Description

LONG: Raksul (4384.JP)

Summary

Raksul operates dominant niche B2B online marketplaces, with one of the most well-regarded founders in Japan, a highly valuable and fast-growing “hidden asset,” and a management team with exceptional shareholder alignment. The highest tranche of incentive compensation for the recently promoted CEO is struck at ~14.5x the current share price. We believe the stock will return 2-4x over the next two years.

The stock has suffered from a long rotation out of domestic Internet services companies and toward semiconductors and exporters, but there are multiple catalysts that will bring the stock and the current deep discount to fair value back into focus.

The upcoming annual (FY 7/24) earnings release and guidance will be the first under the new CEO and CFO, both of whom are foreign-investor-friendly. We also expect more details to be shared on Josys, the “hidden asset” we believe is worth more than half the current Enterprise Value alone.

Core Mission

The company has taken a contrarian approach to collecting a toll on “indirect costs” for Japanese SMEs. By indirect costs the company means any product or service that is not done in-house, and traditionally every such sub-sector in Japan has multiple layers of agents and distributors. Rather than going after fast-growing segments of the market, like IT systems integration, the company began disrupting the inefficient, melting ice-cube segments of the market with large customer bases that were unserved by the market. The relevant “indirect cost” TAM in Japan is JPY 140tr.
 

Raksul’s B2B Marketplace Verticals

Printing – The first vertical the company entered was the outsourced business printing market. This includes direct mail, flyers, posters, brochures, internal communication materials, etc. This is a classic large but declining market, and it was especially ripe for disruption: historically SMEs would place an order through an agent, who would then help find a designer, who would then find a local printer to execute the order, who would then find a logistics partner to deliver the order. This would necessitate multiple layers of communication, leading to confusion, poor quality, delays, and high costs.

Raksul disintermediated this sector by allowing SMEs to directly design and optimize their printing orders, routing the orders to the closest and most cost effective of Raksul’s network of ~300 printers around the country, and handling logistics through bulk third party contracts. This has provided SMEs with a consistent 30-40% cost savings, higher quality, and faster service.

Considering the printing industry is large but suffering, Raksul was able to keep quality control at a high level by selecting only the suppliers who were fiscally sound and capable of meeting orders according to Raksul’s requirements. The ~300 printing partners are the most capable out of a total ~15k nationwide printers.

The printing market, while declining, is still a JPY 5tr+ market. Raksul has over 90% of the e-commerce market for commercial and business stationery printing, excluding companies like Printpac and Printnet, which accept electronic orders but are printers themselves. In these two sub-segments of the printing market, e-commerce penetration is still ~1%.

Business Supplies and Peripherals – While this sounds like it would easily be disrupted by Amazon, it does not include the standard stationery and other supplies consistently being replenished by SMEs (Askul competes in that market as well). Raksul is instead focusing on mugs, cups, uniforms, t-shirts, tote bags, stamps/hanko, etc. The company also focuses on services related to the printing business, like the actual posting of flyers and placing of signs.

These novelty items are an afterthought to the large B2B distributors, but the purchasing decision is typically made by the same person at an SME making the printing decision. With limited incremental sales effort, Raksul was able to open up a new JPY 3tr+ vertical, where its penetration is again ~1% (although this is a more stable and faster-growing market for Raksul).

Packaging – This primarily came through the acquisition of Danball One, and it includes cardboard and other packaging materials. While growth has slowed in this vertical, and it is less than half the size of either Printing or Business Supplies and Peripherals, the company was able to acquire new SME customers through Danball One and has been able to cross-sell other products and services to the same point-people at SMEs. This is a JPY 2.5tr market, and it includes other industrial packaging materials, which Raksul might eventually penetrate as well.

Advertising – This is the company’s Novasell segment, which includes research, planning, and analytics for video and other digital ads. As with Raksul’s other verticals, the company is focusing on SMEs who are both underserved by the large ad agencies and targeting regional / micro markets, including taxis and small-scale offline distribution channels. This is another JPY 2.4tr market.

