Rakuten: New Roaming Agreement and New Shares Issuance Mitigate Immediate Financial Risk

Rakuten’s 4755 March quarter operating loss of JPY 76 billion was a significant improvement from the JPY 113 billion loss in the previous year, thanks to Rakuten Mobile’s cost reduction and subscriber growth. What caught our attention more were the series of actions announced in recent weeks to improve the company’s financial position, which had deteriorated due to massive investments in the mobile business. In addition to Rakuten Bank’s listing in April, reduction of capital expenditures through the extension of the roaming agreement with KDDI and the issuance of new shares announced on May 16 will help alleviate concerns about Rakuten’s cash management. However, we revise our fair value estimate to JPY 620 from JPY 840, considering the dilution from the issuance.

As previously mentioned, increasing the number of subscribers is essential for Rakuten Mobile to become profitable, and in order to increase the number of subscribers, network quality and coverage area must be improved. However, Rakuten does not own the so-called platinum band, 800-900 megahertz spectrum, which is suitable for better telecommunications, therefore large investments are inevitable to build a sufficient network. Hence, we are concerned that the heavy investment burden will continue to affect Rakuten’s financial position.

From this perspective, we believe it is reasonable for Rakuten to extend its roaming agreement with KDDI, which can increase its population coverage from the current 98.4% to 99.9% immediately, instead of solely relying on Rakuten’s own network expansion and continuously burning cash. Under the renewed roaming agreement with KDDI, Rakuten aims to reduce capital expenditure to JPY 200 billion in 2023 from the original JPY 300 billion while providing satisfactory communication quality through leveraging its partner network. Although roaming costs may increase in the short term, we believe that Rakuten can accelerate user acquisition with the improved network quality and coverage.