Economy watch: Singapore halts economy’s slide one year into pandemic; MAS stands pat on policy stance
fer simple loan products as well. With Grab’s ability to use artificial intelligence for credit scoring from the data it has collected since it started operations in Singapore and Malaysia in 2012, it should be able to manage risks associated with its nascent lending business.
In addition to funding its restricted DFB, Grab needs capital to shore up its balance sheet. As at Dec 31, 2020, the group had negative equity to the tune of US$6.26 billion, a result of accumulated losses of some US$10.4 billion. On the other hand, Grab also has convertible redeemable preference shares of around US$10.7 billion. Since the preference shares are convertible and redeemable, they are classified as debt rather than equity.
While the balance sheet of Grab is weak, it is not as weak as the negative equity amount suggests. If the preference shares are converted to equity, Grab’s shareholders’ funds would top US$4 billion, excluding the IPO.
Sea boosted its shareholders equity just recently. Interestingly, on Dec 10, shortly after the award of a restricted DFB license by MAS, Sea announced it planned an equity fund raising which it upsized on Dec 11. In all, Sea raised US$2.7 billion from an issue of 13.2 million American Depository Shares (ADS) at US$195 apiece, boosting paid-up capital to US$8.5 billion as at Dec 31, 2020, and total shareholders’ funds of US$3.4 billion.
The fund raising shored up Sea’s equity following four years of straight losses since it was listed on Nasdaq in 2017, with more
than US$5 billion in accumulated losses. In May 2020, Sea raised US$1 billion through an issue of 2.375% senior convertible notes maturing in 2025.
Valuation yardsticks
If a market value of US$40 billion for Grab at IPO is considered overvalued for a loss-making company, consider Sea, which remains loss-making four years after listing on Nasdaq (in 2017). Its market cap is US$124 billion.
Traditional investors who follow century old investment methods — think Benjamin Graham — may need to rethink valuation yardsticks using sales and revenue in addition to net profit, earnings per share and cash flow metrics. Over and above the P&L and cash flow statements, balance sheets need to be viewed in a forward-looking manner.
For instance, converting Grab’s convertible redeemable preference shares to equity changes the construct of its shareholders fund, and strengthens its balance sheet. Debt becomes equity and accumulated losses are erased.
On the other hand, warning shots are already being fired over the valuation of stocks like Coinbase which listed directly on Nasdaq on April 14, and Tesla which turned profitable only last year, and after almost a decade of US government grants and aid.
On April 8, the US Securities and Exchange Commission gave a fresh warning to companies looking to list via a SPAC. According to Bloomberg, acting director of SEC’s finance division John Coates warned that “a de-SPAC transaction gives no one a free pass for material misstatements or omissions. All involved in promoting, advising, processing, and investing in SPACs should understand the limits on any alleged liability difference between SPACs and conventional IPOs”.
About 300 SPACs were launched on US exchanges in 1Q2021, raising almost US$100 billion. It is also fueling market warnings that the bubble is about to burst, Bloomberg said.
Some market observers reckon that Grab and Sea could turn into Asean’s versions of Amazon, Alphabet, Facebook and Tesla. Instead of social networking, ecommerce, search engines and expensive electric vehicles, Grab and Sea are offering different services, through ‘super apps’ tailored to an Asian population. This, they say, may imply a lot more upside in the longer-term as jargon such as addressable market, gross merchandise value and total payments value become commonplace.