Other – The company is continuing to experiment with other verticals. Some of these have been de-consolidated (like the online logistics platform, Hacobell, in which a majority stake was sold to Seino and Japan Post; minority interest is negligible). Others are tuck-in acquisitions, like AmidA/Hankoya and A-Link, which are complementary to Raksul’s existing key verticals. These are usually acquired at low single-digit EV/EBITDA multiples, as they are owner-operated distributors with no succession plans and no better means of distribution. New verticals are constantly being researched, either for acquisition or incubation (as with Josys, below).

Customer Count and Purchasing Activity

While the company is still penetrating existing verticals and building up new verticals, it is reluctant to give cohort statistics that are commonly provided by larger peers (e.g., Monotaro in Japan or most U.S. peers). The company has said there is typically a drop off from year one to year two, after which there is a gradual increase in purchasing activity across multiple verticals.

Depending on the source, there are 3-4mn SMEs in Japan, but the company includes sole proprietors in its customer count (all others are called “enterprise” customers). Sole proprietors still make up the majority of the company’s 2.6mn registered users (which includes more than one user per customer in some cases), but enterprise customers have been growing faster:

More relevant in judging the scale of the business is the number of purchasing users. Here the company breaks down users acquired through acquisition as well; the company is at 521k purchasing users per quarter, with organic growth in the high-single digits:

What is Josys?

We have referenced Josys a few times above with little detail. Part of this is because little is disclosed about the operations of Josys, and part is because Raksul’s financial exposure is also opaque. We believe the company will only become more transparent about Josys, which could serve as a meaningful upside surprise to investors.

Josys was incubated at Raksul and is a SaaS license and IT device management platform. The company helps enterprises with IT resource management across their worker lifecycles, especially for remote workers. This means they assign newly onboarded workers rights to SaaS seat licenses and IT devices (phones, laptops), monitor and manage usage of these licenses and devices, and make sure licenses are properly terminated and devices are recycled through the enterprise after workers are offboarded.

This business was a product of Raksul’s Indian R&D center and saw rapid growth alongside remote work and the increasing usage of SaaS solutions by smaller teams within large organizations (shadow IT). The company’s clients are skewed towards startups and multinational Japanese corporates, but they are increasingly global – as a global business, Raksul founder Matsumoto took a special interest in Josys and now spends a majority of his time at the company.

Josys has already raised JPY 17bn and has over 100 employees; there are several multi-billion dollar success stories in the U.S. in this market, including Okta, SailPoint, Deel, and ClickUp. Josys is by far the largest with a primary focus on Japan. Based on our conversations with people close to the company, it is likely to hit $15mn in run-rate revenues (growing high double-digits) and a $500mn valuation early next year.

Raksul’s exposure to Josys is unclear, but we believe we have a clearer picture than what the market is implying. Despite incubating Josys, Raksul realized that the growth opportunity was such that a large, sustained investment would be needed, including several years of operating losses. At the same time the company did not feel Raksul’s public-market investors, in the post-COVID downturn, would reward the company for consolidating years of large losses. Raksul has signaled to investors that they will only pursue “profitable growth,” and accordingly they have de-consolidated Josys as outside investors have come in.

But there is a catch – as part of their early funding of Josys, Raksul negotiated acquisition rights that would allow them to have a controlling stake and re-consolidate Josys in the future. The CFO has been tight-lipped about how they are able to accomplish this, but our understanding is that Raksul’s acquisition rights will allow new shares in Josys to be issued to Raksul only under conditions that have a low probability from an accounting standpoint (e.g., they are only triggered when Josys reaches a certain level of profitability and/or revenue scale, which is too far in the future for accountants to require consolidation now).

The actual crystallization of value from Josys could be a few years in the future, but the implied present value should become more apparent as investors return to the core story and Raksul releases more information on Josys as a future value driver.

