DBS Group Research has upgraded Grab by two notches to “buy” from “fully valued”, as the on-demand services player is gaining market share as its competitors shift focus towards profitability.

The research team has also raised its target price on the US-listed counter to US$4.29 from US$3.16, as it sees a buying opportunity from the group’s recent share price pullback.

In a report on Thursday (Sep 21), DBS noted that Grab was gaining market share from Gojek in its mobility segment in Singapore and Indonesia. It is also taking some market share for deliveries from foodpanda, which is reportedly in talks to exit a few Asian markets.

Delivery Hero on Thursday confirmed that it was in talks for the potential sale of its foodpanda businesses in Singapore, Malaysia, the Philippines, Thailand, Cambodia, Myanmar and Laos.

The negotiations were earlier reported by business magazine Wirtschaftswoche, which identified Grab as a potential buyer.

HSBC, in a separate report, said that an in-market consolidation in the food-delivery segment would be a positive for the industry, in that it could pave the way for better unit economics and higher margins.

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“If Grab were a potential buyer, it would imply a sizeable market share in many of the South-east Asian countries named by Delivery Hero.”

However, a main issue would be obtaining regulatory approval in these markets.

HSBC estimated that these markets generated between 900 million euros (S$1.3 billion) and one billion euros in revenue for Delivery Hero in 2022. If a deal happens at around one billion euros, implying a price-to-sales ratio of 1 to 1.1 times, the move could be potentially value-accretive for Grab, which is trading at a 2023 enterprise value that is 2.7 times its adjusted sales.

The research team has maintained its “buy” rating on Grab, with a target price of US$4.40. With or without a deal, it believes the company could strengthen its leadership position in its key ride-hailing and food-delivery categories due to ecosystem synergies, and its ability to roll out innovative and affordable products continuously.

Echoing the sentiment, DBS analyst Sachin Mittal noted that Grab will likely capitalise on GoTo’s weaknesses in Singapore and Indonesia; GoTo has been shifting its focus towards profitability at the expense of market share gains.

Furthermore, Gojek’s mobility fares do not seem to be lower than Grab’s in Singapore, Mittal observed.

Gojek also does not have the additional features that Grab has, such as its shared-taxi option (GrabShare), child-friendly options (GrabFamily) or value-added options for pet owners (GrabPet), cyclists (GrabCar for Cyclists) and those with mobility devices (GrabAssist).

Shares of Nasdaq-listed Grab closed flat at US$3.46 on Thursday, but lost 0.9 per cent or US$0.03 in after-hours trading to reach US$3.43. This implied a potential upside of 25.1 per cent compared with DBS’ new target price, and 28.3 per cent upside from HSBC’s target price.

DBS estimates that Grab is offering a “much higher” compound annual growth rate (CAGR) of 70 per cent in its earnings before interest, taxes, depreciation and amortisation (Ebitda) over FY2023 to FY2025, excluding fintech losses and supported by decreasing regional corporate costs.

This is higher than its competitor Uber, which offers an Ebitda CAGR of 44 per cent over the same period.

“Grab’s mobility and delivery segments are adjusted Ebitda-positive already, excluding regional corporate cost. However, its fintech business might continue to incur Ebitda losses over the next few years.”

Meanwhile, CGS-CIMB maintained its “buy” call on Grab, with no change to its target price of US$4.50, despite concerns over “significant regulatory hurdles”.

It noted that the company had a “strong cost advantage” over other food-delivery players in the region due to its “overlapping drivers” across the mobility and delivery segments.

The brokerage values Grab at an implied ratio of 0.35 enterprise value to gross merchandise value.

Assuming that foodpanda has the same net take-rate as Grab, CGS-CIMB estimates foodpanda’s implied valuation to be 5.3 times trailing enterprise value to sales; Grab’s ratio is six times, which it said “appears reasonable”.

The brokerage added that it “makes sense” for Grab to consider acquiring foodpanda, given its “strong net-cash position and potential to enhance its economies of scale”.

However, like HSBC, CGS-CIMB also believes that a merger with foodpanda will give the company a monopolistic market share of the online food-delivery space in Singapore, Malaysia and the Philippines.

A sale to a “deep-pocketed buyer” looking to expand its presence in, or enter, South-east Asia could potentially disrupt the existing healthy, competitive landscape in the region’s on-demand industry, CGS-CIMB said.

It noted that scale and order density “are key to driving profitability in the low-margin food-delivery business”.