- No longer a rumor, Grab is set to go public via Altimeter Growth Corp. at an even better valuation than initially rumored and UBER.
- Grab's revenue has recovered well over pre-COVID levels and looks to break even on its food delivery segment as it is poised to benefit from recovering economies.
- Setups and indicators across all three levels (economy, industry, and company) in the top-down approach analysis align to suggest unprecedented growth is ahead of Grab.
- Technical analysis suggests a good entry point to take position in Grab as a breakout move is currently taking place and a pocket of liquidity is formed at resistance level.
- Conviction to invest in Grab is derived by strong fundamentals where indicators from all three levels in the top-down approach analysis align while technical analysis provides investors with a good entry point.
Grab is now set to go public via Altimeter Growth Corp (AGC) as soon as this week. There were several factors that suggest a high probability of this deal going forward. Two main pieces of evidence are the contracted agreement with Uber (UBER) to go public before 2023 and meeting the ambitions of 2 million daily bookings. My previous thesis was bullish on Grab and the integrity of the thesis lies in the merger going through. I am even more bullish on Grab now that Grab is set to go forward with the deal as soon as this week at an even better valuation.
In my previous article, I focused my thesis mainly at the company level. In this article, I'll be adding a technical analysis as well as economic analysis and industry analysis to complete the top-down approach analysis. I'll also revise the valuations with updated information. I recommend you to read my previous thesis before proceeding for better context.
Economic analysis and Industry Analysis
This section explains how indicators align across all three levels (economy, industry, and company) in the top-down approach analysis to give investors the conviction required to take position in Grab/AGC.
The latest Fed minutes published on 7th April and the latest letter from Jamie Dimon (JPMorgan's Chief) suggest a booming economy that will last at least until 2023 while the Fed is confident that inflation is only transitory and is committed to keeping inflation in check. The Fed is also committed to quantitative easing efforts until substantial progress towards full employment and 2% inflation.
This coming booming economy will be derived from compounded impact from several aspects such as excess savings and deficit spending during the pandemic, the proposed infrastructure bill, and jobs created from the resumption of businesses after vaccinations. The decline in the 10-year rates and the NASDAQ and S&P 500 at all-time highs suggest the market is digesting this information well.
A booming economy, vaccination, and penned-up demand for tourism (from the excess savings) are good news for the transportation industry and the tourism industry.
These events are favorable to Grab across all three levels in the top-down approach analysis.
- At economy level: Continual QE, low inflation, and low rates are expected to extend the stock market's (including Grab) uptrend further.
- At industry level and company level: Grab manages to increase its net revenue by 70% in 2020 during the pandemic despite near-absent revenue from its main business segment, the ride-hailing services. Moreover, Grab's revenue has recovered well over its pre-COVID levels during the period. The recovery of the tourism industry and the public transportation industry will propel Grab's growth further.
By referring to Chart 1, two bottoms that formed in March are caused by the interest rate and inflation fiasco where the broader market fell as well. I entered my initial trades at an average of $11.10 during the two dips in March since SPACs usually have $10 NAV, hence the downside risk was only 10%. However, the trade-off is the opportunity cost where there might be no development in the potential merger.
At that time, my invested capital was less than 1% of total portfolio, but I used 4x leverage. Although Altimeter is a quality sponsor, I protected my margin by buying put options strike $10 expiring in May for every 100 shares of AGC I own to avoid liquidation as short-sellers are reportedly boosting bets against Special Purpose Acquisition Companies (SPACs). Each option costs $0.1.
AGC spiked and broke the resistance trendline in the pre-market to as high as $16 on 7th April upon new development in the merger reported by Financial Times before going back into the 2 triangles indicated in Chart 1. I expect this price action to be a retest before trending upwards again.
AGC is currently trying to break out from the 2 triangles formed over the past few months indicated in Chart 1. This attempt is supported by elevated volume, which is a positive sign signaling a pocket of liquidity. Another positive sign is given where AGC lingering above the triangle and did not break below the horizontal support given by the horizontal (yellow) triangle support.
I tripled my holdings to an average cost of $12.6 per share on 7th April. I did not wait for any further retracements because indicators across all 3 levels in the top-down approach analysis suggest that a breakout is more likely than a fakeout. I am expecting a strong breakout or at least another breakout-retest before trending up from here. Therefore, this setup provides investors with a good entry point to take position in Grab / AGC.
Chart 1: Technical Analysis on AGC
Source: Author, data sourced from TradingView
Grab's latest known revenue is $1.1 billion in 2018; estimated to be $2.3 billion in 2019. Since Grab reported 70% increase in revenue in 2020, the expected revenue in 2020 is expected to be somewhere between $1.87 billion (= $1.1 billion * 170%) and $3.91 billion (= $2.3 billion * 1.7). This implies a Price-to-Sales ratio between 10 and 21.
According to the latest development, Grab is set to merge at a valuation of $35bn, approximately 12% lower than initially proposed ($40bn). This implies a PS ratio between 8.75 (optimal) and 18.375 (worst). In comparison, Uber's price-to-sales ratio is 9 at the time of writing. This puts Grab relatively cheaper than Uber in the optimal scenario.
I am confident that Grab will grow into its multiple for the reasons outline in this article and in my previous article.
Risk and Considerations
Aside from operational risks and legal liabilities, there is still a risk that the deal might not go through. Perhaps this is the reason why AGC did not manage to break out from the liquidity pocket of the 2 triangles in Chart 1.
The deal is expected to be finalized within these two weeks, hence nothing is certain at this point. Grab is still a private company and there may be information withheld from the general public.
If talks between Grab and AGC break down (touch wood), AGC is expected to fall below $11 (20% from current price levels). Hence ensure you have safe margins.
I was bullish on Grab before, and I am even more bullish than ever. This is an opportunity that is hard to miss. My conviction is derived by strong fundamentals where indicators from all 3 levels in the top-down approach analysis align, while technical analysis provided me with a good entry point.
This article was written by
Analyst’s Disclosure: I am/we are long AGC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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