreality, it does not need the cash and is still at least 2x overvalued based on its fundamentals.
• This looks very much like a transaction aimed at capitalising on the current valuation bubble before it bursts.
• The SPAC in question is Altimeter Growth Corp. (AGC) which was created by Altimeter, a Silicon Valley-based asset manager that specialises in late-stage companies raising money for the last time before going public.
• AGC has already raised $500m and will raise another $4.4bn from PIPE investors at a valuation of $10 per share or market capitalisation of $36.6bn.
• When the deal closes there will be a total of 3.955bn in issue and $4.39bn in cash will be added to the balance sheet where there is already $3.46bn in cash.
• This will result in a net cash balance of $7.76bn clearly highlighting that Grab does not need the money that this transaction will generate.
• While the transaction is being carried out at a share price of $10 giving an EV of $31.8) the SPAC is now trading at $15.33 meaning that the market is valuing this at an enterprise value (EV) of $52.9bn.
• This gives a valuation of 2022 EV / Revenues of 16.2x which I think is way above that which is warranted by the fundamentals.
• Furthermore, I find the documentation that accompanies this offering (see here) to be fairly misleading as:
  • First, valuation comparisons: The issuers have chosen a peer group that substantially flatters the valuation of Grab and is not the right peer group in my opinion.
  • Grab is a ride-hailing company that has become a super-app where users can affect many more transactions than just ordering taxis.
  • Hence the right peer group is not DoorDash, Sea, Mercado Libre and PayPal (page 51) but rather Uber, Lyft, Meituan and Tencent.
  • These are the large, liquid and established players in this space and in my opinion are a better representation of how the market values these sorts of companies.
  • However, these companies do not fit the valuation narrative as Uber trades at 2022 EV / Revenue of 5.3x, Lyft 4.4x, Meituan 5.5x and Tencent 7.2x.
  • The average of these is 5.6x 2022 EV / Revenues where revenues will probably grow around 30% between now and 2022.
  • Grab is expected to grow at 43% (page 51) over that period and so a premium to the 5.6x is warranted.
  • Hence, I would be looking at something like 7x 2022 EV / Revenues as where I would put fair value.
  • However, at $15.33, the EV of $52.9bn gives 2022 EV / Revenues of 16.2x, a 69% premium to the valuation stated in the investor materials (pages 44 and 51).
  • This brings us to the second reason why I find these materials to be misleading.
  • Second $10 per share: All of the valuation comparisons in the deck are based on $10 per share when in reality, the real share price is currently 53% above this level.
  • At the point of time when the transaction occurs, holders of the SPAC’s original 50m shares have the option to cash out at $10 rather than proceed with the transaction which puts a floor underneath the shares.
  • However, these materials are aimed at investors who may be considering buying the shares for the first time and as a result, some consideration of where the real valuation currently lies should have been taken into account.
  • This is not a new state of affairs, as the shares have been trading a substantial premium to $10 for the whole of 2021, meaning that the issuers had ample opportunity to disclose what the real valuation of the company actually is.
• The net result is that this transaction looks like an opportunistic move to capitalise on the reality-free valuations currently being paid in the stock market.
• To be completely fair to the company, if I was in its shoes, I would do exactly the same although I would be more upfront with incoming investors about what the real valuation of the company is.
• A 2022 EV / revenue of 7.0x gives an EV of $22.9bn, a market capitalisation of $30.6bn and a share price of $7.7 some 49% below where the shares are currently trading.
• It is important to remember that while the transaction remains incomplete the share price has a copper-plated bottom at $10 as there is a commitment from the SPAC to buy shares back at $10 at the holders’ discretion.
• However, the minute the deal closes and AGC become GRAB, the absolute bottom becomes $0.
• I would look for a rapid correction to around $7 before I would be even prepared to look at this one.