Raksul 4384 - Place Your Bets?

Ladies and gentlemen of the jury, I'm just a caveman. Your DCF assumptions frighten and confuse me.

I was surprised to see Raksul announce an MBO at the low, low price of 1,710 yen, but maybe should not be considering some of the past questionable related party transactions done by the company. Josys in particular.

The financial advisors, KPMG and Plutus, gave similar estimates for the company based on the "business plan" they received from management. I think these valuations are both fine considering the "business plan" and would indeed put 1,710 as a pretty full value for the stock.

But what about this "business plan"? The only details we have are some tables, nothing qualitative. Here are the numbers provided by Plutus Consulting, the advisor to the Special Committee tasked with getting the best possible price.

This implies a FCF conversion rate (FCF / EBITDA) of 26% for the next 5 years. That is interesting!

When we apply a simple DCF to these estimates, I can get to 1,750 as a fair value using an 8% discount rate and 3% terminal growth rate - I would say relatively fair assumptions and neither too conservative or too aggressive.

So what's the problem??? A good deal you say??

Methinks not.

The management seems to have sandbagged the numbers to be used in the estimated value calculation. Raksul converted 81% of EBITDA to FCF over the last 5 years, but that will drop to 26%? It would take a massive amount of fixed asset investment over the coming years to have these numbers make sense. However, Raksul is an an asset-lite platform business. The only future investment they mention in their Integrated Report is for software.

So what happens if we re-run the same Plutus EBITDA numbers using a 60% FCF/EBITDA conversion ratio. We again discount at 8% and use a Terminal Growth rate of 3%.

Now our per-share fair value jumps to 3,053 yen!

The stock is trading about 8% above the offer price. The management team has less than 20% locked up so I think there is a good chance this results in a fight for control. However, I have been surprised to see the good analysts at SmartKarma commenting they think it is a done deal.

The wildcard in all of this is Josys - the SAAS management business incubated by Raksul, transferred in part to the Founder, funded in part by outside VC, and now a bit of a mystery box on the Raksul balance sheet (how much do they own? what is it worth? why does the company never disclose anything about it?)

I have been watching Raksul for a while and was impressed by the Ludicrous Speed option package awarded to the CEO. But they are so far from achieving the targets needed for him to vest those options, he may have felt this was the better way to make generational wealth for himself.