Rakuten Inventory: A Story Of Two Companies (OTCMKTS:RKUNF)

Elevator Pitch

I charge Rakuten Group, Inc. (OTCPK:RKUNF) [4755:JP] as a Maintain. I first initiated on Rakuten Group with an article printed on November 29, 2020.

My focus is on Rakuten Group’s key Fintech and Cellular enterprise segments on this newest replace. It’s a story of two companies for Rakuten Group which justifies my Maintain score for the inventory. The corporate’s fintech enterprise phase is a beneficiary of tailwinds referring to a rise in Japan’s cashless fee penetration charge, however I’ve doubts about Rakuten Cellular’s skill to fulfill its working profitability targets.

Traders can deal in Rakuten Group’s shares on the OTC (Over-The-Counter) market and the Tokyo Inventory Alternate. The buying and selling liquidity of Rakuten Group’s OTC shares is respectable with a 10-day common day by day buying and selling worth of roughly $150,000 as per S&P Capital IQ knowledge. The comparatively extra liquid Japan-listed Rakuten Group shares ($125 million 10-day imply day by day buying and selling worth) will be purchased and offered with US stockbrokers reminiscent of Interactive Brokers.

Fintech Phase Is Benefiting From The Transition To A Cashless Society

The proportion of cashless funds as a proportion of complete funds in Japan grew in 15.4% for 2013 to 36.0% for 2022, in accordance with data sourced from Statista. In 2022, the tempo of cashless transition picked up meaningfully as Japan’s cashless fee ratio was a lot decrease at 32.4% in 2021. Though the newest cashless fee statistics for 2023 will not be obtainable but, it’s cheap to imagine that the proportion of cashless funds in Japan ought to have elevated final 12 months contemplating historic traits.

Transferring forward, Japan’s purpose is to succeed in a cashless fee penetration charge of 40% for 2025 and 80% in the long term, as highlighted in a September 20, 2023 article printed by Deutsche Financial institution (DB).

Rakuten Group’s key companies which can be a part of its fintech phase are anticipated to profit from Japan’s transition to a cashless society within the intermediate to long run.

The corporate’s on-line banking enterprise, Rakuten Financial institution, issued a media release on January 4, 2024 revealing that its deposits reached the JPY10 trillion mark on the finish of final 12 months. On this press launch, Rakuten Group attributed the expansion in Rakuten Financial institution’s deposits to the web financial institution’s enticing choices like “the Rakuten Pay App, which allows customers to directly debit their Rakuten Bank account” and the “Rakuten Bank Debit Card, which offers a contactless payment function.”

On the firm’s most up-to-date Q3 2023 earnings briefing in November final 12 months, Rakuten Group disclosed that round 31% of its banking shoppers have Rakuten Financial institution as their “main account”, and it’s cheap to imagine that the cashless fee transition has boosted the recognition of web financial institution Rakuten Financial institution amongst Japanese customers.

Final month, RKUNF shared in an announcement that the entire variety of playing cards issued by the corporate’s card & fee enterprise (Rakuten Card) elevated by +50% from 20 million in the course of 2020 to 30 million as of end-2023. Rakuten Group credited the substantial development in card issuance to initiatives like “promoting the use of a second Rakuten Card and the unveiling of new card designs” to “accelerate the adoption of cashless payments” in its December 2023 announcement.

Rakuten Group’s fintech phase, which incorporates the Rakuten Financial institution, Rakuten Fee and Rakuten Card companies, accounted for a third of the corporate’s prime line for full-year FY 2022. Wanting ahead, the rise in Japan’s cashless fee penetration charge over time is more likely to be a tailwind for the corporate’s Fintech phase.

Uncertainty Over Cellular Phase’s Working Profitability Goal

RKUNF’s cell phase (Rakuten Cellular) is one other key enterprise division for the corporate that’s price watching, as this enterprise phase contributes near a fifth of its FY 2022 income.

In direction of the top of final month, Rakuten Group printed a press release highlighting that its cell subscriber base has expanded to greater than 6 million. However Rakuten Cellular’s subscriber numbers aren’t as spectacular as what they appear to be on paper, as 6 million cell providers subscribers will solely translate right into a market share of less than 3% for Rakuten Group’s cell enterprise in Japan.

As per S&P Capital IQ knowledge, Rakuten Group’s precise Q3 2023 working loss margin of -10.5% was a lot worse than the sell-side analysts’ consensus forecast of -6.1%, and that is seemingly attributable to the cell phase’s wider-than-expected working lack of -JPY81.2 billion for the latest quarter.

In Rakuten Group’s Q3 2023 results presentation slides, the corporate famous its goal of attaining EBITDA breakeven for its cell phase on a month-to-month and a yearly foundation by end-2024 and in FY 2025, respectively. However Rakuten Cellular can solely meet its working profitability purpose if it grows its subscriber base from the present 6 million to 8-10 million and in addition elevate its ARPU (Common Income Per Consumer) from JPY2,046 (as of end-Q3 2023) to JPY2,500-3,000 as per its assumptions.

My view is that there’s a good probability of Rakuten Cellular hitting its subscriber development goal, however it is likely to be a lot harder for Rakuten Group’s cell phase to extend its ARPU.

In my earlier July 11, 2023 write-up, I had talked about that Rakuten Cellular “introduced a new mobile plan known as ‘SAIKYO'” in June 2023 to “address the issues of ‘network quality’ and ‘churn'”. This new cell plan has been profitable as Rakuten Group’s variety of cell subscribers rose from 4.8 million as of June 30, 2023 to five.1 million on the finish of Q3 2023 earlier than exceeding 6 million close to the top of final 12 months. As such, I feel the constructive subscriber development momentum pushed by the brand new cell plan will enable Rakuten Cellular to fulfill its 8-10 million subscriber goal.

On the flip facet, it could possibly be difficult for Rakuten Cellular to extend costs to attain its JPY2,500-3,000 ARPU goal. A November 29, 2023 Reuters commentary piece quoted sell-side analysts overlaying Rakuten’s shares indicating that “many of Rakuten’s customers are quite price-conscious.” This is no surprise, as Rakuten Cellular would have adopted an aggressive pricing technique as a comparatively new entrant in Japan’s cell market starting in 2020. Due to this fact, it’s cheap to imagine {that a} vital proportion of Rakuten Group’s cell subscribers could have pricing as a key consideration in deciding on cell service plans.

In abstract, there is no such thing as a certainty that Rakuten Cellular can obtain EBITDA breakeven as per its targets.

Closing Ideas

I’ve a Impartial opinion of Rakuten Group. On one hand, I’m constructive on the prospects of the corporate’s fintech enterprise phase in view of the expansion in cashless funds for the Japanese market. Alternatively, I’m not assured that Rakuten’s cell enterprise phase can obtain its EBITDA profitability purpose.

Additionally, I feel that Rakuten Group is now buying and selling at a fairly honest valuation. The market presently values Rakuten Group at 0.80 instances (supply: S&P Capital IQ) trailing Enterprise Worth-to-Gross sales or EV/S. The honest EV/S a number of for Rakuten Group is calculated to be 0.87 instances (which suggests a modest upside of +9%) based mostly on a valuation rule of thumb {that a} inventory’s EV/S ratio will be derived by dividing the corporate’s projected EBIT margin by 10. As a reference, Rakuten Group’s consensus FY 2027 EBIT margin forecast is 8.7% (supply: S&P Capital IQ).

Editor’s Word: This text discusses a number of securities that don’t commerce on a serious U.S. trade. Please pay attention to the dangers related to these shares.