Why Does This Opportunity Exist?

As we mentioned at the outset, there has been a rotation out of Japan domestic growth and into export growth, but that is not the entire story. Raksul was once a darling of the sell-side and foreign investors in Japan online marketplaces; the company, led by its highly respected founder, was considered to be on par with Monotaro and Mercari. But the nature of Raksul’s power-law business means that only a few verticals, of the many it might try to enter, will be highly successful.

At the peak of the market Raksul was presenting investors with the case for Danball One, Novasell, and Hacobell as the next growth drivers, and none of these has yet lived up to its potential. The common perception among investors was that Raksul will always be a one-trick pony, a niche printing marketplace.

But since then the Business Supplies and Peripherals sub-vertical, which is within the Raksul reporting segment (which also includes Printing and Packaging), quietly grew to a scale that is likely to overtake Printing in the next few quarters. This was a product set that was barely mentioned when a prominent foreign broker initiated on Raksul at peak COVID valuations, but it will soon be the largest and fastest growing (organically high double-digit) segment in the company.

While investors might have been skeptical of Raksul’s inorganic growth, several smaller acquisitions (including the ones mentioned above) have been highly accretive. Sell-side analysts, some of whom discontinued coverage, have been behind the curve in incorporating these acquisitions into their estimates.

The upcoming earnings release, the first annual release under the new CEO and CFO, is likely to provide an increasing level of transparency and guidance that is well ahead of current estimates.

New CEO and CFO

The new CEO, as of August 2023, is the former longtime CFO Yo Nagami. Nagami has an investor-friendly background in banking and private equity (Carlyle), and he has been promoted to take the company from “1 to 10,” after the founder took the company from “0 to 1.”

Most striking about Nagami’s promotion is his incentive plan, announced in November 2023. He not only took out a loan to acquire 877,000 shares in the company, the stock-option grant is only 20% exercisable if the stock reaches 8,500/share, 33% exercisable at 12,000/share, and 47% exercisable at 17,000/share! The EBITDA target at the high end, which also must be met to unlock these shares, is JPY 20bn.

The new CFO, Masaru Sugiyama, is perhaps even more investor-friendly: he is the former Goldman Sachs Japan Internet analyst. We would expect him to increase his communication with tourist investors who are just coming back into Japan domestic Internet as sector rotation appears to have reversed.

See Nagami’s incentive plan below:

Valuation and Summary Base Case Estimates

Including recent acquisitions the company will be run-rating JPY 6bn of EBITDA in the next quarter or two; the company has set a FY 7/27 EBITDA target of JPY 10bn, and while our base case is a slight discount to this, we think the company could easily over-shoot, considering its confidence in incentive plan targets.

We are also attributing some value to Josys in the target prices below; whether Raksul maintains a 50%+ stake or a 20%+ (associate) stake pro forma for further dilution is still unknown, but it is meaningful relative to the current Enterprise Value of the company.

Our bull case multiple of 18x EBITDA is still a discount to the 24x forward EBITDA valuation of Monotaro, which we believe is the closest peer among Japanese B2B marketplaces. The company believes its shares are deeply undervalued and is considering a share repurchase authorization.

Risks

Depressed Sector Valuations – While domestic Internet stocks have rebounded with the currency, most high-multiple stocks are still facing high skepticism from investors; Raksul will not be at single-digit NTM EV/EBITDA multiples for another few quarters at the current share price.

Conflicted Founder – Matsumoto is spending a majority of his time at Josys currently, and we believe his non-diluted ownership in Josys is larger than his current ownership in Raksul. It is still unclear how this will look after further VC funding and dilution from Raksul’s rights exercise, but we believe Matsumoto and Raksul CEO Nagami are aligned.

Catalyst

First annual results (FY 7/24) briefing and guidance by the new CEO and CFO

More transparency on the value of Josys

Potential share repurchase authorization