Rakuten: Eyes On Debt Maturity Risk (OTCMKTS:RKUNY)

Elevator Pitch

I have a Hold investment rating for Rakuten Group, Inc. (OTCPK:RKUNY) [4755:JP] shares.

My earlier article for Rakuten written on July 11, 2023 touched on the company’s portfolio restructuring initiatives and its mobile business segment. In the current write-up, my attention turns to the significant amount of bonds that are expected to mature for Rakuten Group in the next two years.

I leave my existing Hold rating for Rakuten Group unchanged. The company is trying hard to boost its future cash flow via asset monetization and capex (capital expenditures) control initiatives. But there is no assurance that Rakuten Group will be able to generate sufficient cash flow to redeem its maturing bonds. Therefore, I still have a Neutral opinion of Rakuten Group’s shares.

Readers should take note that Rakuten Group’s shares are traded on the OTC market and in Japan as well. Its shares listed on the Tokyo Stock Exchange had an average daily trading value of $120 million (source: S&P Capital IQ) for the past three months, while its OTC shares’ three-month mean daily trading value was still reasonable at $0.3 million. If readers have an interest in trading Rakuten Group’s shares listed in Japan, they can engage the services of US brokerages with foreign markets access such as Interactive Brokers.

Debt Maturity Risk Is In The Spotlight

Rakuten Group disclosed that the company has JPY797 billion (or around $5.4 billion) worth of bonds that mature in the 2024-2025 period as indicated in its Q2 2023 results presentation slides.

As it stands now, sell-side analysts are expecting Rakuten Group to register negative free cash flow of -JPY152 billion and -JPY67 billion for FY 2024 and FY 2025, respectively as per consensus data sourced from S&P Capital IQ.

On the company’s investor relations website, Rakuten Group noted that it has secured investment-grade credit ratings from Rating And Investment Information and Japan Credit Rating Agency, but it also revealed that it has a BB credit rating (below investment grade) from S&P Global Rating.

As such, all eyes are on Rakuten Group’s debt maturity risk, as there are concerns regarding RKUNY’s ability to redeem or refinance its maturing bonds in full successfully.

Asset Monetization

The company is monetizing some of its businesses and assets to raise the necessary funds to redeem its bonds.

In my prior July 11, 2023 update, I highlighted the “proposed spinoff and IPO of Rakuten Securities” which was first disclosed by Rakuten Group in early July this year. According to a July 6, 2023 Nikkei Asia news article, Rakuten Group might potentially realize proceeds of as much as JPY100 billion from the listing of its brokerage business. RKUNY disclosed at its most recent quarterly results briefing in August 2023 that it is currently “preparing for the listing for the Rakuten Securities”, which implies that the IPO plan for the brokerage unit remains on track.

Separately, Rakuten Group could potentially divest or list some of its financial investments to raise cash that could be allocated to bond redemption. In its second quarter results presentation slides, the company revealed that its “Rakuten Capital portfolio” has a “(unrealized) value of JPY89.3 billion” at the end of June this year. Rakuten Group refers to Rakuten Capital as its “corporate venture capital arm” on the company’s website.

Expense And Capex Control

Rakuten Group is managing the company’s expenses and capital expenditures (especially for its mobile business unit) in a more aggressive manner, and this will help to increase the amount of cash flow that is available for the redemption of maturing bonds.

I indicated in my earlier July 2023 article that Rakuten Group’s mobile segment witnessed a substantial operating loss amounting to roughly -JPY103 billion in the first quarter of this year. It is worth noting that the operating loss for the company’s mobile unit in Q2 2023 was much narrower at -JPY82 billion.

Rakuten Group mentioned at its recent quarterly results call that it previously set a target of realizing JPY15.0 billion of cost savings for the mobile business on a monthly basis. As of June 2023, the company has already achieved a monthly expense reduction of JPY12.9 billion.

With regards to the capital investments for the mobile unit, Rakuten Group had previously guided for capital expenditures or capex of JPY300 billion, JPY150 billion and JPY120 billion for FY 2023, FY 2024, and FY 2025, respectively. Following the release of the company’s Q2 2023 results in August, the company has revised its FY 2023 capex guidance downwards by a third to JPY200 billion. While RKUNY didn’t provide specific updated capex guidance for FY 2024 and FY 2025, the company expects its actual capex for the coming two years to be much lower than what it initially expected.

Closing Thoughts

Rakuten Group has a significant amount of debt maturing in the next two years, and the company has plans in place to grow its free cash flow in the future. But if Rakuten Securities’ planned IPO is subsequently aborted or the company’s actual capital expenditures turn out to be higher than expected, Rakuten Group could find it tough to have sufficient cash flow to redeem the company’s bonds that are due to mature in 2024 and 2025. Considering the credit risks associated with Rakuten Group, I think it is appropriate to still rate the stock as a Hold, even though losses for its mobile business are narrowing.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.